<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
REGISTRATION NO. 333-82361
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALEC HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 6719 52-2126573
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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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 WITH COPIES OF ALL COMMUNICATIONS TO:
SENIOR VICE PRESIDENT AND ELLIOTT V. STEIN, ESQ.
CHIEF FINANCIAL OFFICER WACHTELL, LIPTON, ROSEN & KATZ
ALEC HOLDINGS, INC. 51 WEST 52ND STREET
510 L. STREET, SUITE 500 NEW YORK, NEW YORK 10019
ANCHORAGE, ALASKA 99501 (212) 403-1000
(907) 297-3000
(Name, Address, Including Zip Code,
and Telephone Number, Including Area
Code, of Agent for Service)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Exchange Offer referred to herein.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. / /
------------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES OR ACCEPT ANY OFFER TO BUY THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION DATED SEPTEMBER 24, 1999
ALEC HOLDINGS, INC.
OFFER TO EXCHANGE
ALL 13% SENIOR DISCOUNT DEBENTURES DUE 2011 ($46,928,435 PRINCIPAL AMOUNT)
FOR
13% SENIOR DISCOUNT DEBENTURES DUE 2011 ($46,928,435 PRINCIPAL AMOUNT)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1999, UNLESS EXTENDED.
------------------------
We do not intend to list the exchange debentures on any national securities
exchange, and no public market for the exchange debentures is anticipated.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE TENDERING YOUR OLD DEBENTURES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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Summary........................................ 1
Risk Factors................................... 15
Forward-Looking Statements..................... 23
The Exchange Offer............................. 24
The Acquisitions............................... 33
Use of Proceeds................................ 34
Capitalization................................. 35
Selected Historical Consolidated Financial
Data--ALEC Holdings.......................... 36
Selected Historical Combined Financial
Data--Century's Alaska Properties............ 38
Selected Historical Financial Data--ATU........ 40
Unaudited Pro Forma Combined Financial and
Operating Data............................... 42
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 45
Industry Overview.............................. 66
Business....................................... 68
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Regulation..................................... 80
Management..................................... 87
Ownership of Capital Stock..................... 95
Insider Relationships and Related Party
Transactions................................. 98
Description of Other Indebtedness.............. 99
Description of the Exchange Debentures......... 104
Exchange and Registration Rights Agreement..... 130
Book-Entry, Delivery and Form.................. 133
Federal Income Tax Considerations.............. 137
Plan of Distribution........................... 143
Available Information.......................... 143
Experts........................................ 144
Validity of the Exchange Debentures............ 144
Index to Financial Statements.................. F-1
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ADDITIONAL INFORMATION
This prospectus incorporates important business and financial information
about us from documents that are not included in or delivered with this
document. You can obtain documents incorporated by reference in this prospectus
(other than exhibits to those documents) by requesting them in writing or by
telephone from us at the following address:
ALEC Holdings, Inc.
510 L. Street, Suite 500
Anchorage, Alaska 99501
Attention: Michael E. Holmstrom
Telephone: (907) 297-3000
You will not be charged for any documents that you request. If you would
like to request documents, please do so by , 1999 in order to receive them
before the exchange offer expires on , 1999.
i
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE EXCHANGING YOUR OLD DEBENTURES FOR EXCHANGE DEBENTURES,
AND YOU ARE ENCOURAGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THIS PROSPECTUS
INCLUDES SPECIFIC TERMS OF THE EXCHANGE DEBENTURES WE ARE OFFERING, AS WELL AS
INFORMATION ABOUT OUR BUSINESS AND DETAILED FINANCIAL DATA.
OUR COMPANY
We own all of the capital stock of Alaska Communications Systems Holdings,
Inc., and that capital stock accounts for substantially all of our assets. On
May 14, 1999, we completed two acquisitions through Alaska Communications
Systems Holdings, prior to which we had no operations:
- the acquisition of the Alaska telecommunications properties of Century
Telephone Enterprises, Inc. for $411.8 million in cash. Century's Alaska
properties, except for its cellular properties located in Fairbanks that
we did not acquire, are the incumbent provider of local telephone
services to over 131,000 access lines in Juneau, Fairbanks and more than
70 rural communities in Alaska; and
- the acquisition of substantially all of the assets and liabilities of the
Anchorage Telephone Utility, commonly known as ATU, from the Municipality
of Anchorage for $265.1 million in cash. ATU is the incumbent provider of
local telephone services to over 168,000 access lines in Anchorage and
surrounding communities.
With these acquisitions, we, through Alaska Communications Systems Holdings,
are the leading diversified, full-service telecommunications provider in Alaska,
offering local telephone, wireless, long distance and internet services to
business and residential customers throughout the state. We have over $875
million invested in our network, a state-of-the-art telecommunications
infrastructure that includes over 485 miles of fiber optic cable and 176
switching facilities.
Century's Alaska properties and ATU have achieved strong operating results
through stable internal growth and strategic acquisitions. For the year ended
December 31, 1998, we would have had pro forma combined revenues of $282
million, operating income of $41 million, a net loss of $19 million and EBITDA
(as defined) of $102 million.
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SUMMARY OF TERMS OF THE EXCHANGE OFFER
On May 14, 1999, we completed the private offering of the old, unregistered
13% senior discount debentures. We entered into an exchange and registration
rights agreement with the initial purchasers in the private offering in which we
agreed to deliver to you this prospectus as part of the exchange offer and
agreed to complete the exchange offer within 180 days after the date of original
issuance of the old debentures. You are entitled to exchange in the exchange
offer your old debentures for exchange debentures which are identical in all
material respects to the old debentures except:
- the exchange debentures have been registered under the Securities Act;
- the exchange debentures are not entitled to some registration rights
which are applicable to the old debentures under the exchange and
registration rights agreement; and
- contingent interest rate provisions, except for those relating to our
failure to keep effective a shelf registration statement, are no longer
applicable.
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THE EXCHANGE OFFER............ We are offering to exchange up to $46,928,435 aggregate
principal amount of old debentures for up to $46,928,435
aggregate principal amount of exchange debentures. You may
exchange old debentures only in integral multiples of
$1,000.
RESALE........................ Based on an interpretation by the staff of the SEC set forth
in no-action letters issued to third parties, we believe
that the exchange debentures issued pursuant to the exchange
offer in exchange for old debentures may be offered for
resale, resold and otherwise transferred by you (unless you
are an "affiliate" of us within the meaning of Rule 405
under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that you are acquiring the exchange
debentures in the ordinary course of your business and that
you have not engaged in, do not intend to engage in, and
have no arrangement or understanding with any person to
participate in, a distribution of the exchange debentures.
Each participating broker-dealer that receives exchange
debentures for its own account under the exchange offer in
exchange for old debentures that were acquired as a result
of market-making or other trading activity must acknowledge
that it will deliver a prospectus in connection with any
resale of the exchange debentures. See "Plan of
Distribution."
Any holder of old debentures who:
- is our affiliate;
- does not acquire exchange debentures in the ordinary
course of its business; or
- tenders in the exchange offer with the intention to
participate, or for the purpose of participating, in a
distribution of exchange debentures
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2
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cannot rely on the position of the staff of the SEC stated
in Exxon Capital Holdings Corporation, Morgan Stanley & Co.
Incorporated or similar no-action letters and, in the
absence of an exemption, must comply with the registration
and prospectus delivery requirements of the Securities Act
in connection with the resale of the exchange debentures.
EXPIRATION OF THE EXCHANGE
OFFER; WITHDRAWAL OF
TENDER...................... The exchange offer will expire at 5:00 p.m., New York City
time, on , 1999, or a later date and time to which we
extend it. We do not currently intend to extend the
expiration of the exchange offer. You may withdraw your
tender of old debentures pursuant to the exchange offer at
any time before expiration of the exchange offer. Any old
debentures not accepted for exchange for any reason will be
returned without expense to you promptly after the
expiration or termination of the exchange offer.
CONDITIONS TO THE EXCHANGE
OFFER....................... The exchange offer is subject to customary conditions, which
we may waive. Please read the section under the caption "The
Exchange Offer--Conditions" of this prospectus for more
information regarding the conditions to the exchange offer.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........... If you wish to participate in the exchange offer, you must:
- complete, sign and date the accompanying letter of
transmittal, or a facsimile of the letter of transmittal,
according to the instructions contained in this prospectus
and the letter of transmittal; and
- mail or otherwise deliver the letter of transmittal, or a
facsimile of the letter of transmittal, together with your
old debentures and any other required documents, to the
exchange agent at the address set forth on the cover page
of the letter of transmittal.
If you hold old debentures through The Depository Trust
Company and wish to participate in the exchange offer, you
must comply with DTC's Automated Tender Offer Program
procedures, by which you will agree to be bound by the
letter of transmittal. By signing, or agreeing to be bound
by, the letter of transmittal, you will represent to us
that, among other things:
- you acquired your old debentures in the ordinary course of
your business;
- you have no arrangement or understanding with any person
or entity to participate in a distribution of the exchange
debentures;
- if you are a broker-dealer that will receive exchange
debentures for your own account in exchange for old
debentures that were acquired as a result of market-making
activities, that you will deliver a prospectus, as
required by law, in connection with any resale of those
exchange debentures; and
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3
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- you are not an "affiliate," as defined in Rule 405 of the
Securities Act, of us or, if you are an affiliate, that
you will comply with any applicable registration and
prospectus delivery requirements of the Securities Act.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........... If you are a beneficial owner of old debentures that are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, and you want to tender old
debentures in the exchange offer, you should contact the
registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on
your own behalf, you must, before completing and executing
the letter of transmittal and delivering your old
debentures, either make appropriate arrangements to register
ownership of the old debentures in your name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time and may not be able to be completed before expiration
of the exchange offer.
GUARANTEED DELIVERY
PROCEDURES.................. If you wish to tender your old debentures and your old
debentures are not immediately available or you cannot
deliver your old debentures, the letter of transmittal or
any other documents required by the letter of transmittal or
comply with the applicable procedures under DTC's Automated
Tender Offer Program, before expiration of the exchange
offer, you must tender your old debentures according to the
guaranteed delivery procedures set forth under the caption
"The Exchange Offer--Guaranteed delivery procedures."
EFFECT ON HOLDERS OF
OUTSTANDING NOTES........... By making the exchange offer and by accepting for exchange
all validly tendered old debentures under the exchange
offer, we will have fulfilled a covenant contained in the
registration rights agreement. Accordingly, there will be no
increase in the interest rate on the old debentures under
the circumstances described in the registration rights
agreement. If you are a holder of old debentures and you do
not tender your old debentures in the exchange offer, you
will continue to hold your old debentures and will be
entitled to all the rights and subject to all the
limitations applicable to the old debentures in the
indenture, except for any rights under the registration
rights agreement that terminate upon the completion of the
exchange offer.
The trading market for old debentures could be adversely
affected if some but not all of the old debentures are
tendered and accepted in the exchange offer.
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4
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CONSEQUENCES OF FAILURE TO
EXCHANGE.................... All untendered old debentures will remain subject to the
restrictions on transfer provided for in the old debentures
and in the indenture. In general, the old debentures may not
be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities laws. Other than in connection
with the exchange offer, we do not currently anticipate that
we will register the old debentures under the Securities
Act.
FEDERAL INCOME TAX
CONSIDERATIONS.............. The exchange of old debentures for exchange debentures in
the exchange offer will not be a taxable event for U.S.
federal income tax purposes. See "Federal Income Tax
Considerations" for a more detailed description of the tax
consequences of the exchange.
USE OF PROCEEDS............... We will not receive any cash proceeds from the issuance of
exchange debentures pursuant to the exchange offer.
EXCHANGE AGENT................ The Bank of New York is the exchange agent for the exchange
offer. The address and telephone number of the exchange
agent are set forth under the caption "The Exchange
Offer--Exchange agent" of this prospectus.
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5
<PAGE>
SUMMARY OF TERMS OF THE EXCHANGE DEBENTURES
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ISSUER.............................. ALEC Holdings, Inc.
SECURITIES OFFERED.................. $46,928,435 aggregate principal amount of 13% Senior
Discount Debentures due 2011.
MATURITY............................ May 15, 2011.
INTEREST PAYMENT DATES.............. May 15 and November 15 of each year, commencing on
November 15, 2004.
OPTIONAL REDEMPTION................. On or after May 15, 2004, we may redeem some or all
of the exchange debentures at the redemption prices
listed under the caption "Description of the Exchange
Debentures--Optional Redemption."
Before May 15, 2002, we may redeem up to 35% of the
exchange debentures with the proceeds of sales of
equity in our Company at the redemption price listed
under the caption "Description of the Exchange
Debentures-- Optional Redemption."
CHANGE OF CONTROL................... If we experience a change of control, you will have
the right to require us to repurchase your exchange
debentures at a price equal to 101% of the principal
amount of the exchange debentures, together with
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the Exchange
Debentures--Change of Control."
RANKING............................. The exchange debentures will be unsecured and:
- rank equally with all of our other existing and
future senior debt;
- rank senior to all of our senior subordinated debt;
and
- rank senior to all of our existing and future
subordinated debt.
On June 30, 1999:
- Alaska Communications Systems Holdings had $451.2
million of senior debt;
- we did not have any senior debt other than the old
debentures;
- Alaska Communications Systems Holdings' guarantor
subsidiaries had $1.6 million of senior debt;
- Alaska Communications Systems Holdings did not have
any senior subordinated debt other than the Alaska
Communications Systems Holdings senior subordinated
notes, and we and Alaska Communications Systems
Holdings' guarantor subsidiaries did not have any
senior subordinated debt, other than the guarantees
of the Alaska Communications Systems Holdings
senior subordinated notes; and
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- we, Alaska Communications Systems Holdings and
Alaska Communications Systems Holdings' guarantor
subsidiaries did not have any subordinated debt.
RESTRICTIVE COVENANTS............... We will issue the exchange debentures under an
indenture with The Bank of New York, as the trustee.
The indenture will, among other things, restrict our
ability and the ability of our subsidiaries and
future subsidiaries, to:
- incur debt;
- make investments;
- pay dividends on stock or purchase stock;
- sell assets or stock of our subsidiaries;
- engage in transactions with our affiliates;
- engage in mergers, consolidations and sales of
assets; and
- engage in business activities that are unrelated to
our current business.
The indenture will also limit the extent to which we
can permit restrictions on the ability of our
subsidiaries to pay dividends and make other
distributions.
See "Description of the Exchange
Debentures--Restrictive Covenants."
ABSENCE OF ESTABLISHED MARKET FOR
THE NOTES......................... The exchange debentures are a new issue of
securities, and there is no established trading
market for the exchange debentures. We do not intend
to apply for the exchange debentures to be listed on
any securities exchange or to arrange for quotation
on any automated dealer quotation system. The initial
purchasers in the private placement of the old
debentures have advised us that they intend to make a
market in the exchange debentures and any new notes
issued in exchange for the exchange debentures, but
they are not obligated to do so. The initial
purchasers may discontinue any market making in the
exchange debentures or any new notes issued in
exchange for the exchange debentures at any time in
their sole discretion. We cannot assure you that a
liquid market will develop for the exchange
debentures.
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* * * * *
We are located at 510 L. Street, Suite 500, Anchorage, Alaska 99501. Our
telephone number is (907) 297-3000.
7
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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 of Century's Alaska properties;
- the acquisition of ATU;
- the purchase of fiber capacity for $19.5 million; and
- the financings necessary to complete these acquisitions,
as if these transactions had occurred on January 1, 1998 for the Operating Data
and Other Financial Data and on June 30, 1999 for the Other Data and 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. More
complete data can be found under "Unaudited Pro Forma Combined Financial and
Operating Data."
You should also keep the following points in mind as you read the table.
- "Other income (expense)" includes the
- net operating results of Century's Alaska properties' and ATU's equipment
sales and rental, payphone and internet businesses and
- equity in earnings (losses) of minority investments.
For the year ended December 31, 1998, these amounts represented earnings of
$1,431,000 and losses of $2,945,000, respectively. For the six months ended June
30, 1999 "other income (expense) "includes non-operating revenues of $1,046,000
primarily as a result of non-recurring items, non-operating expenses of $545,000
and loss in equity interest of minority investments of $1,282,000.
- Net cash data includes information from ATU financial statements prepared
according to governmental accounting standards.
- "Defined EBITDA," as used here and in other summary financial tables in
this prospectus, is net income before interest expense, interest income,
income taxes, depreciation and amortization, and equity in earnings
(loss) of minority investments, which was $(2,945,000) for the year ended
December 31, 1998 and $(1,282,000) for the six months ended June 30,
1999. Defined EBITDA includes the net operating results of equipment
sales and rental, payphone and internet businesses and the estimated
annual management fee to be paid to Fox Paine & Company, LLC. Defined
EBITDA is not intended to represent cash flow from operations as defined
by GAAP and should not be considered as an alternative to net income as
an indicator of our operating performance or cash flows. Defined EBITDA
is included in this prospectus because management believes it provides
additional information with respect to our ability to satisfy its debt
service, capital expenditure and working capital requirements. While
Defined EBITDA is frequently used as a measure of operations and the
ability of a company to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to the differences in methods of calculation.
- "Adjusted EBITDA" is Defined EBITDA increased by
8
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- 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 for the year ended
December 31, 1998,
- unrealized access revenues in the amount of $417,000 for the year ended
December 31, 1998 that were not recovered in 1998 but are being recovered
in 1999 and in future years and
- 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 on
January 1, 1998, in the amount of $2,047,000. Operating cash flows would
have also increased by a like amount if the purchase of the fiber
capacity had occurred on January 1, 1998. Adjusted EBITDA for the six
months ended June 30, 1999 is Defined EBITDA
- increased by $1,023,500 net cost savings related to the purchase of
fiber capacity and $6,577,000 of non-recurring expenses and transaction
costs and
- decreased by $1,570,000 of revenues related to prior periods.
The net of these three adjustments increased operating cash flows by a like
amount for the six months ended June 30, 1999.
- "Pro forma cash interest expense" is defined as interest expense
exclusive of amortization of deferred financing costs.
- For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings before extraordinary items, income taxes
and fixed charges. "Fixed charges" consist of interest expense,
amortization of deferred financing costs and the component of rental
expense believed by management to be representative of the interest
component of rental expense. Earnings were inadequate to cover fixed
charges by $19,017,000 for the year ended December 31, 1998 and by
$11,639,000 for the six months ended June 30, 1999.
- "Access lines in service" includes all revenue producing lines, whether
connected to retail or wholesale customers.
9
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<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
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(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue............................................................... $ 281,606 $ 145,236
Operating expenses.............................................................. 240,986 127,059
-------- -------------
Operating income................................................................ 40,620 18,177
Interest expense................................................................ (57,097) (29,035)
Other income (expense).......................................................... (2,540) (781)
-------- -------------
Loss before income taxes........................................................ (19,017) (11,639)
Income taxes.................................................................... -- --
-------- -------------
Net loss........................................................................ $ (19,017) $ (11,639)
-------- -------------
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OTHER FINANCIAL DATA:
Net cash provided by operating activities....................................... $ 50,567 $ 57,246
Net cash used by investing activities........................................... (32,323) (704,986)
Net cash provided (used) by financing activities................................ (40,350) 605,576
Defined EBITDA.................................................................. 102,097 47,596
Adjusted EBITDA................................................................. 105,960 53,627
Pro forma cash interest expense................................................. 53,198 19,950
Capital expenditures............................................................ 56,443 30,242
Depreciation and amortization................................................... 61,221 28,918
Ratio of earnings to fixed charges.............................................. N/A N/A
Ratio of Adjusted EBITDA to pro forma cash interest expense..................... 2.0x 2.7x
Ratio of total debt to Adjusted EBITDA (annualized)............................. 5.9x 5.7x
OTHER DATA (END OF PERIOD):
Access lines in service......................................................... 300,394 320,096
Cellular subscribers............................................................ 66,572 69,581
Cellular penetration............................................................ 14.5% 15.1%
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................................................... $ 796,007 $ 796,346
Long-term debt including current portion........................................ 624,245 614,013
Stockholders' equity............................................................ 121,155 122,219
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10
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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 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 included elsewhere in this
prospectus.
- We derived the summary 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 and
which, in our opinion of management, include all adjustments, consisting
solely of normal, recurring adjustments, necessary to present fairly the
information they contain.
- We derived the summary combined 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 in this prospectus and which, in our
opinion, include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information they contain.
- The financial statements of Century's Alaska properties 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.
- Century acquired the Alaska properties on December 1, 1997 as part of its
acquisition of Pacific Telecom. The data for the year ended December 31,
1997 represent the results of Century's Alaska properties for the 11
months ended November 30, 1997, as owned by Pacific Telecom, and the one
month ended December 31, 1997, as owned by Century.
- In conjunction with Century's acquisition of Pacific Telecom on December
1, 1997, the purchase method of accounting was utilized, resulting in the
push down of $208 million of goodwill to Century's Alaska properties.
- 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 summary historical combined financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited combined financial statements of Century's Alaska
properties, and the related notes, included elsewhere in this prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue.................. $ 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) (10,722) (6,770) (11,587) (6,753)
Defined EBITDA..................... 30,790 32,861 35,570 42,574 50,729 11,951 13,775
Defined EBITDA margin.............. 44.4% 43.8% 46.4% 48.4% 45.1% 46.3% 49.6%
Capital expenditures............... $ 21,001 $ 19,437 $ 20,465 $ 16,400 $ 26,799 $ 2,321 $ 2,200
Depreciation and amortization...... 13,098 14,316 15,348 18,289 30,459 7,209 7,785
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>
12
<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 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 included elsewhere in this prospectus.
- We derived the summary historical 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 audited financial statements of ATU which are not
included in this prospectus.
- We derived the summary 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 in this
prospectus and which, in our opinion, include all adjustments, consisting
solely of normal, recurring adjustments, necessary to present fairly the
information they contain.
- 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 principles.
- Defined EBITDA does not include equity in earnings (loss) of minority
investments of $(46,158), $158,000, and $(2,945,000) for the years ended
December 31, 1996, 1997 and 1998 and $(250,000) and $(509,000) for the
three months ended March 31, 1998 and 1999.
The summary historical financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements of ATU, and the related notes,
included elsewhere in this prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue............. $ 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 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)
Defined EBITDA................ 39,549 39,608 41,239 45,567 52,550 12,648 13,016
Defined EBITDA margin......... 37.5% 36.1% 35.6% 36.4% 37.1% 3.5% 35.6%
Capital expenditures.......... $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
Depreciation and
amortization................ 18,936 19,258 20,496 26,839 29,608 7,099 7,434
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>
14
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND THE OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO EXCHANGE YOUR OLD DEBENTURES FOR EXCHANGE
DEBENTURES.
OUR SUBSTANTIAL DEBT INCREASES THE RISK THAT WE WILL NOT BE ABLE TO SATISFY OUR
OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
We have a significant amount of debt, which may impair our ability to
service the exchange debentures. As of June 30, 1999, we had outstanding $627.8
million aggregate principal amount of debt, excluding unused commitments, of
which $25.0 million was our senior debt and of which $602.8 million was senior
and senior subordinated debt of Alaska Communications Systems Holdings, and
stockholders' equity of $121.2 million.
In addition, we and our subsidiaries may incur substantial additional debt
in the future. Alaska Communications Systems Holdings' senior credit facility
provides that Alaska Communications Systems Holdings may borrow up to $75.0
million under a revolving credit facility. The indenture does not prohibit us or
our subsidiaries from incurring additional debt, although there are
restrictions, which are described under "Description of the Exchange
Debentures--Restrictive Covenants."
WE MAY HAVE INSUFFICIENT ASSETS TO REPAY ALL AMOUNTS DUE UNDER THE EXCHANGE
DEBENTURES AND ANY OTHER SENIOR DEBT THAT WILL RANK EQUALLY WITH THE EXCHANGE
DEBENTURES.
The right to payment on the exchange debentures will rank equally with all
of our existing and future senior debt, including our guarantee of Alaska
Communications Systems Holdings' borrowings under the senior credit facility. In
the event of a bankruptcy or similar proceeding with respect to us, our assets
will be available to pay obligations on the exchange debentures only on a
ratable basis with all other outstanding senior debt paid. As a result, there
may not be sufficient assets remaining to make payment of amounts due on any or
all of the exchange debentures then outstanding.
On June 30, 1999:
- we had $25.0 million of senior debt outstanding, in addition to our
guarantee of Alaska Communications Systems Holdings' borrowings under the
senior credit facility, and our guarantee of the Alaska Communications
Systems Holdings senior subordinated notes was subordinate to all of our
outstanding senior debt;
- Alaska Communications Systems Holdings had $451.2 million of senior debt
outstanding under its senior credit facility and $150.0 million from the
issuance of the Alaska Communications Systems Holdings senior
subordinated notes; and
- Alaska Communications Systems Holdings' subsidiaries had $1.6 million of
senior debt outstanding, in addition to their guarantees of Alaska
Communications Systems Holdings' borrowings under the senior credit
facility.
OUR HOLDING COMPANY STRUCTURE LIMITS THE EXTENT TO WHICH WE CAN USE THE ASSETS
OF OUR SUBSIDIARIES TO SATISFY OUR OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
Because we are a holding company, any right we have to participate in any
distribution of the assets of any of our subsidiaries upon the liquidation,
reorganization or insolvency of that subsidiary, and your right to participate
in any distribution as holders of exchange debentures, will be subject to the
prior claims of that subsidiary's creditors. Moreover, the obligations of our
subsidiaries under the senior credit facility are secured by substantially all
of their assets. See "Description of Other Indebtedness." The exchange
debentures will thus be effectively subordinated to all existing and future
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<PAGE>
liabilities of our subsidiaries, including Alaska Communications Systems
Holdings' outstanding debt under the senior credit facility and the Alaska
Communications Systems Holdings senior subordinated notes totaling $593.7
million. Alaska Communications Systems Holdings has $66.3 million in additional
borrowing availability under the senior credit facility.
OUR SUBSIDIARIES MAY BE UNABLE TO DISTRIBUTE TO US THE FUNDS WE REQUIRE TO MAKE
PAYMENTS ON THE EXCHANGE DEBENTURES.
If we do not receive dividends from Alaska Communications Systems Holdings
and its subsidiaries that are sufficient for us to satisfy our obligations under
the exchange debentures, then, unless we can refinance those obligations, a
default under the indenture governing the exchange debentures could occur and
payment of all amounts outstanding under the exchange debentures could be
accelerated.
Our only material asset is Alaska Communications Systems Holdings' capital
stock. We do not expect to undertake any business activities, other than in
connection with:
- our ownership of Alaska Communications Systems Holdings' capital stock;
- the performance of our obligations as a guarantor of Alaska
Communications Systems Holdings' senior credit facility and of the Alaska
Communications Systems Holdings senior subordinated notes; and
- the issuance of the exchange debentures and warrants to purchase our
capital stock.
As a result, we will be dependent upon dividends from Alaska Communications
Systems Holdings and its subsidiaries for the funds necessary to satisfy our
obligations, including payment of principal of the exchange debentures upon
their scheduled maturity or if their maturity is accelerated, unless they could
be refinanced, and, after May 15, 2004, payment of interest on the exchange
debentures. We will also be dependent upon dividends from Alaska Communications
Systems Holdings and its subsidiaries for the funds needed to purchase any
exchange debentures tendered upon an offer to purchase following a "change of
control," as defined in the indenture governing the exchange debentures, or
sales of assets.
The indenture governing the exchange debentures will limit restrictions on
the ability of our subsidiaries to pay dividends or make other distributions,
but these limitations are subject to a number of significant qualifications and
exceptions. In addition,
- Alaska Communications Systems Holdings' senior credit facility and the
indenture governing the Alaska Communications Systems Holdings senior
subordinated notes will restrict the ability of our subsidiaries to pay
dividends or make other distributions; and
- the ability of our subsidiaries to pay dividends or make other
distributions may be restricted by applicable laws and regulations, as
well as by agreements our subsidiaries enter with other parties.
LENDERS UNDER ALASKA COMMUNICATIONS SYSTEMS HOLDINGS' SENIOR CREDIT FACILITY
COULD CAUSE A DEFAULT UNDER THE INDENTURE BY FORECLOSING UPON THE CAPITAL STOCK
OF ALASKA COMMUNICATIONS SYSTEMS HOLDINGS AND PREVENTING YOU FROM RECEIVING
PAYMENTS UNDER THE EXCHANGE DEBENTURES.
In connection with Alaska Communications Systems Holdings' senior credit
facility, we granted the senior lenders a first priority lien on all of the
capital stock of Alaska Communications Systems Holdings we own. 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 Alaska Communications Systems
Holdings capital stock we own. If the
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<PAGE>
lenders did so, we would be prevented from receiving dividends from Alaska
Communications Systems Holdings, our primary source of funds for satisfaction of
our obligations. If that were to occur, unless we could refinance our
obligations, there might be insufficient assets remaining to make payment of
amounts due on any or all of the exchange debentures then outstanding, and a
default under the indenture governing the exchange debentures could occur.
UPON A CHANGE OF CONTROL, WE AND ALASKA COMMUNICATIONS SYSTEMS HOLDINGS MAY NOT
HAVE SUFFICIENT ASSETS TO SATISFY ALL OF OUR OBLIGATIONS UNDER ALASKA
COMMUNICATIONS HOLDINGS' SENIOR CREDIT FACILITY, THE INDENTURE GOVERNING THE
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS SENIOR SUBORDINATED NOTES AND THE
EXCHANGE DEBENTURES.
Upon the occurrence of a "change of control," as defined in the indenture
governing the exchange debentures, each holder of the exchange debentures will
have the right to require us to repurchase the holder's exchange debentures at a
price equal to 101% of the principal amount of the exchange debentures, together
with accrued and unpaid interest, if any, to the date of repurchase. However:
- Alaska Communications Systems Holdings' senior credit facility will
effectively prevent the repurchase of the exchange debentures by us in
the event of a change of control, unless all amounts outstanding under
our senior credit facility are repaid in full;
- our failure to repurchase the exchange debentures would be a default
under the indenture governing the exchange debentures, which would be a
default under our senior credit facility; and
- our failure to repay all amounts outstanding under our senior credit
facility upon a default would be a default under the indenture governing
the exchange debentures.
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT OUR FINANCIAL
AND OPERATING FLEXIBILITY AND ADVERSELY AFFECT OUR ABILITY TO COMPETE.
The indentures governing the exchange debentures and the Alaska
Communications Systems Holdings senior subordinated notes and the credit
agreement relating to Alaska Communications Systems Holdings' senior credit
facility will, among other things, restrict our financial and operating
flexibility. These restrictions could impair our ability to compete or to
achieve our strategic objectives. If we do not comply with these restrictions,
or if Alaska Communications Systems Holdings fails to satisfy the financial
ratios and tests under Alaska Communications Systems Holdings' senior credit
facility, holders of the exchange debentures may accelerate payments due them,
and the lenders could accelerate payment of all amounts outstanding under Alaska
Communications Systems Holdings' senior credit facility.
FAILURE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS MAY PREVENT US FROM
REALIZING OPERATING GAINS AND EFFICIENCIES WHICH WE EXPECT TO HELP SATISFY OUR
OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
Our ability to operate successfully is dependent on our ability to integrate
the acquisitions of Century's Alaska properties and ATU. Because we acquired
both Century's Alaska properties and ATU at the same time, there may be
unanticipated difficulties or complexities that would interfere with our ability
to integrate these businesses. Our success will depend on our ability to, among
other things:
- transfer general and administrative support services and information
technology platforms that are currently provided to Century's Alaska
properties by Century to ATU's systems;
- modify ATU's current information technology platforms to support the
operations of both Century's Alaska properties and ATU; and
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<PAGE>
- coordinate and integrate operational, financial and management processes,
systems and controls.
THE REVOCATION OF SUBSTANTIAL PROTECTIONS FROM COMPETITION GRANTED TO CENTURY'S
ALASKA PROPERTIES UNDER THE TELECOMMUNICATIONS ACT OF 1996 COULD RESULT IN
INCREASED COMPETITION, THUS LOWERING REVENUES AND EARNINGS.
To encourage competition, the Telecommunications Act of 1996 generally
requires incumbent local exchange carriers to allow competitors to interconnect
with their local networks. Historically, each of Century's Alaska rural local
operating companies qualified for protections under the Telecommunications Act
that exempted it from or permitted suspension or modification of these
obligations. For the first three months of 1999, these companies accounted for
42.3% of our revenues and 52.3% of our operating income.
On June 30, 1999 (its last day of existence), the Alaska Public Utilities
Commission, commonly known as the APUC, voted to revoke the rural exemptions
held by each of Century's Alaska rural local exchange operating companies and
directed the commencement of negotiations under Section 252 of the
Telecommunications Act between those companies and GCI, Inc., a competitor which
had been seeking interconnection with Century's Alaska rural local exchange
carriers. Without rural exemptions, all or some of these companies will be
required to negotiate with their competitors the terms under which the
competitors would be allowed to interconnect with our local networks. We cannot
assure you that the terms or rates for this interconnection will be sufficient
to cover our costs or otherwise mitigate the financial impacts of competition or
that we will be able to compete effectively with these competitors. See
"Regulation."
Section 252 provides for a maximum negotiation and arbitration period of
nine months for approval of an interconnection agreement. In its opinion
revoking the rural exemptions, the APUC did not address the rights of Century's
Alaska local exchange operating companies regarding suspension and modification
of interconnection duties under a separate provision of the Telecommunications
Act. Century's Alaska local exchange carriers have pursued reconsideration of
the APUC ruling by the new Regulatory Commission of Alaska, or RCA, the state
regulatory agency that succeeded the APUC, and may also consider seeking
judicial review of the APUC ruling. On September 1, 1999, we filed a petition
with the RCA seeking suspension or modification of interconnection duties and
other market structure reforms for Century's Alaska local exchange carriers in
selected markets. We also requested the removal or reduction of regulatory
limitations on these local exchange carriers. If granted, our petition would
give Century's Alaska local exchange carriers increased operating and marketing
flexibility and could potentially mitigate the impact of the revocation of the
rural exemptions. However, we cannot predict whether or to what extent the RCA
will grant our petition. See "Regulation."
Additionally, during the last session, a bill was proposed in the Alaska
state senate that proposed to open to competition many local telephone markets
within Alaska having 5,000 or more access lines, effectively depriving incumbent
local exchange carriers in those markets of their rural exemptions. We cannot
predict at this time whether or to what extent proposals included in the bill
will be offered again and enacted into law. To the extent the markets of
Century's Alaska rural local exchange carriers are opened to competition by the
APUC's termination of their rural exemptions, we do not believe that the
marginal effect of passage of the proposed bill on our business would be
material.
A REDUCTION OF THE RATES WE CHARGE OUR LOCAL TELEPHONE CUSTOMERS BY THE RCA
WOULD REDUCE OUR REVENUES AND EARNINGS.
The rates we charge our local telephone customers are based, in part, on a
rate of return on capital invested in our networks for our local telephone
operating companies that is authorized by the RCA. These authorized rates are
subject to review and change by the RCA at any time. If the RCA
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<PAGE>
orders us to reduce our rates, both our revenues and our earnings will be
reduced. The APUC has in the past indicated that one of our local telephone
operating companies was earning in excess of its historical authorized rate of
return. However, neither the RCA nor the 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, the
APUC has required that we file, by June 30, 2001, revenue requirement,
cost-of-service and rate design studies which will 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 which could cause the RCA to
order us to reduce our rates.
REVENUES FROM ACCESS CHARGES MAY BE REDUCED OR LOST.
Century's Alaska properties received 45.3% of their revenues in 1998 from
access charges paid by interstate and intrastate interexchange carriers for
originating and terminating calls in their service areas. The amount of revenue
that Century's Alaska properties receives from access charges is calculated in
accordance with guidelines set by the FCC and the RCA. Any change in the
guidelines may reduce our revenue.
A REDUCTION IN THE UNIVERSAL SERVICE SUPPORT CURRENTLY RECEIVED BY SOME OF OUR
SUBSIDIARIES WOULD REDUCE OUR REVENUES AND EARNINGS.
Century's Alaska properties received 11.9% of their revenues in 1998 from
the federal Universal Service Fund, which was established to compensate for the
high cost of providing universal telecommunications services in rural markets.
If the subsidies received from this fund were materially reduced or
discontinued, some of Century's Alaska local operating companies might not be
able to operate profitably.
Various reform proceedings are underway at the FCC to change the method of
calculating the amount of subsidies paid under the universal service support
system. Future reforms are expected to replace the current historical cost
system with a system based upon forward-looking costs. We cannot be certain that
this method or any other method we are required to use to determine the
allocation of costs in the future will accurately reflect all of the costs
Century's Alaska properties incur or that Century's Alaska properties will
continue to receive the subsidies they currently receive, and, therefore, we
cannot assure you that we will be able to recover these costs.
Reform proceedings are also underway within the state jurisdiction to review
carriers' support from the Alaska Universal Service Fund. These proceedings
could change the method of calculating the support paid to some of Century's
Alaska operating companies. For example, the staff of the APUC proposed to
reduce or eliminate carriers' receipt of support for switching costs. By the
staff's calculations, some of Century's Alaska local operating companies receive
$1.5 million of switching support from the Alaska Universal Service Fund.
Depending on the RCA's actions, the guidelines under which some of Century's
Alaska local operating companies receive support from the Alaska Universal
Service Fund may change, impacting their ability to recover its costs.
In addition, the APUC proposed funding public interest pay telephones from
the state universal service fund. Carriers would be required to place pay
telephones in locations required in the public interest, supported by the Alaska
Universal Service Fund. We cannot assure you that the method that the RCA may
adopt for compensating carriers for their public interest pay telephone costs
will ensure full cost recovery. Finally, the APUC's establishment of the Alaska
Universal Service Fund has been
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<PAGE>
challenged in state court. This lawsuit could cause the RCA to change the manner
in which it funds support for universal service, or could render establishment
of this, or any, state universal service support system null and void under
existing legal authority.
THE TELECOMMUNICATIONS INDUSTRY IS EXTREMELY COMPETITIVE, AND WE MAY HAVE
DIFFICULTY OVERCOMING SIGNIFICANT ADVANTAGES ENJOYED BY MANY OF OUR COMPETITORS.
The telecommunications industry is extremely competitive. We face many of
the same types of competitive challenges in our local telephone, wireless, long
distance and internet access businesses. In each case, the companies against
which we compete have or may in the future have advantages over us, including:
- greater financial and technical resources;
- stronger brand name recognition; and
- fewer regulatory burdens.
Aggressive competition could result in, among other things:
- reductions in our customer base;
- the lowering of rates and other prices in order to compete; and
- increased marketing expenditures and use of discounting and promotional
campaigns that would adversely affect our margins.
OUR LONG DISTANCE STRATEGY MAY CAUSE US TO INCUR HIGH FIXED COSTS OR PAY HIGH
PRICES FOR NEEDED CAPACITY.
We currently offer long distance services as a reseller, relying on other
long distance carriers to provide transmission and termination services for our
long distance services. As a result, we are subject to changes in the policies
and available capacity of the carriers from which we lease our transmission
capacity. Furthermore, in negotiating resale agreements with carriers to provide
us with these services, we must estimate future supply and demand for
transmission capacity, as well as the calling patterns and traffic levels for
our future customers. If we:
- overestimate our needs for transmission services, we may be obligated to
incur excessive fixed costs; or
- underestimate our needs for transmission services, we may be obligated to
pay higher prices for needed capacity or may find that this capacity is
unavailable and, therefore, be unable to provide adequate service to our
customers.
In response to these concerns and as part of the settlement of a number of
outstanding disputes, including opposition to our recent acquisitions of
Century's Alaska properties and ATU, we recently purchased capacity between
Alaska's major population centers and between Alaska and the contiguous 48
states of the U.S. We cannot assure you that we will generate sufficient
revenues in our long distance business to recover the costs of these
investments. See "Business--Products Services and Revenue Sources--Long Distance
Services."
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<PAGE>
WE COULD EXPERIENCE SIGNIFICANT BUSINESS DISRUPTIONS IF WE FAIL TO IDENTIFY AND
RESOLVE POTENTIAL YEAR 2000 PROBLEMS IN A TIMELY MANNER.
We believe that, if we or our important vendors or suppliers experience year
2000 problems, the problems could create a material disruption to 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 and 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 and later
years. We expect that the action items required by this plan will be largely
completed by October, 1999. 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.
We can make no assurances that we are immune to any adverse impacts from
year 2000 deficiencies suffered by us or 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.
YOUR INTERESTS AS HOLDERS OF THE EXCHANGE DEBENTURES MAY CONFLICT WITH THOSE OF
OUR CONTROLLING STOCKHOLDER.
Fox Paine & Company beneficially owns approximately 90% of the outstanding
shares of our voting capital stock. As a result, Fox Paine & Company has the
power to:
- elect our directors and the directors of Alaska Communications Systems
Holdings; and
- approve any action requiring the approval of our stockholders or the
stockholders of Alaska Communications Systems Holdings.
The directors elected by Fox Paine & Company have the authority to make
decisions affecting our capital structure and the capital structure of Alaska
Communications Systems Holdings, including the issuance of additional debt or
equity. Fox Paine & Company also has the ability to make decisions regarding any
merger, consolidation or sale of assets involving us or Alaska Communications
Systems Holdings.
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.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE EXCHANGE DEBENTURES, AND ANY
MARKET FOR THE EXCHANGE DEBENTURES MAY BE ILLIQUID.
We cannot assure you that a liquid market will develop for the exchange
debentures, that you will be able to sell your exchange debentures at a
particular time or that the prices that you receive when you sell will be
favorable. The exchange debentures are a new issue of securities with no
established trading market. Moreover, we do not intend to apply for the exchange
debentures to be listed on any securities exchange or to arrange for quotation
on any automated dealer quotation system, and the initial purchasers are not
obligated to make a market in the exchange debentures. If issued under an
effective registration statement, the exchange debentures generally may be
resold or otherwise
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<PAGE>
transferred with no need for further registration, but the offer to exchange the
exchange debentures for the old debentures will not depend upon the amount of
old debentures tendered for exchange.
Future trading prices of the exchange debentures will depend on many
factors, including:
- our operating performance and financial condition;
- prevailing interest rates; and
- the market for similar securities.
IF YOU ARE DEEMED TO HAVE RECEIVED RESTRICTED SECURITIES IN EXCHANGE FOR YOUR
OLD DEBENTURES, YOU MAY FACE SIGNIFICANT TRANSFER RESTRICTIONS IF YOU ATTEMPT TO
RESELL THEM.
If you exchange your old debentures in the exchange offer, you will be
deemed to have represented, by your acceptance of the exchange offer, that you
acquired the exchange debentures in the ordinary course of business and that you
are not engaged in, and do not intend to engage in, a distribution of the
exchange debentures. If the SEC determines otherwise, however, you may be deemed
to have received restricted securities. If so, you will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction.
IF YOU DO NOT EXCHANGE YOUR OLD DEBENTURES, THEY MAY BE DIFFICULT TO RESELL.
It may be difficult for you to sell old debentures that are not exchanged in
the exchange offer. If you do not tender your old debentures or if we do not
accept some of your old debentures, those old notes will continue to be subject
to transfer and exchange restrictions.
These restrictions on transfer of your old debentures arise because we
issued the old debentures pursuant to an exemption from the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old debentures if they are registered
under the Securities Act and applicable state securities laws, or offered and
sold pursuant to an exemption from the Securities Act and applicable state
securities laws. If you intend to make use of an exemption, you must, if
requested by us, deliver to us an opinion of independent counsel, reasonably
satisfactory in form and substance to us, that the exemption is available. We do
not intend to register the old debentures under the Securities Act.
Based on interpretations of the SEC staff, exchange debentures issued
pursuant to the exchange offer may be offered for resale, resold or otherwise
transferred by their holders, other than any holder that is our "affiliate"
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that the holders acquired the exchange debentures in the ordinary
course of the holders' business and the holders have no arrangement or
understanding with respect to the distribution of the exchange debentures to be
acquired in the exchange offer. Any holder who tenders in the exchange offer for
the purpose of participating in a distribution of the exchange debentures:
- cannot rely on the applicable interpretations of the SEC; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
To the extent the old debentures are tendered and accepted in the exchange
offer, the trading market, if any, for the old debentures would be adversely
affected due to a reduction in market liquidity.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including, in
particular, statements about our plans, strategies and prospects under the
captions "Summary," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (particularly under the subheadings "Liquidity and
Capital Resources" and "Outlook") and "Business." We have based these
forward-looking statements on our current assumptions, expectations and
projections about future events. When used in this prospectus, the words
"believe," "anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such words. These forward-looking
statements speak only as of the date of this prospectus. Neither we nor the
initial purchasers undertake any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although management believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct or that savings or
other benefits anticipated in the forward-looking statements will be achieved.
Important factors, some of which may be beyond our control, that could cause
actual results to differ materially from management's expectations ("cautionary
statements") are disclosed in this prospectus, including in conjunction with the
forward-looking statements included in this prospectus and under "Risk Factors."
Prospective purchasers are cautioned not to place undue reliance on these
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by the
cautionary statements. See "Risk Factors." These forward-looking statements are
subject to risks, uncertainties and assumptions about us, including, among other
things:
- our substantial debt and significant debt service obligations;
- our ability to integrate our recent acquisitions of Century's Alaska
properties and ATU;
- developments in, or changes to, the laws and regulations governing our
telecommunications business;
- our ability to improve existing operations;
- the increasingly competitive nature of the telecommunications industry;
- changes in technology;
- our ability to keep key personnel required to operate the business;
- the potential effect of year 2000 compliance issues; and
- changes in economic conditions in Alaska.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We have entered into an exchange and registration rights agreement with the
initial purchasers of the old debentures in which we agreed to file a
registration statement relating to an offer to exchange the old debentures for
exchange debentures. We also agreed to use our reasonable best efforts to cause
the exchange offer to be consummated within 180 days following the original
issue of the old debentures. The exchange debentures will have terms
substantially identical to the old debentures except that the exchange
debentures will not contain terms with respect to transfer restrictions,
registration rights and additional interest for our failure to observe as
obligations in the registration rights agreement. The old debentures were issued
on May 14, 1999.
Under the circumstances set forth below, we will use our reasonable best
efforts to cause the SEC to declare effective a shelf registration statement
with respect to the resale of the old debentures and keep the statement
effective for up to two years after the original issue of the old debentures.
These circumstances include:
- if any changes in law, SEC rules or regulations or applicable
interpretations by the staff of the SEC do not permit us to effect the
exchange offer as contemplated by the registration rights agreement;
- if any old debentures validly tendered in the exchange offer are not
exchanged for exchange debentures within 180 days after the original
issue of the old debentures;
- if any initial purchaser of the old debentures requests within 20 days of
completion of the exchange offer, but only with respect to any old
debentures not eligible to be exchanged for exchange debentures in the
exchange offer;
- if any holder of the old debentures is not permitted by any law or
applicable interpretations by the staff of the SEC to participate in the
exchange offer;
- if any holder of old debentures that participates in the exchange offer
and does not receive fully tradeable exchange notes requests within 20
days of completion of the exchange offer; or
- if we elect to file a shelf registration statement with respect to the
resale of the old debentures.
If we fail to comply with our obligations under the registration rights
agreement, we may be required to pay additional interest to holders of the old
debentures. Please read the section captioned "Exchange and Registration Rights
Agreement" for more details regarding the registration rights agreement.
RESALE OF EXCHANGE DEBENTURES
Based on interpretations of the SEC staff set forth in no-action letters
issued to unrelated third parties, we believe that exchange debentures issued
under the exchange offer in exchange for old debentures may be offered for
resale, resold and otherwise transferred by any exchange debenture holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act, if:
- the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act;
- the exchange debentures are acquired in the ordinary course of the
holder's business; and
- the holder does not intend to participate in a distribution of the
exchange debentures.
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<PAGE>
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange debentures:
- cannot rely on the position of the staff of the SEC set forth in "Exxon
Capital Holdings Corporation" or similar interpretive letters; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
This prospectus may he used for an offer to resell, resale or other
retransfer of exchange debentures. With regard to broker-dealers, only
broker-dealers that acquired the old debentures as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives exchange debentures for its own account in
exchange for old debentures, where the old debentures were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange debentures. Please read the section captioned
"Plan of Distribution" for more details regarding the transfer of exchange
debentures.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old debentures
properly tendered and not withdrawn before expiration of the exchange offer. We
will issue $1,000 principal amount of exchange debentures in exchange for each
$1,000 principal amount of old debentures surrendered under the exchange offer.
Old debentures may be tendered only in integral multiples of $1,000.
The form and terms of the exchange debentures will be substantially
identical to the form and terms of the old debentures except the exchange
debentures:
- will be registered under the Securities Act;
- will not bear legends restricting their transfer; and
- will not provide for any additional interest upon our failure to fulfill
our obligations under the registration rights agreement to file, and
cause to be effective, a registration statement.
The exchange debentures will evidence the same debt as the old debentures.
The exchange debentures will be issued under and entitled to the benefits of the
same indenture that authorized the issuance of the old debentures. Consequently,
both series will be treated as a single class of debt securities under that
indenture. For a description of the indenture, see "Description of Exchange
Debentures" below.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old debentures being tendered for exchange.
As of the date of this prospectus, $46.9 million aggregate principal amount
of the old debentures are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of old debentures. There
will be no fixed record date for determining registered holders of old
debentures entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions of
the registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC. Old debentures that are not tendered for exchange in the
exchange offer will remain outstanding and continue to accrue interest and will
be entitled to the rights and benefits their holders have under the indenture
relating to the old debentures.
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We will be deemed to have accepted for exchange properly tendered old
debentures when we have given oral or written notice of the acceptance to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purposes of receiving the exchange debentures from us and delivering the
exchange debentures to their holders. Subject to the terms of the registration
rights agreement, we expressly reserve the right to amend or terminate the
exchange offer, and not to accept for exchange any old debentures not previously
accepted for exchange, upon the occurrence of any of the conditions specified
below under the caption "--Conditions."
Holders who tender old debentures in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes with respect to the exchange of old
debentures. We will pay all charges and expenses, other than applicable taxes
described below, in connection with the exchange offer. It is important that you
read the section labeled "--Fees and expenses" below for more details regarding
fees and expenses incurred in the exchange offer.
EXPIRATION OF THE EXCHANGE OFFER; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
[ ], 1999, unless, in our sole discretion, we extend it.
In order to extend the exchange offer, we will notify the exchange agent
orally (confirmed in writing) or in writing of any extension. We will notify the
registered holders of old debentures of the extension no later than 9:00 a.m.,
New York City time, on the business day after the previously scheduled
expiration of the exchange offer.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we will have no obligation to publish, advertise, or
otherwise communicate any public announcement, other than by making a timely
release to a financial news service.
CONDITIONS
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange debentures for, any old
debentures, and we may terminate the exchange offer as provided in this
prospectus before accepting any old debentures for exchange if in our reasonable
judgment:
- the exchange debentures to be received will not be tradeable by the
holder, without restriction under the Securities Act, the Exchange Act
and without material restrictions under the blue sky or securities laws
of substantially all of the states of the U.S.;
- the exchange offer, or the making of any exchange by a holder of old
debentures, would violate applicable law or any applicable interpretation
of the staff of the SEC; or
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer.
In addition, we will not be obligated to accept for exchange the old
debentures of any holder that has not made to us:
- the representations described under "--Purpose and effect of the exchange
offer," "--Procedures for tendering" and "Plan of Distribution"; and
- any other representations that may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
us an appropriate form for registration of the exchange debentures under
the Securities Act.
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We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any old debentures by giving oral or written notice of an
extension to their holders. During an extension, all old debentures previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any old debentures that we do not accept for exchange
for any reason without expense to their tendering holder as promptly as
practicable after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any old debentures not previously accepted for exchange,
upon the occurrence of any of the conditions of the exchange offer specified
above. We will give oral or written notice of any extension, amendment,
non-acceptance or termination to the holders of the old debentures as promptly
as practicable. In the case of any extension, the notice of extension will be
issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration of the exchange offer.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. If we
fail at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times.
In addition, we will not accept for exchange any old debentures tendered,
and will not issue exchange debentures in exchange for any old debentures, if at
that time a stop order is threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of record of old debentures may tender old debentures in the
exchange offer. To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and deliver the
letter of transmittal or facsimile to the exchange agent prior to the
expiration date; or
- comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
- the exchange agent must receive old debentures along with the letter of
transmittal; or
- the exchange agent must receive, before expiration of the exchange offer,
a timely confirmation of book-entry transfer of old debentures into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange agent" before expiration of the
exchange offer.
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
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THE METHOD OF DELIVERY OF OLD DEBENTURES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE HOLDER'S ELECTION AND
RISK. RATHER THAN MAIL THESE ITEMS, WE RECOMMEND THAT HOLDERS USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, HOLDERS SHOULD ALLOW SUFFICIENT TIME TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE EXPIRATION OF THE EXCHANGE OFFER.
HOLDERS SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR OLD DEBENTURES TO US.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose old debentures are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If the beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the letter of transmittal
and delivering its old debentures, either:
- make appropriate arrangements to register ownership of the old debentures
in the owner's name; or
- obtain a properly completed bond power from the registered holder of old
debentures.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the U.S.
or another "eligible institution" within the meaning of Rule 17Ad-15 under the
Exchange Act, unless the old debentures are tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the registered
holder of any old debentures, the old debentures must be endorsed or accompanied
by a properly completed bond power. The bond power must be signed by the
registered holder as the registered holder's name appears on the old debentures
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old debentures or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
these persons should so indicate when signing. Unless we waive this requirement,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the old debentures to the exchange
agent in accordance with its procedures for transfer. DTC will then send an
agent's message to the exchange agent. The term "agent's message" means a
message transmitted by DTC, received by the exchange agent and forming part of
the book-entry confirmation, to the effect that:
- DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering old debentures that are
the subject of the book-entry confirmation;
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- the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
- the agreement may be enforced against the participant.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt), acceptance of tendered old
debentures and withdrawal of tendered old debentures. Our determination will be
final and binding. We reserve the absolute right to reject any old debentures
not properly tendered or any old debentures the acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old debentures.
Our interpretation of the terms and conditions of the exchange offer, including
the instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old debentures must be cured within the time that we determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old debentures, neither we, the exchange agent nor any other person will incur
any liability for failure to give notification. Tenders of old debentures will
not be deemed made until those defects or irregularities have been cured or
waived. Any old debentures received by the exchange agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the exchange agent without cost to the tendering
holder, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
In all cases, we will issue exchange debentures for old debentures that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
- old debentures or a timely book-entry confirmation that old debentures
have been transferred into the exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
By signing the letter of transmittal, each tendering holder of old
debentures will represent to us that, among other things:
- any exchange debentures that the holder receives will be acquired in the
ordinary course of its business;
- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange debentures;
- if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange debentures;
- if the holder is a broker-dealer that will receive exchange debentures
for its own account in exchange for old debentures were acquired as a
result of market-making activities or other trading activities, that it
will deliver a prospectus, as required by law, in connection with any
resale of those exchange debentures (see "Plan of Distribution"); and
- the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of us or, if the holder is an affiliate, it will comply
with any applicable registration and prospectus delivery requirements of
the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old debentures at DTC for purposes of the exchange offer promptly after
the date of this prospectus; and any financial institution participating in
DTC's system may make book-entry delivery of old debentures by causing
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DTC to transfer old debentures into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. Holders of old debentures who are
unable to deliver confirmation of the book-entry tender of their old debentures
into the exchange agent's account at DTC or all other documents required by the
letter of transmittal to the exchange agent on or prior to the expiration date
must tender their old debentures according to the guaranteed delivery procedures
described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their old debentures but whose old debentures are
not immediately available or who cannot deliver their old debentures, the letter
of transmittal or any other required documents to the exchange agent or comply
with the applicable procedures under DTC's Automated Tender Offer Program before
expiration of the exchange offer may tender if:
- the tender is made through an eligible institution;
- before expiration of the exchange offer, the exchange agent receives from
the eligible institution either a properly completed and duly executed
notice of guaranteed delivery, by facsimile transmission, mail or hand
delivery, or a properly transmitted agent's message and notice of
guaranteed delivery:
- setting forth the name and address of the holder and the registered
number(s) and the principal amount of old debentures tendered;
- stating that the tender is being made by guaranteed delivery; and
- guaranteeing that, within three New York Stock Exchange trading days
after expiration of the exchange offer, the letter of transmittal, or
facsimile thereof, together with the old debentures or a book-entry
confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and
- the exchange agent receives the properly completed and executed letter of
transmittal, or facsimile thereof, as well as all tendered old debentures
in proper form for transfer or a book-entry confirmation, and all other
documents required by the letter of transmittal, within three New York
Stock Exchange trading days after expiration of the exchange offer.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old debentures according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of old debentures
may withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective:
- the exchange agent must receive a written notice, which may be by
telegram, telex, facsimile transmission or letter, of withdrawal at one
of the addresses set forth below under "--Exchange agent"; or
- holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the old debentures to be
withdrawn;
- identify the old debentures to be withdrawn, including the principal
amount of the old debentures to be withdrawn; and
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- where certificates for old debentures have been transmitted, specify the
name in which the old debentures were registered, if different from that
of the withdrawing holder.
If certificates for old debentures have been delivered or otherwise
identified to the exchange agent, then, prior to the release of those
certificates, the withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution, unless the withdrawing holder is an eligible institution.
If old debentures have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn old
debentures and otherwise comply with the procedures of the facility. We will
determine all questions as to the validity, form and eligibility, including time
of receipt, of notices of withdrawal, and our determination shall be final and
binding on all parties. We will deem any old debentures so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer. We will
return any old debentures that have been tendered for exchange but that are not
exchanged for any reason to their holder without cost to the holder, or in the
case of old debentures tendered by book-entry transfer into the exchange agent's
account at DTC according to the procedures described above, those old debentures
will be credited to an account maintained with DTC for old debentures, as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. You may retender properly withdrawn old debentures by following
one of the procedures described under "--Procedures for tendering" above at any
time on or before expiration of the exchange offer.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery:
The Bank of New York The Bank of New York
101 Barclay Street, 101 Barclay Street, Ground Level
Floor 7 East Corporate Trust Services Window
New York, New York 10286 New York, New York 10286
Attention: Reorganization Section Attention: Reorganization Section
</TABLE>
By Facsimile Transmission (for Eligible Institutions Only):
The Bank of New York
(212) 815-6339
To Confirm by Telephone or for Information Call: (212) 815-2824
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SHOWN
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
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FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitations by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer. The expenses are estimated in the aggregate to be approximately $80,000.
They include:
- SEC registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees; and
- printing and mailing costs.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
debentures under the exchange offer. The tendering holder, however, will be
required to pay any transfer taxes, whether imposed on the registered holder or
any other person, if:
- certificates representing old debentures for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of old
debentures tendered;
- tendered old debentures are registered in the name of any person other
than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
debentures under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with
the letter of transmittal, the amount of any transfer taxes will be billed to
the tendering holder.
ACCOUNTING TREATMENT
We will record the exchange debentures in our accounting records at the same
carrying value as the old debentures, which is the aggregate principal amount,
as reflected in our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in connection with
the exchange offer. We will record the expenses of the exchange offer as
incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. We urge you to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old debentures in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. However, we have no present plans to acquire any old debentures
that are not tendered in the exchange offer or to file a registration statement
to permit resales of any untendered old debentures.
32
<PAGE>
THE ACQUISITIONS
THE ACQUISITION AGREEMENTS
On August 14, 1998, we entered into a purchase agreement with CenturyTel of
the Northwest, Inc. and CenturyTel Wireless, Inc., both of which are wholly
owned subsidiaries of Century, relating to the acquisition of Century's Alaska
properties. We acquired all of the capital stock of Century's Alaska properties
for $411.8 million in cash on May 14, 1999.
On October 20, 1998, we entered into an asset purchase agreement with the
Municipality of Anchorage relating to the acquisition of ATU. Under the ATU
purchase agreement, we acquired substantially all of the assets and liabilities
of ATU for $265.1 million in cash on May 14, 1999.
These acquisitions and the related transactions and expenses were funded
with $441.7 million of senior bank financing at Alaska Communications Systems
Holdings, the issuance by Alaska Communications Systems Holdings of $150 million
of 9 3/8% senior subordinated notes, our issuance of $25 million in gross
proceeds of old debentures and $121.2 million in equity from Fox Paine Capital
Fund, members of management and other investors.
The Century purchase agreement contains customary representations,
warranties and covenants, as well as limited indemnification provisions under
which the sellers agreed to indemnify us for specified losses and we agreed to
indemnify the sellers for specified losses. The ATU purchase agreement contains
customary representations, warranties and covenants. The Century purchase
agreement and the ATU purchase agreement have each been filed as exhibits to the
registration statement of which this prospectus is a part and are incorporated
by reference herein.
RELATED AGREEMENTS
LICENSE AGREEMENT. Under a license agreement entered into on May 14, 1999
among the sellers of Century's Alaska properties and us, the sellers granted to
us an exclusive, royalty-free license to use several trade names, trademarks and
service marks owned by Century, including Pacific Telecom, PTI, PTINet-SM-, PTI
Communications-SM- and Cellulink-SM-, throughout Alaska in connection with our
provisioning of telecommunications services. The license agreement also contains
customary provisions relating to maintaining the quality of the names and marks,
protection against infringement and limited cross-indemnification provisions.
The license agreement is perpetual unless terminated by the sellers of Century's
Alaska properties upon 30 days' written notice to us upon a material breach of
the license agreement by us, which breach has not been cured or discontinued
within 90 days of notification by the sellers. The license agreement may also be
terminated under other limited circumstances.
TRANSITION SERVICES AGREEMENT. Under a transition services agreement dated
August 14, 1998, by and among Century's Alaska properties, on the one hand, and
Century and its affiliates, on the other hand, Century and its affiliates and
Century's Alaska properties formalized intercompany arrangements under which
suppliers provided Century's Alaska properties, among other transition services,
accounting, financial, information and data, technical, construction and
engineering, customer and purchasing and contract administration services prior
to the closing date. Century and its affiliates also agreed to continue to
provide the transition services until August 31, 1999.
Century and its affiliates agreed to provide the transition services in a
manner consistent with past practice in all material respects at their actual
cost plus operating costs and other costs relating to the provision of cellular
services. In addition, we agreed to pay Century and its affiliates a one-time
payment of $1.0 million in consideration for the continued provision of the
transition services.
33
<PAGE>
USE OF PROCEEDS
We contributed all of the proceeds from our offering of old debentures of
$25 million and the equity contributions from Fox Paine Capital Fund, members of
management and other investors of $121.2 million to Alaska Communications
Systems Holdings as common equity.
Alaska Communications Systems Holdings used the proceeds from its offering
of the Alaska Communications Systems Holdings senior subordinated notes, the
equity contributions from us and borrowings under the senior credit facility of
$688 million, after deducting discounts to the initial purchasers in the private
placement of the senior subordinated notes and other fees and expenses of the
acquisitions and related transactions, to:
- finance the aggregate consideration paid to Century in connection with
the acquisition of Century's Alaska properties, including repayment of
outstanding indebtedness of $43 million;
- finance the aggregate consideration paid to the Municipality of Anchorage
in connection with the ATU acquisition; and
- finance general corporate needs, including the purchase of fiber capacity
for $19.5 million.
The table below outlines the sources and uses of funds at Alaska
Communications Systems Holdings for the acquisitions and the related expenses.
You should keep the following points in mind as you read the table.
- The revolving credit facility allows for total borrowings of up to $75.0
million, of which $66.3 million remains available. See "Description of
Other Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A
facility, $150.0 million of term loan B facility and $135.0 million of
term loan C facility.
- The purchase of Century's Alaska properties includes the repayment of
existing indebtedness.
- Working capital was used to fund in part the purchase of $19.5 million of
fiber capacity.
<TABLE>
<CAPTION>
AMOUNT
-------------------
<S> <C>
(DOLLARS IN
MILLIONS)
SOURCES:
Revolving credit facility (of Alaska Communications Systems Holdings)............... $ 6.7
Term loan facilities (of Alaska Communications Systems Holdings).................... 435.0
9 3/8% Senior subordinated notes due 2009 (of Alaska Communications Systems
Holdings)......................................................................... 150.0
13% Senior discount debentures due 2011............................................. 19.9
Equity contributions................................................................ 126.3
------
Total sources..................................................................... $ 737.9
------
------
USES:
Purchase of Century's Alaska properties............................................. $ 411.8
Purchase of ATU..................................................................... 265.1
Working capital..................................................................... 12.6
Transaction fees and expenses....................................................... 48.4
------
Total uses........................................................................ $ 737.9
------
------
</TABLE>
34
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. This
table should be read in conjunction with "Use of Proceeds," "Unaudited Pro Forma
Combined Financial and Operating Data" and the historical financial statements
of Century's Alaska properties and ATU, and the related notes, included in this
prospectus.
You should keep the following points in mind as you read the table.
- Total borrowings of up to $75.0 million are available to Alaska
Communications Systems Holdings under the revolving credit facility, of
which $66.3 million remains available. See "Description of Other
Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A
facility, $150.0 million of term loan B facility and $135.0 million of
term loan C facility.
- Stockholders' equity consists of the proceeds of $128.0 million of common
equity contributed by Fox Paine Capital Fund, members of management and
other investors to us, all of which we contributed to Alaska
Communications Systems Holdings.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------
<S> <C>
(DOLLARS IN
MILLIONS)
Total debt (including current portion):
Capital lease obligations............................................... $ 7.5
Revolving credit facility (of Alaska Communications Systems Holdings)... 8.7
Term loan facilities (of Alaska Communications Systems Holdings)........ 435.0
9 3/8% Senior subordinated notes due 2009 (of Alaska Communications
Systems Holdings)..................................................... 150.0
13% Senior discount debentures due 2011................................. 19.9
Other................................................................... 1.6
------
Total debt............................................................ 622.7
Total stockholders' equity................................................ 122.2
------
Total capitalization.................................................. $ 744.9
------
------
</TABLE>
35
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--ALEC HOLDINGS
The following table sets forth selected historical consolidated financial
data of ALEC Holdings. You should keep the following points in mind as you read
the table.
- We derived the selected historical consolidated financial data for the
six months ended June 30, 1999 and as of June 30, 1999 from the unaudited
consolidated financial statements of ALEC Holdings, which are included 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 net operating results of ALEC
Holdings' equipment sales and rental, payphone and internet businesses.
- "Defined EBITDA" is net income before interest expense, interest income,
income taxes, depreciation and amortization and equity earnings (loss) of
minority investments. Defined EBITDA includes the net operating results
of equipment sales and rental, payphone and internet businesses. Defined
EBITDA is not intended to represent cash flow from operations as defined
by GAAP and should not be considered as an alternative to net income as
an indicator of our operating performance or cash flows. Defined EBITDA
is included in this prospectus to provide additional information with
respect to our ability to satisfy our debt service, capital expenditure
and working capital requirements. While Defined EBITDA is frequently used
as a measure of operations and the ability of a company to meet debt
service requirements, it is not necessarily comparable to other similarly
titled captions of other companies due to the differences in methods of
calculation.
- For purposes of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings before extraordinary items, income taxes
and fixed charges. "Fixed charges" consist of interest expense,
amortization of debt financing costs, and the component of rental expense
believed by management to represent the interest component of rental
expense. Earnings were inadequate to cover fixed charges by $5,746,000
for the six months ended June 30, 1999.
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 ALEC Holdings and the related notes, included in this prospectus.
36
<PAGE>
ALEC HOLDINGS, INC.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
<S> <C>
(IN
THOUSANDS)
-------------
OPERATING DATA:
Operating revenue
Local telephone.................................................................................. $ 32,375
Cellular......................................................................................... 4,568
Long distance.................................................................................... 1,387
-------------
Total operating revenue...................................................................... 38,330
Operating expenses
Local telephone.................................................................................. 23,249
Cellular......................................................................................... 3,039
Long distance.................................................................................... 1,575
Depreciation and amortization.................................................................... 8,093
-------------
Total operating expenses..................................................................... 35,956
-------------
Operating income................................................................................... 2,374
Interest expense, net.............................................................................. (7,624)
Other income (expense)............................................................................. (496)
-------------
Income (loss) before income taxes.................................................................. (5,746)
Income taxes....................................................................................... --
-------------
Net loss........................................................................................... $ (5,746)
-------------
-------------
OTHER FINANCIAL DATA:
Defined EBITDA..................................................................................... $ 9,971
Defined EBITDA margin.............................................................................. 26.0%
Capital expenditures............................................................................... $ 27,231
Ratio of earnings to fixed charges................................................................. N/A
OTHER DATA (END OF PERIOD):
Access lines in service............................................................................ 320,096
Cellular subscribers............................................................................... 69,581
Cellular penetration............................................................................... 15.1%
BALANCE SHEET DATA (END OF PERIOD)
Total assets....................................................................................... $ 796,346
Long-term debt including current portion........................................................... 614,013
Stockholders' equity............................................................................... 122,219
</TABLE>
37
<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 included 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
and which, in the opinion of management, include all adjustments,
consisting solely of normal, recurring adjustments, necessary to present
fairly the information they contain.
- We derived the summary combined 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 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.
- 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.
- Century acquired the Alaska properties on December 1, 1997. 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.
- "Other income (expense)" includes the net operating results of Century's
Alaska properties' equipment sales and rental, payphone and internet
businesses.
- 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 audited combined financial statements of
Century's Alaska properties, and the related notes, included in this prospectus.
38
<PAGE>
<TABLE>
<CAPTION>
CENTURY'S ALASKA PROPERTIES
-------------------------------------------------------------------------------------
CENTURY
-------------------------------------
PACIFIC TELECOM THREE
---------------------------------------------- MONTHS
ENDED
YEAR ENDED DECEMBER 31, JAN. 1, 1997 DEC. 1, 1997 YEAR ENDED MARCH 31,
------------------------------- TO TO DEC. 31, ---------
1994 1995 1996 NOV. 30, 1997 DEC. 31, 1997 1998 1998
--------- --------- --------- ------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenue
Local telephone........................ $ 66,636 $ 70,540 $ 75,950 $ 79,330 $ 10,255 $ 121,933 $ 27,967
Cellular............................... 2,766 4,531 4,823 5,120 181 2,576 408
--------- --------- --------- ------------- ------------- ----------- ---------
Total operating revenue............ 69,402 75,071 80,773 84,450 10,436 124,509 28,375
Operating expenses
Local telephone........................ 37,664 38,043 41,789 42,404 6,434 72,008 16,451
Cellular............................... 2,042 3,147 3,381 3,082 147 2,128 330
Depreciation and amortization.......... 13,089 14,316 15,348 15,823 2,466 30,459 7,209
--------- --------- --------- ------------- ------------- ----------- ---------
Total operating expenses........... 52,795 55,506 60,518 61,309 9,047 104,595 23,990
--------- --------- --------- ------------- ------------- ----------- ---------
Operating income......................... 16,607 19,565 20,255 23,141 1,389 19,914 4,385
Interest expense, net.................... (2,459) (2,331) (1,996) (2,169) (171) (1,405) (302)
Other income (expense)................... 1,094 (1,020) (33) (298) 53 356 357
--------- --------- --------- ------------- ------------- ----------- ---------
Income before income taxes............... 15,242 16,214 18,226 20,674 1,271 18,865 4,440
Income taxes............................. 5,962 5,713 6,737 7,746 736 9,218 2,214
--------- --------- --------- ------------- ------------- ----------- ---------
Net income............................... $ 9,280 $ 10,501 $ 11,489 $ 12,928 $ 535 $ 9,647 $ 2,226
--------- --------- --------- ------------- ------------- ----------- ---------
--------- --------- --------- ------------- ------------- ----------- ---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities............................. $ 22,510 $ 29,917 $ 34,589 $ 21,213 $ 5,588 $ 38,291 $ 11,025
Net cash provided (used) by investing
activities............................. (21,151) (19,587) (20,611) (13,554) (3,279) (26,664) 1,947
Net cash used by financing activities.... (1,659) (10,578) (12,947) (8,209) (2,563) (6,770) (11,587)
Defined EBITDA........................... 30,790 32,861 35,570 38,666 3,908 50,729 11,951
Defined EBITDA margin.................... 44.4% 43.8% 46.4% 49.2% 41.4% 45.1% 46.3%
Capital expenditures..................... $ 21,001 $ 19,437 $ 20,465 $ 14,575 $ 1,825 $ 26,799 $ 2,321
Ratio of earnings to fixed charges....... 4.5x 4.3x 4.8x 5.5x 3.2x 4.5x 2.5x
OTHER DATA (END OF PERIOD):
Access lines in service.................. 73,563 77,660 82,969 -- 124,869 131,858 128,023
Cellular subscribers..................... 3,058 3,950 5,573 -- 2,096 2,945 2,546
Cellular penetration..................... 2.1% 2.7% 3.8% -- 3.7% 5.2% 4.6%
BALANCE SHEET DATA (END OF PERIOD)
Total assets............................. $ 157,536 $ 161,323 $ 162,834 -- $ 459,175 $ 472,660 $ 466,301
Long-term debt including current
portion................................ $ 43,089 43,616 44,294 -- 42,950 43,408 42,683
Stockholders' equity..................... 82,317 90,841 92,137 -- 391,314 400,962 395,359
<CAPTION>
1999
---------
<S> <C>
OPERATING DATA:
Operating revenue
Local telephone........................ $ 30,815
Cellular............................... 546
---------
Total operating revenue............ 31,361
Operating expenses
Local telephone........................ 17,270
Cellular............................... 396
Depreciation and amortization.......... 7,785
---------
Total operating expenses........... 25,451
---------
Operating income......................... 5,910
Interest expense, net.................... (358)
Other income (expense)................... 80
---------
Income before income taxes............... 5,632
Income taxes............................. 2,709
---------
Net income............................... $ 2,923
---------
---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities............................. $ 14,103
Net cash provided (used) by investing
activities............................. (2,339)
Net cash used by financing activities.... (6,753)
Defined EBITDA........................... 13,775
Defined EBITDA margin.................... 49.6%
Capital expenditures..................... $ 2,200
Ratio of earnings to fixed charges....... 5.0x
OTHER DATA (END OF PERIOD):
Access lines in service.................. 134,276
Cellular subscribers..................... 3,417
Cellular penetration..................... 5.2%
BALANCE SHEET DATA (END OF PERIOD)
Total assets............................. $ 473,669
Long-term debt including current
portion................................ 43,094
Stockholders' equity..................... 403,885
</TABLE>
39
<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 included 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 summary 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 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 net operating results of ATU's
equipment sales and rental, and payphone business and 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 principles.
- "EBITDA" excludes equity in earnings (loss) of minority investments of
$(46,158), $158,000 and $(2,945,000) for the years ended December 31,
1996, 1997 and 1998 and $(250,000) and $(509,000) for the three months
ended March 31, 1998 and 1999.
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 audited financial statements of ATU, and the related notes,
included in this prospectus.
40
<PAGE>
<TABLE>
<CAPTION>
ATU
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
<CAPTION>
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenue
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)
Defined EBITDA....................................... 39,549 39,608 41,239 45,567 52,550 12,648 13,016
Defined EBITDA margin................................ 37.5% 36.1% 35.6% 36.4% 37.1% 38.5% 35.6%
Capital expenditures................................. $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
Ratio of earnings to fixed charges................... 1.5x 1.4x 1.4x 1.4x 1.5x 1.7x 1.4x
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>
41
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
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 of Century's Alaska properties;
- the acquisition of ATU;
- the purchase of fiber capacity for $19.5 million; and
- the financings necessary to complete these transactions,
as if they had occurred on January 1, 1998 for the Statement of Operations. 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.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
CENTURY'S
ALASKA ACQUISITION PRO FORMA
PROPERTIES ATU ADJUSTMENTS COMBINED
---------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Operating revenue
Local telephone.......................................... $ 121,933 $ 121,057 $ -- $ 242,990
Cellular................................................. 2,576 29,225 -- 31,801
Long distance............................................ -- 6,815 -- 6,815
-------- --------- ----------- -----------
Total operating revenue.............................. 124,509 157,097 -- 281,606
Operating expenses
Local telephone.......................................... 72,008 74,240 1,033(c) 147,281
Cellular................................................. 2,128 19,961 -- 22,089
Long distance............................................ -- 10,395 -- 10,395
Depreciation and amortization............................ 30,459 29,608 1,154(a) 61,221
-------- --------- ----------- -----------
Total operating expenses............................. 104,595 134,204 2,187 240,986
-------- --------- ----------- -----------
Operating income........................................... 19,914 22,893 (2,187) 40,620
Interest expense, net...................................... (1,405) (6,427) (49,265)(b) (57,097)
Equity in earnings (loss) of subsidiaries.................. -- (2,945) -- (2,945)
Other income (expense)..................................... 356 49 -- 405
-------- --------- ----------- -----------
Income (loss) before income taxes........................ 18,865 13,570 (51,452) (19,017)
Income tax expense (benefit)............................... 9,218 -- (9,218)(d) --
-------- --------- ----------- -----------
Net income (loss).......................................... $ 9,647 $ 13,570 $ (42,234) $ (19,017)
-------- --------- ----------- -----------
-------- --------- ----------- -----------
</TABLE>
42
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO SIX MONTHS
SIX MONTHS MAY 14, 1999 (ACQUISITION) ENDED
ENDED ---------------------------- JUNE 30, 1999
JUNE 30, 1999 CENTURY'S ACQUISITION PRO FORMA
ALEC HOLDINGS ALASKA PROPERTIES ATU ADJUSTMENTS COMBINED
--------------- ----------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Operating Revenue
Local telephone....................... $ 32,375 $ 45,538 $ 46,380 $ -- $ 124,293
Cellular.............................. 4,568 931 10,277 -- 15,776
Long distance......................... 1,387 -- 3,780 -- 5,167
------- ------- --------- ----------- -------------
Total operating revenue........... 38,330 46,469 60,437 -- 145,236
Operating expenses
Local telephone....................... 23,249 27,305 29,120 378(c) 80,052
Cellular.............................. 3,039 957 7,677 -- 11,673
Long distance......................... 1,575 -- 4,841 -- 6,416
Depreciation and amortization......... 8,093 8,912 11,655 258(a) 28,918
------- ------- --------- ----------- -------------
Total operating expenses.......... 35,956 37,174 53,293 636 127,059
Operating income........................ 2,374 9,295 7,144 (636) 18,177
Interest expense, net................... (7,624) (700) (2,439) (18,272)(b) (29,035)
Equity in earnings (loss) of
subsidiaries.......................... -- -- (1,282) -- (1,282)
Other income............................ 125 921 -- -- 1,046
Other expense........................... (621) -- 76 -- (545)
------- ------- --------- ----------- -------------
Income (loss) before taxes............ (5,746) 9,516 3,499 (18,908) (11,639)
Income tax expense (benefit)............ -- 3,944 -- (3,944)(d) --
------- ------- --------- ----------- -------------
Net income (loss)....................... $ (5,746) $ 5,572 $ 3,499 $ (14,964) $ (11,639)
------- ------- --------- ----------- -------------
------- ------- --------- ----------- -------------
</TABLE>
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(a) Represents the increase in amortization expense as a result of the increase
in goodwill due to the application of purchase accounting and the
$19,500,000 purchase of fiber capacity. Goodwill is amortized over 40 years,
and the fiber capacity is amortized over 20 years.
(b) Represents the net adjustment to interest expense as a result of the
borrowings under the revolving credit facility, the term loan facilities,
the Alaska Communications Systems Holdings senior subordinated notes and the
exchange debentures, calculated as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1,
1999
YEAR ENDED TO MAY 14,
DECEMBER 31, 1998 1999
----------------- --------------
<S> <C> <C>
Revolving credit facility(1)........................................ $ 523 $ 196
Term Loan A Facility(2)............................................. 11,625 4,359
Term Loan B Facility(3)............................................. 12,000 4,500
Term Loan C Facility(4)............................................. 11,138 4,177
9 3/8% Senior subordinated notes due 2009(5)........................ 14,063 5,274
13% Senior discount debentures due 2011(6).......................... 3,250 1,219
Interest on long term obligations assumed(7)........................ 600 225
------- -------
Pro forma cash interest expense(8).................................. 53,198 19,950
Amortization of deferred financing costs(9)......................... 3,750 1,406
Amortization of OID on discount debentures.......................... 148 55
------- -------
Pro forma interest expense.......................................... 57,097 21,411
Historical interest expense, net.................................... (7,832) (3,139)
------- -------
Total......................................................... $ 49,265 $ 18,272
------- -------
------- -------
</TABLE>
----------------------------
(1) Represents interest on the $6.7 million that was drawn under the
revolving credit facility of Alaska Communications Systems Holdings on
the closing date using an assumed interest rate of 7.75%.
(2) Represents interest on the $150.0 million Term Loan A Facility of Alaska
Communications Systems Holdings using an assumed interest rate of 7.75%.
(3) Represents interest on the $150.0 million Term Loan B Facility of Alaska
Communications Systems Holdings using an assumed interest rate of 8.00%.
(4) Represents interest on the $135.0 million Term Loan C Facility of Alaska
Communications Systems Holdings using an assumed interest rate of 8.25%.
(5) Represents interest on the $150.0 million senior subordinated notes of
Alaska Communications Systems Holdings using an interest rate of 9.375%.
(6) Represents interest on the $25.0 million exchange debentures using an
interest rate of 13.0%.
(7) Represents interest on $7.5 million of long-term obligations assumed by
us at an interest rate of 8.00%.
(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 $207,000 for the six months ended June 30, 1999.
(9) Deferred financing costs are amortized over the term of the related debt
(an average life of eight years for all borrowings).
(c) Represents the estimated annual management fee to be paid to Fox Paine &
Company prorated for six months. The Fox Paine & Company management fee is
based on 1% of Defined EBITDA as calculated without regard to the fee.
Defined EBITDA is net income before interest expense, interest income,
income taxes, depreciation and amortization and equity in earnings (loss) of
minority investments
(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.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We were formed in 1998 to acquire telecommunications properties in Alaska.
On August 14, 1998, we entered into an agreement to acquire Century's Alaska
properties. Century's Alaska properties are the incumbent provider of local
telephone services to over 131,000 access lines in Juneau, Fairbanks and more
than 70 rural communities in Alaska. Century's Alaska properties also provide
cellular services and internet access services. Beginning in August 1998,
members of management provided advisory and management consulting services to
Century's Alaska properties relating to their day-to-day business operations
under a consulting agreement between Century and LEC Consulting Corporation, a
company formed by members of management.
On October 20, 1998, we entered into an agreement to acquire substantially
all of the assets and liabilities of ATU from the Municipality of Anchorage. ATU
is the incumbent provider of local telephone services to over 168,000 access
lines in the Municipality of Anchorage and surrounding communities. ATU also
provides cellular and long distance services. In addition, ATU holds minority
interests in companies that deliver wireless cable television, internet access
and wholesale long distance. Prior to May 1999, ATU also held a minority
interest in a provider of home security services.
We completed the acquisitions of PTI Alaska and ATU on May 14, 1999. In
connection with these acquisitions, we:
- received equity contributions from Fox Paine Capital Fund, L.P., members
of management and other investors in the amount of $121.2 million and
- issued $46.9 million in principal amount of the old debentures and
warrants for aggregate gross proceeds of $25.0 million.
All $146.2 million of the proceeds from these financings, the fees and expenses
of which were borne by Alaska Communications Systems Holdings, were contributed
to Alaska Communications Systems Holdings as common equity.
The table below outlines the sources and uses of funds at Alaska
Communications Systems Holdings for the acquisitions and the related expenses.
You should keep the following points in mind as you read the table.
- The revolving credit facility allows for total borrowings of up to $75.0
million, of which $66.3 million remains available. See "Description of
Other Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A
facility, $150.0 million of term loan B facility and $135.0 million of
term loan C facility.
- The purchase of Century's Alaska properties includes the repayment of
existing indebtedness.
- Working capital was used to fund in part the purchase of $19.5 million of
fiber capacity.
45
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
<S> <C>
SOURCES:
Revolving credit facility........................................................... $ 6.7
Term loan facilities................................................................ 435.0
9 3/8% Senior subordinated notes due 2009........................................... 150.0
Equity contributions................................................................ 146.2
------
Total sources..................................................................... $ 737.9
------
------
USES:
Purchase of Century's Alaska properties............................................. $ 411.8
Purchase of ATU..................................................................... 265.1
Working capital..................................................................... 12.6
Transaction fees and expenses....................................................... 48.4
------
Total uses........................................................................ $ 737.9
------
------
</TABLE>
Prior to the consummation of the acquisitions of Century's Alaska properties
and ATU, we had no operations. Accordingly, the following discussion should be
read in conjunction with our consolidated financial statements, the combined
financial statements of Century's Alaska properties and the consolidated
financial statements of ATU, and the related notes, included in this prospectus.
REVENUES. Century's Alaska properties generate revenue through:
- the provision of local telephone services, including:
- basic local service to customers within its service areas,
- network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls,
- enhanced services,
- ancillary services, such as billing and collection, and
- universal service payments; and
- the provision of wireless services.
Century's Alaska properties generate additional revenue through the provision of
internet access and miscellaneous equipment sales, which are recorded net of
expenses as "Other income (expense)."
ATU generates revenue through:
- the provision of local telephone services, including
- basic local service to customers within its service areas,
- network access services to interexchange carriers, for origination and
termination of interstate and intrastate long distance phone calls,
- enhanced services and
- ancillary services, such as billing and collection;
- the provision of wireless services; and
- the provision of long distance services.
In addition, ATU recognizes its proportionate share of the net income or loss of
its minority-owned investments.
46
<PAGE>
The historically stable revenue and cash flow of local exchange operations
are the result of 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, such as Century's Alaska properties, to support
the high cost of providing universal service in rural markets. Other service
revenue is generated from ancillary services, enhanced services, such as voice
mail, or 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, such as:
- intrastate and interstate revenue settlement methodologies,
- whether an access line is used by a business or residential subscriber,
- calling patterns (intrastate and interstate),
- customers' selection of various local rate plan options,
- selection of enhanced calling services 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 exchange carrier's local exchanges that
pay for local telephone service and
- the 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 also bill and collect long distance charges
from interexchange carrier customers on behalf of the interexchange
carrier. 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 of return are set by the FCC and the RCA for interstate and intrastate
access charges, respectively, and may change from time to time.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
The following unaudited table summarizes our combined operations for the six
month periods ended June 30, 1999 and June 30, 1998. For the six months ended
June 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 June 30, 1999. For the six months ended June 30,
1998, the summary
47
<PAGE>
information represents the historical combined operating results of Century's
Alaska properties and ATU for that six month period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
<S> <C> <C>
1998 1999
---------- ----------
OPERATING REVENUES
Local Telephone......................................................................... $ 117,429 $ 124,319
Cellular................................................................................ 14,122 15,776
Long Distance........................................................................... 2,487 5,141
---------- ----------
Total operating revenues............................................................ 134,038 145,236
OPERATING EXPENSES
Cost of sales and operating expenses--local............................................. 70,944 79,674
Cost of sales and operating expenses--cellular.......................................... 9,782 11,432
Cost of sales and operating expenses--long distance..................................... 4,410 6,416
Depreciation and amortization........................................................... 26,575 28,901
---------- ----------
Total operating expenses............................................................ 111,711 126,423
---------- ----------
OPERATING INCOME.......................................................................... 22,327 18,813
Interest expense, net................................................................... (4,267) (10,763)
Other income (expense).................................................................. (667) (781)
---------- ----------
INCOME BEFORE TAXES....................................................................... 17,393 7,269
Income Taxes............................................................................ 4,304 3,944
---------- ----------
NET INCOME................................................................................ $ 13,089 $ 3,325
---------- ----------
DEFINED EBITDA............................................................................ $ 48,439 $ 48,215
---------- ----------
</TABLE>
OPERATING REVENUES
Combined operating revenues increased 8.4% for the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. Local telephone,
cellular and long distance revenues all increased as compared to the prior six
month period. The revenue increases were primarily due to increased traffic as
follows:
- 9.7% increase in access lines to 320,096 from 291,844,
- 104.2% increase in long distance minutes of use mitigated somewhat by a
7.7% decrease in revenue dollars per minute and
- 15.2% increase in cellular subscribers to 69,581 from 60,425.
OPERATING EXPENSES
Operating expense increased 13.2% for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. Operating expenses increased to
87.0% of revenues for the six months ended June 30, 1999 as compared to 83.3% of
revenues for the six months ended June 30, 1998. Adjusted for one-time and
transaction related costs of approximately $6.6 million and reducing revenues by
$1.6 million for non-recurring items related to a prior period, operating
expenses would be 83.4% of revenues for the current six month period.
LOCAL TELEPHONE cost of sales and operating expenses increased $8.7 million,
or 12.3%. The one-time costs discussed above contributed to the increase. Sales
and customer service expense, two
48
<PAGE>
components of local telephone customer expense, increased for the current six
month period primarily due increased competition in the local market
LONG DISTANCE cost of sales and operating expenses increased in dollars but
decreased as a percentage of sales as long distance operations benefited from
economies of scale, particularly in general and administrative expenses.
CELLULAR cost of sales and operating expenses increased 16.9% for the six
months ended June 30, 1999 as compared to the six months ended June 30, 1998
primarily due to the increase costs of supporting a larger customer base.
DEPRECIATION AND AMORTIZATION expense increased 8.7% due to increases in
plant in service and additional amortization of goodwill from date of
acquisition to June 30, 1999.
INTEREST EXPENSE, NET
Interest expense, net increased 152.2% for the six months ended June 30,
1999 as compared to the six months ended June 30, 1998 due to the increase in
acquisition related long-term debt.
OTHER INCOME (EXPENSE)
Other income expense for the six months ended June 30, 1999 consists
primarily of non-recurring income and expenses ancillary to telephone operations
and losses in minority interests. Other income is approximately $1.2 million and
includes approximately $0.5 million of one-time revenues and $0.7 million of
other ancillary revenues. Other expense is approximately $0.7 million and
consists primarily of miscellaneous non-recurring expense items. The other
component of other expense is losses in minority interests of $1.3 million.
Other income (expense) decreased by 28.3% for the six months ended June 30, 1999
as compared to the six months ended June 30, 1998. A significant factor was
increased losses in minority interests.
NET INCOME AND DEFINED EBITDA
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. Defined EBITDA is not driven by the
increase in interest expense. Defined EBITDA includes the net operating results
of equipment sales and rental, payphone, internet businesses and non-recurring
income and expense items which are included below operating income in the line
"Other income (expense), net." Defined EBITDA decreased approximately $0.2
million. As the Company integrates the acquisitions, management anticipates
strengthening of earnings and Defined EBITDA.
CENTURY'S ALASKA PROPERTIES
Century acquired the Alaska properties on December 1, 1997 as part of its
acquisition of Pacific Telecom, Inc. 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.
49
<PAGE>
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 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998.
OPERATING REVENUES
Combined operating revenues increased 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.
LOCAL TELEPHONE
Local telephone revenues increased 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 paralleled a 4.9% growth in access lines from the
previous period. Access revenues increased $1.0 million, or 7.1%, as compared to
the prior three month period.
CELLULAR
Cellular revenues increased 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% during that period.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased marginally for the
three months ended March 31, 1999 as compared to the three months ended March
31, 1998.
50
<PAGE>
CELLULAR
Cost of sales and operating expenses--cellular increased 20.0% for the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998. This increase is due to the additional cost required to support additional
cellular customers.
DEPRECIATION AND AMORTIZATION
The 8.0% increase in depreciation and amortization for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998 was
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 from $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 77.6% as compared to the three months
ended March 31, 1998. The decrease was primarily due to recognition of
non-recurring expenses 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 higher taxable income in the more recent three month period.
NET INCOME AND DEFINED EBITDA
Increases in Net Income and Defined EBITDA are 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. Defined
EBITDA includes the net operating results of equipment sales and rental,
payphone and internet businesses which are included below operating income in
the line "Other income (expense)."
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 satisfy FCC cross-
51
<PAGE>
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>
1996 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
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 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
52
<PAGE>
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 $4.9 million in higher cash and cash equivalents
and $11.5 million higher 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 income and
expenses ancillary to telephone operations. 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. Higher
income taxes were due to higher taxable income in 1998 as compared to 1997.
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.
DEFINED EBITDA
As a result of the factors described above, Defined 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. Defined EBITDA
includes the net operating results of equipment sales and rental, payphone and
internet businesses.
53
<PAGE>
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
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.
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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 income and
expenses ancillary to telephone operations. For the year ended December 31,
1996, this activity 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
higher income taxes were due to higher 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.
DEFINED EBITDA
As a result of the factors described above, Defined EBITDA increased $7.0
million to $42.6 million for the year ended December 31, 1998 as compared to
$35.6 million for the year ended December 31, 1996. In particular, the local
telephone and cellular customer bases increased. Defined EBITDA includes the net
operating results of equipment sales and rental, payphone and internet
businesses.
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 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
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
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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 $3,204, $3,672 and $3,187 and 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 Alaska Communications Systems Holdings expects 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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
OPERATING REVENUES
Operating revenues increased 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 2.1% for the three months ended March 31,
1999 as compared to the three months ended March 31, 1998. Comparing the same
periods, local service revenues decreased 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.
Network access revenues increased 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 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 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.
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OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased 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 local market to
competition.
CELLULAR
Cost of sales and operating expenses--cellular increased 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 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 is not a facilities-based carrier, a primary component of long
distance cost of sales is the semi-fixed expense of leased lines. The number of
leased lines is fixed 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 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 and goodwill
amortization.
INTEREST EXPENSE, NET
Interest expense, net decreased 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.
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 (expense) changed only marginally between the two three month periods.
NET INCOME AND DEFINED EBITDA
The 0.8% increase in net income and the 2.9% increase in Defined EBITDA
result from 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. Because ATU was
a public utility of the Municipality of Anchorage, it was exempt from U.S.
federal and state income taxes. Because earnings and losses from equity
investments do not directly affect the operating cash requirements of ATU, these
amounts have been excluded from the Defined EBITDA calculation. Defined EBITDA
includes the net operating results of equipment sales and rental, payphone and
internet businesses which are included below operating income in the line "Other
income (expense)."
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<PAGE>
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.
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.
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<PAGE>
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 higher
expenses were offset by $3.5 million of lower 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. Higher expenses were due to increased
dedicated facilities leases, access payments, advertising and administrative
expenses to support greater 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 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 higher
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 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,
LLC, and Internet Alaska, Inc., respectively.
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<PAGE>
NET INCOME
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.
DEFINED EBITDA
As a result of the factors described above, Defined EBITDA increased $7.0
million to $52.6 million for the year ended December 31, 1998 as compared to
$45.6 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. Because
earnings and losses from equity investments do not directly affect the operating
cash requirements of ATU, these amounts have been excluded from the Defined
EBITDA calculation. Defined EBITDA includes the net operating results of
equipment sales and rental, payphone and internet businesses.
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 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.
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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 from 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.
INTEREST EXPENSE, NET
Interest expense, net remained relatively unchanged. Higher interest expense
from higher outstanding long-term debt balances was offset by higher interest
income associated with higher cash balances.
OTHER INCOME (EXPENSE)
Other income (expense) includes minority investment earnings of $0.2 million
for the year ended December 31, 1997, 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 federal and state
income taxes.
DEFINED EBITDA
As a result of the factors described above, Defined EBITDA increased $4.4
million to $45.6 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. Because earnings and
losses from equity investments do not directly affect the operating cash
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requirements of ATU, these amounts have been excluded from the Defined EBITDA
calculation. Defined EBITDA includes the net operating results of equipment
sales and rental, payphone and internet businesses.
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 complete 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 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. For carrier access billing, ATU will 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 management and repair support systems for Century's
Alaska properties are scheduled to be transitioned in October 1999 to ATU
platforms, which have been represented by the vendors as year 2000 compliant.
Since January 1, 1997, ATU has spent approximately $22.8 million to upgrade
and maintain its information technology systems. While each of these upgrades
related to systems that, based on representations by the vendors, we believe are
year 2000 compliant, the expenditures for upgrading these systems also included
costs of replacing otherwise obsolete systems. We expect to spend an additional
$4.3 million to make our information technology systems year 2000 compliant by
the end of October 1999.
Century's Alaska properties' cellular systems are supported by Novatel and
Northern Telecom switching and cell site equipment. The Novatel switches, which
serve southeast Alaska, are not currently year 2000 compliant, but these systems
are in the process of being replaced by year 2000 compliant systems, with
completion expected by October 1999 at a cost of approximately $4.0 million.
Given the progress made to date, we do not anticipate delays in finalizing
and implementing year 2000 readiness solutions by the end of October 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
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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 October
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 both customers 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 six months ended June 30, 1999 include operations
from acquired telephone operations for the period from May 15, 1999 to June 30,
1999. On this basis, our cash flows from operating activities were approximately
$13.0 million, primarily as a result of a decrease in accounts receivable and
the add-back of depreciation as a non-cash component of the net loss.
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 June 30, 1999, we had approximately $6.0 million in
working capital, including approximately $4.0 million in cash and cash
equivalents.
We currently have commitments for capital expenditures totaling
approximately $30 million and anticipate spending approximately $60 million,
including the $30 million already committed, during the next 12 months. We
expect a significant portion of this spending to be directed at expanding and
upgrading our telecommunications infrastructure and computer systems.
We believe that internally generated cash flows will be adequate to satisfy
our capital requirements for the next twelve months. Incremental borrowings on
our line of credit are available should any shortfalls occur due to the timing
of inflows and outflows.
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Our initial debt borrowings, including those of Alaska Communications
Systems Holdings, and equity contributions were sufficient to fund the
consummation of the acquisitions of Century's Alaska properties and ATU. As a
result of the financing for these acquisitions, we have a substantial amount of
long-term debt. Interest payments on the old debentures and on the exchange
debentures, commencing on November 15, 2004, on the Alaska Communications
Systems Holdings senior subordinated notes and on borrowings by Alaska
Communications Systems Holdings under the senior credit facility, as well as
amortization of borrowings under the senior credit facility, represent
significant obligations of ours. Interest on the old debentures and on the
exchange debentures, commencing on November 15, 2004, and on the Alaska
Communications Systems Holdings senior subordinated notes is payable
semiannually. Interest on borrowings under the senior credit facility is payable
quarterly, and the senior credit facility requires annual amortization payments
commencing on May 14, 2002. Alaska Communications Systems Holdings also has a
$75.0 million revolving credit facility, approximately $66.3 million of which is
undrawn and available.
Management believes additional debt availability and internally generated
cash flow from operations will be adequate to meet our anticipated capital and
liquidity requirements. Other than debt service, our future liquidity demands
relate to capital expenditures and working capital.
The local telephone business is a regulated business that 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. We are in the process of completing a digital
upgrade of our cellular network and expect to finish this upgrade during the
last six months of 1999, spending approximately $7.0 million. The implementation
of our long distance strategy is capital intensive. We recently purchased fiber
capacity for $19.5 million. This purchase will enable us to use our own leased
facilities in developing our business. If we successfully implement our long
distance strategy and grow our long distance business, we will be required to
make substantial purchases of additional fiber capacity. In addition to the
purchase of fiber capacity, we anticipate total capital expenditures in 1999 of
approximately $58.0 million, of which approximately $48.0 million will be for
our local exchange business and approximately $10.0 million will be for our
cellular business. We do not expect our capital expenditure requirements to
increase materially in the foreseeable future for our local exchange or cellular
businesses.
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, or
- the effects of competition.
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.
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 is
effective for fiscal years beginning after June 15, 1999. We are currently
analyzing the impact SFAS No. 133 will have on our financial statements.
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SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE, was issued in March 1998. SOP 98-1, among other
things, requires that the costs of the software, whether purchased or developed
internally, be capitalized and amortized over the estimated useful life of the
software. Adoption of SOP 98-1 is required as of January 1, 1999. We do not
expect SOP 98-1 to have a material impact on our financial statements.
RECENT DEVELOPMENTS
On July 6, 1999, we issued 1,624,907 shares of our common stock to Cook
Inlet Region, Inc. for $10 million in cash, all of which was subsequently
contributed to Alaska Communications Systems Holdings as additional equity
capital. In connection with Cook Inlet's investment, it became a party to our
stockholders' agreement described under the caption "Ownership of Capital
Stock--Stockholders' Agreement."
OUTLOOK
We expect the current demand for telecommunications services in Alaska to
continue to grow, particularly as data-related usage leads to increased access
line demand and industry-wide demand for wireless services increases. 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
federal and state levels that could have a significant impact on our operations.
The APUC held hearings the week of June 21, 1999 and on June 30, 1999 issued
orders revoking the rural exemptions applicable to Century's Alaska rural local
exchange operating companies. We have sought reconsideration of the APUC rulings
by the RCA, and we may also consider seeking judicial review of the APUC
rulings. On September 1, 1999, we filed a petition with the RCA seeking
suspension or modification of interconnection duties and other market structure
reforms for Century's Alaska local exchange carriers in selected markets. We
also requested the removal or reduction of regulatory limitations on these local
exchange carriers. If reconsideration or appeal of the APUC's orders or
suspension or modification of interconnection duties is unsuccessful, or if
market structure reforms are not implemented or if they are implemented in a
manner that is unfavorable to us, then we may be unable to provide local
telephone service on a profitable basis to all our service areas. See
"Regulation."
We believe there are numerous potential facilities-based competitors for
each of our services in our service areas. During the last session, 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. We cannot predict at this
time whether or to what extent proposals included in the bill will be offered
again and enacted into law. However, with the exception of Anchorage, we do not
expect facilities-based competition for our services to begin in the near
future, either because of regulatory restrictions pertaining to negotiation or
arbitration or because of the significant capital investment that would be
required to initiate facilities-based competition. We believe that our existing
competitors in Anchorage will continue to market their services aggressively and
that we may be forced to react to special promotions or discounts in order to
retain our customer base. If that is required, it may materially adversely
affect our profitability.
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.
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INDUSTRY OVERVIEW
OVERVIEW
In recent years, the telecommunications industry has undergone rapid change
due to deregulation, construction of additional infrastructure and introduction
of new technologies, all of which have resulted in increased competition and
demand for telecommunications services. The Alaskan telecommunications industry
is influenced by many of these factors, though Alaska's unique characteristics
further enhance the need for telecommunications services. Alaska has widely
dispersed population centers across a large geographic area and under-developed
ground transportation infrastructure. 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
services and internet access. Management estimates the telecommunications market
in Alaska generated revenues of approximately $810 million in 1997, of which
approximately $300 million was attributable to local telephone, $60 million to
wireless, $430 million to long distance and $20 million to internet.
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 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 support
mechanism for rural local exchange carriers are universal service payments. See
"Regulation."
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ALASKAN OVERVIEW
The population of Alaska was approximately 614,020 at June 30, 1998, having
grown at a compound annual rate of approximately 1.3% over the past ten years.
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 a 0.8% compound annual rate projected for the U.S. as a whole.
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. In addition, Alaskans benefit from the absence of state
personal income taxes.
Alaska's economic activity centers around three urban areas: Anchorage,
Juneau, and Fairbanks. 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.
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BUSINESS
OUR COMPANY
We are the leading diversified, full-service telecommunications provider in
Alaska offering local telephone, wireless, long distance and internet services
to business and residential customers throughout the state. We have over $875
million invested in our network, a state-of-the-art telecommunications
infrastructure that includes over 485 miles of fiber optic cable and 176
switching facilities.
LOCAL TELEPHONE. With over 300,000 access lines, we are the 16th largest
local exchange carrier in the U.S. and the leading local exchange carrier in
Alaska. We provide service to 75% of the Alaskan population and 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 66,000 subscribers. Our service areas
cover all major population centers and highway corridors.
LONG DISTANCE AND INTERNET. We provide long distance services to
approximately 26,000 customers, primarily in Anchorage, and internet access
services to approximately 16,000 customers throughout the state.
Century's Alaska properties and ATU have achieved strong operating results
through stable internal growth and strategic acquisitions. For the year ended
December 31, 1998, we would have had consolidated pro forma revenues of $282
million, operating income of $41 million, a net loss of $19 million and EBITDA
of $102 million.
We believe that the outlook for continued growth in our local telephone
business is favorable due to the fundamentals of the local exchange business,
including:
- continued demand for core telephone services and enhanced service
offerings, such as voice mail and call waiting,
- access line growth due to higher consumer bandwidth needs for internet,
data and video usage and
- improving regulatory environments.
We also intend to leverage our strength in our core local telephone business to
grow our wireless, long distance and internet businesses.
COMPANY BACKGROUND
We were formed in 1998 by Fox Paine & Company and members of management to
acquire Century's Alaska properties and ATU.
CENTURY'S ALASKA PROPERTIES. Century's Alaska properties are the incumbent
provider of local telephone services to over 131,000 access lines in Juneau,
Fairbanks and more than 70 rural communities in Alaska. Century's Alaska
properties also provide cellular service to approximately 3,000 subscribers,
primarily in Juneau, and owns 10 megahertz personal communications services, or
PCS, licenses covering Anchorage, Juneau and Fairbanks. In addition, Century's
Alaska properties provide internet services to approximately 16,000 customers
statewide.
ATU. ATU is the largest local exchange carrier in Alaska and is the
incumbent provider of local telephone services to over 168,000 access lines,
primarily in Anchorage. ATU also provides cellular service to over 63,000
subscribers primarily in Anchorage and Fairbanks under the MACtel brand name.
MACtel is the leading cellular provider in Alaska and has achieved a penetration
rate of
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approximately 16% in its service areas. ATU began providing long distance
service through ATU Long Distance on a resale basis in the fall of 1997 and
serves approximately 26,000 customers, primarily in Anchorage.
STRATEGY
The principal elements of our business strategy include:
CAPITALIZE ON GROWTH OPPORTUNITIES. We intend to capitalize on growth
opportunities by expanding our offerings of enhanced services, wireless
services, long distance services, data services and internet access services and
by marketing these services under a common branding strategy. We believe that
our statewide presence and history of providing quality service will allow us to
achieve greater brand awareness and service penetration than our competitors.
- ACCESS LINE GROWTH. We intend to focus our sales and marketing efforts to
capitalize on continued growth in access line demand. We also intend to
stimulate additional demand for access lines through the provision of
advanced high-speed data services, such as digital subscriber lines and
integrated services digital networks in our major markets.
- ENHANCED SERVICES. We intend to market enhanced services, such as call
waiting, caller ID and voice mail. Customer penetration of enhanced
services (the number of enhanced services divided by the number of access
lines) in our service areas is approximately 82%, while other local
exchange carriers in the U.S. have achieved penetration levels of 100% to
120%, on average. Increasing penetration rates will improve revenue per
customer that, due to the fixed cost nature of the local exchange
business, are expected to result in increasing EBITDA.
- WIRELESS SERVICES. As the only statewide cellular service provider in
Alaska, we believe our cellular operations represent a significant growth
opportunity. Our cellular operations currently penetrate only 8% of the
population in our Fairbanks and southeast Alaska service areas, compared
with MACtel's 18% penetration rate in Anchorage. We also plan to complete
the digital conversion of our entire cellular network by the end of 1999.
After this conversion, we will be able to offer our customers enhanced
digital cellular services and features. We believe that the market for
wireless services will continue to grow with the growth in the wireless
industry as a whole.
- LONG DISTANCE SERVICES. As the incumbent local exchange carrier in our
service areas, we are well positioned to offer long distance services to
our existing customers. Management intends to leverage the long distance
experience it gained while operating the largest long distance provider
in Alaska, to improve the long distance operations at ATU and to expand
ATU's long distance business in the service areas of Century's Alaska
properties. In connection with the settlement of a number of outstanding
disputes we recently purchased fiber capacity between Alaska's major
population centers and between Alaska and the contiguous 48 states of the
U.S. This capacity will allow us both to improve the quality of our
service offerings and realize future operating cost efficiencies.
IMPROVE OPERATING EFFICIENCIES. We intend to use our operating, regulatory,
marketing and management expertise to improve operations and profitability.
There are several redundancies between the operations of Century's Alaska
properties and those of ATU. These redundancies include material management,
purchasing, network planning/engineering and customer care centers that we
intend to consolidate to enhance operating efficiencies. We also intend to
support the general and administrative requirements of Century's Alaska
properties and ATU on a common basis.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS. We will pursue selective regional
acquisitions in Alaska and the western U.S. as opportunities arise, subject to
regulatory approval. During the last five years, the regional Bell operating
companies and GTE Corporation have made significant divestitures and
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recently announced plans for additional divestitures of their rural
telecommunications properties to allow them to focus on urban markets.
Additionally, according to the United States Telephone Association, there are
approximately 1,300 independent telephone companies in the U.S. with fewer than
25,000 access lines. We believe that these industry dynamics will provide
opportunities for growth through acquisitions.
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, the 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 and internet service offerings.
The following table sets forth the components of our revenues on a pro forma
basis for the year ended December 31, 1998:
<TABLE>
<CAPTION>
REVENUE SOURCE PERCENT
- ------------------------------------------------------------------------------------ AMOUNT -----------
-------------------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Local telephone services
Basic local service............................................................... $ 78.6 27.9%
Enhanced services................................................................. 9.5 3.4
Network access...................................................................... 85.6 30.4
Cellular............................................................................ 31.8 11.3
Long distance....................................................................... 6.8 2.4
Universal service................................................................... 13.5 4.8
Other............................................................................... 55.8 19.8
------ ---
Total........................................................................... $ 281.6 100%
------ ---
------ ---
</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 appropriate state
regulatory authorities. 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.
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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. Note that 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. Also, the number of access lines shown for ATU
represents all revenue producing access lines, whether connected to retail or
wholesale customers:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Access lines
Century's Alaska properties ..................... 73,563 77,660 82,969 124,869 131,858
ATU.............................................. 144,869 147,934 154,752 158,486 168,536
% Growth
Century's Alaska properties ..................... -- 5.6% 6.8% 50.5% 5.6%
ATU.............................................. -- 2.1% 4.6% 2.4% 6.3%
</TABLE>
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' bill for basic local services. Customer penetration of enhanced
services, or the number of enhanced services divided by the number of access
lines, in our service areas is currently 82%, while other rural local exchange
carriers in the U.S. have achieved penetration levels of 100% to 120%, on
average.
NETWORK ACCESS
Network access services include long distance, or toll, calls that typically
involve more than one company in the provision of telephone service. We bill
access charges to each interexchange carrier for the use of our facilities to
access the customer, as described below. 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. Rural local exchange carriers
typically are allowed to charge higher access rates to interexchange carriers
than urban local exchange carriers as an implicit means of recovering a portion
of the costs of providing telephone service to rural service areas.
INTRASTATE ACCESS CHARGES. We generate intrastate access revenue when an
intrastate long distance call which involves an interexchange carrier is
originated by a customer within the same state but in another local calling
area. 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 and approved by the RCA.
INTERSTATE ACCESS CHARGES. We generate interstate access revenue when an
interstate long distance call is originated by a customer calling 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 and approved by the
FCC rather than by the RCA.
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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. Management intends to integrate the cellular operations of
Century's Alaska properties 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, both Century's Alaska properties and
MACtel have experienced growth in the number of cellular subscribers served and
the total population over the past five years:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998(A)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total populations
Century's Alaska properties ............................. 53,484 54,286 55,101 55,927 56,766
MACtel................................................... 289,813 294,160 298,573 397,434 403,396
Ending subscribers
Century's Alaska properties ............................. 1,194 1,300 1,678 2,096 2,945
MACtel................................................... 13,684 24,855 37,651 53,035 63,627
Ending penetration
Century's Alaska properties ............................. 2.2% 2.4% 3.1% 3.7% 5.2%
MACtel................................................... 4.7% 8.4% 12.6% 13.3% 15.8%
</TABLE>
- ------------------------------
(a) MACtel acquired the Alaska RSA #1 B-Side cellular property from PTI Alaska
on January 5, 1998, which covered a population of 94,383 and had 5,497
subscribers on the date of acquisition. The chart includes the RSA #1 B-Side
cellular property for MACtel as of December 31, 1997. The RSA #1 B-Side
cellular property has been excluded from the data for PTI Alaska presented
in the table.
Although MACtel has achieved cellular penetration rates of 18% and 19% in
Anchorage and Kenai, respectively, 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.
We also own 10 megahertz E Block PCS licenses covering Anchorage, Juneau and
Fairbanks, which were purchased by Century's Alaska properties in 1997. We have
not built out these licenses and do not plan to do so in the near future.
Management is analyzing 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 a 2.5% market share, based on revenues. We intend to
expand our long distance operations into the service areas of Century's Alaska
properties during 1999. Before August 1998, Century's Alaska properties were
precluded from entering the long distance business by a non-competition
agreement with AT&T Alascom, Inc. which was signed when Pacific Telecom sold
Alascom, Inc. to AT&T in 1995. To date, our long distance operations have
generated operating losses.
Recently, we and GCI, Inc. entered into a settlement agreement under which
we agreed to enter into a number of new business arrangements and to settle a
number of outstanding disputes, including
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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 fiber
capacity between the major population centers in Alaska and between Alaska and
the contiguous 48 states of the U.S. from GCI. We agreed to pay $19.5 million
for one DS-3 from Fairbanks to Anchorage, one-half DS-3 from Anchorage to
Juneau, and one DS-3 from Anchorage to Seattle. One DS-3 is equivalent to 28
multiplexed T-1 channels. We expect that, despite the large initial cost of
acquiring this capacity, the transition away from resale dependence will over
the longer term reduce the cost of providing long distance and internet access
services. We will require significant additional fiber capacity to grow our long
distance business. We have various alternatives for the purchase of this
additional capacity, including a limited purchase option with GCI. Under our
agreement with GCI, the price for additional capacity, if available, will be the
lowest price at which GCI sells capacity to another purchaser. In addition, GCI
has agreed to match the lowest price we receive for comparable capacity from
other suppliers. We intend to pursue purchases of additional capacity from
another supplier that has indicated it will complete the construction of a fiber
optic cable over similar routes in the third quarter of 1999. Although the
capacity to be purchased from GCI covers our primary long distance routes, we
expect to lease capacity over routes serving other areas of the state.
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. Specifically, our long distance
affiliates are
- required 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;
- prohibited from jointly marketing or bundling local and long distance
services until competition develops in the local market and
- prevented 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.
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 federal Universal Service Fund is funded by monthly
customer fees charged to interexchange carriers, local exchange carriers and
other telecommunications providers and distributed to us on a monthly basis
based upon our costs for providing local service. See "Regulation."
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.
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INTERNET ACCESS
We provide internet access services to approximately 16,000 customers under
the PTINet( SM) brand name. For the year ended December 31, 1998, Century's
Alaska properties generated $5.1 million in internet access revenues. 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 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. Internet revenues are recorded, net of expenses, in our
income statement under "Other income (expense)."
NETWORK FACILITIES
LOCAL TELEPHONE SERVICES
As of December 31, 1998, we owned 74 exchanges serving over 300,000 access
lines. All of our exchanges are served by digital switches, provided
predominately by Northern Telecom. 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, such as information delivery that
improves the delivery speeds of data, video and voice traffic, known as ATM, and
the efficient switching of variable-length data packets, known as Frame Relay.
Network operations and monitoring will be 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. In addition,
we have the right to use Century's network operating control center until August
31, 1999 under a transition services agreement. We also have customer care
facilities in Anchorage and Fairbanks with extensive business hours to
efficiently handle customer inquiries and orders for service.
WIRELESS SERVICES
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.
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;
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- 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--i.e.,
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.
In September 1997, GCI and AT&T Alascom, two 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 sell 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, 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. We
expect GCI and AT&T Alascom to continue to compete for local telephone business.
As "rural telephone companies" under the Telecommunications Act, Century's
Alaska local telephone operating subsidiaries had been granted rural exemptions
from the obligation to lease their facilities to competitive local exchange
carrier seeking to interconnect with our network. Thus, we do not currently face
competition for local telephone services in the service areas of Century's
Alaska properties, although Century's Alaska properties voluntarily offered
competitors the opportunity to begin resale service at wholesale rates in 1997.
Despite these rural exemptions, in the fall of 1997, Century's Alaska
properties received a request from GCI for unbundled network element
interconnection. Following failed negotiations between Century's Alaska
properties and GCI, the APUC conducted a hearing in which it affirmed Century's
Alaska properties' rural exemptions. This ruling was appealed and was remanded
to the APUC for further proceedings. The APUC terminated the rural exemptions on
June 30, 1999 and ordered the start of a nine-month cycle of negotiation or
arbitration as provided for in the Telecommunications Act. We expect that we may
eventually be required to allow unbundled network element interconnection in
some of the service areas of Century's Alaska properties but believes that our
services offerings and customer relationships and management's expertise in the
local telephone business will provide us a competitive advantage over new local
exchange carriers. In addition, we believe that the lifting of the rural
exemptions provides the RCA the opportunity to implement market structure
reforms that would mitigate the financial impact caused by competition, although
we cannot assure you that the RCA will take any actions that would so benefit
us.
We expect increasing competition from providers of various services that
provide users the means to bypass its 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 services, we anticipate that existing
and emerging wireless technologies may increasingly compete with local exchange
carrier services. Technological developments in cellular telephone features,
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personal communications services, digital microwave and other wireless
technologies are expected to further permit the development of alternatives to
traditional landline services.
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 one
other cellular provider in each of its wireless service areas, including AT&T
Wireless Services, Century and Mercury Communications. Competition is based on
price, quality and network coverage. In addition, there are six PCS licensees in
each of our wireless service areas. We hold 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 build-out 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.
Our long distance operations are subject to regulatory restrictions.
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 on line 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. At Century's Alaska properties,
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local telephone products and services are provided under the PTI
Communications(SM) brand name, wireless services are marketed under the
Cellulink(SM) brand name and Century's Alaska properties' internet access
services are sold under the PTINet brand name. Similarly, at ATU local telephone
products and services are marketed under the ATU brand name, cellular services
are marketed under the MACtel brand name and long distance services are marketed
under the ATU LD brand name. Each of these product lines has separate sales
forces and marketing departments.
Our sales and marketing strategy, subject to regulatory restrictions, is to:
- market aggressively current and future service offerings, including
packaged service offerings,
- centralize sales and marketing functions and
- enhance direct sales efforts.
We also believe that we can leverage our position as an integrated provider of
multiple telecommunications services with attractive positions in local access
and cellular services. By pursuing a marketing strategy that takes advantage of
these characteristics, we believe we can increase penetration of new product
offerings, maintain 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,
packaged local telephone services into attractively-priced service offerings and
packaged these local telephone services with wireless, long distance and
internet services, neither Century's Alaska properties nor ATU has focused on
these types of offerings. Packaged offerings 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.
We intend to establish a sales and marketing division where marketing
strategies will be centralized and sales functions will be based locally. To
enhance our direct selling efforts, we intend to establish additional customer
and retail service centers in its larger service areas, such as Juneau and
Kenai/ Soldotna, and to enhance call center operations through a combination of
technology investments and training and incentive compensation programs for call
center employees. In addition, we intend to begin marketing Century's Alaska
properties' cellular operations under the MACtel brand name. We will continue to
review our branding strategy and believe that further rationalization of our
brand names may be appropriate.
SUPPLIERS
We believe we have strong, long-term relationships with our numerous
communications vendors. Our primary switching vendor is Northern Telecom, a
leading provider of advanced switching systems to rural service providers. 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 also
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 June 18, 1999, we employed
a total of 1,107 full-time employees, 750 of whom were represented by unions. In
addition, we employ approximately 32 part-time employees in various support
positions throughout the organization.
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Century's Alaska properties have a collective bargaining agreement with the
International Brotherhood of Electrical Workers 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 that was scheduled to expire in August
1999. Management and the IBEW are in the process of concluding negotiations
regarding the terms under which ATU's represented employees would be
transitioned to Century's Alaska properties' collective bargaining agreement. We
believe this transition will be completed prior to October 1, 1999. ATU's
existing agreement remains in full force and effect while the parties continue
negotiating, and we are confident that a mutually acceptable transition can be
negotiated with the IBEW. 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.
MINORITY INTERESTS
We own minority interests in the entities described below:
- a 47% equity interest in Alaska Network Systems, Inc., which provides
wholesale intrastate and interstate long distance services;
- a 30% share of Internet Alaska, which serves approximately 30,000
customers, primarily in Anchorage and Fairbanks; and
- a 33% interest in Alaskan Choice Television, a wireless cable television
provider whose business plan requires significant additional capital.
While we are not obligated to make an additional investment in Alaskan
Choice Television, we are currently considering a number of alternatives
which address our proportionate interest.
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. See Note 7 to the consolidated financial statements of ATU included
herein.
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.
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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. Most of these sites are leased.
LEGAL PROCEEDINGS
We currently, and from time to time, are involved in litigation and
regulatory proceedings incidental to the conduct of our business. None of
Century's Alaska properties nor ATU is a party to any lawsuit or proceeding
that, in the opinion of management, is likely to have a material adverse effect
on us.
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REGULATION
OVERVIEW
Our operations are subject to the separate but concurrent jurisdictional
control of both the federal government and the State of Alaska. Century's Alaska
local telephone operating subsidiaries, Telephone Utilities of the Northland,
Telephone Utilities of Alaska and 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. As a result, the FCC exercises
jurisdiction over all of our interstate and wireless communications activities.
Century's Alaska local telephone operating companies and ATU are also "public
utilities" within the meaning of the Alaska statutes and are, therefore,
governed by the applicable rules and regulations of the RCA.
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. 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 are required to obtain
operating authorizations prior to providing international, interstate and
wireless communications services. The FCC also regulates transfers of control
and assignments of these operating authorizations. 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.
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.
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 or other rates to competing carriers
interconnecting with our networks or reselling our services, and
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- high-cost support mechanisms, such as the federal Universal Service Fund,
and the state high-cost fund.
Rates for regulated services, and the amount of high-cost support, are set by
the FCC with respect to interstate services and by the APUC 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.
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 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.
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 each
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
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return on the investment of all of the participants. Currently, the authorized
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.
The FCC has initiated a proceeding to review its rates and policies
governing interstate exchange access and the rate of return applicable to
incumbent local exchange carriers. Because most rural local exchange carriers
are subject to rate-of-return regulation, the outcome of this proceeding will
directly affect the earning prospects for rural and small local exchange
carriers. The outcome of this proceeding, 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 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 Century's Alaska
properties, the APUC required that a general rate proceeding be initiated for
PTI Communications by June of 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 Century's Alaska 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 carriers charges
interexchange carrier's fees for originating or terminating long distance calls
on its
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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. These revisions also allow local exchange carriers to exit the pool in the
event of competitive entry. These local exchange carriers 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 Alaska Universal Service Fund serves as a complement to the federal
Universal Service Fund. 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 may 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 is examining whether existing support paid to carriers for
switching costs is reasonable or should be changed, eliminated or reduced.
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 make the provision of universal
service prohibitively expensive.
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 appropriate
conditions for competitive entry exist.
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;
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- 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.
The Telecommunications Act also requires incumbent local exchange carriers
to:
- 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
carriers' 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 local exchange carrier, excluding the
portion of costs avoided by the local exchange carrier. In the case of unbundled
network elements interconnection, rates are based on costing methodologies that
employ a forward-looking pricing methodology known as total element long run
incremental cost. The Telecommunications Act specifies that resale and unbundled
network elements 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.
In January of 1997, ATU entered into an interconnection agreement with GCI,
which provides for resale and unbundled network elements interconnection, and
with AT&T Alascom, which provides for resale interconnection.
Century's Alaska 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 to continue until the APUC determined that interconnection
was technically feasible, not unduly economically burdensome and consistent with
the Telecommunications Act's universal service provisions, or until Alaska's
state legislature acted to remove the rural exemptions directly.
On June 30, 1999, the APUC ordered the rural exemptions of Telephone
Utilities of the Northland, Telephone Utilities of Alaska and PTI Communications
terminated in order to increase
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competition in their rural exchange markets. As a result, these companies are no
longer exempt from the Telecommunications Act's interconnection requirements.
While the short-term effect of the orders will likely be delayed for up to nine
months under the Telecommunications Act while interconnection agreements are
negotiated, the eventual effect of the orders, taken alone as written by the
APUC without reference to potential modification and suspension of those
companies' interconnection duties, would likely be materially adverse to their
operations. We have sought reconsideration of the APUC's orders and may also
consider appealing them.
Separately, on September 1, 1999, we filed a petition with the RCA seeking
suspension or modification of interconnection duties and addressing market
structure reforms for the Fairbanks and Juneau-Douglas markets. In that
petition, Telephone Utilities of Alaska, Telephone Utilities of the
Northland,with respect to North Pole, Alaska only, and PTI Communications
proposed tariffed terms and conditions, including pricing, for resale of their
services at wholesale discounts 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 these local operating utilities
to operate subject to competitive regulation and that the RCA remove or reduce
other regulatory limitations now imposed on these local operating utilities,
effective January 1, 2001. We believe the RCA must act on this petition within
the next 180 days, but the RCA retains the power to grant, deny or modify the
petition, in whole or in part, and we cannot predict whether and to what extent
the petition will be approved. Grant of the petition would provide increased
operating and marketing flexibility that we believe over time could partially or
substantially offset the potential for adverse effect caused by termination of
the rural exemptions.
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. We
cannot predict at this time whether or to what extent proposals included in the
bill will be offered again and enacted into law. To the extent the markets of
Century's Alaska rural local exchange carriers are opened to competition by the
APUC's termination of their rural exemptions, we do not believe that the
marginal effect of passage of the proposed bill on our business would be
material.
For the first three months of 1999, Century's Alaska local exchange carriers
benefiting from rural exemptions accounted for 42.3% of our revenues and 52.3%
of our operating income. Loss of the rural exemptions, absent compensating
measures, such as rate increases, or market structure reforms, such as the
replacement of implicit subsidies by explicit support mechanisms, or rate
deaveraging, could adversely affect our ability to meet our financial
obligations.
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:
- requiring the FCC to make implicit subsidies explicit;
- expanding the types of communications carriers required to pay universal
service support; 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.
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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
carriers) only after determining that the designation of an additional eligible
telecommunications carrier will serve 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 Century's Alaska 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 implemented new rules for interstate universal service
support. The new rules provide for separate federal Universal Service Fund
programs for rural and non-rural telephone companies. The new rules for
non-rural companies base support upon "forward-looking costs" derived from cost
proxy models. It is uncertain whether the forward-looking cost model will fully
compensate local exchange carriers for the cost of providing local service in
high-cost areas. The FCC set the implementation date for the new system at
January 1, 1999, which has now been postponed to January 1, 2000 for non-rural
telephone companies. The FCC has established a Rural Task Force, which will
investigate how to adapt the proxy cost models approved for larger carriers for
rural telephone companies. The FCC has indicated that it will not implement a
new system for application to rural telephone companies for an additional three
years after the first step implementation, or at least until January 1, 2001. In
the interim, support mechanisms for rural carriers remain unchanged. The FCC
revised its rules for non-rural carriers in May 1999 and sought comment on
aspects of its revised plan.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions of the individuals who
currently serve as our executive officers and directors. Subject to our
obligations under the employment agreements described under the caption "--New
Employment Arrangements," our directors and officers are elected at the annual
meeting of our shareholders and will serve until they resign or are removed or
until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ----------------------------------- ---------------------------------------------------------------------- ---------
<S> <C> <C>
Charles E. Robinson Chairman, President and Chief Executive Officer 65
Wesley E. Carson Executive Vice President and Assistant Secretary 49
Michael E. Holmstrom Senior Vice President and Chief Financial Officer 56
Benjamin L. Jarvis Senior Vice President of LEC Operations 62
F. Scott Davis President and CEO of MACtel 63
Michael E. Bowman Vice President, Engineering 43
Mark A. Foster President of ATU Long Distance; Vice President, Products and Services 38
Strategy
John Ayers Senior Vice President of Marketing and Sales 56
Donn T. Wonnell Executive Vice President, General Counsel and Secretary 52
Kenneth Laing Vice President, Operations 57
Michael L. Schuh Vice President of Information Technology and Chief Information Officer 40
Dean A. Ryland Vice President, Finance and Accounting, Controller and Assistant 48
Treasurer
Thomas R. Meade Vice President, Revenue Requirements 48
Kevin P. Hemenway Vice President and Treasurer 39
Priscilla B. Andres Vice President, Human Resources 49
W. Dexter Paine, III Director 38
Saul A. Fox Director 45
J. Russell Triedman Director 29
Carl H. Marrs Director 50
</TABLE>
See "Ownership of Capital Stock--Stockholders' Agreement" for information
regarding election and terms of our directors and other related arrangements.
CHARLES E. ROBINSON
Mr. Robinson, our Chairman, President 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 to 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 Executive Vice President and Assistant Secretary since July
1998, has over 19 years of telecommunications experience. Mr. Carson began his
career in telecommunications in 1980
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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 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.
MICHAEL E. HOLMSTROM
Mr. Holmstrom, our Senior Vice President and Chief Financial Officer since
January 1999, will be 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.
BENJAMIN L. JARVIS
Mr. Jarvis, our Senior Vice President of LEC Operations since November 1998,
has over 35 years of experience in the telecommunications industry. Mr. Jarvis
served Pacific Telecom in operations management from 1966 to 1982. From 1982 to
1998, Mr. Jarvis held various leadership positions with Harris Corporation, Bay
Area Teleport and Harbor Bay Telecommunications, American Satellite Inc., U.S.
Intelco Networks Inc. and two competitive local exchange carriers operating in
emerging markets.
F. SCOTT DAVIS
Mr. Davis is responsible for our statewide cellular operations as President
and Chief Executive Officer of MACtel, which position he has held since August
1995. Mr. Davis has been with MACtel since 1990, previously serving as Sales and
Marketing Manager, and then General Manager. Mr. Davis has more than 30 years of
experience in the wireless industry beginning in 1966 at Airsignal
International, Inc., where he advanced to the position of Executive Vice
President before he left in 1982. From 1982 to 1987 he served as Senior Vice
President and General Manager for McCaw Communications Companies, Inc., with
responsibility for Alaska and Hawaii. Mr. Davis worked in Alaska as a
communications broker and consultant from 1987 to 1990. Mr. Davis holds a B.B.A.
degree from Washburn University.
MICHAEL E. BOWMAN
Mr. Bowman was appointed Vice President of Engineering with responsibility
for ATU's operations and managing statewide central office engineering and
network administration in September 1999. Prior to joining us, Mr. Bowman had
been with ATU since 1975, rising to become Chief Operations Officer. Mr. Bowman
has also held positions of significant leadership within the International
Brotherhood of Electrical Workers.
MARK A. FOSTER
Mr. Foster is President of ATU Long Distance and Vice President, Products
and Services Strategy, positions he has held since June 1999. Mr. Foster has
over 15 years experience in the utility industry,
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including a term as a Commissioner on the Alaska Public Utility Commission. Mr.
Foster served as President of the Western Conference of Public Service
Commissioners in 1993. Prior to joining ATU Long Distance in 1997, Mr. Foster
was a consultant specializing in strategic planning for utilities transitioning
into increasingly competitive markets.
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.
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 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.
KENNETH LAING
Mr. Laing was appointed Vice President of Operations with statewide
responsibility for customer service and outside plant engineering, as well as
direction of operations for the PTI Communications properties, in September
1999. Mr. Laing's telecommunications experience includes more than 30 years
serving in various Senior management capacities in local exchange telephone and
long distance companies. Mr. Laing began his telecommunications career in 1968
as a technician for RCA, building the Alaskan telecommunications network that
preceded Alascom. Mr. Laing subsequently served in various leadership positions
within Alascom, including Vice President of Administration and Vice President of
Local Exchange Operations for Pacific Telecom's Montana and Washington
divisions. Mr. Laing was an executive of LEC Consulting Corporation before our
acquisition of Century's Alaska properties and ATU. Mr. Laing, a veteran of the
U.S. Air Force, attended the University of Washington and Northeastern
University.
MICHAEL L. SCHUH
Mr. Schuh, our Vice President of Information Technology and Chief
Information Officer since November 1998, has more than 22 years of information
technology experience, with 17 of those years devoted to telecommunications. Mr.
Schuh worked for Pacific Telecom from 1986 to 1998, initially as an Information
Services Manager and later as Senior Manager, LEC Operations, Customer Services
and System Support. Prior to joining Pacific Telecom, Mr. Schuh held various
positions in the computer operations department of the Municipality of Anchorage
and Alascom from 1979 through 1986.
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
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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.
THOMAS R. MEADE
Mr. Meade joined us in May 1999 as Vice President, Revenue Requirements.
From 1996 through May of 1999, Mr. Meade was employed by TelAlaska, Inc. where
he served as Vice President, Regulatory and Legislative Affairs. Prior to that
time, he worked for ATU for 12 years, holding various positions in finance,
revenue requirements, jurisdictional cost separations, and regulatory affairs.
Mr. Meade started his telecommunications career with Alascom in 1977, where he
held supervisory and managerial positions in finance and accounting. Mr. Meade
has an MBA in finance from the University of Michigan and a BA from Cornell
University.
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 and
Touche, LLP as a C.P.A. and manager, performing both audit and consulting
services. From 1983 to 1986, Mr. Hemenway 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.
PRISCILLA B. ANDRES
Ms. Andres has served as our Vice President of Human Resources since
September 1998. Prior to joining us, she was Senior Manager of Corporate
Compensation, Benefits and HRIS for a high technology capital equipment
manufacturing company in Portland, Oregon. Ms. Andres was employed during the
previous 11 years by Pacific Telecom and its parent company, PacifiCorp, in
increasingly responsible human resources positions in the area of compensation,
benefits, employee relations, employee services, employment, labor relations and
health services. Ms. Andres has a bachelor's degree from the University of
Portland.
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
Paine, Mr. Paine served as a senior partner of Kohlberg & Company, where he was
responsible for establishing and leading the firm's west coast office. Prior to
joining Kohlberg & Company, Mr. Paine served as a general partner at Robertson
Stephens & Company. In his more than 11 years in leveraged investing, Mr. Paine
has focused on the supermarket, healthcare, telecommunications and automotive
industries. 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.,
where he became one of KKR's most senior general partners prior to his
retirement from KKR in 1996. In his more than 13 years at KKR, Mr. Fox was
involved in
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numerous leveraged transactions in a wide variety of industries. Prior to
joining KKR, Mr. Fox was an attorney at Latham & Watkins, a leading national 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.
J. RUSSELL TRIEDMAN
Mr. Triedman, a director since June 1999, has been a Vice President of Fox
Paine & Company since 1998. Upon completion of law school in 1996, Mr. Triedman
worked at Cravath, Swaine & Moore. While at Cravath, Mr. Triedman worked in
mergers and acquisitions and high yield finance. Prior to attending law school,
Mr. Triedman worked as a financial analyst at Brown Brothers Harriman & Co. in
the private equity group, where he facilitated three private equity investments
totaling $95 million. Mr. Triedman is a graduate of Brown University with a B.S.
in Applied Mathematics and Economics and holds a J.D. from the University of
Chicago Law School.
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 is a
native of Alaska. 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.
COMPENSATION OF DIRECTORS
We currently do not compensate our directors other than for expense
reimbursement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee. All arrangements
regarding executive compensation before completion of the acquisitions of
Century's Alaska properties and ATU were conducted between members of Fox Paine
& Company and our executive officers.
NEW 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, as
more fully described below.
EMPLOYMENT AGREEMENT WITH CHARLES E. ROBINSON. Under the employment
agreement among us, Alaska Communications Systems Holdings and Charles E.
Robinson, dated as of March 12, 1999, Mr. Robinson serves as the Chairman of the
Board, Chief Executive Officer and President of us and Alaska Communications
Systems Holdings for a three-year period, which term will be extended
automatically for successive additional one-year periods unless either our board
of directors gives Mr. Robinson, or Mr. Robinson gives our board of directors,
no less than 90 days written notice of the intention not to extend the term. Mr.
Robinson will receive during the initial term of his employment agreement an
annual base salary of $500,000 that may be increased at the beginning of each
year following the first year of employment. Mr. Robinson will be eligible for
an annual bonus for each calendar year based on our attainment of mutually
determined business targets. Mr. Robinson will receive an annual bonus equal to
100% of his annual base salary, as then in effect, if we attain these 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.
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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 us without cause (as defined below), 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, notwithstanding any provisions to the contrary in any option plan
or agreement under which Mr. Robinson has received options, 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.
As used in the Robinson employment agreement:
- "Good reason" means:
- the assignment of Mr. Robinson by us to any duties materially
inconsistent with, or a material diminution of, his position, including
duties, title, offices, or responsibilities; or
- the transfer, without Mr. Robinson's concurrence, of Mr. Robinson's
principal place of employment to a geographic location more than 100
miles from both his current personal residence and from the location of
his current principal place of employment;
- "Cause" means:
- the willful failure to comply with lawful directions of our board of
directors after written notice;
- fraud, misappropriation or embezzlement; or
- a material breach of the Robinson employment agreement (other than due to
physical or mental illness) that is not cured within 30 days after
receipt of written notice from our board of directors of a specific
failure to perform his duties; and
- "Change in control" means:
- the acquisition by any person or group as that term is used in Regulation
13D under the Exchange Act, other than Fox Paine & Company or any of its
affiliates, of beneficial ownership of a majority of ours or Alaska
Communications Systems Holdings' outstanding voting securities; or
- any sale, lease, exchange or other transfer in one transaction or a
series of transactions, other than a transfer to an entity which is
majority controlled by Fox Paine & Company or any affiliate thereof or an
entity with substantially the same equity holders as immediately prior to
the transfer, of all or substantially all of the assets of us or Alaska
Communications Systems Holdings or its operating subsidiaries taken
together, or any plan for the liquidation or dissolution.
The Robinson employment agreement also provides that during his employment
and during the 12-month period following any termination of his employment, Mr.
Robinson shall not directly or indirectly own, make equity or debt investments
in, manage, control, participate in, consult with, advise,
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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
- 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 the Robinson 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 restrictions during Mr. Robinson's employment
and during the 12-month period following any termination of his employment in
connection with:
- inducing or attempting to induce any employee of us or our affiliates or
subsidiaries to terminate, or otherwise interfering with, the
relationship between us or our affiliates or subsidiaries and any of our
employees, and
- soliciting or attempting to solicit business from any customer or
supplier of us or our affiliates or subsidiaries.
EMPLOYMENT AGREEMENT WITH WESLEY E. CARSON. Under the employment agreement,
dated March 12, 1999, by and among us, Alaska Communications Systems Holdings
and Wesley E. Carson, Mr. Carson serves 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. Mr. Carson's employment agreement contains provisions
for additional terms, salary increases during any additional term, annual bonus,
severance, other benefits, definitions of "good reason," "cause" and "change in
control" and provisions for non-competition and non-solicitation 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.
EMPLOYMENT AGREEMENT WITH MICHAEL E. HOLMSTROM. Under the employment
agreement, dated April 19, 1999, by and among us and Alaska Communications
Systems Holdings and Michael E. Holmstrom, Mr. Holmstrom serves 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. Mr. Holmstrom's employment
agreement contains provisions for additional terms, salary increases during any
additional term, annual bonus, severance, other benefits, definitions of "good
reason," "cause" and "change in control" and provisions for non-competition and
non-solicitation similar to those in Mr. Robinson's employment agreement, except
that:
- Mr. Holmstrom does not have a guaranteed minimum annual bonus and Mr.
Holmstrom will receive no annual bonus if termination occurs prior to
December 31, 1999; and
- Mr. Holmstrom's employment agreement does not provide any additional
rights with respect to vesting of then-unvested options upon termination.
Mr. Holmstrom's employment agreement also obliges us to pay relocation-related
costs of Mr. Holmstrom.
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OTHER EMPLOYMENT ARRANGEMENTS. We have made additional employment
commitments to other of our officers on terms and conditions substantially
similar to those in the Carson employment agreement and the Holmstrom employment
agreement described above.
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 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.
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OWNERSHIP OF CAPITAL STOCK
The following table sets forth information regarding the beneficial
ownership of our common stock, par value $0.01 per share, by:
- each person known by us to own beneficially more than 5% of our common
stock;
- each director and each named executive officer of us; and
- all of our executive officers and directors, 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 table.
- The amounts and percentage of our common stock beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of
the SEC, 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 of 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 securities 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 21,774,027 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, as the case may be,
held by the holder, without taking into account any options or warrants.
- 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
the Members of Fox Paine Capital and share voting power of Fox Paine
Capital. Mr. Triedman is a Vice President of Fox Paine & Company. Each of
Messrs. Paine and Fox are limited partners of FPC Investors. None of the
shares shown as beneficially owned by any of Messrs. Fox, Paine or
Triedman are owned of record by these individuals. The address of Fox
Paine Capital, Fox Paine Capital Fund, FPC Investors, and Messrs. Paine,
Fox and Triedman is c/o Fox Paine & Company, LLC, 950 Tower Lane, Suite
1950, Foster City, CA 94404.
- 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. Robinson is record owner of 241,788 shares of our common stock. The
address of Mr. Robinson is c/o ALEC Holdings, Inc., 510 L. Street, Suite
500, Anchorage, Alaska 99501. Of these shares, 172,729 represent stock
grants. See "Insider Relationships and Related Party Transactions."
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- Mr. Carson is record owner of 129,341 shares of our common stock. The
address of Mr. Carson is c/o ALEC Holdings, Inc., 510 L. Street, Suite
500, Anchorage, Alaska 99501. Of these shares, 85,469 represent stock
grants. See "Insider Relationships and Related Party Transactions."
- Mr. Holmstrom is record owner of 16,249 shares of our common stock. See
"Insider Relationships and Related Party Transactions." The address of
Mr. Holmstrom is c/o ALEC Holdings, Inc., 510 L. Street, Suite 500,
Anchorage, Alaska 99501.
- Mr. Wonnell is the record owner of 66,249 shares of our common stock. Of
these shares, 50,000 represent stock grants. See "Insider Relationships
and Related Party Transactions." The address of Mr. Wonnell is c/o ALEC
Holdings, Inc., 510 L. Street, Anchorage, Alaska 99501.
<TABLE>
<CAPTION>
SHARES OF
HOLDINGS COMMON
STOCK PERCENT OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED OUTSTANDING
- --------------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Fox Paine Capital.......................................................... 19,498,879 89.6%
Fox Paine Capital Fund..................................................... 16,251,658 74.6%
FPC Investors.............................................................. 241,144 1.1%
W. Dexter Paine, III....................................................... 19,498,879 89.6%
Saul A. Fox................................................................ 19,498,879 89.6%
J. Russell Triedman........................................................ 241,144 1.1%
Cook Inlet Region, Inc..................................................... 1,624,907 7.5%
Carl H. Marrs.............................................................. 1,624,907 7.5%
Charles E. Robinson........................................................ 241,788 1.1%
Wesley E. Carson........................................................... 129,341 *
Michael E. Holmstrom....................................................... 16,249 *
Donn T. Wonnell............................................................ 66,249 *
All directors and executive officers as a group (7 persons)................ 21,634,285 99.4%
</TABLE>
- ------------------------------
(*) Indicates less than 1% of outstanding shares.
STOCKHOLDERS' AGREEMENT
On May 14, 1999, we entered into a stockholders' agreement with Fox Paine
Capital Fund, fund investors affiliated with Fox Paine Capital Fund, and
non-fund investors, including co-investors and some of our employees listed as
parties thereto. The following is a summary of the principal terms of the
stockholders' agreement and is subject to and 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 and is
incorporated by reference herein.
The stockholders' agreement provides, among other things for:
- the right of the non-fund investors to participate in, and the right of
Fox Paine Capital Fund to require the non-fund investors to participate
in, sales of our common stock by Fox Paine Capital Fund;
- prior to an initial public offering of our stock, our rights to purchase,
and the rights of the non-fund investors to require us to purchase,
except in the case of termination of employment of the non-fund
investors, all, but not less than all, of the shares of our common stock
owned by a non-fund investor upon the termination of employment or death
of the non-fund investor, at prices determined in accordance with the
stockholders' agreement; and
- additional restrictions on the rights of the non-fund investors to
transfer shares of our common stock.
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The stockholders' agreement also contains provisions granting Fox Paine
Capital Fund and the non-fund investors rights in connection with registrations
of our common stock and provides for indemnification and other rights,
restrictions and obligations in connection with those registrations.
The stockholders' agreement will terminate:
- with respect to the rights and obligations of and restrictions on the
fund investors and the non-fund investors in connection with restrictions
on the transfer of shares of our common stock, when Fox Paine Capital
Fund and its affiliates no longer hold at least 20% of the outstanding
shares of our common stock, on a fully diluted basis; however, that the
stockholders' agreement will terminate in that respect in any event if we
enter into transactions resulting in Fox Paine Capital Fund, the fund
investors, the non-fund investors, and each of their respective permitted
transferees, owning less than a majority of the outstanding voting power
of the entity surviving those transactions; and
- with respect to the registration of our common stock in offerings on the
earlier of:
- the date on which there are no longer any registrable securities
outstanding (as determined under the stockholders' agreement) and
- the 20(th) anniversary of the stockholders' agreement.
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INSIDER RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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 two members of management and one
former member of management approximately 40% of the fair market value of the
grants on May 14, 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, are to be used by those two individuals to pay taxes on the income
deemed received in connection with the grants.
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 members of management. Pursuant to the consulting agreement, LEC
Consulting provided management and advisory services to Century's Alaska
properties with respect to their 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. 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 the lower 48 contiguous states. These services will not
interfere with Mr. Robinson's fulfillment of his duties and responsibilities to
us. However, we have agreed that Mr. Robinson will not participate in making any
decisions relating to acquisitions by us in the lower 48 contiguous states
during the term of his consulting agreement and for two years thereafter. This
consulting agreement is expected to expire on or before November 2000.
Fox Paine & Company received advisory fees upon consummation of each of the
acquisitions. In addition, Fox Paine & Company will receive an annual management
fee.
In connection with the consummation of the acquisitions of Century's Alaska
properties and ATU and the private offering of the old debentures, we issued
warrants to purchase shares of our common stock, representing 3.40% of our fully
diluted ownership, to the initial purchasers in the private offering of the old
debentures. The warrants are exercisable for $0.01 per share and expire on May
14, 2011. The proceeds received from the issuance of the old debentures and the
warrants, together with the proceeds to us of the equity contributions, were
contributed to Alaska Communications Systems Holdings as common equity.
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DESCRIPTION OF OTHER 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. acts 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 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 and is incorporated by reference
herein.
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 guarantees thereunder 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 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
- 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,
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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
required to be drawn in a single drawing 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. 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.
AMORTIZATION, INTEREST.
- The term loan A facility is repayable in annual principal payments of one
percent of 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 a rate PER ANNUM 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 the
greater of the administrative agent's prime rate, a certificate of
deposit rate plus 1% and the federal funds effective rate plus 2.25%, 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 one
percent of 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) the
federal funds effective rate plus 2.50%.
- The term loan C facility is repayable in annual principal payments of one
percent of 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) the federal
funds effective rate plus 2.75%.
- 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) the federal funds effective rate plus 2.25%, in each case
subject to reduction based on Alaska Communications Systems Holdings'
financial performance. Amounts under the senior credit facility not paid
when due bear interest at a default rate equal to 2.0% above the
otherwise applicable rate.
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
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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 1/2 of 1% 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
Systems Holdings is required to comply with specified financial ratios,
including minimum interest coverage ratios and maximum leverage ratios.
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.
THE ACS 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 Alaska Communications Systems Holdings 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 Alaska Communications
Systems Holdings senior credit facility.
The Alaska Communications Systems Holdings senior subordinated notes rank
junior in right of payment to all current and future senior indebtedness of
Alaska Communications Systems Holdings,
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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 Alaska
Communications Systems Holdings senior subordinated notes are effectively
subordinated to all obligations of the subsidiaries of Alaska Communications
Systems Holdings.
The Alaska Communications Systems Holdings senior subordinated notes are not
redeemable until May 15, 2004. Thereafter, the Alaska Communications Systems
Holdings 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 Alaska Communications Systems Holdings 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 Alaska Communications Systems Holdings senior
subordinated notes, each holder will be able to require Alaska Communications
Systems Holdings to offer to redeem the holder's Alaska Communications Systems
Holdings senior subordinated notes at a price equal to 101% of principal amount,
subject to restrictions contained in the Alaska Communications Systems Holdings
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 Alaska Communications Systems Holdings
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 Alaska Communications Systems Holdings 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 Alaska Communications Systems Holdings 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.
Each of these limitations, however, is subject to qualifications set forth fully
in the indenture governing the Alaska Communications Systems Holdings senior
subordinated notes, which has been filed as an exhibit to the registration
statement of which this prospectus is a part and is incorporated by reference
herein.
The indenture relating to the Alaska Communications Systems Holdings senior
subordinated notes also contains events of default customary for obligations of
this type, including:
- a default in the payment of interest on the Alaska Communications Systems
Holdings senior subordinated notes when due and payable,
- 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.
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As a result, events may occur that cause a default under the indenture governing
the Alaska Communications Systems Holdings senior subordinated notes at a time
when there is no default under the indenture governing the exchange debentures.
Payment of all amounts outstanding under the Alaska Communications Systems
Holdings senior subordinated notes could be accelerated in the event of a
default under the indenture governing the Alaska Communications Systems Holdings
senior subordinated notes.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
We will issue the exchange debentures under the same indenture, dated as of
May 14, 1999, between us and The Bank of New York, as trustee, under which the
old debentures were issued. We will provide you with a copy of the indenture
upon request. The indenture contains provisions that define your rights under
the exchange debentures. In addition, the indenture governs our obligations
under the exchange debentures. The terms of the exchange debentures include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act.
The following description is meant to be only a summary of the indenture. It
does not restate the terms of the indenture in their entirety. We urge you to
read carefully the indenture as it, and not this description, governs your
rights as holders.
OVERVIEW OF THE EXCHANGE DEBENTURES
The exchange debentures:
- will be general unsecured obligations of us;
- will be senior in right of payment to all of our existing and future
subordinated obligations; and
- will be effectively subordinated to all of our secured Indebtedness to
the extent of the value of the assets securing that Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
We will initially issue exchange debentures in an aggregate principal amount
of $46,928,435 with gross proceeds of $25 million. The exchange debentures will
mature on May 15, 2011. We will issue the exchange debentures in fully
registered form, without coupons, in denominations of $1,000 and any integral
multiple of $1,000.
The exchange debentures will not accrue interest prior to November 15, 2004.
Each exchange debenture we issue will bear interest at a rate of 13% beginning
on November 15, 2004, or from the most recent date to which interest has been
paid or provided for. We will pay interest semiannually to holders of record at
the close of business on the May 1 or November 1 immediately preceding the
interest payment date on May 15 and November 15 of each year. We will pay
interest on overdue principal at 1% annually in excess of such rate, and we will
pay interest on overdue installments of interest at such higher rate to the
extent lawful.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the exchange
debentures at any office of ours or any agency designated by us which is located
in the Borough of Manhattan, the City of New York. We have initially designated
the corporate trust office of the trustee to act as our paying agent in such
matters. The location of the corporate trust office is 101 Barclay Street, Floor
21W, New York, New York 10286. We reserve the right, however, to pay interest by
check mailed directly to holders at their registered addresses.
Holders may exchange or transfer their exchange debentures at the location
given in the preceding paragraph. No service charge will be made for any
registration of transfer or exchange of exchange debentures. We may, however,
require holders to pay any transfer tax or other similar governmental charge
payable in connection with a transfer or exchange.
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, we may not redeem the
exchange debentures at our option prior to May 15, 2004. After this date, we may
redeem the exchange debentures in whole or in part, at the following redemption
prices, which are expressed as percentages of principal amount, plus accrued and
unpaid interest thereon, and additional amounts in respect thereof, if any, to
the redemption date. This redemption is subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date, if redeemed during the twelve-month period commencing on
May 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------------------------------- -----------
<S> <C>
2004................................................................................. 106.500%
2005................................................................................. 105.200%
2006................................................................................. 103.900%
2007................................................................................. 102.600%
2008................................................................................. 101.300%
2009 and thereafter.................................................................. 100.000%
</TABLE>
Prior to May 15, 2002, we may, at our option, on one or more occasions, also
redeem up to a maximum of 35% of the original aggregate principal amount of the
exchange debentures with the net cash proceeds of one or more equity offerings
by us, at a redemption price equal to 113% of the principal amount of the
exchange debentures redeemed, plus accrued and unpaid interest on, and any
additional amounts in respect of, the exchange debentures, to the redemption
date. However after giving effect to any such redemption:
- at least 65% of the original aggregate principal amount of the exchange
debentures must remain outstanding; and
- any such redemption must be made within 90 days of a related equity
offering by us and otherwise in accordance with the procedures set forth
in the indenture.
SELECTION
If we partially redeem exchange debentures, the trustee will select the
exchange debentures to be redeemed on a ratable basis, by lot or by such other
method as the trustee deems to be fair and appropriate. However, no exchange
debenture of $1,000 in original principal amount or less will be redeemed in
part. On and after the redemption date, interest will cease to accrue on
exchange debentures or portions of exchange debentures called for redemption so
long as we have deposited with the paying agent funds sufficient to pay the
principal of, plus accrued and unpaid interest on, and additional amounts in
respect of, the exchange debentures to be redeemed.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require us to repurchase all or
any part of such holder's exchange debentures at a purchase price in cash equal
to 101% of the accreted value (or if after May 14, 2004, of the principal amount
thereof plus accrued and unpaid interest thereon) and additional amounts in
respect thereof, if any, to the date of repurchase; PROVIDED, HOWEVER, that
notwithstanding the occurrence of a change of control, we shall not be obligated
to repurchase the exchange debentures pursuant to this section in the
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event that we have exercised our right to redeem all the exchange debentures
under the terms described under the caption "--Optional Redemption":
(1) prior to the first public offering of our common stock, the Permitted
Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, of a majority in
the aggregate of the total voting power of the voting stock of Alaska
Communications Systems Holdings or us;
(2) (a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in clause (1) above, except that
for purposes of this clause (2) such person shall be deemed to have
"beneficial ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 35% of the
total voting power of the voting stock of Alaska Communications Systems
Holdings or us and (b) the Permitted Holders beneficially own (as defined
in clause (1) above), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the voting stock of Alaska
Communications Systems Holdings or us than such other person and do not
have the right or ability to elect or designate for election a majority
of the board of directors of Alaska Communications Systems Holdings or us
(for the purposes of this clause (2), such other person shall be deemed
to beneficially own any voting stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as defined
in this clause (2)), directly or indirectly, of more than 35% of the
voting power of the voting stock of such parent entity and the Permitted
Holders beneficially own (as defined in clause (1) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the voting stock of such parent entity and do not have the right or
ability to elect or designate for election a majority of the board of
directors of such parent entity);
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors of us or
Alaska Communications Systems Holdings (together with any new directors
whose (a) election by such board of directors of Alaska Communications
Systems Holdings or us or whose nomination for election by the
shareholders of Alaska Communications Systems Holdings or us was approved
by a majority vote of the directors of Alaska Communications Systems
Holdings or us then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved or (b) who are designees of the Permitted Holders
or were nominated by the Permitted Holders) cease to constitute a
majority of the board of directors of us or Alaska Communications Systems
Holdings then in office;
(4) the adoption of a plan relating to the liquidation or dissolution of
Alaska Communications Systems Holdings or us;
(5) the merger or consolidation of Alaska Communications Systems Holdings or
us with or into another person or the merger of another person with or
into Alaska Communications Systems Holdings or us, or the sale of all or
substantially all the assets of Alaska Communications Systems Holdings or
us to another person, other than a person that is controlled by the
Permitted Holders, and, in the case of any such merger or consolidation,
the securities of Alaska Communications Systems Holdings or us that are
outstanding immediately prior to such transaction and that represent 100%
of the aggregate voting power of the voting stock of Alaska
Communications Systems Holdings or us are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving person or transferee that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the voting stock of the surviving person or
transferee; or
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(6) Alaska Communications Systems Holdings ceases to be a wholly owned
restricted subsidiary of us.
If at the time of such Change of Control the terms of the Bank Indebtedness
restrict or prohibit the repurchase of exchange debentures pursuant to this
covenant, then prior to the mailing of the notice to holders provided for in the
immediately succeeding paragraph but in any event within 30 days following any
Change of Control, we shall:
(1) repay in full all Bank Indebtedness or, if doing so will allow the
repurchase of exchange debentures, offer to repay in full all Bank
Indebtedness and repay the Bank Indebtedness of each lender who has
accepted such offer; or
(2) obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the exchange debentures as
provided for in the immediately succeeding paragraph.
Within 30 days following any Change of Control, we shall mail a notice to
each holder with a copy to the trustee (the "Change of Control Offer") stating
that a Change of Control has occurred and that such holder has the right to
require us to purchase such holder's exchange debentures.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
exchange debentures validly tendered and not withdrawn under such Change of
Control Offer.
RESTRICTIVE COVENANTS
The indenture will contain covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (1) Neither we nor any restricted subsidiary
will incur any Indebtedness unless on the date of and after giving effect to
such incurrence the Debt to EBITDA Ratio would be less than 7.25:1.
(2) Notwithstanding the foregoing paragraph (1), we and our restricted
subsidiaries may incur the following Indebtedness:
(a) Bank Indebtedness in an aggregate principal amount not to exceed $585
million less the aggregate amount of all prepayments of principal applied
to permanently reduce any such Indebtedness;
(b) Indebtedness of us owed to and held by any wholly owned restricted
subsidiary or Indebtedness of a restricted subsidiary owed to and held by
us or any wholly owned restricted subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any capital stock or any other event
that results in any such wholly owned restricted subsidiary ceasing to be
a wholly owned subsidiary or any subsequent transfer of any such
Indebtedness, except to Alaska Communications Systems Holdings or a
wholly owned restricted subsidiary, shall be deemed, in each case, to
constitute the incurrence of such Indebtedness by the issuer thereof;
(c) Indebtedness (i) represented by the exchange debentures, (ii)
represented by the Alaska Communications Systems Holdings senior
subordinated notes and the guarantees, (iii) outstanding on the Closing
Date, other than the Indebtedness described in clauses (a) and (b) above,
(iv) consisting of Refinancing Indebtedness incurred in respect of any
Indebtedness described in this clause (c) or the foregoing paragraph (1)
or (v) consisting of guarantees of any Indebtedness permitted under
clauses (a) and (b) of this paragraph (2);
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(d) (i) Indebtedness of a restricted subsidiary incurred and outstanding on
or prior to the date on which such restricted subsidiary was acquired by
us (other than Indebtedness incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which such
restricted subsidiary became a subsidiary of, or was otherwise acquired
by, us); PROVIDED, HOWEVER, that on the date that such restricted
subsidiary is acquired by us, we would have been able to incur $1.00 of
additional Indebtedness pursuant to the foregoing paragraph (1) after
giving effect to the incurrence of such Indebtedness pursuant to this
clause (d) and (ii) Refinancing Indebtedness incurred by us or a
restricted subsidiary in respect of Indebtedness incurred pursuant to
this clause (d);
(e) Indebtedness in respect of performance bonds, bankers' acceptances,
letters of credit and surety or appeal bonds provided by us and the
restricted subsidiaries in the ordinary course of their business;
(f) Purchase Money Indebtedness and capitalized lease obligations in an
aggregate principal amount not in excess of $20 million at any time
outstanding;
(g) Hedging obligations of us directly related to Indebtedness permitted to
be incurred by us pursuant to the indenture for the purpose of fixing or
hedging interest rate risk or currency fluctuations;
(h) (i) Indebtedness of another person incurred and outstanding on or prior
to the date on which such person consolidates with or merges with or into
us or Alaska Communications Systems Holdings (other than Indebtedness
incurred as consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or series
of related transactions pursuant to which such person consolidates with
or merges with or into us or Alaska Communications Systems Holdings);
PROVIDED, HOWEVER, that on the date that such transaction is consummated,
we would have been able to incur $1.00 of additional Indebtedness
pursuant to the foregoing paragraph (1) after giving effect to the
incurrence of such Indebtedness pursuant to this clause (h) and (ii)
Refinancing Indebtedness incurred by us or Alaska Communications Systems
Holdings or a successor company in respect of Indebtedness incurred
pursuant to subclause (i) of this clause (h); or
(i) Indebtedness, other than Indebtedness permitted to be incurred pursuant
to the foregoing paragraph (1) or any other clause of this paragraph (2),
in an aggregate principal amount on the date of incurrence that, when
added to all other Indebtedness incurred pursuant to this clause (i) and
then outstanding, shall not exceed $5 million.
(3) Notwithstanding the foregoing, we may not incur any Indebtedness
pursuant to paragraph (2) above if the proceeds thereof are used, directly or
indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any
subordinated obligations, unless such Indebtedness will be subordinated to the
exchange debentures to at least the same extent as such subordinated
obligations. In addition, we may not incur any secured Indebtedness that is not
Pari Passu Indebtedness unless effective provision is made to secure the
exchange debentures equally and ratably with (or on a senior basis to, in the
case of Indebtedness subordinated in right of payment to the exchange
debentures) such secured Indebtedness for so long as such secured Indebtedness
is secured by a lien.
(4) Notwithstanding any other provision of this covenant, the maximum amount
of Indebtedness that we or any restricted subsidiary may incur pursuant to this
covenant shall not be deemed to be exceeded solely as a result of fluctuations
in the exchange rates of currencies. For purposes of
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determining the outstanding principal amount of any particular Indebtedness
incurred pursuant to this covenant:
(a) Indebtedness incurred pursuant to the Credit Agreement prior to or on
the Closing Date shall be treated as incurred pursuant to clause (2)(a)
above;
(b) Indebtedness permitted by this covenant need not be permitted solely by
reference to one provision permitting such Indebtedness but may be
permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness; and
(c) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in this covenant, we, in our sole
discretion, shall classify such Indebtedness and only be required to
include the amount of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS. (1) Neither we nor any restricted
subsidiary will directly or indirectly:
(a) declare or pay any dividend or make any distribution on or in respect of
its capital stock or similar payment to the holders of its capital stock
except dividends or distributions payable solely in its capital stock,
other than Disqualified Stock, and except dividends or distributions
payable to us or another restricted subsidiary (and, if such restricted
subsidiary has shareholders other than us or other restricted
subsidiaries, to its other shareholders on a pro rata basis);
(b) purchase, redeem, retire or otherwise acquire for value any capital
stock of us or any restricted subsidiary held by persons other than us or
another restricted subsidiary;
(c) purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment any subordinated obligations (other than the
purchase, repurchase or other acquisition of subordinated obligations
purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case, due within one
year of the date of acquisition); or
(d) make any Investment, other than a Permitted Investment, in any person
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Investment being herein referred to as a
"Restricted Payment") if at the time we or such restricted subsidiary make such
Restricted Payment:
(i) a Default will have occurred and be continuing, or would result
therefrom;
(ii) we could not incur at least $1.00 of additional Indebtedness under
paragraph (1) of the covenant described under the caption "--Limitation on
Indebtedness"; or
(iii) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined conclusively in good faith by the board of directors) declared or
made subsequent to the Closing Date would exceed the sum of, without
duplication:
(A) (i) 100% of EBITDA accrued during the period, treated as one
accounting period, from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Closing
Date occurs to the end of the most recent fiscal quarter for
which financial statements are publicly available (or, in case
such EBITDA will be a deficit, minus 100% of such deficit), minus
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(ii) 140% of Consolidated Interest Expense accrued during the
period, treated as one accounting period, from the beginning of
the fiscal quarter immediately following the fiscal quarter
during which the Closing Date occurs to the end of the most
recent fiscal quarter for which financial statements are publicly
available; plus
(B) the aggregate net cash proceeds received by us from the issue or
sale of our capital stock, other than Disqualified Stock,
subsequent to the Closing Date (other than (x) an issuance or
sale to one of our subsidiaries, (y) an issuance or sale to an
employee stock ownership plan or other trust established by us
or any of our subsidiaries or (z) to the extent used in
accordance with clause (2)(e)(ii) or (2)(f)(iii)(B)) below; plus
(C) the aggregate net cash proceeds received by us from the sale or
other disposition, other than to us or a restricted subsidiary,
of any Investments previously made by us or a restricted
subsidiary and treated as a Restricted Payment; PROVIDED that
the amount added pursuant to this clause (C) shall not exceed
the amount treated as a Restricted Payment and not previously
added pursuant to this paragraph (iii); plus
(D) the amount by which Indebtedness of us or our restricted
subsidiaries is reduced on our balance sheet upon the conversion
or exchange, other than by one of our subsidiaries, subsequent to
the Closing Date of any Indebtedness of us or our restricted
subsidiaries issued after the Closing Date that is convertible or
exchangeable for capital stock, other than Disqualified Stock, of
us (less the amount of any cash or the fair market value of other
property distributed by us or any restricted subsidiary upon such
conversion or exchange); plus
(E) the amount equal to the net reduction in Investments in
unrestricted subsidiaries resulting from (i) payments of
dividends, repayments of the principal of loans or advances or
other transfers of assets to us or any restricted subsidiary
from unrestricted subsidiaries or (ii) the redesignation of
unrestricted subsidiaries as restricted subsidiaries (valued, in
each case, as provided in the definition of "Investment") not to
exceed, in the case of any unrestricted subsidiary, the amount
of Investments previously made by us or any restricted
subsidiary in such unrestricted subsidiary, which amount was
included in the calculation of the amount of Restricted
Payments; plus
(F) $5 million.
(2) The provisions of the foregoing paragraph (1) will not prohibit:
(a) any purchase, repurchase, retirement, defeasance or other acquisition or
retirement for value of capital stock or subordinated obligations of us
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, capital stock of us, other than Disqualified Stock
and other than capital stock issued or sold to one of our subsidiaries or
an employee stock ownership plan or other trust established by us or any
of our subsidiaries; PROVIDED, HOWEVER, that:
(i) such Restricted Payment will be excluded in the calculation of the
amount of Restricted Payments; and
(ii) the net cash proceeds from such sale applied in the manner set
forth in this clause (a) will be excluded from the calculation of
amounts under clause (B) of paragraph (iii) above;
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(b) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of subordinated obligations of us made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of us that is permitted to be incurred pursuant to paragraph
(2) of the covenant described under the caption "--Limitation on
Indebtedness"; PROVIDED, HOWEVER, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value will
be excluded in the calculation of the amount of Restricted Payments;
(c) any purchase or redemption of subordinated obligations from Net
Available Cash to the extent permitted by the covenant described under
the caption "--Limitation on Sales of Assets and Subsidiary Stock";
PROVIDED, HOWEVER, that such purchase or redemption will be excluded in
the calculation of the amount of Restricted Payments;
(d) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; PROVIDED, HOWEVER, that such dividend will be included in the
calculation of the amount of Restricted Payments;
(e) the repurchase or other acquisition of shares of, or options to purchase
shares of, common stock of us or any of our subsidiaries from employees,
former employees, consultants, former consultants, directors or former
directors of us or any of our subsidiaries (or permitted transferees of
such employees, former employees, consultants, former consultants,
directors or former directors), pursuant to the terms of agreements or
plans or amendments thereto approved by the board of directors under
which such individuals purchase or sell, or are granted the option to
purchase or sell, shares of such common stock; PROVIDED, HOWEVER, that
the aggregate amount of such repurchases, together with any amounts or
other distributions to us under the following paragraph (f)(iii), shall
not exceed in any calendar year the sum of (i) $5 million plus (ii) the
net cash proceeds received since the date of the indenture by us or
received by us and contributed to us from the sale of capital stock to
employees, consultants and directors of us; PROVIDED, FURTHER, HOWEVER,
that such repurchases and other acquisitions of shares, or options to
purchase shares of common stock shall be included in the calculation of
the amount of Restricted Payments; and
Notwithstanding the foregoing, no cash dividends in excess of $10.0 million may
be paid by us unless we shall have set aside in an escrow account an amount not
less than the amount of accretion accrued from the original issue date of the
exchange debentures.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. Neither we nor any restricted subsidiary will create or otherwise
cause or permit to exist or become effective any consensual encumbrance or
restriction on the ability of any restricted subsidiary to:
(1) pay dividends or make any other distributions on its capital stock or
pay any Indebtedness or other obligations owed to us or any of our
restricted subsidiaries;
(2) make any loans or advances to us or any of our restricted subsidiaries;
or
(3) transfer any of its property or assets to us or any of our restricted
subsidiaries,
except:
(a) any encumbrance or restriction pursuant to applicable law or an
agreement in effect at or entered into on the Closing Date;
(b) any encumbrance or restriction with respect to a restricted subsidiary
pursuant to an agreement relating to any Indebtedness incurred by such
restricted subsidiary prior to the date on which such restricted
subsidiary was acquired by us (other than Indebtedness incurred as
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consideration in, in contemplation of, or to provide all or any portion
of the funds or credit support utilized to consummate the transaction or
series of related transactions pursuant to which such restricted
subsidiary became a restricted subsidiary or was otherwise acquired by
us) and outstanding on such date;
(c) any encumbrance or restriction (x) pursuant to an agreement effecting a
refinancing of Indebtedness incurred pursuant to an agreement referred to
in clause (a) or (b) above or this clause (c) or (y) contained in any
amendment to an agreement referred to in clause (a) or (b) above or this
clause (c) or (z) pursuant to any other agreement regarding Indebtedness
otherwise permitted by the covenant "Limitation on Indebtedness";
PROVIDED, HOWEVER, that the encumbrances and restrictions contained in
any such refinancing agreement or amendment are no less favorable to the
noteholders than the encumbrances and restrictions contained in such
predecessor agreements or, with respect to agreements entered into at or
after the Closing Date, the most restrictive agreement in existence at or
prior to the Closing Date;
(d) in the case of clause (3), any encumbrance or restriction:
(i) that restricts in a customary manner the subletting, assignment or
transfer of any property or asset that is subject to a lease,
license or similar contract; or
(ii) contained in security agreements securing Indebtedness of a
restricted subsidiary to the extent such encumbrance or restriction
restricts the transfer of the property subject to such security
agreements;
(e) with respect to a restricted subsidiary, any restriction imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the capital stock or assets of such restricted
subsidiary pending the closing of such sale or disposition;
(f) any encumbrance or restriction relating to Purchase Money Indebtedness
or capitalized lease obligations for property acquired in the ordinary
course of business that imposes restrictions on the ability of us or a
restricted subsidiary to sell, lease or transfer the acquired property to
us or our restricted subsidiaries;
(g) restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business;
(h) any encumbrance or restriction contained in joint venture agreements and
other similar agreements entered into in the ordinary course of business
and customary for such types of agreements; and
(i) any encumbrance or restriction pursuant to an agreement for Indebtedness
under Section 2(e) and 2(g) of the covenant "Limitation on Indebtedness."
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (1) Neither we nor any
restricted subsidiary will make any Asset Disposition unless:
(a) we or such restricted subsidiary receives consideration at the time of
such Asset Disposition at least equal to the fair market value, as
determined in good faith by the board of directors, of the shares and
assets subject to such Asset Disposition;
(b) at least 75% of the consideration thereof received by us or such
restricted subsidiary is in the form of cash; PROVIDED that the following
shall be deemed to be cash for purposes of this clause (b): (i) the
amount of any liabilities (as shown on our, or such restricted
subsidiary's, most recent balance sheet or in the notes thereto) of us or
any restricted subsidiary, other than liabilities that are by their terms
subordinated to the exchange debentures, that are assumed by the
transferee of any such assets, (ii) the amount of any securities received
by us
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or such restricted subsidiary from such transferee that are converted by
us or such restricted subsidiary into cash, to the extent of the cash
received, within 90 days following the closing of such Asset Disposition,
(iii) the fair market value of any Telecommunications Assets received by
us in such Asset Disposition and (iv) the fair market value of any
Permitted Joint Venture Interests received by us or any restricted
subsidiary in such Asset Disposition; PROVIDED that the aggregate fair
market value of all Permitted Joint Venture Interests received pursuant
to this clause (iv), valued, in each case, at the time of receipt, shall
not exceed 10% of Consolidated Net Tangible Assets,
(for purposes of this paragraph (b), all determinations of fair market
value shall be made in good faith by the board of directors and evidenced
by an officers' certificate delivered to the trustee); and
(c) from and after the date on which neither the Bank Indebtedness nor the
Alaska Communications Systems Holdings senior subordinated notes
(including any refinancings thereof) are outstanding, an amount equal to
100% of the Net Available Cash from such Asset Disposition is applied by
us (or such restricted subsidiary, as the case may be):
(i) FIRST, to the extent we elect or are required by the terms of any
Indebtedness to prepay, repay, redeem, purchase or otherwise acquire
Indebtedness, other than any Disqualified Stock, of a wholly owned
restricted subsidiary (in each case, other than Indebtedness owed to
us or any of our affiliates and other than preferred stock) within
180 days of the later of the date of such Asset Disposition or the
receipt of such Net Available Cash;
(ii) SECOND, to the extent of the balance of Net Available Cash after
application in accordance with clause (i) above, to the extent we
or such restricted subsidiary elect to, or enter into a binding
agreement to, reinvest in Additional Assets (including by means of
an Investment in Additional Assets by a restricted subsidiary with
cash in an amount equal to the amount of Net Available Cash
received by, or to be received by, us or another restricted
subsidiary) within 180 days of the later of such Asset Disposition
or the receipt of such Net Available Cash; and
(iii) THIRD, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (i) and (ii) above, to
make an offer to purchase exchange debentures pursuant to and
subject to the conditions set forth in paragraph (2) below;
PROVIDED, HOWEVER, that, if we elect (or are required by the terms
of any other Senior Subordinated Indebtedness), such offer may be
made ratably to purchase the exchange debentures and other Pari
Passu Indebtedness of us;
PROVIDED, HOWEVER, that, in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (i) or (iii) above, we or
such restricted subsidiary will retire such Indebtedness and will cause
the related loan commitment, if any, to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Upon completion of any offer, the amount of Net Available Cash shall be
reset at zero, and we shall be entitled to use any remaining proceeds for any
corporate purposes to the extent permitted under the indenture. Notwithstanding
the foregoing provisions of this covenant, we and the restricted subsidiaries
will not be required to apply any Net Available Cash in accordance with this
covenant except to the extent that the aggregate Net Available Cash from all
Asset Dispositions that is not applied in accordance with this covenant exceeds
$10 million.
(2) In the event of an Asset Disposition that requires the purchase of
exchange debentures pursuant to clause (c)(iii) above, we will be required to
offer to purchase exchange debentures tendered pursuant to an offer by us for
the exchange debentures at a purchase price of 100% of their
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accreted value, (or, if after May 14, 2004, principal amount plus accrued and
unpaid interest thereon), and additional amounts in respect thereof, if any, to
the date of purchase in accordance with the procedures set forth in the
indenture and to purchase other Pari Passu Indebtedness on the terms and to the
extent contemplated thereby. We will not be required to make an offer for
exchange debentures (and other Pari Passu Indebtedness) pursuant to this
covenant if the Net Available Cash available therefor (after application of the
proceeds as provided in clauses (c)(i) and (c)(ii) above) is less than $10
million for any particular Asset Disposition (which lesser amount will be
carried forward for purposes of determining whether an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
(3) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of exchange debentures pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached our obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (1) Neither we nor any
restricted subsidiary will, directly or indirectly, enter into or conduct any
transaction or series of related transactions with any affiliate of us (an
"Affiliate Transaction") unless such Affiliate Transaction is on terms:
(a) that are no less favorable to us or such restricted subsidiary, as the
case may be, than those that could be obtained at the time of such
transaction in arms'-length dealings with a person who is not such an
affiliate;
(b) that, in the event such Affiliate Transaction involves an aggregate
amount in excess of $5 million:
(i) are set forth in writing; and
(ii) have been approved by a majority of the members of the board of
directors having no personal stake, other than as a holder of
capital stock of us, or such restricted subsidiary, in such
Affiliate Transaction; and
(c) that, in the event such Affiliate Transaction involves an amount in
excess of $15 million, have been determined by a nationally recognized
appraisal or investment banking firm to be fair, from a financial
standpoint, to us and our restricted subsidiaries.
(2) The provisions of paragraph (1) above will not prohibit:
(a) any Restricted Payment permitted to be paid pursuant to the covenant
described under the caption "--Limitation on Restricted Payments";
(b) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
board of directors;
(c) the grant of stock options or similar rights to employees and directors
of us pursuant to plans approved by the board of directors;
(d) loans or advances to employees in the ordinary course of business in
accordance with past practices of us, but in any event not to exceed $10
million in the aggregate outstanding at any one time;
(e) the payment of reasonable fees to directors of us and our subsidiaries
who are not employees of us or our subsidiaries;
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(f) any transaction between us and a restricted subsidiary or between
restricted subsidiaries;
(g) customary indemnification and insurance arrangements in favor of
officers, directors, employees and consultants of us or any of our
restricted subsidiaries;
(h) payments by us or any of our restricted subsidiaries to Fox Paine &
Company and its affiliates for any financial advisory, financing,
underwriting or other placement services or in respect of other
investment banking activities, including, without limitation, in
connection with acquisitions or divestitures which payments are approved
by a majority of the members of the board of directors referred to in
clause (b)(ii) above in good faith;
(i) the existence of, or the performance by us or any of our restricted
subsidiaries of the obligations under the terms of, any stockholders
agreements, including any registration rights agreement or purchase
agreement related thereto, to which it is a party as of the Closing Date,
as such agreements, may be amended from time to time pursuant to the
terms thereof; PROVIDED, HOWEVER, that the terms of any such amendment
are no less favorable to the holders than the terms of any such
agreements in effect as of the Closing Date; and
(j) the issuance of capital stock, other than Disqualified Stock, of us for
cash to any Permitted Holder.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. We will not sell or otherwise dispose of any shares of capital
stock of a restricted subsidiary, and will not permit any restricted subsidiary,
directly or indirectly, to issue or sell or otherwise dispose of any shares of
its capital stock except:
(1) to us or a wholly owned restricted subsidiary;
(2) if, immediately after giving effect to such issuance, sale or other
disposition, neither we nor any of our subsidiaries own any capital stock
of such restricted subsidiary; or
(3) if, immediately after giving effect to such issuance or sale, such
restricted subsidiary would no longer constitute a restricted subsidiary
and any Investment in such person remaining after giving effect thereto
would have been permitted to be made under the covenant described under
the caption "--Limitation on Restricted Payments" if made on the date of
such issuance, sale or other disposition.
The proceeds of any sale of such capital stock permitted hereby will be
treated as Net Available Cash from an Asset Disposition and must be applied in
accordance with the terms of the covenant described under the caption
"--Limitation on Sales of Assets and Subsidiary Stock."
SEC REPORTS. We will file with the SEC and provide the trustee and exchange
debentures and prospective exchange debentures upon request within 15 days after
we file them with the SEC, copies of our annual report and the information,
documents and other reports that are specified in Sections 13 and 15(d) of the
Exchange Act. In addition, following an Equity Offering, we shall furnish to the
trustee and exchange debentures, promptly upon their becoming available, copies
of the annual report to shareholders and any other information provided by us to
our public shareholders generally. We also will comply with the other provisions
of Section 314(a) of the Trust Indenture Act.
LIMITATION ON LINES OF BUSINESS. Neither we nor any restricted subsidiary
will engage in any business other than a Related Business.
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MERGER AND CONSOLIDATION
We will not consolidate with or merge with or into, or convey, transfer or
lease all or substantially all our assets to, any person, unless:
(1) the successor company will be a U.S. corporation, and the successor
company, if not us, will expressly assume, by a supplemental indenture,
all of our obligations under the exchange debentures and the indenture;
(2) immediately after giving effect to such transaction, no Default shall
have occurred and be continuing;
(3) immediately after giving effect to such transaction, the successor
company would be able to incur an additional $1.00 of Indebtedness under
paragraph (1) of the covenant described under the caption "--Restrictive
Covenants--Limitation on Indebtedness";
(4) We shall have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture, if any, comply with the
indenture; and
(5) We shall have delivered to the trustee an opinion of counsel to the
effect that the holders will not recognize income, gain or loss for
federal income tax purposes as a result of such transaction and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.
Notwithstanding the foregoing clause (2) or (3), we may merge with an affiliate
incorporated or formed solely for the purpose of reincorporating we in another
jurisdiction.
The successor company will succeed to, and be substituted for, and may
exercise every right and power of, us under the indenture. However, in the case
of a conveyance, transfer or lease of all or substantially all its assets, we
will not be released from the obligation to pay the principal of and interest on
the exchange debentures.
DEFAULTS
Each of the following is an "Event of Default":
(1) a default in any payment of interest on any exchange debenture when due
and payable, continued for 30 days;
(2) a default in the payment of principal of any exchange debenture when due
and payable at its stated maturity, upon required redemption or
repurchase, upon declaration or otherwise;
(3) our failure to comply with our obligations under the covenant described
under the caption "--Merger and Consolidation";
(4) our failure to comply for 30 days after notice with any of our
obligations under the covenants described under the captions "--Change of
Control" or "--Restrictive Covenants" (in each case, other than a failure
to purchase exchange debentures);
(5) our failure to comply for 60 days after notice with its other agreements
contained in the exchange debentures or the indenture;
(6) our failure or that of any of our subsidiaries to pay any Indebtedness,
other than Indebtedness owing to us or any of our subsidiaries, within
any applicable grace period after final maturity or the acceleration of
any such Indebtedness by the holders thereof because of a default if the
total amount of such Indebtedness unpaid or accelerated exceeds $5.0
million or its foreign currency equivalent (the "cross acceleration
provision") and such failure continues for 10 days after receipt of the
notice specified in the indenture;
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(7) certain events of bankruptcy, insolvency or reorganization of us or a
Significant Subsidiary (the "bankruptcy provisions"); or
(8) the rendering of any judgment or decree for the payment of money in
excess of $5.0 million or its foreign currency equivalent against us or
any of our subsidiaries, to the extent such judgment or decree is not
covered by insurance or is in excess of insurance coverage, if such
judgment or decree remains outstanding for a period of 60 days following
such judgment and is not discharged, waived or stayed (the "judgment
default provision").
A default under clause (4), (5) or (6) above will not constitute an Event of
Default until the trustee or the holders of at least 25% in principal amount of
the outstanding exchange debentures notify us of the default and we do not cure
such default within the time specified in clauses (4), (5) or (6) above after
receipt of such notice.
If an Event of Default, other than an Event of Default under the bankruptcy
provisions, occurs and is continuing, the trustee or the holders of at least 25%
in principal amount of the outstanding exchange debentures by notice to us may
declare the principal of (if, prior to May 14, 2004, the accreted value) and
accrued but unpaid interest on all the exchange debentures to be due and
payable. Upon such a declaration, such principal and interest will be due and
payable immediately. If an Event of Default under the bankruptcy provisions
occurs, the principal of and accrued and unpaid interest on all the exchange
debentures (if, prior to May 14, 2004, the accreted value of all the exchange
debentures) will become immediately due and payable. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
exchange debentures may rescind any such acceleration with respect to the
exchange debentures and its consequences.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default occurs and is continuing, the trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders, unless such holders
have offered to the trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the indenture or the exchange debentures unless:
(1) such holder has previously given the trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding exchange
debentures have requested the trustee in writing to pursue the remedy;
(3) such holders have offered the trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
exchange debentures have not given the trustee a direction inconsistent
with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding exchange debentures will be given the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or of exercising any trust or power conferred on the trustee. The
trustee, however, may refuse to follow any direction that conflicts with law or
the indenture or that the trustee determines is unduly prejudicial to the rights
of any other holder or that would involve the trustee in personal liability.
Prior to taking any action under the indenture, the trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
If a Default occurs and is continuing and is known to the trustee, the
trustee must mail to each holder notice of the Default within 90 days after it
is known to a trust officer or written notice of it is
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received by the trustee. Except in the case of a Default in the payment of
principal of, premium, if any, or interest on any exchange debenture, including
payments pursuant to the redemption provisions of such exchange debenture, the
trustee may withhold notice if and so long as a committee of its trust officers
in good faith determines that withholding notice is in the interests of the
holders. In addition, we will be required to deliver to the trustee, within 120
days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. We
will also be required to deliver to the trustee, within 30 days after the
occurrence thereof, written notice of any event that would constitute certain
Events of Default, its status and what action we are taking or propose to take
in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, holders of a majority in principal amount of
the exchange debentures then outstanding may amend the indenture and waive
defaults. More significant amendments require the consent of each holder of an
outstanding exchange debenture affected. Without the consent of each holder, no
amendment may, among other things:
- reduce the amount of exchange debentures whose holders must consent to an
amendment;
- reduce the rate of or extend the time for payment of interest or any
additional amounts on any exchange debenture or change or have the effect
of changing the definition of accreted value;
- reduce the accreted value or principal of or extend the stated maturity
of any exchange debenture;
- reduce the premium payable upon the redemption of any exchange debenture
or change the time at which any exchange debenture may be redeemed;
- make any exchange debenture payable in money other than that stated in
the exchange debenture;
- impair the right of any holder to receive payment of principal of, and
interest or any additional amounts on, such holder's exchange debentures
on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's exchange
debentures; or
- make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Less significant amendments can be done without the consent of any holder.
Without the consent of any holder, we and trustee may amend the indenture to:
- cure any ambiguity, omission, defect or inconsistency;
- provide for the assumption by a successor corporation of the obligations
of us under the indenture;
- provide for uncertificated exchange debentures in addition to or in place
of certificated exchange debentures;
- secure the exchange debentures;
- add to the covenants of us for the benefit of the holders or to surrender
any right or power conferred upon us;
- make any change that does not adversely affect the rights of any holder,
subject to the provisions of the indenture; or
- comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
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After an amendment becomes effective, we will be required to mail to holders
a notice briefly describing such amendment. However, the failure to give such
notice to all holders, or any defect therein, will not impair or affect the
validity of the amendment.
TRANSFER AND EXCHANGE
A holder will be able to transfer or exchange exchange debentures. Upon any
transfer or exchange, the registrar and the trustee may require a
debentureholder, among other things, to furnish appropriate endorsements and
transfer documents. We may require a debentureholder to pay any taxes required
by law or permitted by the indenture. We will not be required to transfer or
exchange any exchange debenture selected for redemption or to transfer or
exchange any exchange debenture for a period of 15 days prior to a selection of
exchange debentures to be redeemed. The exchange debentures will be issued in
registered form, and the holder will be treated as the owner of such exchange
debenture for all purposes.
DEFEASANCE
We may at any time terminate all our obligations under the exchange
debentures and the indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and administrative
obligations. In addition, we may at any time terminate:
(1) our obligations under the covenants described under "--Restrictive
Covenants" or
(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "--Defaults" and the limitations
contained in clauses (3) and (4) under the first paragraph under
"--Merger and Consolidation" ("covenant defeasance").
If we exercise our legal defeasance option or our covenant defeasance option,
each guarantor will be released from all of its obligations with respect to its
guarantee.
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the exchange debentures may not be accelerated because of an
Event of Default with respect thereto. If we exercise our covenant defeasance
option, payment of the exchange debentures may not be accelerated because of an
Event of Default specified in clause (4), (6), (7) (with respect only to
Significant Subsidiaries) or (8) under "--Defaults" or because of our failure to
comply with clause (3) or (4) under the first paragraph under "--Merger and
Consolidation."
In order to exercise either defeasance option, we must irrevocably deposit
in trust, the "defeasance trust", with the trustee money or U.S. government
obligations for the payment of principal, premium if any, and interest on the
exchange debentures to redemption or maturity, and must comply with certain
other conditions, including delivery to the trustee of an opinion of counsel
relating to tax matters affecting holders.
CONCERNING THE TRUSTEE
The Bank of New York is to be the trustee under the indenture and has been
appointed by us as registrar and paying agent with regard to the exchange
debentures.
GOVERNING LAW
The indenture and the exchange debentures will be governed by, and construed
in accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
DEFINITIONS
"Additional Assets" means:
(1) any property or assets, other than Indebtedness and capital stock, to be
used by us or a restricted subsidiary in a Related Business;
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(2) the capital stock of a person that becomes a restricted subsidiary as a
result of the acquisition of such capital stock by us or another
restricted subsidiary; or
(3) capital stock constituting a minority interest in any person that at
such time is a restricted subsidiary;
PROVIDED, HOWEVER, that any such restricted subsidiary described in clauses (2)
or (3) above is primarily engaged in a Related Business.
"Asset Disposition" means any sale, lease, transfer or other disposition, or
series of related sales, leases, transfers or dispositions, by us or any
restricted subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of capital stock of a restricted subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a person other than us or a restricted subsidiary);
(2) all or substantially all the assets of any division or line of business
of us or any restricted subsidiary; or
(3) any other assets of us or any restricted subsidiary outside of the
ordinary course of business of us or such restricted subsidiary;
(other than, in the case of (1), (2) and (3) above:
(a) a disposition by a restricted subsidiary to us or by us or a
restricted subsidiary to a wholly owned restricted subsidiary;
(b) for purposes of the provisions described under the caption
"--Restrictive Covenants-- Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition subject to the covenant
described under the caption "--Restrictive Covenants--Limitation on
Restricted Payments";
(c) a disposition of assets with a fair market value of less than
$100,000;
(d) a disposition of temporary cash investments or goods held for sale in
the ordinary course of business or obsolete equipment or other
obsolete assets in the course of business consistent with past
practices of us;
(e) the disposition of all or substantially all of our assets of us in a
manner permitted under the covenant described under the caption
"--Merger and Consolidation" or any disposition that constitutes a
Change of Control under the indenture; and
(f) the lease, assignment or sub-lease of any real or personal property
in the ordinary course of business).
"Attributable Debt" in respect of a sale/leaseback transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the exchange debentures, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such sale/leaseback transaction, including any period for which such
lease has been extended.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Credit Agreement, the notes issued pursuant thereto, the guarantees thereof,
the collateral documents relating thereto and any Refinancing Indebtedness with
respect thereto, as amended from time to time, including principal, premium, if
any, interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Alaska Communications
Systems Holdings
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whether or not a claim for post-filing interest is allowed in such proceedings),
fees, charges, expenses, reimbursement obligations, guarantees and all other
amounts payable thereunder or in respect thereof.
"Closing Date" means the date of the indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of us and our Consolidated restricted
subsidiaries which may properly be classified as current liabilities, including
taxes accrued as estimated, on a Consolidated basis, after eliminating:
(1) all intercompany items between us and any restricted subsidiary; and
(2) all current maturities of long-term Indebtedness, all as determined in
accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of us and our Consolidated restricted subsidiaries, plus, to the extent
incurred by us and our Consolidated restricted subsidiaries in such period but
not included in such interest expense:
(1) interest expense attributable to capitalized lease obligations and the
interest expense attributable to leases constituting part of a
sale/leaseback transaction;
(2) amortization of debt discount and debt issuance costs;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing;
(6) interest accruing on any Indebtedness of any other person to the extent
such Indebtedness is guaranteed by us or any restricted subsidiary;
(7) amortization of net costs associated with hedging obligations;
(8) dividends in respect of all Disqualified Stock of us and all preferred
stock of any of our subsidiaries, to the extent held by persons other
than us or a wholly owned restricted subsidiary;
(9) interest incurred in connection with investments in discontinued
operations; and
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any person, other than us, in connection with
Indebtedness incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of us and
our Consolidated subsidiaries for such period; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income:
(1) any net income of any person, other than us, if such person is not a
restricted subsidiary, except that:
(a) subject to the limitations contained in clause (4) below, our equity
in the net income of any such person for such period shall be
included in such Consolidated Net Income up to the aggregate amount
of cash or other assets actually distributed by such person during
such period to us or a restricted subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
distribution made to a restricted subsidiary, to the limitations
contained in clause (3) below); and
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(b) Our equity in a net loss of any such person for such period shall be
included in determining such Consolidated Net Income;
(2) any net income or loss of any person acquired by us or any of our
subsidiaries in a pooling of interests transaction for any period prior
to the date of such acquisition;
(3) any net income of any restricted subsidiary 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, 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;
(4) any gain, but not loss, realized upon the sale or other disposition of
any asset of us or our Consolidated subsidiaries, including pursuant to
any sale/leaseback transaction, that is not sold or otherwise disposed of
in the ordinary course of business and any gain, but not loss, realized
upon the sale or other disposition of any capital stock of any person;
(5) any extraordinary or otherwise nonrecurring gain or loss; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purpose of the covenant described
under the caption "--Restrictive Covenants--Limitation on Restricted Payments"
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from unrestricted
subsidiaries to us or a restricted subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (1)(d)(iii)(E) thereof.
"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
us and our Consolidated restricted subsidiaries, determined on a Consolidated
basis in accordance with GAAP, and after giving effect to purchase accounting
and after deducting therefrom Consolidated Current Liabilities and, to the
extent otherwise included, the amounts of:
(1) minority interests in Consolidated subsidiaries held by persons other
than us or a restricted subsidiary;
(2) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the board of directors;
(3) any revaluation or other write-up in book value of assets subsequent to
the date of the indenture as a result of a change in the method of
valuation in accordance with GAAP consistently applied;
(4) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items;
(5) treasury stock;
(6) cash set apart and held in a sinking or other analogous fund established
for the purpose of redemption or other retirement of capital stock to the
extent such obligation is not reflected in Consolidated Current
Liabilities; and
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(7) Investments in and assets of unrestricted subsidiaries.
"Consolidation" means the consolidation of the amounts of each of the
restricted subsidiaries with those of us in accordance with GAAP consistently
applied; PROVIDED, HOWEVER, that "Consolidation" will not include consolidation
of the accounts of any unrestricted subsidiary, but the interest of us or any
restricted subsidiary in an unrestricted subsidiary will be accounted for as an
investment. The term "Consolidated" has a correlative meaning.
"Credit Agreement" means the credit agreement dated as of May 14, 1999 among
us, Alaska Communications Systems Holdings, the financial institutions named
therein, The Chase Manhattan Bank, as Administrative Agent, Canadian Imperial
Bank of Commerce, as Syndication Agent and Credit Suisse First Boston, as
Documentation Agent, as amended, waived or otherwise modified from time to time
(except to the extent that any such amendment, waiver or other modification
thereto would be prohibited by the terms of the indenture, unless otherwise
agreed to by the holders of at least a majority in aggregate principal amount of
exchange debentures at the time outstanding), including any such amendments or
modifications, or any other credit agreement or credit agreements, that replace,
refund or refinance any or a portion of the commitments or loans thereunder, up
to a maximum principal amount not to exceed $585 million.
"Debt to EBITDA Ratio" as of any date of determination means the ratio of:
(1) Total Consolidated Indebtedness as of the date of determination to
(2) EBITDA for the period of the most recent four consecutive fiscal
quarters ending at the end of the most recent fiscal quarter for which
financial statements are publicly available; PROVIDED, HOWEVER, that:
(a) if we or any restricted subsidiary has repaid, repurchased, defeased
or otherwise discharged any Indebtedness since the beginning of such
period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged (in each case, other than Indebtedness
incurred under any revolving credit facility unless such Indebtedness
has been permanently repaid and has not been replaced) on the date of
the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio, EBITDA for such period shall be calculated on a pro
forma basis as if such discharge had occurred on the first day of
such period and as if we or such restricted subsidiary has not earned
the interest income actually earned during such period in respect of
cash or temporary cash investments used to repay, repurchase, defease
or otherwise discharge such Indebtedness;
(b) if since the beginning of such period we or any restricted subsidiary
shall have made any Asset Disposition, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA, if positive,
directly attributable to the assets that are the subject of such
Asset Disposition for such period or increased by an amount equal to
the EBITDA, if negative, directly attributable thereto for such
period;
(c) if since the beginning of such period, we or any restricted
subsidiary shall have made an Investment in any person that is merged
with or into us or any restricted subsidiary, or any person that
becomes a restricted subsidiary, or an acquisition of assets,
including any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a
business, EBITDA for such period shall be calculated after giving pro
forma effect thereto, including the incurrence of any Indebtedness,
as if such Investment or acquisition occurred on the first day of
such period; any such pro forma calculation may include adjustments
appropriate to reflect, without duplication (x) any such acquisition
to the extent such adjustments may be reflected in the preparation of
pro forma financial information in accordance with the requirements
of GAAP and Article XI of
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Regulation S-X under the Exchange Act; (y) the annualized amount of
operating expense reductions reasonably expected to be realized in
the six months following any such acquisition made during any of the
four fiscal quarters constituting the four-quarter reference period
prior to the date of determination; and (z) the annualized amount of
operating expense reductions reasonably expected to be realized in
the six months following any such acquisition made by us during
either of the two fiscal quarters immediately preceding the
four-quarter reference period prior to the date of determination;
PROVIDED that in either case such adjustments are set forth in an
officers' certificate which states (i) the amount of such adjustment
or adjustments, (ii) that such adjustment or adjustments are based on
the reasonable good faith beliefs of the officers executing such
officers' certificate at the time of such execution and (iii) that
any related incurrence of Indebtedness is permitted pursuant to the
indenture; and
(d) if since the beginning of such period, any person (that subsequently
became a restricted subsidiary or was merged with or into us or any
restricted subsidiary since the beginning of such period) shall have
made any Asset Disposition or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (b) or (c)
above if made by us or a restricted subsidiary during such period,
EBITDA for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or
acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets and the amount of income or earnings relating thereto,
the pro forma calculations shall be determined in good faith by a responsible
financial or accounting officer of us. If any Indebtedness bears a floating rate
of interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any interest rate agreement applicable to such Indebtedness if such
interest rate agreement has a remaining term as at the date of determination in
excess of 12 months).
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any person, any capital stock
that by its terms, or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable, or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock;
or
(3) is redeemable at the option of the holder thereof, in whole or in part;
in each case on or prior to the first anniversary of the stated maturity of the
exchange debentures; PROVIDED, HOWEVER, that any capital stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such person to repurchase or redeem such capital stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the stated maturity of the exchange debentures shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such capital stock are not more favorable to the
holders of such capital stock than the provisions of the covenants described
under the captions "--Change of Control" and "--Restrictive
Covenants--Limitation on Sale of Assets and Subsidiary Stock."
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income:
(1) income tax expense of us and our Consolidated restricted subsidiaries;
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(2) Consolidated Interest Expense;
(3) depreciation expense of us and our Consolidated restricted subsidiaries;
(4) amortization expense of us and our Consolidated restricted subsidiaries
(excluding amortization expense attributable to a prepaid cash item that
was paid in a prior period); and
(5) all other non-cash charges of us and our Consolidated restricted
subsidiaries (excluding any such non-cash charge to the extent it
represents an accrual of or reserve for cash expenditures in any future
period, but that will not be expensed in such future periods),
in each case for such period.
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 us 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 us 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.
"Equity Offering" means any public or private sale of capital stock, other
than Disqualified Stock, of us, other than offerings of us of the type that can
be registered on Form S-8.
"GAAP" means generally accepted accounting principles in the U.S. as in
effect as of the Closing Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards
Board;
(3) such other statements by such other entities as approved by a
significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements, including pro forma financial statements, in
periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
SEC.
All ratios and computations based on GAAP contained in the indenture shall be
computed in conformity with GAAP.
"Indebtedness" means, with respect to any person on any date of
determination, without duplication:
(1) the principal of and premium, if any, in respect of indebtedness of such
person for borrowed money;
(2) the principal of and premium, if any, in respect of obligations of such
person evidenced by bonds, debentures, notes or other similar
instruments;
(3) all obligations of such person in respect of letters of credit or other
similar instruments;
(4) all obligations of such person to pay the deferred and unpaid purchase
price of property or services, except trade payables and contingent
obligations to pay earn-outs, which purchase price is due more than six
months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services;
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(5) all capitalized lease obligations and all Attributable Debt of such
person;
(6) the amount of all obligations of such person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any subsidiary of such person, any preferred stock (but
excluding, in each case, any accrued dividends);
(7) all Indebtedness of other persons secured by a lien on any asset of such
person, whether or not such Indebtedness is assumed by such person;
PROVIDED, HOWEVER, that the amount of Indebtedness of such person shall
be the lesser of:
(A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other persons;
(8) to the extent not otherwise included in this definition, hedging
obligations of such person; and
(9) all obligations of the type referred to in clauses (1) through (8) above
of other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee.
The amount of Indebtedness of any person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Investment" in any person means any, direct or indirect, advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of capital stock, Indebtedness or other
similar instruments issued by such person. For purposes of the definition of the
covenant described under the caption "--Restrictive Covenants--Limitation on
Restricted Payments":
(1) "Investment" shall include the portion, proportionate to our equity
interest in such Subsidiary, of the fair market value of the net assets
of any of our subsidiaries at the time that such subsidiary is designated
an unrestricted subsidiary; PROVIDED, HOWEVER, that, upon a redesignation
of such subsidiary as a restricted subsidiary, we shall be deemed to
continue to have a permanent "Investment" in an unrestricted subsidiary
in an amount, if positive, equal to:
(a) our Investment in such subsidiary at the time of such redesignation
less
(b) the portion, proportionate to our equity interest in such subsidiary,
of the fair market value of the net assets of such subsidiary at the
time of such redesignation; and
(2) any property transferred to or from an unrestricted subsidiary shall be
valued at its fair market value at the time of such transfer, in each
case, as determined in good faith by the board of directors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or
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assets that are the subject of such Asset Disposition or received in any other
non-cash form) therefrom, in each case net of:
(1) all legal fees and expenses, title and recording tax expenses,
commissions and other fees and expenses incurred, and all federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition;
(2) all payments, including any prepayment premiums or penalties, made on
any Indebtedness that is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any lien upon or other
security agreement of any kind with respect to such assets, or which must
by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the
property or other assets disposed of in such Asset Disposition and
retained by us or any restricted subsidiary after such Asset Disposition.
"Pari Passu Indebtedness" of us means the exchange debentures, our guarantee
of the Bank Indebtedness, and any other Indebtedness of us that specifically
provides that such Indebtedness is to rank equally with the exchange debentures,
in right of payment and is not subordinated by its terms in right of payment to
any Indebtedness or other obligation of us which is not Pari Passu Indebtedness.
"Permitted Holders" means Fox Paine Capital Fund, L.P., and its affiliates,
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, members of management and any person acting in the
capacity of an underwriter in connection with a public or private offering of
our capital stock.
"Permitted Investment" means an Investment by us or any restricted
subsidiary in:
(1) us, a restricted subsidiary or a person that will, upon the making of
such Investment, become a restricted subsidiary; PROVIDED, HOWEVER, that
the primary business of such restricted subsidiary is a Related Business;
(2) another person if as a result of such Investment such other person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Alaska Communications Systems Holdings
or a restricted subsidiary; PROVIDED, HOWEVER, that such person's primary
business is a Related Business;
(3) temporary cash investments;
(4) receivables owing to us or any restricted subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; PROVIDED, HOWEVER, that such
trade terms may include such concessionary trade terms as us or any such
restricted subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) any loans or advances to employees made in the ordinary course of
business consistent with past practices of us or such restricted
subsidiary and not exceeding, when aggregated with amounts loaned or
advanced under clause (2)(f)(iv) of "--Restrictive Covenants--Limitation
on Restricted Payments," $5 million in the aggregate outstanding at any
one time;
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(7) stock, obligations or securities received in settlement of, or
foreclosure with respect to, debts created in the ordinary course of
business and owing to us or any restricted subsidiary or in satisfaction
of judgments;
(8) any person to the extent such Investment represents the non-cash or
deemed cash portion of the consideration received for an Asset
Disposition that was made pursuant to and in compliance with the covenant
described under the caption "--Restrictive Covenants-- Limitation on
Sales of Assets and Subsidiary Stock";
(9) any Investment existing on the Closing Date;
(10) hedging obligations permitted under paragraph (2)(g) of the covenant
described under the caption "--Restrictive Covenants--Limitation on
Indebtedness";
(11) guarantees of Indebtedness permitted under the covenant described under
the caption "--Restrictive Covenants--Limitation on Indebtedness";
(12) Investments which are made exclusively with our capital stock, other
than Disqualified Stock; and
(13) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (13)
that are at the time outstanding, not to exceed $5 million at the time of
such Investment, with the fair market value of each Investment being
measured at the time made and without giving effect to subsequent changes
in value.
"Permitted Joint Venture Interests" means equity interests representing at
least 35% of the voting stock of a person engaged in a business in which we were
engaged at the Closing Date or a Related Business.
"Purchase Money Indebtedness" means Indebtedness:
(1) consisting of the deferred purchase price of an asset, conditional sale
obligations, obligations under any title retention agreement and other
purchase money obligations, in each case where the maturity of such
Indebtedness does not exceed the anticipated useful life of the asset
being financed; and
(2) incurred to finance the acquisition by us or a restricted subsidiary of
such asset, including additions and improvements; PROVIDED, HOWEVER, that
such Indebtedness is incurred within 180 days before or after the
acquisition by us or such restricted subsidiary of such asset.
"Refinancing Indebtedness" means Indebtedness that is incurred to refund,
refinance, replace, repay, redeem, retire, renew, repay or extend (including
pursuant to any defeasance or discharge mechanism) any Indebtedness of us or any
restricted subsidiary existing on the Closing Date or incurred in compliance
with the indenture; PROVIDED, HOWEVER, that:
(1) other than with respect to Bank Indebtedness or the Alaska
Communications Systems Holdings senior subordinated notes, the
Refinancing Indebtedness has a stated maturity no earlier than the stated
maturity of the Indebtedness being refinanced;
(2) other than with respect to Bank Indebtedness or the Alaska
Communications Systems Holdings senior subordinated notes, the
Refinancing Indebtedness has an average life at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the average
life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount (or
if issued with original issue discount, the aggregate accreted value)
then outstanding of the Indebtedness being refinanced; and
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(4) if the Indebtedness being refinanced is subordinated in right of payment
to the exchange debentures, such Refinancing Indebtedness is subordinated
in right of payment to the exchange debentures at least to the same
extent as the Indebtedness being refinanced;
PROVIDED, FURTHER, HOWEVER, that Refinancing Indebtedness shall not include:
(a) Indebtedness of a restricted subsidiary that refinances Indebtedness
of us; or
(b) Indebtedness of us or a restricted subsidiary that refinances
Indebtedness of an unrestricted subsidiary.
"Related Business" means any business related, ancillary or complementary to
the businesses of us and the restricted subsidiaries on the Closing Date.
"Significant Subsidiary" means any restricted subsidiary that would be a
"Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Telecommunications Assets" means (1) assets used or useful in the operating
businesses of Alaska Communications Systems Holdings at the Closing Date or in a
Related Business or (2) equity interests representing a majority of the voting
stock of persons engaged in such businesses.
"Total Consolidated Indebtedness" means, as of any date of determination, an
amount equal to the aggregate amount of all Indebtedness of us and our
restricted subsidiaries, determined on a Consolidated basis, outstanding as of
such date of determination, after giving effect to any incurrence of
Indebtedness and the application of the proceeds therefrom giving rise to such
determination.
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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
We and the initial purchasers in the private offering of the old debentures
entered into an exchange and registration rights agreement on May 14, 1999.
Pursuant to the registration rights agreement, we agreed to:
- file with the SEC on or before July 28, 1999, or 75 days after issuance
of the old debentures, a registration statement on Form S-1 or Form S-4,
if the use of that form is then available, relating to a registered
exchange offer for the exchange debentures under the Securities Act and
- use our reasonable best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act on or before
October 11, 1999, or 150 days after issuance of the old debentures.
As soon as practicable after the effectiveness of the exchange offer
registration statement, we will offer to the holders of transfer restricted
securities who are not prohibited by any law or policy of the SEC from
participating in the exchange offer the opportunity to exchange their transfer
restricted securities for exchange debentures. We will keep the exchange offer
open for not less than 30 days, or longer, if required by applicable law, after
the date on which notice of the exchange offer is mailed to the holders of the
old debentures.
If:
- because of any change in law or applicable interpretations thereof by the
staff of the SEC, we are not permitted to effect the exchange offer as
contemplated by the registration rights agreement;
- any old debentures validly tendered pursuant to the exchange offer are
not exchanged for exchange debentures on or before November 10, 1999, or
180 days after issuance of the old debentures;
- any initial purchaser so requests within 20 business days of completion
of the exchange offer with respect to old debentures held by it that are
not eligible to be exchanged for exchange debentures in the exchange
offer;
- any applicable law or interpretations do not permit any holder of old
debentures to participate in the exchange offer;
- any holder of old debentures that participates in the exchange offer that
does not receive freely transferable exchange debentures in exchange for
tendered old debentures so requests within 20 business days of completion
of the exchange offer; or
- we so elect,
then we will file with the SEC a shelf registration statement to cover resales
of transfer restricted securities by holders who provide requested information
in connection with the shelf registration statement.
For purposes of this section, "transfer restricted securities" means each
old debenture until:
- the date on which the old debenture has been exchanged for a freely
transferable exchange debenture in the exchange offer;
- the date on which the old debenture has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement; or
- the date on which the old debenture is distributed to the public pursuant
to Rule 144 under the Securities Act or is salable pursuant to Rule
144(k) under the Securities Act.
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We will use our reasonable best efforts to have the exchange offer
registration statement or, if applicable, the shelf registration statement
declared effective by the SEC as promptly as practicable after its filing with
the SEC. Unless the exchange offer would not be permitted by a policy of the
SEC, we will commence the exchange offer and will use our reasonable best
efforts to consummate the exchange offer as promptly as practicable, but in any
event on or before November 10, 1999. If applicable, we will use our reasonable
best efforts to keep the shelf registration statement effective until May 14,
2001 or the shorter period when all old debentures covered by the shelf
registration statement have been sold in the manner set forth above and as
contemplated in the shelf registration statement or when the old debentures
become eligible for resale pursuant to Rule 144 under the Securities Act without
volume restrictions, if any.
Any of the following is considered a registration default:
- if the applicable registration statement is not filed with the SEC on or
before July 28, 1999;
- if the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective on or before
October 11, 1999, or, in the case of a shelf registration statement
required to be filed in response to a change in law or applicable
interpretations of the staff of the SEC, if later, within 60 days after
publication of the change in the law or interpretation;
- if the exchange offer is not consummated on or before November 10, 1999;
or
- if the shelf registration statement is filed and declared effective on or
before October 11, 1999, or, in the case of a shelf registration
statement required to be filed in response to a change in law or
applicable interpretations of the staff of the SEC, if later, within 60
days after publication of the change in the law or interpretation; but
shall thereafter cease to be effective at any time that we are obligated
to maintain its effectiveness without being succeeded within 45 days by
an additional registration statement filed and declared effective
If a registration default occurs, we will be obligated to pay liquidated damages
to each holder of transfer restricted securities, during the period of one or
more registration defaults, in an amount equal to $0.192 per week per $1,000
principal amount of the old debentures constituting transfer restricted
securities held by the holder until the applicable registration statement is
filed, the exchange offer registration statement is declared effective and the
exchange offer is consummated or the shelf registration statement is declared
effective or again becomes effective, as the case may be. All accrued liquidated
damages shall be paid to holders in the same manner as interest payments on the
old debentures on semi-annual payment dates that correspond to interest payment
dates for the old debentures. Following the cure of all registration defaults,
the accrual of liquidated damages will cease.
The registration rights agreement also provides that we:
- will make available for a period of 90 days after the completion of the
exchange offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any
exchange debentures and
- will pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the old debentures, and will
jointly and severally indemnify holders of the old debentures, including
any broker-dealer, against related liabilities, including liabilities
under the Securities Act. A broker-dealer that delivers a prospectus to
purchasers in connection with resales of the exchange debentures will be
subject to the civil liability provisions under the Securities Act and
will be bound by the provisions of the registration rights agreement,
including those relating to indemnification rights and obligations.
Holders of the old debentures will be required to make the representations
to us described under the caption "The Exchange Offer--Procedures for tendering"
in order to participate in the exchange
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offer and will be required to deliver information to be used in connection with
the shelf registration statement in order to have their old debentures included
in the shelf registration statement and benefit from the provisions regarding
liquidated damages set forth in the preceding paragraphs. A holder who sells old
debentures pursuant to the shelf registration statement generally will be:
- required to be named as a selling securityholder in the related
prospectus and to deliver a prospectus to purchasers;
- subject to the civil liability provisions under the Securities Act in
connection with those sales; and
- bound by the provisions of the registration rights agreement that are
applicable to that holder, including those relating to indemnification
obligations.
As long as the old debentures are outstanding, we will continue to provide
to holders of the old debentures and to prospective purchasers of the old
debentures the information required by Rule 144A(d)(4) under the Securities Act.
This description of the registration rights agreement is a summary only and
is qualified in its entirety by reference to all provisions of the registration
rights agreement, which has been filed as an exhibit to the registration
statement of which this prospectus is a part and is incorporated by reference
herein.
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BOOK-ENTRY, DELIVERY AND FORM
The exchange debentures will initially be represented by one or more
permanent global notes in definitive, fully registered book-entry form, without
interest coupons that will be deposited with, or on behalf of, DTC and
registered in the name of Cede and Co., as nominee of DTC, on behalf of the
acquirors of exchange debentures for credit to the accounts of the acquirors or
to other accounts as they may direct at DTC, or Morgan Guaranty Trust Company of
New York, Brussels office, as operator of the Euroclear System, or Cedel Bank,
societe anonyme.
The global notes may be transferred in whole and not in part, solely to
another nominee of DTC or to a successor of DTC or its nominee. Beneficial
interests in the global notes may not be exchanged for exchange notes in
physical, certificated form except in the limited circumstances described below.
All interests in the global notes, including those held through Euroclear or
Cedel, may be subject to the procedures and requirements of DTC. Those interests
held through Euroclear or Cedel may also be subject to the procedures and
requirements of those systems.
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided as a matter of convenience. These operations
and procedures are solely within the control of the settlement systems and are
subject to change by them from time to time. We take no responsibility for these
operations or procedures, and you are urged to contact the relevant system or
its participants directly to discuss these matters.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York,
- a "banking organization" within the meaning of the New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, eliminating
the need for physical transfer and delivery of certificates. DTC's participants
include securities brokers and dealers, including the initial purchasers in the
private offering of the old debentures, banks and trust companies, clearing
corporations and similar organizations. Indirect access to DTC's system is also
available to indirect participants, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
We expect that pursuant to procedures established by DTC ownership of the
exchange debentures will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC, with respect to the
interests of participants, and the records of participants and the indirect
participants, with respect to the interests of persons other than participants.
The laws of some jurisdictions may require that purchasers of securities
take physical delivery of purchased securities in definitive form. Accordingly,
the ability to transfer interests in the exchange notes represented by a global
note to those persons may be limited. In addition, because DTC can act only on
behalf of its participants, who in turn act on behalf of persons who hold
interests through participants, the ability of a person having an interest in
exchange debentures represented by a global
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note to pledge or transfer that interest to persons or entities that do not
participate in DTC's system, or to otherwise take actions in respect of that
interest, may be affected by the lack of a physical definitive security in
respect of that interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or its nominee will be considered the sole owner or holder of the exchange
debentures represented by the global note for all purposes under the indenture.
Except as provided below, owners of beneficial interests in a global note will
not be entitled to have exchange debentures represented by that global note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated exchange notes and will not be considered the owners or
holders thereof under the indenture for any purpose, including with respect to
the giving of any direction, instruction or approval to the trustee.
Accordingly, each holder owning a beneficial interest in a global note must rely
on the procedures of DTC and, if the holder is not a participant or an indirect
participant, on the procedures of the participant through which the holder owns
its interest, to exercise any rights of a holder of exchange debentures under
the indenture or the global note. We understand that, under existing industry
practice, in the event that we request any action of holders of exchange
debentures, or a holder that is an owner of a beneficial interest in a global
note desires to take any action that DTC, as the holder of that global note, is
entitled to take, DTC would authorize the participants to take that action and
the participants would authorize holders owning through the participants to take
that action or would otherwise act upon the instruction of the holders. Neither
we nor the trustee will have any responsibility or liability for any aspect of
the records relating to or payments made on account of exchange debentures by
DTC, or for maintaining, supervising or reviewing any records of DTC relating to
exchange debentures.
Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any exchange debentures represented by a
global note registered in the name of DTC or its nominee on the applicable
record date will be payable by the trustee to or at the direction of DTC or its
nominee in its capacity as the registered holder of the global note representing
the exchange debentures under the indenture. Under the terms of the indenture,
we and the trustee may treat the persons in whose names the exchange debentures,
including the global notes, are registered as the owners for the purpose of
receiving payment thereon and for any and all other purposes whatsoever.
Accordingly, neither we nor the trustee has or will have any responsibility or
liability for the payment of these amounts to owners of beneficial interests in
a global note, including principal, premium, if any, liquidated damages, if any,
and interest. Payments by the participants and the indirect participants to the
owners of beneficial interests in a global note will be governed by standing
instructions and customary industry practice and will be the responsibility of
the participants or the indirect participants and DTC.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter year 2000 problems. DTC has
informed its participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as they relate
to the timely payment of distributions, including principal and income payments,
to securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others.
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DTC has informed the industry that it is contacting and will continue to contact
third party vendors from whom DTC acquires services to:
- impress upon them the importance of their services being year 2000
compliant; and
- determine the extent of their efforts for year 2000 remediation and, as
appropriate, testing of their services.
In addition, DTC is in the process of developing the contingency plans that
it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
exchange notes, cross-market transfers between the participants in DTC, on the
one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary. However, these
cross-market transactions will require delivery of instructions to Euroclear or
Cedel by the counterparty in the appropriate system in accordance with the rules
and procedures and within the established deadlines, Brussels time, of the
appropriate system. Euroclear or Cedel will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf by delivering or receiving
interests in the relevant global notes in DTC and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a participant in
DTC will be credited, and that crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day,
which must be a business day for Euroclear and Cedel, immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales
of interest in a global note by or through a Euroclear or Cedel Participant to a
participant in DTC will be received with value on the settlement date of DTC,
but will be available in the relevant Euroclear or Cedel cash account only as of
the business day for Euroclear or Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the global notes among participants in DTC,
Euroclear and Cedel, they are under no obligation to perform or to continue to
perform these procedures, and these procedures may be discontinued at any time.
Neither we nor the trustee will have any responsibility for the performance by
DTC, Euroclear or Cedel or their participants or indirect participants of their
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If:
- we notify the Trustee in writing that DTC is no longer willing or able to
act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within
90 days of that notice or cessation;
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- we, at our option, notify the trustee in writing that we elect to cause
the issuance of exchange debentures in definitive form under the
indenture; or
- upon the occurrence of other events as provided in the indenture,
then, upon surrender by DTC of the global notes, certificated exchange notes
will be issued to each person that DTC identifies as the beneficial owner of the
exchange debentures represented by the global notes. Upon that issuance, the
trustee is required to register the certificated exchange notes in the name of
that person, or the nominee of any thereof, and cause the same to be delivered
to that person.
Neither we nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related exchange debentures, and each beneficial owner of exchange debentures
may conclusively rely on, and shall be protected in relying on, instructions
from DTC for all purposes, including with respect to the registration and
delivery, and the respective principal amounts, of the exchange debentures to be
issued.
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FEDERAL INCOME TAX CONSIDERATIONS
SCOPE OF DISCUSSION
This general discussion of certain U.S. federal income and estate tax
consequences applies to you if you acquired old debentures at original issue for
cash, exchange your old debentures for exchange debentures pursuant to the terms
set forth in this prospectus and hold the exchange debentures as a "capital
asset," generally, for investment, under Section 1221 of the Code. This summary,
however, does not consider state, local or foreign tax laws. In addition, it
does not include all of the rules which may affect the U.S. tax treatment of
your investment in the exchange debentures. For example, special rules not
discussed here may apply to you if you are:
- a broker-dealer, a dealer in securities, a trader in securities who
elects to apply a mark-to-market method of accounting or a financial
institution;
- an S corporation;
- an insurance company;
- a tax-exempt organization;
- subject to the alternative minimum tax provisions of the Code;
- holding the exchange debentures as part of a hedge, straddle, conversion
transaction or other risk reduction or constructive sale transaction;
- a nonresident alien or foreign corporation subject to net-basis U.S.
federal income tax on income or gain derived from an exchange debenture
because such income or gain is effectively connected with the conduct of
a U.S. trade or business; or
- an expatriate of the U.S.
This discussion only represents our best attempt to describe certain federal
income tax consequences that may apply to you based on current U.S. federal tax
law. This discussion may in the end inaccurately describe the federal income tax
consequences which are applicable to you because the law may change, possibly
retroactively, and because the IRS or any court may disagree with this
discussion.
THIS SUMMARY MAY NOT COVER YOUR PARTICULAR CIRCUMSTANCES BECAUSE IT DOES NOT
CONSIDER FOREIGN, STATE OR LOCAL TAX RULES, DISREGARDS CERTAIN SPECIAL FEDERAL
TAX RULES, AND DOES NOT DESCRIBE FUTURE CHANGES IN FEDERAL TAX RULES. PLEASE
CONSULT YOUR TAX ADVISOR RATHER THAN RELYING ON THIS GENERAL DESCRIPTION.
THE EXCHANGE OFFER
The issuance of the exchange debentures to holders of the old debentures
pursuant to the terms set forth in this prospectus will not constitute an
exchange for federal income tax purposes. Consequently, no gain or loss will be
recognized by holders of the old debentures upon receipt of the exchange
debentures, and ownership of the exchange debentures will be considered a
continuation of ownership of the old debentures. For purposes of determining
gain or loss upon the subsequent sale or exchange of the exchange debentures, a
holder's basis in the exchange debentures should be the same as the holder's
basis in the old debentures exchanged. A holder's holding period for the
exchange debentures should include the holder's holding period for the old
debentures exchanged. The issue price and other tax characteristics of the
exchange debentures should be identical to the issue price and other tax
characteristics of the old debentures exchanged.
U.S. HOLDERS
If you are a U.S. holder, as defined below, this section applies to you.
Otherwise, the next section, "non-U.S. holders," applies to you.
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DEFINITION OF U.S. HOLDER. You are a U.S. holder if you hold the exchange
debentures and you are:
- a citizen or resident of the U.S., including an alien individual who is a
lawful permanent resident of the U.S. or meets the "substantial presence"
test under Section 7701 (b) of the Code;
- a corporation or partnership created or organized in the U.S. or under
the laws of the U.S. or of any political subdivision of the U.S. (except
that under the regulations to be published, certain partnerships created
or organized under the foreign laws may be classified as a domestic
partnership if such classification is more appropriate);
- an estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
- a trust, if a U.S. court can exercise primary supervision over the
administration of the trust and one or more U.S. persons can control all
substantial decisions of the trust, or if the trust was in existence on
August 20, 1996 and has elected to continue to be treated as a U.S.
person.
TAXATION OF ORIGINAL ISSUE DISCOUNT. You must include original issue
discount, or OID, on the exchange debentures as ordinary income as it accrues
over the term of the exchange debentures under a constant yield methods' as
described below, whether you use the accrual method or the cash method.
The exchange debentures will be treated as issued with OID equal to the
excess of the stated redemption price at maturity of an exchange debenture over
its issue price. The issue price of an exchange debenture should be identical to
the issue price of an old debenture. The issue price of an old debenture is the
first price at which a substantial portion of the old debentures were sold for
money (excluding sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers). The stated redemption price at maturity of an exchange debenture
is the total of all payments on the exchange debenture, including payments of
stated interest.
The amount of OID includable in your income is the sum of the daily portions
of OID with respect to the exchange debenture for each day during the taxable
year or portion thereof in which you hold such exchange debenture. The daily
portion is determined by allocating to each day in any "accrual period" a
pro-rata portion of the OID that accrued in such period. The accrual period of
an exchange debenture may be of any length and may vary in length over the term
of an exchange debenture, provided that each accrual period is no longer than
one year and each scheduled payment of principal or interest occurs either on
the first or last day of an accrual period. The amount of OID that accrues with
respect to any accrual period is the product of the exchange debenture's
adjusted issue price at the beginning of such accrual period and its yield to
maturity, determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of such period. The adjusted issue
price of an exchange debenture at the start of any accrual period is equal to
its issue price increased by the accrued OID for each prior accrual period and
reduced by any prior payments made on such exchange debenture. Payments of
stated interest on an exchange debenture need not be included in income as they
are received or accrued, because they are reflected in the calculation of OID.
HIGH YIELD DISCOUNT OBLIGATIONS. Sections 163(e) and 163(i) of the Code
provide rules that affect the tax treatment of certain high-yield discount
obligations. The exchange debentures constitute high-yield discount obligations
because their yield-to-maturity exceeds by five percentage points or more the
applicable federal rate for instruments with a similar maturity in effect for
the calendar month in which the old debentures were issued. Because the exchange
debentures are high-yield discount obligations, we may not deduct any OID that
accrues with respect to the exchange debentures until we pay such amount in
cash.
In addition, because the exchange debentures' yield-to-maturity exceeds the
relevant applicable federal rate by more than six percentage points,
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- a portion of such interest corresponding to the yield in excess of six
percentage points above the applicable federal rate will not be
deductible by us at any time and
- a corporate holder may be entitled to treat the portion of the interest
that is not deductible by us as a dividend, which may then qualify for
the dividends-received deduction provided by Section 243 of the Code
(subject to applicable conditions and limitations).
Corporate holders of exchange debentures should consult with their tax advisors
as to the applicability of the dividends-received deduction.
SALE OR OTHER TAXABLE DISPOSITION OF THE EXCHANGE DEBENTURES. You must
recognize taxable gain or loss on the sale, exchange, redemption, retirement or
other taxable disposition of an exchange debenture. The amount of your gain or
loss equals the difference between the fair market value of the cash or other
property you receive for the exchange debenture, minus the amount attributable
to accrued interest on the exchange debenture, minus your adjusted tax basis in
the exchange debenture. Your initial tax basis should equal the price you paid
for the old debenture. Your adjusted tax basis in an exchange debenture will
equal the initial tax basis, increased by OID previously included in your gross
income to the date of disposition with respect to the exchange debenture and the
old debenture exchanged therefor and reduced by any payments on the exchange
debenture or the old debenture exchanged therefor.
Your gain or loss will generally be a long-term capital gain or loss if your
holding period for the exchange debenture is more than one year. Otherwise, it
will be a short-term capital gain or loss. Payments attributable to accrued
interest which you have not yet included in income will be taxed as ordinary
interest income.
OPTIONAL REDEMPTION: REPURCHASE AT THE OPTION OF HOLDERS.
On or after May 15, 2004, we have the right to redeem the exchange
debentures prior to their stated maturity date. In addition, we may, under
certain circumstances, have the right to redeem up to 35% of the exchange
debentures before May 15, 2002. If we experience a change of control, you will
have the right to require us to repurchase your exchange debentures prior to
their stated maturity date.
The presence of such options may affect the calculation of OID, among other
things. The OID rules provide that, solely for purposes of the accrual of OID,
an issuer of a debt instrument having an option to redeem the debt instrument
prior to its stated maturity date will be presumed to exercise such option in
the manner that minimizes the yield on the debt instrument. Conversely, a holder
having an option to elect repayment of the debt instrument prior to its stated
maturity date will be presumed to exercise such option in a manner that
maximizes the yield on the debt instrument. If the exercise of such option or
options to redeem the debt instrument prior to its stated maturity date or to
elect repayment of the debt instrument prior to its stated maturity date
actually occurs or does not occur, contrary to the presumption made under the
OID rules, then, solely for purposes of the accrual of OID, the debt instrument
is treated as reissued on the date of the change in circumstances for an amount
equal to its adjusted issue price on that date.
BACKUP WITHHOLDING. You may be subject to a 31% backup withholding tax when
you receive interest payments on an exchange debenture or proceeds upon the sale
or other disposition of an exchange debenture. Certain holders (including, among
others, corporations and certain tax-exempt organizations) are generally not
subject to backup withholding. In addition, the 31% backup withholding tax will
not apply, to you if you provide your taxpayer identification number in the
prescribed manner unless:
- the IRS notifies us or our agent that the taxpayer identification number
you provided is incorrect;
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- you fail to report interest and dividend payments that you receive on
your tax return and the IRS notifies us or our agent that withholding is
required; or
- you fail to certify under penalties of perjury that you are not subject
to back up withholding.
If the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your U.S. federal income tax liability as
long as you provide certain information to the IRS.
NON-U.S. HOLDERS
DEFINITION OF NON-UNITED STATES HOLDER. A "non-U.S. holder" is any person
who holds exchange debentures other than a U.S. holder. Please note that if you
are subject to U.S. federal income tax on a net basis on income or gain with
respect to an exchange debenture because such income or gain is effectively
connected with the conduct of a U.S. trade or business, this disclosure does not
cover the U.S. federal tax rules that apply to you.
INTEREST.
PORTFOLIO INTEREST EXEMPTION. You will generally not have to pay U.S.
federal income tax on interest, including OID, paid on the exchange debentures
because of the "portfolio interest exemption" if either:
- you represent that you are not a U.S. person for U.S. federal income tax
purposes and you provide your name and address to us or our paying agent
on a properly executed IRS Form W-8 (or a suitable substitute form)
signed under penalties of perjury; or
- a securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its business
holds the exchange debenture on your behalf, certifies to us or our agent
under penalties of perjury that it has received IRS Form W-8 (or a
suitable substitute form) from you or from another qualifying financial
institution intermediary, and provides a copy to us or our agent.
You will not, however, qualify for the portfolio interest exemption described
above if:
- you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our capital stock;
- you are a controlled foreign corporation with respect to which we are a
"related person" within the meaning of Section 864(d)(4) of the Code;
- you are a bank receiving interest described in Section 881(c)(3)(A) of
the Code;
WITHHOLDING TAX IF THE INTEREST IS NOT PORTFOLIO INTEREST. If you do not
claim, or do not qualify for, the benefit of the portfolio interest exemption,
you may be subject to a 30% withholding tax on interest payments made on the
exchange debentures. However, you may be able to claim the benefit of a reduced
withholding tax rate under an applicable income tax treaty. The required
information for claiming treaty benefits is generally submitted, under current
regulations, on Form 1001. Successor forms will require additional information,
as discussed below under the heading "Non-U.S. Holders-- Backup Withholding and
Information Reporting--New Withholding Regulations."
REPORTING. We may report annually to the IRS and to you the amount of
interest paid to, and the tax withheld, if any, with respect to you.
SALE OR OTHER DISPOSITION OF EXCHANGE DEBENTURES. You will generally not be
subject to U.S. federal income tax or withholding tax on gain recognized on a
sale, exchange, redemption, retirement, or other disposition of an exchange
debenture. You may, however, be subject to tax on such gain if you are an
individual who was present in the U.S. for 183 days or more in the taxable year
of the disposition, in
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which case you may have to pay a U.S. federal income tax of 30% (or a reduced
treaty rate) on such gain.
U.S. FEDERAL ESTATE TAXES. If you qualify for the portfolio interest
exemption under the rules described above when you die, the exchange debentures
will not be included in your estate for U.S. federal estate tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING.
PAYMENTS FROM U.S. OFFICE. If you receive payments of interest or principal
directly from us or through a U.S. office of a custodian, nominee, agent or
broker, there is a possibility that you will be subject to both backup
withholding at a rate of 31% and information reporting.
With respect to interest payments made on the Note, however, backup
withholding and information reporting will not apply if you certify, generally
on a Form W-8 or a substitute form, that you are not a U.S. person in the manner
described above under the heading "Non-U.S. Holders-- Interest."
Moreover, with respect to proceeds received on the sale, exchange,
redemption, or other disposition of an exchange debenture, backup withholding or
information reporting generally will not apply if you properly provide,
generally on Form W-8 or a substitute form, a statement that you are an "exempt
foreign person" for purposes of the broker reporting rules, and other required
information. If you are not subject to U.S. federal income or withholding tax on
the sale or other disposition of an exchange debenture, as described above under
the heading "Non-U.S. Holders--Interest--Sale or Other Disposition of Exchange
Debentures," you will generally qualify as an "exempt foreign person" for
purposes of the broker reporting rules.
PAYMENTS FROM FOREIGN OFFICE. If payments of principal and interest are
made to you outside the U.S. by or through a foreign office of your foreign
custodian, nominee or other agent, or if you receive the proceeds of the sale of
an exchange debenture through a foreign office of a "broker," as defined in the
pertinent U.S. Treasury regulations, you will generally not be subject to backup
withholding or information reporting. You will, however, be subject to backup
withholding and information reporting if the foreign custodian, nominee, agent
or broker has actual knowledge or, after December 31, 2000, reason to know, that
the payee is a U.S. person. You will also be subject to information reporting,
but not backup withholding, if the payment is made by a foreign office of a
custodian, nominee, agent or broker that is a U.S. person or a controlled
foreign corporation for U.S. federal income tax purposes, or that derives 50% or
more of its gross income from the conduct of a U.S. trade or business for a
specified three year period, unless the broker has in its records documentary
evidence that you are a Non-U.S. Holder and certain other conditions are met.
REFUNDS. Any amounts withheld under the backup withholding rules may be
refunded or credited against the non-U.S. holder's U.S. federal income tax
liability, provided that the required information is furnished to the IRS.
NEW WITHHOLDING REGULATIONS. New regulations relating to withholding tax on
income paid to foreign persons will generally be effective for payments made
after December 31, 2000, subject to certain transition rules. The new
withholding regulations modify and, in general, unify the way in which you
establish your status as a non-U.S. "beneficial owner" eligible for withholding
exemptions including the portfolio interest exemption, a reduced treaty rate or
an exemption from backup withholding. For example, the new withholding
regulations will require new forms, which you will generally have to provide
earlier than you would have had to provide replacements for expiring existing
forms.
The new withholding regulations clarify withholding agents' reliance
standards. They also require additional certifications for claiming treaty
benefits. The new withholding regulations also provide somewhat different
procedures for foreign intermediaries and flow-through entities (such as foreign
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partnerships) to claim the benefit of applicable exemptions on behalf of
non-U.S. beneficial owners for which or for whom they receive payments.
When you purchased the old debentures, you were required to submit
certification that complies with the currently effective temporary Treasury
regulations in order to obtain an available exemption from or reduction in
withholding tax. The new withholding regulations provide that certifications
satisfying the requirements of the new withholding regulations will be deemed to
satisfy the requirement of the temporary Treasury regulations now in effect. If
you are a non-U.S. holder claiming benefit under an income tax treaty (and not
relying on the portfolio interest exemption), you should be aware that you may
be required to obtain a taxpayer identification number and to certify your
eligibility under the applicable treaty's limitations on benefits article in
order to comply with the new withholding regulations' certification
requirements.
THE NEW WITHHOLDING REGULATIONS ARE COMPLEX AND THIS SUMMARY DOES NOT
COMPLETELY DESCRIBE THEM. PLEASE CONSULT YOUR TAX ADVISOR TO DETERMINE HOW THE
NEW WITHHOLDING REGULATIONS WILL AFFECT YOUR PARTICULAR CIRCUMSTANCES.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange debentures for its own account in
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange debentures. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange debentures received in exchange for old
debentures where the old debentures were acquired as a result of market-making
activities or other trading activities. We have agreed that, for at least 90
days after the exchange offer is completed, we will make this prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any resale of exchange debentures.
We will not receive any proceeds from any sales of the exchange debentures
by broker-dealers. Exchange debentures received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange debentures or a combination of
methods of resale, at market prices prevailing at the time of resale, at prices
related to those prevailing market prices or at negotiated prices. Any resale
may be made directly to the purchaser or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from the
broker-dealer and/or the purchasers of the exchange debentures. Any
broker-dealer that resells the exchange debentures that were received by it for
its own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of the exchange debentures may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
resale of exchange debentures and any commissions or concessions received by any
of those persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay the expenses incident to the exchange offer, other
than commission or concessions of any brokers or dealers and the fees of any
counsel or other advisors or experts retained by the holders of old debentures,
and will indemnify the holders of the exchange debentures (including any
broker-dealers) against related liabilities, including liabilities under the
Securities Act.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act for the registration of the exchange debentures offered in this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement, some of which is contained in exhibits and schedules to the
registration statement as permitted by the rules and regulations of the SEC. For
further information with respect to us or the exchange debentures offered in
this prospectus, you should refer to the registration statement, including the
related exhibits and financial statement. With respect to each document filed
with the SEC as an exhibit to the registration statement, you should refer to
the exhibit for a more complete description of the matter involved, and each
discussion in this prospectus of any document filed as an exhibit to the
registration statement qualified in its entirety by reference to the relevant
exhibit.
In connection with the exchange offer, we will become subject to the
information requirements of the Exchange Act, and, in accordance therewith, will
file reports and other information with the SEC. The registration statement and
the reports and other information we file can be inspected and copied at the
Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and the regional offices of the SEC located at 7 World Trade Center, New
York, New York 10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois
60661. Copies of these materials may be obtained from the Public Reference
Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at its public reference facilities in New York, New York and Chicago,
Illinois at prescribed rates. Information on the operation of the Public
Reference Room can be obtained by calling the SEC
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at 1-800-SEC-0330. We will make our filings with the SEC electronically. The SEC
maintains an internet site that contains reports, proxy and information
statements and other information regarding registrants that file electronically,
which information can be accessed at < http://www.sec.gov >.
We will send to each holder of exchange debentures copies of annual reports
and quarterly reports containing the information required to be filed under the
Exchange Act. So long as we are subject to the periodic reporting requirements
of the Exchange Act, we are required to furnish the information required to be
filed with the SEC to the trustee and the holders of the old debentures and the
exchange debentures. We have agreed that, even if we are not required under the
Exchange Act to furnish this information to the SEC, we will nonetheless
continue to furnish information that would be required to be furnished by us by
Section 13 of the Exchange Act to the trustee and the holders of the old
debentures or exchange debentures as if we were subject to these periodic
reporting requirements.
EXPERTS
Our balance sheet as of March 31, 1999 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 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 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.
VALIDITY OF THE EXCHANGE DEBENTURES
The validity of the exchange debentures will be passed upon for us by
Wachtell, Lipton, Rosen & Katz, New York, New York.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ALEC Holdings, Inc.
Independent Auditors' Report....................................................... F-3
Balance Sheet--March 31, 1999...................................................... F-4
Notes to Balance Sheet--March 31, 1999............................................. F-5
Consolidated Balance Sheet--June 30, 1999 (Unaudited).............................. F-6
Consolidated Statement of Operations--Six Months Ended June 30, 1999 (Unaudited)... F-7
Consolidated Statement of Stockholders' Equity--Six Months Ended June 30, 1999
(Unaudited)...................................................................... F-8
Consolidated Statement of Cash Flows--Six Months Ended June 30, 1999 (Unaudited)... F-9
Notes to Consolidated Financial Statements--Six Months Ended June 30, 1999
(Unaudited)...................................................................... F-10
Alaska Communications Systems Holdings, Inc.
Independent Auditors' Report....................................................... F-15
Consolidated Balance Sheets--December 31, 1998 and March 31, 1999 (Unaudited)...... F-16
Consolidated Statement of Cash Flows--Period from July 16, 1998 (Date of Inception)
through December 31, 1998 and Three Months Ended March 31, 1999 (Unaudited)...... F-17
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-18
CenturyTel Alaska Properties
Independent Auditors' Reports...................................................... F-21
Combined Balance Sheets--December 31, 1997, December 31, 1998 and March 31, 1999... F-23
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........... F-24
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.......................... F-25
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 (Notes for Three Months Ended March 31, 1998 and 1999 Are
Unaudited)....................................................................... F-26
Telephone Fund of Fairbanks Municipal Utilities Services
Independent Auditors' Report....................................................... F-39
Combined Balance Sheet--October 6, 1997............................................ F-40
Combined Statements of Income and Fund Equity--Year Ended December 31, 1996 and
Period Ended October 6, 1997..................................................... F-41
Combined Statements of Cash Flows--Year Ended December 31, 1996 and Period Ended
October 6, 1997.................................................................. F-42
Notes to Combined Financial Statements--Year Ended December 31, 1996 and Period
Ended October 6, 1997............................................................ F-43
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Municipality of Anchorage Telephone Utility Fund
Independent Auditors' Report (Notes for Three Months Ended March 31, 1998 and 1999
Are Unaudited)................................................................... F-46
Balance Sheets--December 31, 1997, December 31, 1998 and March 31, 1999............ F-47
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......................................................................... F-48
Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998 and Three
Months Ended March 31, 1998 and March 31, 1999................................... F-49
Notes to Financial Statements--Years Ended December 31, 1996, 1997 and 1998........ F-50
</TABLE>
F-2
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INDEPENDENT AUDITORS' REPORT
Board of Directors
ALEC Holdings, Inc.
Anchorage, Alaska
We have audited the balance sheet of ALEC Holdings, Inc. (the "Company") 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 ALEC Holdings, Inc. as of
March 31, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
June 28, 1999
F-3
<PAGE>
ALEC HOLDINGS, INC.
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash............................................................................ $ 1
---------
---------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares; outstanding, 100
shares........................................................................ $ 1
---------
---------
</TABLE>
See notes to Balance Sheet.
F-4
<PAGE>
ALEC HOLDINGS, INC.
NOTES TO BALANCE SHEET
MARCH 31,1999
1. THE COMPANY
ALEC Holdings, Inc. (the "Company") 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 Company 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 paid by the Company
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 by the Company was approximately $265.1
million.
ACS recorded transaction fees and expenses of approximately $48 million from
these purchases. In addition, ACS will amortize approximately $267 of
acquisition goodwill over 40 years.
F-5
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................................... $ 4,019
Accounts receivable--trade......................................................................... 47,493
Accounts receivable--affiliates.................................................................... --
Materials and supplies............................................................................. 5,759
Prepayments and other current...................................................................... 3,788
-----------
Total current assets............................................................................. 61,059
-----------
Investments.......................................................................................... 4,356
-----------
Property, plant and equipment:
Telecommunications................................................................................. 829,962
Less: Accumulated depreciation..................................................................... (432,095)
-----------
397,867
Construction work in progress...................................................................... 23,041
-----------
Net property, plant and equipment................................................................ 420,908
-----------
Intangible assets.................................................................................... 25,115
Goodwill............................................................................................. 243,980
Debt issuance cost................................................................................... 37,311
Deferred charges..................................................................................... 3,238
Other assets......................................................................................... 379
-----------
Total assets..................................................................................... $ 796,346
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................................. $ 4,248
Notes payable...................................................................................... 8,700
Accounts payable--trade............................................................................ 16,134
Accounts payable--affiliates....................................................................... 75
Income taxes payable............................................................................... (278)
Advance billings and customer deposits............................................................. 6,242
Dividend payable................................................................................... --
Accrued and other current liabilities.............................................................. 19,944
-----------
Total current liabilities........................................................................ 55,065
-----------
Long-term debt, net of current portion............................................................... 609,765
Deferred income taxes................................................................................ 2
Unamortized investment tax credits................................................................... 694
Other deferred credits and long-term liabilities..................................................... 8,601
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 shares authorized,
20,082,871 shares issued......................................................................... 201
Paid in capital in excess of par value............................................................. 128,482
Notes receivable from officers..................................................................... (718)
Retained earnings (deficit)........................................................................ (5,746)
-----------
Total stockholders' equity....................................................................... 122,219
-----------
Total liabilities and stockholders' equity......................................................... $ 796,346
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
-----------------
<S> <C>
Operating revenues:
Local telephone.............................................................................. $ 32,375
Cellular..................................................................................... 4,568
Long distance................................................................................ 1,387
-------
Total operating revenues................................................................. 38,330
-------
Operating expenses: Cost of sales and operating expenses
Local telephone.............................................................................. 23,249
Cellular..................................................................................... 3,039
Long Distance................................................................................ 1,575
Depreciation and amortization................................................................ 8,093
-------
Total operating expenses................................................................. 35,956
-------
Operating income............................................................................... 2,374
-------
Other income and expense:
Interest expense............................................................................. (7,852)
Interest during construction................................................................. 126
Interest income.............................................................................. 102
Other........................................................................................ (496)
-------
Total other income and expense........................................................... (8,120)
-------
Income (loss) before income taxes.............................................................. (5,746)
Income taxes................................................................................... --
-------
Net loss....................................................................................... $ (5,746)
-------
-------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PAID IN
CAPITAL IN NOTES
IN EXCESS RECEIVABLE TOTAL
COMMON OF FROM RETAINED STOCKHOLDERS'
STOCK PAR VALUE OFFICERS EARNINGS EQUITY
----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998........................... $ -- $ -- $ -- $ -- $ --
Issuance of 20,082,871 shares of common stock, $.01
par................................................ 201 123,393 -- -- 123,594
Discount on warrants issued in conjunction with
long-term debt..................................... -- 5,089 -- -- 5,089
Officers loans in conjunction with the issuance of
stock.............................................. -- -- (718) -- (718)
Net loss for the period December 31, 1998 to June 30,
1999............................................... -- -- -- (5,746) (5,746)
----- ----------- ---------- ----------- ------------
Balance, June 30, 1999............................... $ 201 $ 128,482 $ (718) $ (5,746) $ 122,219
----- ----------- ---------- ----------- ------------
----- ----------- ---------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
<S> <C>
Cash Flows from Operating Activities:
Net loss......................................................................................... $ (5,746)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................. 8,093
Amortization of debt issuance costs............................................................ 589
Deferred income taxes.......................................................................... 41
Deferred credits............................................................................... (154)
Account receivable and other current assets.................................................... 8,237
Accounts payable and other current liabilities................................................. 1,910
Other.......................................................................................... (55)
-------------
Net cash provided by operating activities.................................................... 12,915
-------------
Cash Flows from Investing Activities:
Construction (excluding interest capitalized on equity funds).................................... (27,231)
Cost of acquisitions, net of cash received....................................................... (690,207)
Organizational costs............................................................................. (2,634)
-------------
Net cash used by investing................................................................... (720,072)
-------------
Cash Flows from Financing Activities:
Net change in short-term notes payable........................................................... 8,700
Proceeds from the issuance of long-term debt, net of discounts................................... 612,411
Payments on long-term debt....................................................................... --
Debt issuance costs.............................................................................. (37,900)
Dividends paid................................................................................... --
Issuance of common stock/warrants................................................................ 127,965
-------------
Net cash provided by financing activities.................................................... 711,176
-------------
Increase in cash................................................................................... 4,019
Cash at beginning of period........................................................................ --
-------------
Cash at end of period.............................................................................. $ 4,019
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for ALEC Holdings, Inc. and
Subsidiaries (the Company) represent the operating results of the following
three legal entities (see Note 2, Acquisitions):
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. at the closing of the
acquisitions.
The Company wholly owns Alaska Communications Systems Holdings, Inc. which
was organized in 1998 as the principal entity to acquire and manage
telecommunication operations in Alaska. The principal activities in 1998 were
the preparation of systems and obtaining financing for the recently completed
acquisitions.
A summary of significant accounting policies followed by the Company is set
forth below:
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for six
months ended June 30, 1999 and include the operations of Alaska Communications
Systems Holdings for the full six 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
six month period ended June 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
F-10
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
subject to rate regulation as a non-dominant interexchange carrier by the FCC
for 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. Renewal and betterment 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 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 seven to 15
years.
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.
GOODWILL
Goodwill is amortized on the straight-line method over 40 years.
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 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.
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.
F-11
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
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, a 100%-owned
subsidiary of the Company, 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. 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 Alaska 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. Deferred 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>
F-12
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
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 $12,600 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 six month periods ended June
30, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Revenues.................................................................................. $ 134,038 $ 145,236
Net Loss.................................................................................. (8,835) (11,639)
</TABLE>
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
Term Loan A Facility............................................................. $ 150,000
Term Loan B Facility............................................................. 150,000
Term Loan C Facility............................................................. 135,000
9 3/8% Senior subordinated notes due 2009........................................ 150,000
13% Senior discount debentures due 2011.......................................... 19,911
Note to Municipality of Fairbanks................................................ 1,602
Capital Lease Obligations........................................................ 7,500
-------------
614,013
Less current portion............................................................. (4,248)
-------------
Total long-term obligations...................................................... $ 609,765
-------------
-------------
</TABLE>
The Company's senior discount debentures balance of $19,911 is the $25,000
book value minus original issue discount of $5,089. The Original Issue Discount
resulted from the issuance of detachable warrants in connection with the 13%
senior discount debentures. These detachable warrants are exercisable 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.
F-13
<PAGE>
ALEC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, IN THOUSANDS)
4. STOCK OPTIONS
At June 30, 1999, the Company has authorized a total of 3,410,486 shares of
common stock for issuance under the 1999 Stock Incentive Plan. At June 30,
1999, 2,806,500 shares are reserved for issuance upon the exercise of
outstanding options. The options are exercisable at $6.1542 per share of common
stock. No options are currently vested.
5. BUSINESS SEGMENTS
The Company has adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Utility has three reportable
segments: local telephone (consisting of local telephone service, directory
advertising, deregulated revenue and other revenues), 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.
The following table illustrates selected financial data for each segment for
the consolidated period ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
LOCAL LONG
TELEPHONE DISTANCE CELLULAR TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Operating revenues................................................. $ 32,375 $ 1,387 $ 4,568 $ 38,330
Operating income (loss)............................................ 1,477 (256) 1,153 2,374
Depreciation and amortization...................................... 7,649 68 376 8,093
Capital expenditures............................................... 7,403 19,502 326 27,231
Total assets....................................................... 708,375 22,458 65,513 796,346
</TABLE>
6. INCOME TAXES
There was no current provision for income taxes in the consolidated period
ended June 30, 1999. 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.
F-14
<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-15
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
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-16
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16,
1998
(DATE OF
INCEPTION)
THROUGH THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
------------ --------------
<S> <C> <C>
(UNAUDITED)
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-17
<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-18
<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-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)
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-20
<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-21
<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-22
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C>
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
--------- --------- -----------
--------- --------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
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-23
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ELEVEN ONE MONTH ENDED MARCH 31,
YEAR ENDED MONTHS ENDED ENDED YEAR ENDED ------------------------
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, 1998 1999
1996 1997 1997 1998 ----------- -----------
------------- ------------- ------------- ------------- (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-24
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ELEVEN ONE MONTH ENDED MARCH 31,
YEAR ENDED MONTHS ENDED ENDED YEAR ENDED ------------------------
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, 1998 1999
1996 1997 1997 1998 ----------- -----------
------------- ------------- ------------- ------------- (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-25
<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 reported
F-26
<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)
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 December 31, 1996, $455 during 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)
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 be
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)
2. PCS LICENSE ACQUISITION COSTS (CONTINUED)
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-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)
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.
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>
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)
6. INCOME TAXES (CONTINUED)
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>
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>
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)
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.
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
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)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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
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)
8. CERTAIN TRANSACTIONS (CONTINUED)
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.
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.
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)
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>
<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>
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)
11. BUSINESS SEGMENTS (CONTINUED)
<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 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
------------ -------------- ------------- ------------ --------- ---------
<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 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.
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)
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.
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.
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)
14. YEAR 2000 (UNAUDITED) (Continued)
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-38
<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-39
<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-40
<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-41
<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 PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 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-42
<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-43
<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 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
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)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
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-45
<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-46
<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-47
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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) 0 0
---------- ---------- ---------- ----------- -----------
RETAINED EARNINGS, PERIOD END...................... $ 132,596 $ 136,414 $ 141,884 $ 139,873 $ 145,372
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED MARCH 31,
DECEMBER 31,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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-49
<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-50
<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. 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.
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.
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)
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.
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.
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)
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>
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.
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)
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.
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.
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)
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.
(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-55
<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-56
<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-57
<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
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 benefits when
due.
F-58
<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)
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-59
<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 PERCENTAGE
ENDED 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 ACTUARIAL ACTUARIAL ACCRUED UAAL AS A
VALUATION VALUE ACCRUED LIABILITY PERCENTAGE
YEAR 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 Municipality has no liability for losses under the Plan but does have
the duty of due care that would be required of an ordinary
F-60
<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)
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 to the
Utility totaled $3,187, $3,672, and $3,204 for the years ended December 31,
1998, 1997, and 1996, respectively.
F-61
<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)
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.
F-62
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(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-63
<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-64
<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-65
<PAGE>
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("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 attorneys' 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 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 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
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(a) Exhibits:
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 CenturtyTel 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.*
3.3 Certificate of Incorporation of Alaska Communications Systems Holdings, Inc.*
3.4 By-Laws of Alaska Communications Systems Holdings, Inc.*
3.5 Certificate of Incorporation of ALEC Acquisition Sub Corp.*
3.6 By-Laws of ALEC Acquisition Sub Corp.*
3.7 Certificate of Incorporation of Alaska Communication Systems, Inc.*
3.8 By-Laws of Alaska Communications Systems, Inc.*
3.9 Certificate of Incorporation of Telephone Utilities of the Northland, Inc.*
3.10 By-Laws of Telephone Utilities of the Northland, Inc.*
3.11 Certificate of Incorporation of Telephone Utilities of Alaska, Inc.*
3.12 By-Laws of Telephone Utilities of Alaska, Inc.*
</TABLE>
II-1
<PAGE>
<TABLE>
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3.13 Certificate of Incorporation of Pacific Telecom Cellular of Alaska, Inc.*
3.14 By-Laws of Pacific Telecom Cellular of Alaska, Inc.*
3.15 Certificate of Incorporation of Pacific Telecom of Alaska PCS, Inc.*
3.16 By-Laws of Pacific Telecom of Alaska PCS, Inc.*
3.17 Certificate of Incorporation of PTI Communications of Alaska, Inc.*
3.18 By-Laws of PTI Communications of Alaska, Inc.*
3.19 Certificate of Incorporation of MACtel, Inc.*
3.20 By-Laws of MACtel, Inc.*
3.21 Certificate of Incorporation of MACtel License Sub, Inc.*
3.22 By-Laws of MACtel License Sub, Inc.*
3.23 Certificate of Incorporation of MACtel Fairbanks, Inc.*
3.24 By-Laws of MACtel Fairbanks, Inc.*
3.25 Certificate of Incorporation of MACtel Fairbanks License Sub, Inc.*
3.26 By-Laws of MACtel Fairbanks License Sub, Inc.*
3.27 Certificate of Incorporation of Prudhoe Communications, Inc.*
3.28 By-Laws of Prudhoe Communications, Inc.*
3.29 Certificate of Incorporation of ATU Communications, Inc.*
3.30 By-Laws of ATU Communications, Inc.*
3.31 Certificate of Incorporation of ATU Long Distance, Inc.*
3.32 By-Laws of ATU Long Distance, Inc.*
3.33 Certificate of Incorporation of Peninsula Cellular Services, Inc.*
3.34 By-Laws of Peninsula Cellular Services, Inc.*
3.35 Certificate of Incorporation of PTINet, Inc.*
3.36 By-Laws of PTINet, Inc.*
4.1 Indenture, dated as of May 14, 1999, by and among Alaska Communications Systems
Holdings, Inc., the Guarantors (as defined therein) and IBJ Whitehall Bank & Trust
Company.*
4.2 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.*
4.3 Indenture, dated as of May 14, 1999, by and between the Registrant and The Bank of
New York.*
4.4 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.*
</TABLE>
II-2
<PAGE>
<TABLE>
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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 Stockholders' Agreement, dated as of May 14, 1999, by and among the Registrant and
the Investors listed on the signature pages thereto.*
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 Employment Agreement, dated as of April 19, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Registrant and Michael E. Holmstrom.*
10.8 ALEC Holdings, Inc. 1999 Stock Incentive Plan.*
12.1 Statements re computation of ratios.*
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. 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 financial statements of
Telephone Fund of Fairbanks Municipal Utilities Services as of October 6, 1997 and
for the period ended October 6, 1997 and the year ended December 31, 1996 (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.
23.6 Consent of Deloitte & Touche LLP relating to the audited 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 in signature pages to Registration Statement).*
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of The Bank of New
York under the Trust Indenture Act of 1939.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal for the 13% Senior Discount Debentures due 2011.
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Guidelines for Certification of Taxpayer Identification Number on Substitute Form
W-9.*
99.4 Form of Institutions Letter.*
99.5 Form of Client Letter.*
</TABLE>
- ------------------------
* Previously filed
II-3
<PAGE>
<TABLE>
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(b) Financial Statement Schedule.
</TABLE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change in such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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 Act
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 Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in the documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Municipality of Anchorage, State
of Alaska, on September 24, 1999.
ALEC HOLDINGS, INC.
By: /s/ MICHAEL E. HOLMSTROM
-----------------------------------------
Michael E. Holmstrom
Senior Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles E. Robinson, Wesley E. Carson and Michael
E. Holmstrom, and each of them, his attorney-in-fact with power of substitution
for him in any and all capacities, to sign any amendments, supplements,
subsequent registration statements relating to the offering to which this
Registration Statement relates, or other instruments he deems necessary or
appropriate, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
* Chairman of the Board,
- ------------------------------ President and Chief September 24, 1999
Charles E. Robinson Executive Officer
/s/ MICHAEL E. HOLMSTROM Senior Vice President and
- ------------------------------ Chief Financial Officer September 24, 1999
Michael E. Holmstrom
* Executive Vice President
- ------------------------------ and Assistant Secretary September 24, 1999
Wesley E. Carson
* Executive Vice President,
- ------------------------------ General Counsel and September 24, 1999
Donn T. Wonnell Secretary
* Vice President, Controller
- ------------------------------ and Assistant Treasurer September 24, 1999
Dean A. Ryland
(signing in his capacity as
principal accounting
officer)
* Director
- ------------------------------ September 24, 1999
Saul A. Fox
* Director
- ------------------------------ September 24, 1999
W. Dexter Paine, III
* Director
- ------------------------------ September 24, 1999
J. Russell Triedman
/s/ CARL H. MARRS Director
- ------------------------------ September 24, 1999
Carl H. Marrs
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/s/ MICHAEL E. HOLMSTROM
-----------------------------------
Michael E. Holmstrom
*By: ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
Exhibit 3.1
State of Delaware
PAGE 1
Office of the Secretary of State
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "ALEC ACQUISITION CORPORATION", CHANGING ITS NAME FROM "ALEC ACQUISITION
CORPORATION" TO "ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.", FILED IN THIS
OFFICE ON THE NINTH DAY OF APRIL, A.D. 1999, AT 4 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
2918478 8100 AUTHENTICATION: 9725659
991177441 DATE: 05-05-99
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
ALEC Acquisition Corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: setting forth a proposed amendment to the Certificate of
Incorporation of said corporation, declaring said amendment to be advisable and
calling a meeting of the stockholders of said corporation for consideration
thereof. The resolution setting forth the proposed amendment as follows: The
name of the corporation has been changed to Alaska Communications Systems
Holdings, Inc.
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon at which the necessary number of shares as required by statues were
voted in favor of the amendment.
THIRD: That said amendment duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, ALEC Acquisition Corporation has caused this
certificate to be signed by Deborah Johnson Harwood, its Vice President and
Corporate Secretary this 26th day of March 1999.
ALEC ACQUISITION CORPORATION
By: /s/ Deborah Johnson Harwood
-----------------------------
Title: Vice President & Secretary
--------------------------
Deborah Johnson Harwood
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:00 PM 04/09/1999
991140257 -- 2918478
<PAGE>
UNANIMOUS CONSENT OF DIRECTORS
PROPOSING AND DECLARING ADVISABLE
AN AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
ALEC ACQUISITION CORPORATION
WE, THE UNDERSIGNED, being all of the members of the board of directors of
ALEC Acquisition a corporation organized and existing under the laws of the
State of Delaware, DO HEREBY, pursuant to Sections 141 and 242 of the General
Corporation Law of the State of Delaware, propose and declare advisable the
following amendment to the Certificate of Incorporation: The name of the
corporation has been changed to Alaska Communications Systems Holdings, Inc. and
hereby authorize the proper officers of this corporation, if the stockholders
adopt said amendment, to file the necessary certificate effecting said amendment
with the Secretary of State of Delaware and to file with the proper state
official of any state I which this corporation is authorized to do business as a
foreign corporation such evidence of said amendment and/or any other instrument
as may be required by the laws of such state.
WITNESS our hands this 26th day of March.
ALEC ACQUISITION CORPORATION
By: /s/ W. Dexter Paine III
-------------------------------
Title: Director/W. Dexter Paine III
By: /s/ Sanjay Swani
-------------------------------
Title: Sanjay Swani/Director
<PAGE>
UNANIMOUS CONSENT OF SHAREHOLDER
PROPOSING AND DECLARING ADVISABLE
AN AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
ALEC ACQUISITION CORPORATION
WE, THE UNDERSIGNED, being the sole shareholder of ALEC Acquisition a
corporation organized and existing under the laws of the State of Delaware, DO
HEREBY, pursuant to Sections 141 and 242 of the General Corporation Law of the
State of Delaware, propose and declare advisable the following amendment to the
Certificate of Incorporation: The name of the corporation has been changed to
Alaska Communications Systems Holdings, Inc. and hereby authorize the proper
officers of this corporation, if the stockholders adopt said amendment, to file
the necessary certificate effecting said amendment with the Secretary of State
of Delaware and to file with the proper state official of any state I which this
corporation is authorized to do business as a foreign corporation such evidence
of said amendment and/or any other instrument as may be required by the laws of
such state.
WITNESS our hands this 26th day of March.
ALEC HOLDINGS, INC.
By: /s/ W. Dexter Paine III
-------------------------------
Title: Director/W. Dexter Paine III
By: /s/ Sanjay Swani
-------------------------------
Title: Sanjay Swani/Director
<PAGE>
State of Delaware
PAGE 1
Office of the Secretary of State
------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "ALEC HOLDINGS, INC.", FILED IN THIS OFFICE ON THE TENTH
DAY OF MAY, A.D. 1999, AT 11:30 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
2954530 8100 AUTHENTICATION: 9734592
991184857 DATE: 05-10-99
-8-
<PAGE>
ALEC HOLDINGS, INC.
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
ALEC Holdings, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That by unanimous written consent of the members of the Board of
Directors of the Corporation, resolutions were duly adopted setting forth a
proposed amendment of the Certificate of Incorporation of the Corporation and
declaring said amendment to be advisable. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Corporation's Certificate of Incorporation
be amended in accordance with Section 242 of the General Corporation
Law of the State of Delaware to increase the authorized number of
shares of common stock from One Thousand (1,000) to Forty Million
(40,000,000);
SECOND: That Article IV, Section 1 of the Certificate of Incorporation
is hereby amended to read in its entirety as follows:
"1. The Corporation shall be authorized to issue 40,000,000 shares of
capital stock, all of which shall be shares of Common Stock, $.01 par value
("Common Stock")."
THIRD: That in lieu of a meeting and vote of stockholders, the sole
stockholder of the Corporation has given its written consent to said
amendments and said amendments were duly adopted in accordance with the
applicable provisions of Sections 242 and 228 of the General Corporation
Law of the State of Delaware.
[SIGNATURE PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, said ALEC Holdings, Inc. has caused this
certificate to be signed by its Secretary, this 7th day of May, 1999.
By: Deborah J. Harwood
----------------------
Name: Deborah J. Harwood
Title: Asst. Secretary
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT]
-10-
<PAGE>
[LETTERHEAD OF WACHTELL, LIPTON, ROSEN & KATZ]
EXHIBIT 5.1
September 24, 1999
ALEC Holdings, Inc.
510 L. Street, Suite 500
Anchorage, Alaska 99501
Ladies and Gentlemen:
We have acted as counsel for ALEC Holdings, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-4, registration number 333-82361 (the
"Registration Statement"), first filed with the Securities and Exchange
Commission on July 7, 1999, relating to an offer to exchange (the "Exchange
Offer") 13% Senior Discount Debentures due 2011 of the Company (the "Exchange
Debentures") which will have been registered under the Securities Act of 1933,
as amended, for an equal principal amount of the Company's outstanding 13%
Senior Discount Debentures due 2011 (the "Old Debentures").
The Exchange Debentures will be issued under an Indenture dated as of May
14, 1999 (the "Indenture"), among the Company and The Bank of New York, as
trustee (the "Trustee").
As counsel, we have examined the Registration Statement, the Indenture, the
form of the Exchange Debentures, the form of the Old Debentures and such other
documents, records and other matters as we have deemed necessary or appropriate
in order to give the opinions set forth herein.
In giving the opinions contained herein, we have, with your approval, relied
upon representations of officers of the Company and certificates of public
officials with respect to the accuracy of the material factual matters addressed
by such representations and certificates. We have, with your approval, assumed
the genuineness of all signatures or instruments submitted to us, and the
conformity or certified copies submitted to us with the original documents to
which such certified copies relate.
We are members of the bar of the State of New York and we express no opinion
as to the laws of any jurisdiction other than the federal laws of the United
States and the laws of the State of New York.
Based upon and subject to the foregoing, assuming that the Indenture has
been duly authorized, executed and delivered by, and represents the valid and
binding obligations of, the Trustee, it is our opinion that:
(1) the Indenture has been duly executed and delivered by, and constitutes
the legal, valid and binding obligation of, the Company, enforceable
against the Company in accordance with its terms; and
(2) the Exchange Debentures, when duly executed and delivered by the Company
upon the terms set forth in the Exchange Offer, will constitute legal,
valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms;
subject in each case to (a) bankruptcy, insolvency, moratorium, reorganization
and other laws of general applicability relating to or affecting creditors'
rights from time to time in effect and (b) application of general principles of
equity, including standards of commercial reasonableness and good faith
(regardless of whether considered in proceedings in equity or at law).
We express no opinion with respect to: (i) the enforceability of provisions
in the Indenture relating to delay or omission of enforcement of rights or
remedies, or waivers of defenses, or waivers of benefits of usury, appraisement,
valuation, stay, extension, moratorium, redemption, statutes of limitation, or
other non-waivable benefits bestowed by operation of law; or (ii) the lawfulness
or
<PAGE>
ALEC Holdings, Inc.
September 24, 1999
Page 2
enforceability of exculpation clauses, clauses relating to releases of unmatured
claims, clauses purporting to waive unmatured rights, severability clauses, and
clauses similar in substance or nature to those expressed in the foregoing
clause (i) and this clause (ii), insofar as any of the foregoing are contained
in the Indenture. In addition, we express no opinion as to whether a federal or
state court outside of the State of New York would give effect to the choice of
New York law provided for in the Indenture.
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,
Wachtell, Lipton, Rosen & Katz
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-82361 of ALEC Holdings, Inc. on Form S-4 of our reports dated March 24,
1999, March 25, 1999 and June 28, 1999 appearing in the Prospectus, which is
part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus
DELOITTE & TOUCHE LLP
Portland, Oregon
September 22, 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 herein
and to the references to our firm under the heading "Experts" in this
registration statement and related prospectus.
KPMG LLP
Shreveport, Louisiana
September 22, 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
September 22, 1999
<PAGE>
LETTER OF TRANSMITTAL
ALEC HOLDINGS, INC.
OFFER TO EXCHANGE
13% SENIOR DISCOUNT DEBENTURES DUE 2011
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
FOR ALL OF ITS OUTSTANDING
13% SENIOR DISCOUNT DEBENTURES DUE 2011
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999, UNLESS THE OFFER IS EXTENDED.
TO: THE BANK OF NEW YORK (AS "EXCHANGE AGENT")
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER OR BY HAND:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
Floor 7 East Ground Level
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section New York, New York 10286
Attention: Reorganization Section
</TABLE>
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS ONLY):
212-815-6339
CONFIRM BY TELEPHONE:
212-815-2824
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile number other than the ones listed
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of Transmittal
is completed.
The undersigned hereby acknowledges receipt of the Prospectus dated ,
1999 (the "Prospectus") of ALEC Holdings, Inc. ("Holdings") and this Letter of
Transmittal, which together constitute Holdings' offer (the "Exchange Offer") to
exchange $1,000 principal amount of its 13% Senior Discount Debentures due 2011
(the "Exchange Debentures"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which the Prospectus is a part, for each $1,000 principal amount of its
outstanding 13% Senior Discount Debentures due 2011 (the "Debentures"),
respectively. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on , 1999, unless Holdings, in its reasonable judgment,
extends the Exchange Offer, in which case the term shall mean the latest date
and time to which the Exchange Offer is extended. Capitalized terms used but not
defined herein have the meaning given to them in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
<PAGE>
List below the notes to which this Letter of Transmittal relates. If the
space indicated below is inadequate, the Certificate or Registration Numbers and
Principal Amounts should be listed on a separately signed schedule affixed
hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF 13% SENIOR DISCOUNT DEBENTURES DUE 2011 TENDERED HEREBY
AGGREGATE
CERTIFICATE PRINCIPAL
OR AMOUNT PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) REGISTRATION REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBERS* BY DEBENTURES TENDERED**
<S> <C> <C> <C>
Total
- --------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the
full aggregate principal amount represented by such Debentures. All
tenders must be in integral multiples of $1,000.
- --------------------------------------------------------------------------------
This Letter of Transmittal is to be used (i) if certificates of Debentures
are to be forwarded herewith or (ii) if tender of the Debentures is to be made
according to the guaranteed delivery procedures described in the Prospectus
under the caption "The Exchange Offer--Guaranteed delivery procedures." See
Instruction 2. Delivery of documents to a book-entry transfer facility does not
constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Debentures are registered on the books of Holdings or any other
person who has obtained a properly completed bond power from the registered
holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Debentures must complete
this letter in its entirety.
<TABLE>
<C> <S>
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY TRUST COMPANY
(THE "DEPOSITORY") AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Account Number
Transaction Code Number
</TABLE>
Holders whose Debentures are not immediately available or who cannot deliver
their Debentures and all other documents required hereby to the Exchange Agent
on or prior to the Expiration Date must tender their Debentures according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer--Guaranteed delivery procedures." See Instruction 2.
2
<PAGE>
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) __________________________________________
Name of Eligible Institution that Guaranteed Delivery _________________
IF DELIVERY BY BOOK-ENTRY TRANSFER:
Account Number __________________________________________________________
Transaction Code Number _________________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name __________________________________________________________________
Address _______________________________________________________________
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to Holdings the principal amount of the Debentures
indicated above. Subject to, and effective upon, the acceptance for exchange of
such Debentures tendered hereby, the undersigned hereby exchanges, assigns and
transfers to, or upon the order of, Holdings all right, title and interest in
and to such Debentures as are being tendered hereby, including all rights to
accrued and unpaid interest thereon as of the Expiration Date. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent the true and
lawful agent and attorney-in-fact of the undersigned (with full knowledge that
said Exchange Agent acts as the agent of Holdings in connection with the
Exchange Offer) to cause the Debentures to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Debentures and to acquire
Exchange Debentures issuable upon the exchange of such tendered Debentures, and
that when the same are accepted for exchange, Holdings will acquire good and
unencumbered title to the tendered Debentures, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim.
The undersigned represents to Holdings that (i) the Exchange Debentures
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Debentures, whether or
not such person is the undersigned, and (ii) neither the undersigned nor any
such other person is engaged or intends to engage in, or has an arrangement or
understanding with any person to participate in, the distribution of such
Exchange Debentures. If the undersigned or the person receiving the Exchange
Debentures covered hereby is a broker-dealer that is receiving the Exchange
Debentures for its own account in exchange for Debentures that were acquired as
a result of market-making activities or other trading activities, the
undersigned acknowledges that it or such other person will deliver a prospectus
in connection with any resale of such Exchange Debentures; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned and any such other person acknowledge that, if they are
participating in the Exchange Offer for the purpose of distributing the Exchange
Debentures, (i) they cannot rely on the position of the staff of the Securities
and Exchange Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION
(available April 13, 1989), MORGAN STANLEY & CO., INC. (available June 5, 1991)
or similar no-action letters and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in
3
<PAGE>
connection with the resale transaction and (ii) failure to comply with such
requirements in such instance could result in the undersigned or any such other
person incurring liability under the Securities Act for which such persons are
not indemnified by Holdings. If the undersigned or the person receiving the
Exchange Debentures covered by this letter is an affiliate (as defined under
Rule 405 of the Securities Act) of Holdings, the undersigned represents to
Holdings that the undersigned understands and acknowledges that such Exchange
Debentures may not be offered for resale, resold or otherwise transferred by the
undersigned or such other person without registration under the Securities Act
or an exemption therefrom.
The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or Holdings to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Debentures or transfer ownership of such Debentures on the account
books maintained by a book-entry transfer facility. The undersigned further
agrees that acceptance of any tendered Debentures by Holdings and the issuance
of Exchange Debentures in exchange therefor shall constitute performance in full
by Holdings of its obligations under the Registration Rights Agreement and that
Holdings shall have no further obligations or liabilities thereunder for the
registration of the Debentures or the Exchange Debentures.
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer--Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by Holdings), as more particularly set forth in the Prospectus,
Holdings may not be required to exchange any of the Debentures tendered hereby
and, in such event, the Debentures not exchanged will be returned to the
undersigned at the address shown below the signature of the undersigned.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Debentures may be withdrawn at any time
prior to the Expiration Date.
Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, certificates for all Exchange Debentures delivered in exchange
for tendered Debentures, and any Debentures delivered herewith but not
exchanged, will be registered in the name of the undersigned and shall be
delivered to the undersigned at the address shown below the signature of the
undersigned. If an Exchange Debenture is to be issued to a person other than the
person(s) signing this Letter of Transmittal, or if an Exchange Debenture is to
be mailed to someone other than the person(s) signing this Letter of Transmittal
or to the person(s) signing this Letter of Transmittal at an address different
than the address shown on this Letter of Transmittal, the appropriate boxes of
this Letter of Transmittal should be completed. If Debentures are surrendered by
Holder(s) that have completed either the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by
an Eligible Institution (defined in Instruction 2).
4
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------
SPECIAL REGISTRATION INSTRUCTIONS
To be completed ONLY if the Exchange Debentures are to be issued in the
name of someone other than the undersigned.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
Book-Entry Transfer Facility Account:
____________________________________________________________________________
Employer Identification or Social Security Number:
____________________________________________________________________________
(Please print or type)
- -------------------------------------------
- -------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if the Exchange Debentures are to be sent to
someone other than the undersigned, or to the undersigned at an address
other than that shown under "Description of Debentures Tendered Hereby."
Name: ______________________________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
Employer Identification or Social Security Number:
____________________________________________________________________________
(Please print or type)
- ------------------------------------------
REGISTERED HOLDER(S) OF DEBENTURES SIGN HERE
(IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW)
X ____________________________________________________________________________
X ____________________________________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on the
Debentures or on a security position listing as the owner or the Debentures or
by person(s) authorized to become registered holder(s) by properly completed
bond powers transmitted herewith. If signature is by attorney-in-fact,
trustee, executor, administrator, guardian, officer of a corporation or other
person acting in a fiduciary capacity, please provide the following
information (Please print or type:)
<TABLE>
<S> <C>
Name and Capacity (full title)
SIGNATURE GUARANTEE
(IF REQUIRED--SEE INSTRUCTION 4)
Address (including zip code) (Signature of Representative of Signature
Guarantor)
(Area Code and Telephone Number) (Name and Title)
(Taxpayer Identification or Social Security (Name of Plan)
No.)
(Area Code and Telephone Number)
Dated: , 19 Dated: , 19
</TABLE>
5
<PAGE>
PAYOR'S NAME: ALEC HOLDINGS, INC.
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED. Please provide your
social security number on the following Substitute Form W-9 and certify therein
that you are subject to backup withholding.
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN IN THE
FORM W-9 BOX AT THE RIGHT AND CERTIFY BY SIGNING
DEPARTMENT OF THE TREASURY AND DATING BELOW. For all accounts, Social Security Number
INTERNAL REVENUE SERVICE enter TIN in the box at right. (For
most individuals, this is your social OR
security number. If you do not have a Employer Identification Number
number, see enclosed Guidelines for
Certification of Taxpayer (If awaiting TIN write
Identification Number on Substitute "Applied For")
Form W-9.) Certify by signing and
dating below.
------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER PART II--For Payees exempt from backup withholding, see the enclosed
IDENTIFICATION NUMBER (TIN) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 and complete as instructed therein.
- ------------------------------------------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number or a Taxpayer Identification Number
has not been issued to me and either (a) I have mailed or delivered an application to receive a Taxpayer
Identification Number to the appropriate Internal Revenue Service ("IRS") Center or Social Security
Administration Office or (b) I intend to mail or deliver an application in the near future; and
(2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, (b) I have not
been notified by the IRS that I am subject to backup withholding as a result of failure to report all interest
or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATE INSTRUCTIONS--You must cross out item (2) above if you have been notified by the IRS that you are
subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the
enclosed Guidelines.)
- ------------------------------------------------------------------------------------------------------------------
The IRS does not require your consent to any provision of this document other than the certifications required to
avoid backup withholding.
- ------------------------------------------------------------------------------------------------------------------
SIGNATURE DATE , 199
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU ON ACCOUNT OF THE EXCHANGE DEBENTURES.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
6
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU WROTE "APPLIED FOR" INSTEAD
OF A TIN IN THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld until I provide a number, but
will be refunded if I provide a certified taxpayer identification number within
60 days.
<TABLE>
<S> <C>
Signature Dated:
</TABLE>
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. All physically
delivered Debentures or confirmation of any book-entry transfer to the Exchange
Agent's account at a book-entry transfer facility of Debentures tendered by
book-entry transfer, as well as a properly completed and duly executed copy of
this Letter of Transmittal or facsimile thereof, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to expiration of the Exchange Offer
(the "Expiration Date"). The method of delivery of this Letter of Transmittal,
the Debentures and any other required documents is at the election and risk of
the Holder, and except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. If such delivery is by
mail, it is suggested that registered mail with return receipt requested,
properly insured, be used.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Debentures for exchange.
Delivery to an address other than as set forth herein, or instructions via a
facsimile number other than the ones set forth herein, will not constitute a
valid delivery.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Debentures, but whose Debentures are not immediately available and thus cannot
deliver their Debentures, the Letter of Transmittal or any other required
documents to the Exchange Agent (or comply with the procedures for book-entry
transfer) prior to the Expiration Date, may effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States or an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the registration number(s)
of such Debentures and the principal amount of Debentures tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof), together with the Debentures (or a
confirmation of book-entry transfer of such Debentures into the Exchange
Agent's account at the Depository) and any other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Debentures in proper form for
transfer (or a confirmation of book-entry transfer of such Debentures into
the Exchange Agent's account at the Depository) and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within three New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Debentures according to the guaranteed
delivery procedures set forth above. Any Holder who wishes to tender Debentures
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery relating to such
Debentures prior to the Expiration Date. Failure to comply with the guaranteed
delivery procedures
8
<PAGE>
outlined above will not, of itself, affect the validity or effect a revocation
of any Letter of Transmittal form properly completed and executed by a Holder
who attempted to use the guaranteed delivery procedures.
3. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount
of Debentures evidenced by a submitted certificate is tendered, the tendering
Holder should fill in the principal amount tendered in the column entitled
"Principal Amount Tendered" in the box entitled "Description of Debentures
Tendered Hereby." A newly issued Debenture for the principal amount of
Debentures submitted but not tendered will be sent to such Holder as soon as
practicable after the Expiration Date. All Debentures delivered to the Exchange
Agent will be deemed to have been tendered in full unless otherwise indicated.
Debentures tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date, after which tenders of Debentures are
irrevocable. To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Debentures to be withdrawn (the "Depositor"), (ii) identify the Debentures
to be withdrawn (including the registration number(s) and principal amount of
such Debentures, or, in the case of Debentures transferred by book-entry
transfer, the name and number of the account at the Depository to be credited),
(iii) be signed by the Holder in the same manner as the original signature on
this Letter of Transmittal (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Debentures register the transfer of such Debentures into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Debentures are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by Holdings, whose determination shall be
final and binding on all parties. Any Debentures so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no Exchange
Debentures will be issued with respect thereto unless the Debentures so
withdrawn are validly retendered. Any Debentures which have been tendered but
which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of Exchange Offer.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered Holder(s) of the Debentures tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Depository, the signature must
correspond with the name as it appears on the security position listing as the
owner of the Debentures.
If any of the Debentures tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Debentures registered in different names are tendered, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Debentures.
Signatures of this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the Debentures
tendered hereby are tendered (i) by a registered Holder who has not completed
the box entitled "Special Registration Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders
of Debentures (which term, for the purposes described herein, shall include a
participant in the Depository whose name appears on a security listing as the
owner of the Debentures) listed and tendered hereby, no endorsements of the
tendered Debentures or separate written instruments of transfer or exchange are
required. In any other case, the registered Holder (or acting Holder) must
either properly endorse the Debentures or transmit properly completed bond
powers with this Letter of Transmittal (in either case, executed exactly as the
9
<PAGE>
name(s) of the registered Holder(s) appear(s) on the Debentures, and, with
respect to a participant in the Depository whose name appears on a security
position listing as the owner of Debentures, exactly as the name of the
participant appears on such security position listing), with the signature on
the Debentures or bond power guaranteed by an Eligible Institution (except where
the Debentures are tendered for the account of an Eligible Institution).
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by Holdings, proper evidence
satisfactory to Holdings of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders
should indicate, in the applicable box, the name and address (or account at the
Depository) in which the Exchange Debentures or substitute Debentures for
principal amounts not tendered or not accepted for exchange are to be issued (or
deposited), if different from the names and addresses or accounts of the person
signing this Letter of Transmittal. In the case of issuance in a different name,
the employer identification number or social security number of the person named
must also be indicated and the tendering Holder should complete the applicable
box.
If no instructions are given, the Exchange Debentures (and any Debentures
not tendered or not accepted) will be issued in the name of and sent to the
acting Holder of the Debentures or deposited at such Holder's account at the
Depository.
6. TRANSFER TAXES. Holdings shall pay all transfer taxes, if any,
applicable to the transfer and exchange of Debentures to it or its order
pursuant to the Exchange Offer. If a transfer tax is imposed for any reason
other than the transfer and exchange of Debentures to Holdings or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the registered Holder or any other person) will be payable by the
tendering Holder. If satisfactory evidence of payment of such taxes or exception
therefrom is not submitted herewith, the amount of such transfer taxes will be
collected from the tendering Holder by the Exchange Agent.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Debentures listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS. Holdings reserves the right, in its reasonable
judgment, to waive, in whole or in part, any of the conditions to the Exchange
Offer set forth in the Prospectus.
8. MUTILATED, LOST, STOLEN OR DESTROYED DEBENTURES. Any Holder whose
Debentures have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering as well as requests for additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent
at the address and telephone number(s) set forth above. In addition, all
questions relating to the Exchange Offer, as well as requests for assistance or
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to ALEC Holdings, Inc., 510 L. Street, Anchorage, Alaska 99501,
Attention: Corporate Secretary; telephone (907) 297-3000.
10. VALIDITY AND FORM. All questions as to the validity, form, eligibility
(including time of receipt), acceptance of tendered Debentures and withdrawal of
tendered Debentures will be determined by Holdings in its sole discretion, which
determination will be final and binding. Holdings reserves the absolute right to
reject any and all Debentures not properly tendered or any Debentures Holdings'
acceptance of which would, in the opinion of counsel for Holdings, be unlawful.
Holdings also reserves the right, in its reasonable judgment, to waive any
defects, irregularities or conditions of tender as to particular
10
<PAGE>
Debentures. Holdings' interpretation of the terms and conditions of the Exchange
Offer (including the instructions in this Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Debentures must be cured within such time as ACS
shall determine. Although Holdings intends to notify Holders of defects or
irregularities with respect to tenders of Debentures, neither Holdings, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Debentures will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any
Debentures received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holder as soon as practicable
following the Expiration Date.
IMPORTANT TAX INFORMATION
Under federal income tax law, a Holder tendering Debentures is required to
provide the Exchange Agent with such Holder's correct TIN on Substitute Form W-9
above. If such Holder is an individual, the TIN is the Holder's social security
number. The Certificate of Awaiting Taxpayer Identification Number should be
completed if the tendering Holder has not been issued a TIN and has applied for
a number or intends to apply for a number in the near future. If the Exchange
Agent is not provided with the correct TIN, the Holder may be subject to a $50
penalty imposed by the IRS. In addition, payments that are made to such Holder
with respect to tendered Debentures may be subject to backup withholding.
Certain Holders (including, among others, all domestic corporations and
certain foreign individuals and foreign entities) are not subject to these
backup withholding and reporting requirements. Such a Holder who satisfies one
or more of the conditions set forth in Part 2 of the Substitute Form W-9 should
execute the certification following such Part 2. In order for a foreign Holder
to qualify as an exempt recipient, that Holder must submit to the Exchange Agent
a properly completed Internal Revenue Service Form W-9, signed under penalties
of perjury, attesting to that Holder's exempt status. Such forms can be obtained
from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any amounts otherwise payable to the Holder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
PURPOSE OF SUBSTITUTE FORM W-9. To prevent backup withholding on payments
that are made to a Holder with respect to Debentures tendered for exchange, the
Holder is required to notify the Exchange Agent of his or her correct TIN by
completing the form herein certifying that the TIN provided on Substitute Form
W-9 is correct (or that such Holder is awaiting a TIN) and that (i) such Holder
is exempt, (ii) such Holder has not been notified by the IRS that he or she is
subject to backup withholding as a result of failure to report all interest or
dividends or (iii) the IRS has notified such Holder that he or she is no longer
subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT. Each Holder is required to give the
Exchange Agent the social security number or employer identification number of
the record Holder(s) of the Debentures. If Debentures are in more than one name
or are not in the name of the actual Holder, consult the instructions on IRS
Form W-9, which may be obtained from the Exchange Agent, for additional guidance
on which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER. If the tendering
Holder has not been issued a TIN and has applied for a number or intends to
apply for a number in the near future, write "Applied For" in the space for the
TIN on Substitute Form W-9, sign and date the form and the Certificate of
Awaiting Taxpayer Identification Number and return them to the Exchange Agent.
If such certificate is completed
11
<PAGE>
and the Exchange Agent is not provided with the TIN within 60 days, the Exchange
Agent will withhold 31% of all payments made thereafter until a TIN is provided
to the Exchange Agent.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with
Debentures or confirmation of book-entry transfer and all other required
documents) or a Notice of Guaranteed Delivery must be received by the Exchange
Agent on or prior to the Expiration Date.
PLEASE REVIEW INSTRUCTION 11 FOR ADDITIONAL DETAILS.
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