<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
COMMISSION FILE NUMBER 000-28167
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
510 L STREET, SUITE 500
DELAWARE ANCHORAGE, ALASKA
(State or other jurisdiction of (Address of principal executive offices)
incorporation or organization)
52-2126573 99501
(I.R.S. Employer Identification No.) (Zip Code)
(907) 297-3000
(Registrant's telephone number, including area code)
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------- -----------------------------------------
NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Common Stock, Par Value $.01 per Share
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on March 13, 2000, was
approximately $152,834,402 computed upon the basis of the closing sales price of
the Common Stock on that date. For purposes of this computation, shares held by
directors (and shares held by any entities in which they serve as officers) and
officers of the registrant have been excluded. Such exclusion is not intended,
nor shall it be deemed, to be an admission that such persons are affiliates of
the registrant.
As of March 13, 2000, there were outstanding 32,715,474 shares of Common
Stock, $.01 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for the registrant's 2000 annual meeting
of stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
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PAGE
PART I
<S> <C> <C>
ITEM 1 BUSINESS 2
ITEM 2 PROPERTIES 23
ITEM 3 LEGAL PROCEEDINGS 24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT 25
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 28
ITEM 6 SELECTED FINANCIAL DATA 29
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 35
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 51
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 52
PART III
ITEM 10 EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT 53
ITEM 11 EXECUTIVE COMPENSATION 53
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 53
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 53
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 54
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS F-1
SIGNATURES
</TABLE>
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Alaska Communications Systems Group, Inc. ("ACS Group" or "the Company")
was formed in 1998 by Fox Paine & Company, members of the former senior
management team of Pacific Telecom, and other experienced telecommunications
industry executives. In May 1999, the Company acquired Century Telephone
Enterprises, Inc.'s Alaska properties ("CenturyTel's Alaska properties") and
Anchorage Telephone Utility or ATU. CenturyTel's Alaska properties were the
incumbent provider of local telephone services in Juneau, Fairbanks and more
than 70 rural communities in Alaska and provided Internet services to customers
statewide. CenturyTel's Alaska properties included PTI Communications of Alaska,
Inc. ("PTIC"), Telephone Utilities of Alaska, Inc. ("TUA") and Telephone
Utilities of the Northland, Inc. ("TUNI"). ATU was the largest local exchange
carrier in Alaska and provided local telephone and long distance services
primarily in Anchorage and cellular services statewide. ATU provided long
distance services through ATU Long Distance, Inc. and cellular services through
MACtel, Inc. On October 29, 1999, the Company changed its name from ALEC
Holdings, Inc. to Alaska Communications Systems Group, Inc.
ACS Group is in the process of changing the names of several of its
operating companies to unify and promote its brand name statewide. Pending
regulatory approval, the following name changes are planned:
<TABLE>
<CAPTION>
Former Name New Name
----------- --------
<S> <C>
PTI Communications of Alaska, Inc. ACS of Fairbanks, Inc.
Telephone Utilities of Alaska, Inc. ACS of Alaska, Inc.
Telephone Utilities of the Northland, Inc. ACS of the Northland, Inc.
Anchorage Telephone Utility ACS of Anchorage, Inc.
ATU Long Distance, Inc. ACS Long Distance, Inc.
MACtel, Inc. ACS Wireless, Inc.
PTINet, Inc. ACS Internet, Inc.
Alaskan Choice Television, LLC ACS Television, Inc.
</TABLE>
ACS Group is the leading diversified, facilities-based
telecommunications provider in Alaska, offering local telephone, cellular, long
distance, data and Internet services to business and residential customers
throughout the state. ACS Group is the only telecommunications provider in
Alaska using its own network facilities to provide end-to-end communications
services to its customers.
At various times, ACS Group evaluates opportunities for establishing or
acquiring other telecommunications businesses through acquisitions or otherwise
in Alaska and elsewhere in the United States, and may make investments in such
businesses in the future. ACS Group has focused its attention on local
telephone, cellular, interexchange network and data services, and Internet
businesses. On September 30, 1999, ACS Group acquired a 67% interest in Alaskan
Choice Television, LLC ("ACTV"), which provides wireless cable television
services to the Anchorage and Fairbanks areas. On October 6, 1999, the Company
entered into an agreement to acquire the remaining one-third interest in Alaskan
Choice Television, together with certain FCC licenses and, on February 14, 2000,
completed the acquisition.
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LOCAL TELEPHONE. With over 325,000 access lines, representing
approximately 75% of the access lines in Alaska, ACS Group is the largest local
exchange carrier in Alaska and the 15th largest in the U.S. The Company provides
service to all of the state's major population centers, including Anchorage,
Juneau and Fairbanks.
CELLULAR. ACS Group is the largest and only statewide provider of
cellular services in Alaska, currently serving over 73,000 subscribers. Its
cellular network covers over 460,000 residents, including all major population
centers and highway corridors. The Company recently upgraded its network to be
fully digital in substantially all of its service areas.
INTEREXCHANGE NETWORK, DATA SERVICES AND OTHER
Long-distance. ACS Group provides long distance and other interexchange
services to approximately 32,000 customers primarily in Anchorage and intends to
market these services statewide beginning in the first quarter of 2000. ACS
Group recently migrated long distance traffic on main routes from leased
circuits onto its own network infrastructure, which it believes will result in
significant cost savings over time.
Data and Internet. ACS Group is the third largest provider of Internet
access services in Alaska with approximately 16,000 customers. The Company also
owns 28.5% of the second largest Internet service provider in Alaska with
approximately 28,000 customers. ACS Group currently offers dedicated and dial-up
Internet access to its customers and also commenced offering digital subscriber
line, or DSL, services in January of 2000.
ACS Group also owns 100% of ACTV, effective February 14, 2000, which is
a provider of wireless cable television services in the Fairbanks and Anchorage
service areas. ACS Group expects to expand its offering of wireless cable
services using digital compression technology.
PRODUCTS SERVICES AND REVENUE SOURCES
ACS Group offers a broad portfolio of telecommunications services to
residential and business customers in its markets. The Company's service
offerings are locally managed to better serve the needs of each community. The
Company believes 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. The Company complements its local
telephone services by actively marketing its cellular, long distance, data and
Internet service offerings.
The following table sets forth the components of ACS Group's revenues on
a pro forma combined basis for the periods presented:
<TABLE>
<CAPTION>
COMBINED REVENUE FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1999
----------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
REVENUE BY SOURCE: (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Local network service $ 93.1 33.0% $ 96.0 31.9%
Network access 98.6 35.0 105.3 35.0
Directory advertising 26.5 9.4 27.9 9.3
Deregulated and other revenue 19.6 7.0 19.7 6.6
--------- --------- --------- ---------
Local telephone 237.8 84.4 248.9 82.8
Cellular 31.8 11.3 36.1 12.0
Interexchange network, data services and other 12.0 4.3 15.5 5.2
--------- --------- --------- ---------
Total $ 281.6 100.0% $ 300.5 100.0%
========= ========= ========= =========
</TABLE>
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LOCAL TELEPHONE SERVICE
Local Network Service. Basic local network service enables customers to
originate and receive telephone calls within a defined "exchange" area. The
Company provides basic local services to residential and business customers,
generally for a fixed monthly charge. The maximum amount that can be charged to
a customer for basic local services is determined by rate proceedings involving
the Regulatory Commission of Alaska ("RCA"). The Company charges 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, 1999, approximately 57% of ACS Group's retail access
lines served residential customers, while 43% served business customers.
Currently, monthly charges for basic local service for residential customers
range from $9.42 to $16.30 in ACS Group's service areas, as compared to the
national average of $15.99. Monthly charges for business customers range from
$17.65 to $26.05 in ACS Group's service areas, as compared to the national
average of $34.55. See "Business - Introduction" for a discussion of ACS Group's
common statewide branding strategy.
The table below sets forth the annual growth in access lines at
CenturyTel's Alaska properties and ATU from December 31, 1995 to December 31,
1999. The number of access lines shown for CenturyTel's Alaska properties in
1997 includes approximately 37,000 access lines that were acquired by
CenturyTel's Alaska properties as part of its acquisition of the City of
Fairbanks Telephone Operation in October 1997. The number of access lines shown
for ATU represents all revenue producing access lines connected to both retail
and wholesale customers.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
LOCAL TELEPHONE ACCESS LINES:
CenturyTel's Alaska properties 77,660 82,969 124,869 131,858 143,412
ATU 147,934 154,752 158,486 168,536 182,196
--------- --------- --------- --------- ---------
Total 225,594 237,721 283,355 300,394 325,608
========= ========= ========= ========= =========
PERCENTAGE GROWTH:
CenturyTel's Alaska properties 5.6% 6.8% 50.5% 5.6% 8.8%
ATU 2.1% 4.6% 2.4% 6.3% 8.1%
Combined 3.3% 5.4% 19.2% 6.0% 8.4%
</TABLE>
On June 1, 1999, as part of the consolidation of its operating and
billing systems, ACS Group conformed the methodology by which the number of
access lines is calculated across all of its local exchanges to that used for
CenturyTel's Alaska properties. The Company intends to use the method used to
calculate access lines in service for CenturyTel's Alaska properties to
calculate its access lines in all future periods. In the table above, for the
year ended December 31, 1999, the Company shows ATU's number of access lines
calculated using this method. If the number of ATU's access lines in service at
December 31, 1998 was computed under this same method, the number of access
lines at ATU would increase by 4,940 and the total number of access lines would
equal 305,334 and the combined growth percentage would be 6.6% for 1999. Due to
limited data available to ACS Group, no adjustments to the access lines in
service for any year prior to 1998 have been computed.
Future access line growth is expected to be derived from:
- increases in line demand from data-related usage by existing
business customers,
- increases in line demand from Internet usage by residential
customers and
- population growth in ACS Group's service areas.
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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 and included on
customers' bills for basic local service. Customer penetration of enhanced
services, calculated as the number of enhanced services divided by the number of
access lines, in ACS Group's service areas is approximately 86%, while other
rural local exchange carriers in the U.S. have achieved a penetration level of
121%, on average.
Operating results for local telephone services are not materially
impacted by seasonal factors.
NETWORK ACCESS
Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than one
company in the provision of such long distance service on an end-to-end basis.
Since toll calls are generally billed to the customer originating the call, a
mechanism is required to compensate each company providing services relating to
the call. This mechanism is the access charge, which the Company bills to each
interexchange carrier for the use of its facilities to access the customer, as
described below.
Intrastate Access Charges. ACS Group generates intrastate access revenue
when an intrastate long distance call that involves an ACS Group local exchange
company and an interexchange carrier is originated and terminated within the
same state. The interexchange carrier pays the Company an intrastate access
payment for either terminating or originating the call. The Company records the
details of the call through its carrier access billing system and receives the
access payment from the interexchange carrier. When one of the Company's
customers originates the call, it typically provides billing and collection for
the interexchange carrier through a billing and collection agreement. The access
charge for ACS Group's intrastate service is regulated by the RCA.
Interstate Access Charges. ACS Group generates interstate access revenue
when an interstate long distance call is originated from an Alaskan local
calling area served by an ACS Group local exchange company and is terminated in
a local calling area in another state, and vice versa. The Company bills
interstate access charges in the same manner as it bills intrastate access
charges; however, the interstate access charge is regulated by the FCC rather
than by the RCA.
Operating results for network access services are not materially
impacted by seasonal factors.
DIRECTORY ADVERTISING
Directory advertising revenues are derived by ACS Group principally from
yellow pages advertising in the local telephone books of each of the Company's
local exchange service areas. The Company provides this service under a
contractual arrangement with a directory publishing company. Directory
advertising is billed in conjunction with local telephone service.
DEREGULATED AND OTHER REVENUE
Deregulated and other revenues consist of billing and collections
contracts, space and power rents, pay telephone service, customer premise
equipment sales, and other miscellaneous revenues generated by the Company's
local exchange carriers.
CELLULAR SERVICES
ACS Group's cellular business is currently managed separately from its local
exchange carrier business and is subject to a different regulatory framework and
cost structure. Cellular services are provided statewide under
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the MACtel brand name. Subsequent to the acquisition of CenturyTel's Alaska
properties and ATU, cellular operations were merged under the MACtel brand name,
which was formerly a subsidiary of ATU. The primary sources of cellular 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. The Company
provides digital service and advanced features in Anchorage and Fairbanks and
expects to be fully digital in the other service areas by the first quarter of
2000. Upon conversion of all service areas to digital service, ACS Group will be
able to offer advanced digital services and features, such as text messaging, on
a statewide basis.
As illustrated in the table below, CenturyTel's Alaska properties and
MACtel have experienced growth in the number of cellular subscribers served and
total covered population over the past five years.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Covered population:
CenturyTel's Alaska properties 54,286 55,101 55,927 56,766 56,733
MACtel 294,160 298,573 397,434 403,396 404,069
--------- --------- --------- --------- ---------
Total 348,446 353,674 453,361 460,162 460,802
========= ========= ========= ========= =========
Ending subscribers
CenturyTel's Alaska properties 1,300 1,678 2,096 2,945 3,692
MACtel 24,855 37,651 53,035 63,627 69,376
--------- --------- --------- --------- ---------
Total 26,155 39,329 55,131 66,572 73,068
========= ========= ========= ========= =========
Ending penetration
CenturyTel's Alaska properties 2.4% 3.0% 3.7% 5.2% 6.5%
MACtel 8.4% 12.6% 13.3% 15.8% 17.2%
Combined 7.5% 11.1% 12.2% 14.5% 15.9%
</TABLE>
Although ACS Group has achieved cellular penetration rates of 18% in
Anchorage and 20% in Kenai, penetration rates in the Company's other service
areas are significantly lower. Management believes there are opportunities to
improve the penetration rates of its cellular operations in Fairbanks and
Juneau. Management also believes that the market for cellular services will
continue to grow with the growth in the cellular industry as a whole.
ACS Group also owns 10 megahertz E Block PCS licenses covering
Anchorage, Juneau and Fairbanks, which were purchased by CenturyTel's Alaska
properties in 1997. Management is analyzing the build out of these licenses and
technical alternatives for using this spectrum to enhance the Company's service
offerings in its overall business.
Operating results for cellular services are not materially impacted by
seasonal factors.
INTEREXCHANGE NETWORK, DATA AND OTHER
Long Distance Services. ACS Group's predecessors began offering long
distance services on a resale basis in October 1997, primarily in Anchorage. The
Company currently has approximately 32,000 long distance customers and less than
2.5% of total long distance revenues in Alaska. ACS Group is expanding its long
distance operations into the service areas of CenturyTel's Alaska properties
starting in the first quarter of 2000. Before August 1998, CenturyTel's Alaska
properties were precluded from entering the long distance business by a
non-competition agreement with AT&T Alascom which was signed when Pacific
Telecom sold Alascom, Inc. to AT&T in 1995. To date, ACS Group's long distance
operations have generated operating losses.
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In April 1999, ACS Group entered into a settlement agreement with
General Communication, Inc. ("GCI") under which the Company agreed to enter into
a number of new business arrangements and to settle a number of outstanding
disputes, including GCI's opposition to ACS Group's acquisitions of CenturyTel's
Alaska properties and ATU. As part of this agreement and to reduce the Company's
dependence on a resale long distance strategy, ACS Group purchased from GCI
$19.5 million of fiber capacity for high-speed links within Alaska and for
termination of traffic in the lower 48 states. Subsequently, the Company entered
into an amendment of the purchase agreement with GCI, whereby, among other
things, ACS Group agreed to purchase additional capacity in 2001 for $19.5
million. ACS Group expects that migrating long distance traffic onto its own
network facilities will, over time reduce the cost of providing long distance
and other interexchange services and data and Internet access services.
ACS Group is subject to numerous conditions imposed by the RCA and, to a
lesser degree, by the FCC on the manner in which the Company conducts its long
distance operations. The restrictions are intended to prohibit
cross-subsidization from the regulated local exchange carrier to the unregulated
long distance affiliate and discrimination against other long distance providers
in favor of a local exchange carrier's long distance affiliate. Among the
conditions applied to ACS Group's long distance affiliates are those which:
- require the Company to hold all books and records, management,
employees and administrative services separate, except that
services may be provided among affiliates through arm's length
affiliated interest agreements,
- prohibit CenturyTel's Alaska properties from bundling local and
long distance services until competition develops in their local
markets and
- prevent the Company 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 Alaska Public Utilities Commission ("APUC"), predecessor to the RCA,
lifted the restriction on bundling of local and long distance services in ATU's
service areas in 1998.
Operating results for long distance services are not materially impacted
by seasonal factors.
Internet Access. ACS Group provides Internet access services to
approximately 16,000 customers at December 31, 1999. In order to offer Internet
access, the Company provides local dial-up telephone numbers for its customers.
These local dial-up numbers allow customers access, through a modem connection
on their computer, to a series of computer servers ACS Group owns and maintains.
These servers allow customers to access their e-mail accounts and to be routed
to local access points that connect customers to the Internet. ACS Group charges
customers either a flat rate for unlimited Internet usage or a usage sensitive
rate, which, in either case, is billed on customers' local telephone bill.
Commencing January 2000, ACS Group is offering high speed Digital Subscriber
Line service, or DSL, to its Internet subscribers.
ACS Group also owns a 28.5% minority interest in Internet Alaska, Inc.,
which provides Internet access to approximately 28,000 customers, primarily in
Anchorage and Fairbanks.
Operating results for Internet access services are not materially
impacted by seasonal factors.
Wireless Cable Television. ACS Group owns ACTV, a wireless cable
television provider. ACTV provides wireless cable television services over
assigned UHF frequencies to approximately 3,000 customers in the
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Company's Anchorage and Fairbanks service areas. As of December 31, 1999, ACS
Group held a two-thirds interest in ACTV and completed the acquisition of the
remaining one-third interest on February 14, 2000.
UNIVERSAL SERVICE REVENUE
Universal service revenue supplements the amount of local service
revenue the Company receives to ensure that basic local service rates for
customers in high cost rural areas are not significantly higher than rates
charged in lower cost urban and suburban areas. The Telecommunications Act of
1996 prescribed new standards applicable to universal service, including
mechanisms for defining the types of services to be provided as part of a
universal service program, specific goals or criteria applicable to universal
service programs, new qualifications for receipt of universal service funding
and new requirements for contributions to universal service funding. The FCC, in
conjunction with a federal-state joint board composed of FCC and state
commission members, has been working since passage of the Telecommunications Act
of 1996 to implement these new statutory provisions. The FCC has chosen to
address universal service matters, initially for non-rural telephone companies,
and subsequently for rural telephone companies. New cost-identification models
for non-rural local carriers were adopted effective on January 1, 2000 and would
be applicable to ACS Group's Anchorage operations. New rules for rural telephone
companies, applicable to CenturyTel's Alaska properties, are not expected to be
adopted before January 1, 2001 at the earliest.
OTHER
ACS Group seeks to capitalize on its local presence and network
infrastructure by offering additional services to customers, such as directory
services and billing and collection services for interexchange carriers.
NETWORK FACILITIES
As of December 31, 1999, ACS Group owned 74 exchanges serving over
325,000 access lines. All of the Company's exchanges are served by digital
switches provided predominately by Nortel Networks. ACS Group's 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. The Company has 100% single-party services (one customer per
access line), and believes substantially all of its switches have current
generic software upgrades available, allowing for the full range of enhanced
customer features.
ACS Group has 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,
the Company intends to introduce additional enhancements.
Network operations and monitoring are provided for CenturyTel's Alaska
properties and ATU by ACS Group'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. The Company
also has customer care call center facilities in Anchorage and Fairbanks along
with additional customer care facilities in Juneau, Sitka, Kenai/Soldotna and
Kodiak. All of these facilities offer extensive business hours to efficiently
handle customer inquiries and orders for service.
ACS Group's cellular operations consist of five switching centers, 75
cell sites and four repeaters covering all major population centers and highway
corridors in Alaska. The Company plans to complete the conversion of all of its
switching and cell site equipment to digital service by the first quarter of
2000. The Company's switching and cell site infrastructure is linked by digital
microwave and fiber. MACtel also has a network operating control center located
in Anchorage that supports all cellular switches in ACS Group's markets.
Customer care centers are located in Anchorage, Fairbanks, Juneau and
Kenai/Soldotna.
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The Company is enhancing its interexchange network to accommodate
developing products and technology. The Company is working with Nortel Networks
on a multiple phase conversion of its network from a time division multiple
access, or TDMA, circuit switched platform to an asynchronous transfer
mode/Internet protocol, or ATM/IP, packet switched platform based on Nortel's
SUCCESSION NETWORK(TM). ACS Group believes the implementation of the SUCCESSION
NETWORK(TM) will enhance its capability to provide a complete suite of
telecommunications and data services and achieve significant operating
efficiencies. The Company has completed the first phase of the conversion, which
resulted in the migration of its network traffic to its fiber optic transport
facilities acquired in June 1999. The Company is currently in the second phase,
which will involve the conversion of its transport connections between Anchorage
and each of Fairbanks, Kenai, Juneau and Seattle from TDMA to ATM, which ACS
Group expects to complete by the second quarter of 2000. ACS Group expects to
complete the implementation of Nortel's SUCCESSION NETWORK(TM) by year-end 2002.
Planned network enhancements prior to year-end 2002 will include the
installation of call servers in Anchorage and either Fairbanks or Juneau and the
conversion of network switching nodes to accommodate ATM/IP traffic.
Completion of the SUCCESSION NETWORK(TM) will enable the Company to
provide an array of IP products throughout its core business. ACS Group
currently offers frame relay, and will offer each of the following services as
the necessary network elements are completed:
- virtual private networks,
- virtual private lines,
- transparent local area networks (LAN),
- proprietary LANs and wide area networks (WAN) and
- high speed Internet access.
SUPPLIERS
ACS Group believes it has strong, long-term relationships with its
numerous communications vendors. The Company's primary switching vendor is
Nortel Networks, a leading provider of advanced switching systems. The Company
uses Ericsson switches and radios for its cellular operations. For its billing
systems ACS Group uses Saville Systems and for its accounting systems it uses
SAP. ACS Group's primary information technology architecture is provided by
IBM. While the Company recognizes that the separation of CenturyTel's Alaska
properties from the rest of CenturyTel's properties might result in higher unit
costs for CenturyTel's Alaska properties, it expects that the combination of
CenturyTel'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. ACS Group enjoys positive relationships with a
variety of vendors for outside plant facilities and other elements of its
network.
COMPETITION
Local Telephone Service
Incumbent local exchange carriers may be subject to any of three types
of competition:
- facilities-based competition from providers with their own local
service network,
- resale competition from resale interconnection, or providers who
purchase local service from the incumbent local exchange carrier
at wholesale rates and resell these services to their customers
and
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- competition from unbundled network element interconnection, that
is, providers who lease unbundled network elements from the
incumbent local exchange carrier.
The geographic characteristics of rural areas make the entrance of most
facilities-based competitors uneconomical because of the significant capital
investment required and the limited market size. Thus, competition is likely to
come from resale interconnection or unbundled network element interconnection.
There are no regional Bell operating companies in Alaska.
In September 1997, GCI and AT&T Alascom, the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage. GCI competes principally through unbundled network element
interconnection with ATU's facilities, while AT&T Alascom competes exclusively
by reselling ATU's services. Competition is based upon price and pricing plans,
types of services offered, customer service, billing services, quality and
reliability. GCI has focused principally on advertising discount plans for
bundled services. AT&T Alascom's strategy has been to resell ATU's service as
part of a package of local and long distance services. As a result, ATU lost
approximately 19% of its retail access lines in Anchorage to these competitors
during the first ten months of competition ended June 1998, approximately 61% of
which resulted from unbundled network element interconnection by GCI. The
majority of this loss was among price-sensitive residential customers who have
lower average monthly bills than ATU's business customers. Since June 1998, the
rate of this loss has slowed, with ATU's aggregate market share loss rising only
from 19% to just over 24% in the last eighteen months. The Company expects GCI
and AT&T Alascom to continue to compete for local telephone business.
As "rural telephone companies" under the Telecommunications Act of 1996,
ACS Group's rural local exchange carriers have historically been exempt from the
obligation to lease their facilities or resell their services on a wholesale
discount basis to competitive local exchange carriers seeking interconnection.
However, on June 30, 1999 the ordered these exemptions terminated as to certain
of their study areas, and on October 11, 1999, the RCA, which replaced the APUC
on July 1, 1999, sustained the APUC's order. As a result, ACS Group's rural
local exchange carriers have entered into interconnection negotiations and
arbitration with GCI affecting certain of their study areas. The RCA has
established July 1, 2000 as the date for its resolution of any interconnection
issues requiring arbitration under the Telecommunications Act. At the conclusion
of this process, ACS Group may be required to provide interconnection elements
and/or wholesale discount services to competitors in some or all of its rural
service areas. However, ACS Group believes that its service offerings, customer
relationships and expertise in the local telephone business may provide a
competitive advantage over new local exchange carriers. See "Business -
Regulation".
ACS Group expects 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 also may be
able to modify their networks to partially or completely bypass the Company's
local network.
In addition, while cellular telephone services have historically
complemented traditional local exchange carrier services, the Company
anticipates that existing and emerging wireless technologies may increasingly
compete with local exchange carrier services. Technological developments in
cellular telephone features, personal communications services, digital microwave
and other wireless technologies are expected to further permit the development
of alternatives to traditional wireline services.
Cellular 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. ACS Group
believes 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. ACS Group currently
competes
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with at least one other cellular provider in each of its cellular service areas,
including AT&T Wireless Services, CenturyTel and Mercury Communications.
Competition is based on price, quality, network coverage and brand
reputation. In addition, there are six PCS licensees in each of the Company's
cellular service areas. ACS Group holds PCS licenses covering Anchorage,
Fairbanks and Juneau. One of the PCS licensees began providing digital PCS
service in Anchorage in October 1998. Another PCS licensee has recently
indicated it will commence trials of its technology. The Company believes that
the unique and vast terrain and the high cost of PCS system buildout makes
entrance into markets outside Anchorage unlikely.
Long Distance Services
The long distance telecommunications market is highly competitive.
Competition in the long distance business is based on price, customer service,
billing services and quality. ACS Group currently offers long distance service
to customers located in ATU's service areas and the Fairbanks and Juneau areas
of CenturyTel's Alaska properties, and intends, subject to regulatory
restrictions, to expand ATU's long distance operations into the remaining
service areas of CenturyTel's Alaska properties. AT&T Alascom and GCI are
currently the two major long distance providers in Alaska, including in ACS
Group's service areas. ACS Group currently has less than 2.5% of total long
distance revenues in Alaska.
Internet Services
The market for Internet access services is highly competitive. There are
few significant barriers to entry, and the Company expects that competition will
intensify in the future. ACS Group currently competes with a number of
established online services companies, interexchange carriers and cable
companies. The Company believes that its ability to compete successfully will
depend upon a number of factors, including the reliability and security of its
network infrastructure, the ease of access to the Internet, and the pricing
policies of its competitors.
CUSTOMERS
ACS Group has two basic types of customers for the services of its local
exchange companies:
- business and residential customers located in their local
service areas that pay for local phone service
- interexchange carriers that pay us for access to long distance
calling customers located within its local service areas.
Approximately 57% of ACS Group's retail access lines served residential
customers, while 43% served business customers. In addition, no single ACS Group
customer represented more than 10% of its total 1999 consolidated revenue.
SALES AND MARKETING
CenturyTel's Alaska properties and ATU have historically conducted their
sales and marketing operations for each of their respective products on a
stand-alone basis, with each product line having its own sales force and
marketing department. Going forward, ACS Group intends to consolidate its
product and service offerings under the "Alaska Communications Systems" brand,
subject to regulatory and strategic business considerations. See "Business -
Introduction".
Key components of the Company's sales and marketing strategy include:
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- marketing current and future service offerings aggressively,
including packaged service offerings,
- centralizing marketing functions
- enhancing direct sales efforts.
ACS Group believes that it can leverage its position as an integrated,
one-stop provider of telecommunications services with strong positions in local
access, cellular, long distance and data, and Internet markets. By pursuing,
within the bounds of any applicable regulatory constraints, a marketing strategy
that takes advantage of these characteristics and that facilitates cross-selling
and packaging of it products and services, the Company believes it can increase
penetration of new product offerings, improve customer retention rates, increase
its share of its customers' overall telecommunications expenditures, and achieve
continued revenue and operating cash flow growth.
While CenturyTel's Alaska properties and ATU have, to a limited extent,
marketed local telephone services in attractively-priced, packaged service
offerings with cellular, long distance and Internet services, neither
CenturyTel's Alaska properties nor ATU emphasized these types of offerings.
However, ACS Group believes packaged offerings are popular with customers
because they allow customers to enjoy pricing for a number of services at a
substantial discount to a la carte pricing of individual services. Subject to
regulatory limitations, the Company intends to expand this strategy, which it
expects will increase the average revenue per customer, and result in a more
loyal and satisfied customer base and in reduced churn.
The Company has established a sales and marketing organization where
marketing strategies will be centralized and sales functions will be based
locally. To enhance its direct selling efforts, the Company has established
additional customer and retail service centers in its larger service areas, such
as Juneau and Kenai/Soldotna, and intends to enhance its call center operations
through a combination of technology investments, training, and incentive
compensation programs for call center employees.
ENVIRONMENTAL REGULATIONS
ACS Group'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 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.
Many of ACS Group's properties formerly contained, or currently
contain, underground and above ground 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.
ACS Group's 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 the Company
has not been named in any lawsuits alleging damages from radio frequency
emissions, it is possible it could be sued in the future, particularly if
scientific studies conclusively determine that radio frequency emissions are
harmful.
EMPLOYEES
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ACS Group considers employee relations to be good. As of December 31,
1999, the Company employed a total of 1,231 regular full-time employees, 837 of
whom were represented by the International Brotherhood of Electrical Workers,
Local 1547 ("IBEW"). CenturyTel's Alaska properties had a collective bargaining
agreement with the IBEW that was scheduled to expire in 2004. The ATU collective
bargaining agreement with the IBEW was scheduled to expire on August 31, 1999,
but was extended by mutual agreement to accommodate negotiations to consolidate
the Century and ATU agreements. On November 2, 1999, the IBEW membership for ACS
Group ratified the terms of the collective bargaining agreement that governs the
terms and conditions of employment for all IBEW represented employees. The new
agreement, which expires December 31, 2006, provides for wage increases up to 4%
based on the annual increases in the U.S. Department of Labor CPI-U, the
consumer price index for Anchorage. There have been no work stoppages or
strikes, and none are anticipated; management has worked closely with IBEW
leadership for many years.
REGULATION
OVERVIEW
ACS Group's operations are subject to the separate but concurrent
jurisdictional control of both the Federal Communications Commission ("FCC") and
the Regulatory Commission of Alaska ("RCA"). The Company's local telephone
operating subsidiaries, TUNI, TUA, PTIC, which was formerly the City of
Fairbanks Telephone Operation, and Alaska Communications Systems, Inc., formerly
ATU, are each "telecommunications carriers" and "local exchange carriers" under
the Communications Act of 1934, which was amended by the Telecommunications Act
of 1996, and are subject to FCC jurisdiction. ACS Group's cellular companies are
also subject to FCC jurisdiction because they are telecommunications carriers
and because they hold FCC-issued licenses. The Company's local telephone
operating companies are also "public utilities" within the meaning of the Alaska
statutes and are, therefore, governed by the applicable rules and regulations of
the RCA. The RCA succeeded to the regulatory responsibilities of the APUC when
it ceased to exist on June 30, 1999. Only one of the new RCA commissioners has
prior experience as a commissioner on the APUC.
FEDERAL REGULATION
Under the federal regulatory scheme, incumbent local exchange carriers
are required to comply with the Communications Act and the applicable rules and
regulations of the FCC. In substantially overhauling the Communications Act, the
Telecommunications Act of 1996 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, ACS Group's subsidiaries are required to maintain
accounting records in accordance with the Uniform System of Accounts, to
structure access charges according to FCC rules, and to charge for interstate
services at a rate of return not to exceed a rate prescribed by the FCC. The FCC
also must give prior consent to transfers of control and assignments of radio
station licenses. The FCC requires incumbent local exchange carriers providing
access services to file tariffs with the FCC reflecting the rates, terms and
conditions of those services. These tariffs are subject to review and potential
objection by the FCC or third parties. Additionally, all of the Company's local
exchange carriers are "incumbent local exchange carriers" within the meaning of
the Telecommunications Act of 1996. As such, they are subject to various
requirements under that Act, including specific interconnection duties such as
providing requesting telecommunications carriers with unbundled network elements
and wholesale discounted resale of end user services.
STATE REGULATION
Telecommunications companies subject to the RCA's jurisdiction are
required to obtain certificates of public convenience and necessity prior to
operating as a public utility in Alaska. The RCA is responsible for approving
new certificates and any transfers of existing certificates. In addition, the
RCA is responsible for implementing a portion of the competitive requirements of
the Telecommunications Act of 1996, as well as for regulating intrastate access
and rates for local and other services of local telephone companies. After
passage of the Telecommunications Act of 1996, the APUC adopted a plan to
address competition issues across Alaska. The
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APUC established multiple dockets to investigate different competition-related
issues, including revising local and long distance market structures, reforming
its intrastate access charge system and establishing a state universal service
fund. While some of these dockets have been completed, many others remain open
for further processing by the RCA. In connection with regulatory approval of ACS
Group's acquisitions of CenturyTel's Alaska properties and ATU, the APUC imposed
several conditions on its operating companies. Among those conditions was a
requirement that ATU, PTIC, TUA and TUNI each file revenue requirements, cost of
service and rate design studies no later than July 2001. Additionally,
restrictions were placed on the ability of ACS Group's rural local exchange
carriers to bundle service offerings with ATU Long Distance, Inc.
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, ACS Group is afforded the opportunity to
set maximum rates at a level that allows the Company the opportunity to recover
the reasonable costs incurred in the provision of regulated telecommunications
services and to earn a reasonable rate of return on the investment required to
provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services
and enhanced service offerings,
- access charges to interexchange carriers for originating and
terminating interstate and intrastate interexchange calls,
- interconnection charges, wholesale service charges, unbundled
network element charges, and other rates to competing carriers
interconnecting with the Company's networks or reselling its
services and
- high-cost support mechanisms, such as the federal Universal
Service Fund and the Alaska Universal Service Fund.
Maximum rates for regulated services, and the amount of high-cost
support, are set by the FCC with respect to interstate services and by the RCA
with respect to intrastate services.
In conjunction with the recovery of costs and establishment of rates for
regulated services, 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 between state and federal
jurisdictions and among its various interstate and intrastate services. . 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 jurisdictional 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 by reallocating costs between the federal and state
jurisdictions.
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
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loop allocated to the interstate jurisdiction directly from the end user
customer through the assessment of a subscriber line charge. The remaining
portion of the local loop costs are recovered from interstate access charges to
an interexchange carrier or, in some circumstances, from the federal Universal
Service Fund.
As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher than in
urban areas. In the absence of an accommodation in the FCC rules to address this
fact, a substantial portion of the costs of smaller local exchange carriers
would remain allocated to the intrastate jurisdiction placing substantial
pressure on such carriers to charge higher rates for intrastate services.
Accordingly, the FCC provides for additional interstate cost recovery by
eligible telecommunications carriers through the federal Universal Service Fund.
The federal Universal Service Fund is available to carriers whose local loop
costs are significantly above the national average as calculated pursuant to FCC
rules. Recent FCC rulings have made this high-cost support available to a
competitive carrier, on an averaged per line basis, for those lines serving
customers switching to the competitive carrier. The FCC has adopted new
universal service rules for non-rural local exchange companies, effective
January 1, 2000. Rules for rural telephone companies are still being developed
by the FCC and will not be adopted before January 1, 2001, at the earliest.
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 access
service. The resulting rates are published in a company's interstate access
tariff and filed with the FCC, at which time they are subject to challenge by
third parties and to review by the FCC.
The FCC recognized that this rate making and tariff filing process may
be administratively burdensome for small local exchange carriers. Accordingly,
the FCC established the National Exchange Carriers Association, which is
commonly referred to as NECA, in 1983 to, among other things, develop common
interstate access service rates, terms and conditions. NECA develops interstate
access rates on the basis of data that are provided individually by
participating local exchange carriers and blended to yield average rates. These
rates are intended to generate revenue equal to the aggregate costs plus a
return on the investment of all of the participants. Currently, the authorized
maximum rate of return used in setting interstate access rates is 11.25%.
Individual participating local exchange carriers are likely to have
costs of providing service that are either higher or lower than the revenues
generated by applying the overall NECA tariff rate. To rectify this result, the
revenues generated by applying the NECA rates are pooled from all of the
participating companies and redistributed on the basis of each individual
company's costs. The result of this process not only eliminates the burden of
individual tariff filing, but also produces a system in which small companies
can share and spread risk. For example, if a smaller local exchange carrier
filed its own tariff and subsequently suffered the loss of major customers that
utilize interstate access service, the local exchange carrier could suffer
significant under-recovery of its costs. In the NECA pool environment, the
impact of this loss is reduced because it is spread over all of the pool
participants.
NECA operates separate pools for traffic sensitive costs, which are
primarily switching costs, and non-traffic sensitive costs, which are primarily
loop costs. Companies are also free to develop and administer their own
interstate access charges. ACS Group's rural local exchange carriers participate
in both the traffic sensitive and non-traffic sensitive NECA pools. ATU files
its own traffic sensitive access tariffs with the FCC but participates in the
NECA non-traffic sensitive pool.
The FCC has initiated a proceeding to review its policies governing
interstate exchange access rates and the rate of return applicable to incumbent
local exchange carriers who are subject to rate-of-return, rather than price
cap, regulation. Both ATU and the Company's rural local exchange carriers are
rate-of-return regulated, and thus the outcome of this proceeding could directly
affect their earning prospects. The outcome of this proceeding, however, and its
ultimate impact on ACS Group, cannot be predicted at this time.
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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 TUA and TUNI, respectively. These rates were ordered in 1989. PTIC
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 ACS Group, the APUC required that a
general rate proceeding be initiated for PTIC by June 1999. This proceeding has
been delayed and combined with a company-wide earnings review to be filed with
the RCA 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 the Company's rural properties and ATU, as dominant
carriers,
- symmetrical requirements that all carriers, both dominant and
nondominant, offer all retail services for resale at wholesale rates
and
- substantial dominant carrier pricing flexibility in competitive
areas, under which carriers may reduce retail rates, offer new or
repackaged services and implement special contracts for retail
service upon 30 days' notice to the APUC. Only rate increases
affecting existing services are subject to full cost support showings
for local exchange carriers in areas with local competition.
INTRASTATE ACCESS RATES
In the past, the APUC has required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each local exchange carrier charges interexchange carriers fees for
originating or terminating long distance calls on its network based on the
statewide average cost of access rather than on its costs of access. Access
revenues are collected in a pool administered by the Alaska Exchange Carriers
Association and then redistributed to the local exchange carriers based on their
actual costs. With the passage of the Telecommunications Act of 1996 and
increased competition in the local exchange market, the APUC began a process of
reforming intrastate access charges.
Under recent revisions to the Alaska access system, local exchange
carriers not yet subject to local competition continue to participate in the
Alaska Exchange Carriers Association pool. Participants in this pool recover
their costs based on the embedded cost of services most recently authorized by
the APUC. In the event of competitive entry into a dominant carrier's service
area, these revisions also require the dominant local exchange carrier to exit
the pool and initiate separate access charges. Dominant local exchange carriers
subjected to competitive entry have the right to propose that their access
charges be based on market rates. The RCA has recently initiated a proceeding to
examine whether changes to the current annual process for establishing access
charges are warranted.
An additional consequence of this access reform is the continued removal
of subsidies implicit in access pricing. For instance, the APUC abolished the
"weighting system" for the non-traffic-sensitive rate element that had loaded
extra costs on access charges for lower cost urban exchanges to support rural
exchanges. At the same time, the APUC proposed to support a portion of high
switching costs separately through a state universal service fund. The RCA has
subsequently proposed that such state universal service support be available
only to local
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companies with access lines of 20,000 or less. If adopted as proposed, this
limitation would reduce the amount of state universal service support which the
Company's rural local exchange carriers would receive in the future.
The Alaska Universal Service Fund serves as a complement to the federal
Universal Service Fund, but must meet federal statutory criteria concerning
consistency with federal rules and regulations. Currently, the Alaska Universal
Service Fund only subsidizes a portion of higher cost carriers' switching costs,
and the costs of lifeline service--supporting rates of low income customers. The
RCA has proposed to subject existing support paid to carriers for switching
costs to an access line threshold which could reduce or eliminate such support
for some of ACS Group's subsidiaries. Although it initially ordered the
suspension of certain payments from the Alaska Universal Service Fund,
associated with such switching costs, to one of the Company's rural local
exchange carriers, the RCA subsequently revoked its order without effect on the
carrier's receipts from the fund.
THE TELECOMMUNICATIONS ACT OF 1996
Among other things, the Telecommunications Act of 1996 was enacted to
enhance competition without jeopardizing the availability of nationwide
universal service at affordable rates. These two objectives have resulted in a
complex set of rules intended to promote competitive entry in the provision of
local telephone services, except where entry would adversely affect the
provision of universal service or the public interest.
PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL EXEMPTIONS
The Telecommunications Act of 1996 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 of 1996
established new interconnection rules generally requiring local exchange
carriers to allow competing carriers to interconnect with their local networks.
Congress recognized, however, that when the desire to promote competition
conflicted with the ability of existing carriers to provide universal service to
higher cost customers, local exchange carriers classified as "Rural Telephone
Companies" should be exempted from interconnection requirements until the
continuation of the exemption was no longer required by the public interest, as
defined in the Telecommunications Act of 1996.
Under the Telecommunications Act of 1996, all local exchange carriers,
including both incumbent local exchange carriers and new competitive carriers,
are required to:
- offer reasonable and nondiscriminatory resale of their
telecommunications services,
- ensure that customers can keep their telephone numbers when changing
carriers,
- ensure that competitors' customers can use the same number of digits
when dialing and receive nondiscriminatory access to telephone
numbers, operator service, directory assistance and directory
listing,
- ensure access to telephone poles, ducts, conduits and rights of way
and
- compensate competitors for the costs of terminating traffic.
The Telecommunications Act of 1996 also requires incumbent local exchange
carriers to:
- negotiate in good faith the terms and conditions of interconnection
with any competitive carrier making a request for same,
- interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point,
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- unbundle and provide nondiscriminatory access to unbundled network
elements, such as local loops, switches and transport facilities, at
nondiscriminatory rates and on nondiscriminatory terms and
conditions,
- offer resale interconnection at wholesale rates,
- provide reasonable notice of changes in the information necessary
for transmission and routing of services over the incumbent local
exchange carrier's facilities or in the information necessary for
interoperability and
- provide for the physical collocation of equipment necessary for
interconnection or access to unbundled network elements at the
premises of the incumbent local exchange carrier, at rates, terms
and conditions that are just, reasonable and nondiscriminatory.
In order to implement interconnection requirements, local exchange
carriers generally enter into negotiated interconnection arrangements with
competing carriers. Local exchange carriers may also offer interconnection
tariffs, available to all competitors.
Competitors are required to compensate a local exchange carrier for the
cost of providing interconnection services. In the case of resale
interconnection, the rules provide that the rates charged should be on a
wholesale basis and reflect the current retail rates of the incumbent local
exchange carrier, excluding the portion of costs avoided by the incumbent local
exchange carrier. In the case of unbundled network element interconnection,
rates are based on costing methodologies that employ a forward-looking economic
cost pricing methodology known as total element long run incremental cost. While
the Supreme Court recently affirmed the FCC's authority to develop pricing
guidelines, the Supreme Court did not evaluate this pricing methodology. Some
incumbent local exchange carriers have argued that total element long run
incremental cost pricing methodology does not allow adequate compensation for
the provision of unbundled network elements. The Eighth Circuit Court of Appeals
heard oral arguments on this pricing issue on September 16, 1999, but has not
yet issued a stay or a ruling on this methodology.
The Telecommunications Act of 1996 specifies that resale and unbundled
network element rates are to be negotiated among the parties, or, if the parties
fail to reach an agreement, arbitrated by the relevant state regulatory
commission. Once the parties have come to agreement, the proposed rates are
subject to final approval by the state regulatory commission.
The Supreme Court has also recently upheld the FCC's authority to
prevent the incumbent local exchange carrier from disaggregating existing
combinations of network elements and to establish "pick and choose" rules
regarding interconnection agreements. "Pick and choose" rules permit a carrier
seeking interconnection to pick and choose among the terms of service from other
interconnection agreements between the incumbent and local exchange carriers and
other competitors.
The Supreme Court also remanded the list of unbundled network elements
that the FCC adopted for further consideration of the necessity of each one
under the statutory standard. On September 15, 1999, the FCC adopted an order
eliminating some previously included unbundled network elements, but adding
other elements to the list. These new FCC rules are likely to be the subject of
further appeals.
In January 1997, ATU entered into an interconnection agreement with GCI,
which provides for resale and unbundled network element interconnection, and
with AT&T Alascom, which provides for resale interconnection. Neither
interconnection agreement contained a defined term or a termination date. Near
the end of 1999, the Company notified GCI and AT&T of its view that the
interconnection agreements pertaining to ATU had reached the end of a reasonable
period of availability under applicable regulations. In January of 2000, the
Company filed a motion with the RCA to reopen the original GCI arbitration
proceedings involving ATU, for purposes which included the establishment of an
appropriate forward looking cost model and the re-pricing of various
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interconnection services and unbundled network elements in the Anchorage market.
The RCA subsequently granted the essence of the Company's motion and has
reopened the docket for such purposes. No specific date for resolution of these
issues has been established.
In 1999, the Company also received requests for interconnection from
Alaska Fiber Star, L.L.C. and DSL.net, and has entered into interconnection
negotiations and arbitration with respect to certain of the issues raised by
those requests.
Certain of ACS Group's local operating utilities, TUA, TUNI, and PTIC,
are defined as "rural telephone companies" under the Telecommunications Act of
1996. As rural telephone companies, they were granted rural exemptions from the
requirements relating to both resale interconnection and unbundled network
element interconnection. The rural exemptions were continued until the APUC
determined that interconnection was technically feasible, not unduly
economically burdensome and consistent with the Telecommunications Act of 1996's
universal service provisions.
On June 30, 1999, the APUC issued an order terminating the rural
exemptions of TUNI, TUA and PTIC. On October 11, 1999, the RCA affirmed the
APUC's order. As a result, these rural local exchange carriers are no longer
exempt from the Telecommunications Act of 1996's interconnection requirements
applicable to incumbent local exchange carriers, and are now engaged in the
negotiation and arbitration of interconnection agreements with potential
competitors, including GCI. The RCA has established July 1, 2000 as the date for
its resolution of any interconnection issues requiring arbitration under the
Telecommunications Act in the GCI proceedings. Although it has actively
supported its proposed cost models and interconnection charges, ACS Group cannot
be certain that it will be able to charge rates that provide fair compensation
for providing unbundled network elements and/or schedule discounted resale
services.
Separately, on September 1, 1999, ACS Group filed petitions with the RCA
seeking suspension or modification of interconnection duties and addressing
market structure reforms for the Fairbanks and Juneau-Douglas markets. In those
petitions, the Company's rural local exchange carriers proposed tariffed terms
and conditions, including pricing, for resale of their services at wholesale
discounts, for certain unbundled network elements, and for the interconnection
of their facilities and those of competitive local exchange carriers in the
Fairbanks and Juneau-Douglas markets, effective January 1, 2000. Further, as
part of that proposal, ACS Group also requested that the RCA permit its local
exchange carriers to operate subject to competitive regulation and that the RCA
remove or reduce other regulatory limitations in those markets, effective
January 1, 2001. Subsequently, on October 26, 1999, the RCA dismissed the
Company's petitions seeking to establish open competitive markets in Fairbanks
and Juneau through tariffed interconnection terms and conditions. On November
10, 1999, the Company filed a formal appeal of the RCA's order terminating the
rural exemptions in the Alaskan Superior Court. On November 12, 1999, the
Company filed a parallel appeal of the RCA's order dismissing its petitions for
tariffed interconnection in the Alaskan Superior Court. Although ACS Group
believes that the appeals are well founded, it cannot predict the timing and
outcome of this litigation. The Company believes that tariffing terms and
conditions for interconnection will promote more open competitive markets and
thus eventually promote regulatory flexibility and/or reduced regulation.
In April 1999, a bill was proposed in the Alaska State senate to open to
competition many local telephone markets in which ACS Group operates.
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, and would have deprived 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 the
Company's profitability. Although this bill was not enacted into law, ACS Group
cannot predict at this time whether or to what extent proposals included in the
bill will be offered again and enacted into law.
For 1999, ACS Group's local exchange carriers benefiting from rural
exemptions accounted for 42.4% of its consolidated operating revenues and 47.8%
of its consolidated operating income. The loss of the rural exemptions, absent
compensating measures, such as rate increases or market structure reforms,
including the
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<PAGE> 21
replacement of implicit subsidies by explicit support mechanisms, rate
deaveraging, or regulatory flexibility, could adversely affect the Company's
operating results.
PROMOTION OF UNIVERSAL SERVICE
While the Telecommunications Act of 1996 promoted Congress' policy of
ensuring that affordable service is provided to consumers universally in rural,
high-cost areas of the country, the Telecommunications Act of 1996 altered the
framework for providing universal service by:
- providing for the identification of those services eligible for
universal service support,
- requiring the FCC to make implicit subsidies explicit,
- expanding the types of communications carriers required to pay
universal service contributions and
- allowing competitive local exchange carriers to be eligible for
funding.
These and other provisions were intended to make provision of universal
service support compatible with a competitive market.
Pursuant to the Telecommunications Act of 1996, 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 of
1996 provides that a state public utilities commission may designate more than
one eligible telecommunications carrier, in addition to the incumbent local
exchange carrier, only after determining that the designation of an additional
eligible telecommunications carrier is consistent with the public interest. As a
result, an incumbent rural local exchange carrier has an opportunity to maintain
its status as the sole recipient of federal Universal Service Fund payments in
its service area, even if it is subsequently subjected to competition. TUA, TUNI
and PTIC 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 ACS Group's properties could
have the effect of reducing the amount of funds available from the federal
Universal Service Fund and could materially adversely affect the Company's
ability to achieve a reasonable rate of return on the capital invested in its
network.
In May 1997, the FCC initiated new proceedings addressing federal
universal service support. The new proceedings undertook to separately analyze
and address federal Universal Service Fund requirements and considerations for
rural and for non-rural telephone companies. The FCC indicated its intention
that new rules for universal service support of non-rural companies would be
based on forward-looking economic cost principles as applied through cost proxy
models. On October 21, 1999, the FCC issued orders addressing specific
implementation matters for providing universal service support to non-rural
carriers. The FCC established cost input parameters for use in the cost proxy
models, upon which universal service support payments to non-rural carriers
would be based in the future. The FCC also established procedures for allocating
universal service support for non-rural carriers among and between the states.
This new system of universal service support applies only to non-rural carriers
and became effective January 1, 2000.
With respect to universal service support for rural telephone companies,
the FCC established a Rural Task Force in 1997 to investigate rural carrier
universal service needs, including issues concerning whether and how cost proxy
models adopted for non-rural carriers could be applied to rural telephone
companies. The FCC has indicated several times that it will not implement a new
universal service support system for rural telephone companies sooner than
January 1, 2001 and may delay any implementation beyond that date. The October
21, 1999 order described above applies only to non-rural carriers.
Because ACS Group provides interstate and international services, it is
required to contribute to the federal Universal Service Fund a percentage of its
revenue earned from its interstate and international services.
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<PAGE> 22
Although the Company's rural local exchange carriers receive subsidies from the
federal Universal Service Fund, it cannot be certain of how, in the future, the
Company's contributions to the fund will compare to the subsidies it receives
from the fund.
Separately, the FCC has requested comments concerning ways to promote
basic and advanced services to unserved and underserved areas. As a part of
these proceedings, the FCC is reviewing its authority to designate certain types
of telecommunications carriers, such as cellular carriers, as eligible to
receive payments from the universal service fund. Any determinations concerning
such eligibility could affect either ACS Group's rural local exchange carriers,
its cellular carrier, or both, but the Company cannot predict the outcome of
these proceedings at present.
On July 30, 1999, the U.S. Court of Appeals for the Fifth Circuit
overturned certain of the FCC's rules governing the basis on which the FCC
collects subsidy payments from telecommunications carriers and recovery of those
payments by incumbent local exchange carriers. One or more parties to that
litigation may seek review by the Supreme Court. On October 8, 1999, the FCC
revised its universal service rules in response to the decision by the Fifth
Circuit. Among other things, these revised rules provide that intrastate revenue
earned by a contributing carrier will not be considered in determining the
amount of the contribution to the federal universal service fund.
FCC REGULATION OF WIRELESS SERVICES
The FCC regulates the licensing, construction, operation, acquisition
and sale of personal communications services and cellular systems in the United
States. All cellular and personal communications services licenses have a
10-year term, at the end of which they must be renewed. Licenses may be revoked
for cause, and license renewal applications may be denied if the FCC determines
that renewal would not serve the public interest. In addition, all personal
communications services licensees must satisfy certain coverage requirements.
Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license.
The FCC restricts the amount of wireless spectrum that a single entity
may hold in a market. Currently, the FCC's rules prohibit an entity from holding
more than 45 MHz of spectrum, except for certain rural cellular markets, in
which the limit is 55 MHz. Many interested parties in the wireless industry have
proposed elimination of the FCC's cap on wireless spectrum. Until this rule is
relaxed or eliminated, it will limit the amount of wireless spectrum the Company
can acquire in a particular market.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of commercial mobile radio service
which includes personal communications services and cellular services and the
FCC does not regulate such rates. The FCC imposes, however, a variety of
additional regulatory requirements on commercial mobile radio service operators.
These include:
- Commercial mobile radio service operators must be able to transmit
911 calls from any qualified handset without credit check or
validation, are required to provide the location of the 911 caller,
within an increasingly narrow geographic tolerance over time, and in
the future, will be required to provide 911 service for individuals
with speech and hearing disabilities.
- The FCC is considering mechanisms to permit commercial mobile radio
service operators to charge the party initiating the call for the
call (even if it is not a personal communications service or cellular
subscriber)
FCC REGULATION OF INTERSTATE LONG DISTANCE SERVICES
The Company's long distance services are currently not subject to rate
regulation by the FCC, and it is not required to obtain FCC authorization for
the installation, acquisition or replacement of its domestic interexchange
network facilities. However, the Company must comply with the requirements of
common carriage under the Communications Act. ACS Group is subject to the
general requirement that its charges and terms for its
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<PAGE> 23
telecommunications services be "just and reasonable" and that it not make any
"unjust or unreasonable discrimination" in its charges or terms, as well as to a
number of other requirements of the Communications Act and the FCC's rules. The
FCC has jurisdiction to act upon complaints against any common carrier for
failure to comply with its statutory obligations, and it has recently levied
substantial fines on carriers that have engaged in "slamming," which is the
industry term for unauthorized switching of a customer's telecommunications
service provider.
In 1996, the FCC issued an order that required nondominant interexchange
carriers, like ACS Group, to cease filing tariffs for its domestic interexchange
services. The order required mandatory detariffing and gave carriers nine months
to withdraw federal tariffs and move into contractual relationships with their
customers. This order subsequently was stayed by a federal appeals court. If the
FCC's order becomes effective, nondominant interstate services providers will no
longer be able to file tariffs with the FCC and the Company may need to
implement customer contracts which could result in substantial administrative
expense.
On March 1, 2000, the FCC and the Federal Trade Commission issued a
joint policy statement on advertising of long distance services. The joint
policy statement establishes guidelines designed to ensure that the information
presented in advertising of long distance services is truthful, non-misleading,
and substantiated, and that the information is complete and conspicuous. The
impact, if any, that this newly issued order will have on ACS Group's
advertising is uncertain.
FCC POLICY ON INTERNET SERVICES
The Telecommunications Act of 1996 establishes a distinction between
telecommunications services, which are regulated by the FCC, and information
services, which remain unregulated. ACS Group's Internet services are considered
information services and are not regulated by the FCC. Because the regulatory
boundaries in this area are somewhat unclear and subject to dispute, however,
the FCC could seek to characterize some of the Company's information services as
"telecommunications services." If that happens, those services would become
subject to FCC regulations. The impact of a reclassification of ACS Group's
Internet services is difficult to predict.
OTHER PROCEEDINGS
In addition to the foregoing matters, a number of other FCC, state and
judicial proceedings are currently pending or may be initiated in the future
which could materially affect the Company's business. Some of these proceedings
include:
- The FCC has adopted certain restrictions on the ability of
telecommunications carriers to use and disclose certain types of
customer information in marketing different types of services. The
U.S. Court of Appeals for the Tenth Circuit has held that these rules
are an unconstitutional abridgment of the carrier's freedom of
speech. At least one interested party has asked the U.S. Supreme
Court to review the Tenth Circuit's decision. Although the Company
continues to adhere to these rules pending further legal
developments, any further judicial action concerning these rules may
impose significant restrictions on ACS Group's ability to market
packaged service offerings to its customers.
- The FCC has adopted new rules designed to make it easier for
customers to understand the bills of telecommunications carriers.
These new rules, among other things, establish certain requirements
regarding the formatting of bills and the information that must be
included on bills. Judicial review of these rules is pending.
- ACS Group has historically classified ISP costs as interstate,
consistent with past FCC findings concerning the interstate character
of such calls. The FCC staff, pursuant to FCC accounting policies,
has now indicated that such calls, and their associated costs, should
be reclassified as intrastate. The effect of such a reclassification
could be to decrease the level of expense recognized in the
interstate jurisdiction, and thus require reductions in interstate
access charges in the future, and/or
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<PAGE> 24
to increase the level of expense recognized in the intrastate
jurisdiction, and thus lead to increases in various intrastate rates
in the future. The Company is reviewing the FCC's position and the
ultimate outcome of this matter cannot be predicted at this time.
- The FCC has recently adopted an order that requires
telecommunications service providers to make their services
accessible to individuals with disabilities, if readily achievable.
It is unclear the effect that this order will have on ACS Group's
businesses.
- The FCC has ordered telecommunications service providers to provide
law enforcement personnel with a sufficient number of ports and
technical assistance in connection with wiretaps. The Company cannot
predict its cost of complying with this order.
- In 1998, the FCC issued a notice seeking comment and evidence
concerning possible revisions (including reductions) to the existing
authorized rate of return on the federal portion of
telecommunications facilities and other investment of and by local
exchange carriers. Any rate of return prescribed by the FCC must be
utilized in setting the rates for the interstate services of local
exchange carriers (such as exchange access) subject to FCC
regulation. To date, the FCC has taken no final action in this
proceeding to alter the currently authorized return, which is 11.25
%.
- In June 1999, following prior notification to GCI, PTIC and TUNI
(then under the ownership and control of Century Tel, Inc.) effected
network changes associated with removal of the network switch located
at North Pole, Alaska, in favor of a remote terminal (remote) served
from the Fairbanks switch (host). As a consequence of this network
change, GCI's point of switching for serving North Pole changed to
Fairbanks. GCI filed a formal complaint against the Company with the
RCA. On November 1, 1999, the RCA issued an order sustaining GCI's
complaint and requiring further filings. The Company met with GCI and
made further filings with the RCA. GCI has asked the RCA to grant GCI
protection from any cost increases for a period of ten years
associated with the changeover at North Pole, but has never
quantified or offered any proof of damages. The RCA has not yet acted
on these further submissions.
The foregoing is not an exhaustive list of proceedings that could materially
affect ACS Group's business. The Company cannot predict the outcome of these or
any other proceeding before the FCC, the RCA or the courts.
ITEM 2. PROPERTIES
At December 31, 1999, ACS Group's telecommunications network includes
over 485 miles of fiber optic cable, 176 switching facilities and a statewide
cellular network. In addition, the Company recently purchased fiber capacity for
high-speed links within Alaska and for termination of traffic in the lower 48
states. The Company plans to continue enhancing its network to meet customer
demand for increased bandwidth and advanced services. See "Business -- Network
Facilities".
Local Telephone. ACS Group's primary properties consist of 168 switching
facilities serving 74 exchanges. The Company owns most of its administrative and
maintenance facilities, central office and remote switching platforms and
transport and distribution network facilities. ACS Group leases its corporate
headquarters located in Anchorage.
ACS Group's 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.
Cellular. ACS Group has 75 cell sites and four repeaters that cover all
major population centers and highway corridors throughout Alaska. In most cases,
the Company leases the land on which these sites are located.
Substantially all of the Company's assets (including those of its
subsidiaries) are pledged as collateral for its senior obligations. See Note 7
"Long-term Obligations" to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements for further discussion.
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<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows. Some of these regulatory proceedings are described
under "Business -- Regulation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
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<PAGE> 26
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the executive officers and directors of ACS Group as
of the date hereof:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles E. Robinson 66 Chairman and Chief Executive Officer
Wesley E. Carson 49 President and Chief Operating Officer
Donn T. Wonnell 53 Executive Vice President, General Counsel and Secretary
Michael E. Holmstrom 57 Senior Vice President and Chief Financial Officer
John R. Ayers 57 Senior Vice President of Marketing and Sales
F. Scott Davis 64 Senior Vice President of Non-Regulated Operations
Kevin P. Hemenway 39 Vice President and Treasurer
Carl H. Marrs 50 Director
Byron I. Mallott 57 Director
W. Dexter Paine, III 39 Director
Saul A. Fox 46 Director
Wray T. Thorn 28 Director
</TABLE>
CHARLES E. ROBINSON, ACS Group's Chairman and Chief Executive Officer
since May 1999, has over four decades of experience in the telecommunications
industry. Mr. Robinson was instrumental in creating Alaska's long distance
communications systems, including the White Alice Communications System,
beginning in the late 1950's. Between 1979 and 1982, Mr. Robinson served as
President of Alascom, the state's primary long distance carrier at the time.
Under his guidance, Alascom developed the first statewide long distance service
network in Alaska, connecting with more than 27 independent local companies. Mr.
Robinson served as President and Chief Operating Officer of Pacific Telecom from
1981 until its sale to CenturyTel in 1997 and was appointed Chairman and Chief
Executive Officer in 1989. Mr. Robinson remained as President and Chief
Executive officer at Pacific Telecom until February 1999. 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 has also
served on the Board of Directors of the United States Telecommunications
Association from 1993 to 1995, and from 1999 to the present.
WESLEY E. CARSON, ACS Group's President and Chief Operating Officer, has
been with the Company since its inception. On October 7, 1999, Mr. Carson
(previously an Executive Vice President) was appointed President and Chief
Operating Officer. Mr. Robinson had previously held the title of President. Mr.
Carson has over 20 years of telecommunications experience. He began his career
in telecommunications in 1980 with TRT Telecommunications Corporation, an
international data and voice carrier located in Washington, D.C. that was
acquired by Pacific Telecom in 1988. From 1989 to 1998, Mr. Carson served as the
Vice President of Human Resources for Pacific Telecom. In 1998, Mr. Carson
became the Director of Human Resources for Pacificcorp and was responsible for
administrative services, the planning, development, implementation and
administration of human resources policies and procedures and employee
relations. From July 1998 to May 1999, Mr. Carson served as the Executive Vice
President of LEC Consulting. Mr. Carson has been involved with labor issues for
nearly 20 years and an active participant in Alaska labor relations since 1989.
Mr. Carson holds a B.A. in International Relations from Brigham Young
University, a Master of Public Administration degree from the University of
Illinois-Springfield and a J.D. from Georgetown University.
DONN T. WONNELL 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 24 years. Mr. Wonnell
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<PAGE> 27
served as Vice President for legal, regulatory and legislative affairs of
Pacific Telecom until the merger of Pacific Telecom into CenturyTel at the end
of 1997. Prior to joining Pacific Telecom, Mr. Wonnell served as President of
the Telecommunications and Energy Division of California Pacific Utilities in
San Francisco, and, earlier, as Vice President and General Counsel of RCA Alaska
Communications in Anchorage. Mr. Wonnell holds a B.A. from the College of
William & Mary and a J.D. from the University of Pennsylvania School of Law. Mr.
Wonnell has been admitted to practice before the bars of Alaska, California,
Pennsylvania and the District of Columbia.
MICHAEL E. HOLMSTROM, ACS Group's Senior Vice President and Chief
Financial Officer since February 1999, is responsible for the Company's
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.
JOHN R. 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 1983 through March 1996, 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.
F. SCOTT DAVIS was appointed as Senior Vice President of Non-Regulated
Operations on February 9, 2000. He is responsible for the Company's nonregulated
communications enterprises, including cellular, long-distance, Internet and
wireless cable television operations. Prior to his appointment, he served as
President and Chief Operating Officer of MACtel since August of 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 Vise
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.
KEVIN P. HEMENWAY joined ACS Group as Vice President and Treasurer in
July 1999 with 10 years of prior experience in the telecommunications industry.
Before joining the Company, 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 financial, accounting, management and rate making consulting services
for the telecommunications industry, principally for Atlantic Tele-Network, Inc.
and its subsidiaries. From 1986 through 1989, Mr. Hemenway was employed by
Deloitte & Touche LLP as a CPA and manager, performing both audit and consulting
services and from 1983 to 1986, was employed by Grant Thornton as a CPA 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.
CARL H. MARRS, a director since July 1999, is President and Chief
Executive Officer of Cook Inlet Region, Inc. ("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
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<PAGE> 28
attended the Stanford University School of Business for Executives in 1983 and
the Amos Tuck School of Business at Dartmouth College in 1986.
BYRON I. MALLOTT, a director since January 2000, is the President and
Chief Executive Officer of the First Alaskans Foundation. From 1995 until
January 2000, Mr. Mallott served as the Executive Director of the Alaska
Permanent Fund Corporation. Prior to joining the Alaska Permanent Fund
Corporation, Mr. Mallott served in various capacities, including Director,
Chairman and President and Chief Executive Officer of Sealaska Corporation over
a period of nearly 20 years. Mr. Mallott has also served in various political
appointments and elected positions.
W. DEXTER PAINE, III, a director since July 1998, was a Co-founder and
has been President 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. Prior to joining Kohlberg & Company, Mr. Paine served as a general
partner at Robertson Stephens & Company. Mr. Paine has a B.A. in economics from
Williams College.
SAUL A. FOX, a director since May 1999, was a Co-founder and has been
Chief Executive Officer of Fox Paine & Company since its inception in 1997. From
1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis &
Roberts & Co. Prior to joining KKR, Mr. Fox was an attorney at Latham & Watkins,
a law firm headquartered in Los Angeles, California. Mr. Fox has a B.S. in
communications and computer science from Temple University and a J.D. from the
University of Pennsylvania Law School.
WRAY T. THORN, a director since January 2000, has also been a director
with Fox Paine & Company since January 2000. From 1996 until joining Fox Paine &
Company, Mr. Thorn was a principal and founding member of Dubilier & Company.
Prior to joining Dubilier & Company, Mr. Thorn was an associate in the
Acquisition Finance Group of Chase Securities, Inc. Mr. Thorn is a graduate of
Harvard University.
SANJAY SWANI, a director during 1999, left the board in June 1999 for
personal reasons unrelated to ACS Group.
J. RUSSELL TRIEDMAN, a director since June 1999, left the board in
October 1999 for personal reasons unrelated to ACS Group.
JASON B. HURWITZ, a director since October 1999, left the board in
January 2000 for personal reasons unrelated to ACS Group.
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<PAGE> 29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ACS Group's Common Stock, $.01 par value, was first listed on the NASDAQ
National Market on November 18, 1999 under the symbol "ALSK". Prior to November
18, 1999, there was no public market for ACS Group's Common Stock. The following
table sets forth quarterly market price ranges for ACS Group's Common Stock in
1999 for the period during which it was publicly traded:
<TABLE>
<CAPTION>
1999 QUARTERS HIGH LOW
------------- ------ ----
<S> <C> <C> <C>
4th (from November 18 through December 31) $16 $12
</TABLE>
The approximate number of holders of record of Common Stock as of March
13, 2000 was 46.
STOCK OFFERINGS
During 1999 the Company issued 21,829,273 shares of stock under Rule 144
under the Securities Act of 1933. On May 14, 1999, the Company sold 20,082,871
shares of common stock to Fox Paine Capital, its affiliates and members of
management for proceeds of $121.2 million, which was used together with proceeds
of debt issued to acquire ATU and CenturyTel's Alaska properties. On May 14, the
Company also issued detachable warrants which were convertible into 828,261
shares of common stock at an exercise price of $.01 per share to a lender in
connection with the issuance of $25.0 million in senior discount debentures
which was also used to fund the acquisitions. The warrants were converted into
827,670 shares of stock on November 18, 1999 in connection with the Company's
initial public offering. Subsequent to the acquisitions and prior to its initial
public offering, the Company also issued 1,746,402 shares of common stock to
certain members of management and Cook Inlet for proceeds of $10.4 million which
was used to fund ACS Group's capital expenditures.
During 1999 ACS Group offered to the public 10,000,000 shares of its
common stock. The effective date of the Company's registration statement (File
#333-88753) filed on Form S-1 under the Securities Act of 1933, as amended,
relating to ACS Group's initial public offering of common stock was November 17,
1999. Goldman, Sachs & Co., Donaldson, Lufkin and Jenrette, CIBC World Markets,
Deutsche Banc Alex. Brown, and Hambrecht & Quist led the underwriting syndicate.
The offering commenced on November 18, 1999 and closed on November 23, 1999,
resulting in aggregate proceeds of $140.0 million. ACS Group's net proceeds from
the offering were $127.9 million. Approximately $9.1 million of offering
expenses was attributable to underwriting discounts. As of March 13, 2000, $10.6
million of the proceeds was used to retire 35% of the Company's senior discount
debentures, including a $1.3 million premium for early retirement, $25.0 million
was used to repay outstanding obligations under the Company's senior revolving
credit facility and $3.7 million was used to fund capital expenditures and
operations. Unused proceeds of the offering are invested in institutional money
market funds and investment grade corporate and U.S. Government securities. The
Company has not made any specific expenditure plans with respect to the
remaining proceeds of this offering. While the Company cannot specify with
certainty the particular uses for such proceeds, ACS Group currently intends to
use the remaining proceeds over time to fund capital expenditures, strategic
investments and acquisitions, including acquisitions of access lines, and for
general corporate purposes.
On December 3, 1999 the Company registered 6,021,489 shares under
various employee and non-employee stock option plans and an employee stock
purchase plan (File #333-92091) on Form S-8 under the Securities Act of 1933.
As of March 13, 2000, 3,982,969 option grants are outstanding under these plans
and 97,528 options have been exercised and converted into shares of the
Company's common stock. See Note 10, "Stock Incentive Plans" to the Alaska
Communications Systems Group, Inc. Consolidated Financial Statements for further
discussion.
DIVIDENDS
ACS Group has never declared or paid any cash dividends on its common
stock. The Company intends to retain its earnings, if any, to finance the
development and expansion of its business, and, therefore, it does not
anticipate paying any cash dividends in the foreseeable future. Moreover, the
Company's ability to declare and pay cash dividends on its common stock is
restricted by covenants in its senior credit facility and in the indentures
governing its senior discount debentures and senior subordinated notes.
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<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of ACS Group. Consider the following points in connection with
the table:
- The selected historical consolidated operating data for the year ended
December 31, 1999 include the operating results of CenturyTel's Alaska
properties and ATU from their acquisition on May 14, 1999 through
December 31, 1999.
- "EBITDA" is net income before interest expense, income taxes,
depreciation and amortization and extraordinary items. EBITDA is not
intended to represent cash flow from operations as defined under
generally accepted accounting principles and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or cash flows. EBITDA is presented because management
believes it is a useful financial performance measure for comparing
companies in the telecommunications industry in terms of operating
performance and ability to satisfy debt service, capital expenditures
and working capital requirements.
- "EBITDA margin" is EBITDA divided by total operating revenues.
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 audited consolidated financial statements of
ACS Group and the related notes which are included elsewhere in this Form 10-K.
29
<PAGE> 31
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. AND SUBSIDIARIES
For the Year Ended December 31, 1999
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
<S> <C>
OPERATING DATA:
Operating revenues:
Local telephone:
Local network service $ 60,989
Network access service 67,174
Directory advertising 17,713
Deregulated and other revenue 13,275
---------
Total local telephone 159,151
Cellular 24,882
Interexchange network, data services and other 9,586
---------
Total operating revenues 193,619
Operating expenses:
Local telephone 106,266
Cellular 15,922
Interexchange network data services and other 14,838
Depreciation and amortization 40,306
---------
Total operating expenses 177,332
---------
Operating income 16,287
Other income and expense:
Interest expense (39,624)
Interest and other income 1,023
Equity in loss of minority investments (198)
---------
Total other income and expense (38,799)
---------
Loss before income tax benefit (22,512)
Income tax benefit 301
---------
Loss from continuing operations (22,211)
Extraordinary item - early extinguishment of debt (3,267)
---------
Net loss $ (25,478)
=========
Basic and diluted net loss per share $ (1.09)
=========
Basic and diluted weighted average shares
outstanding 23,396
=========
OTHER FINANCIAL DATA:
Cash provided by operating activities $ 44,033
Cash used by investing activities (774,653)
Cash provided by financing activities 832,614
EBITDA 56,593
EBITDA margin 29.2%
Capital expenditures (74,828)
OTHER DATA (END OF PERIOD)
Access lines in service 325,608
Cellular subscribers 73,068
Cellular penetration 15.9%
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 934,443
Long-term debt including current portion 612,756
Stockholders' equity 247,968
</TABLE>
30
<PAGE> 32
SELECTED HISTORICAL COMBINED FINANCIAL DATA--CENTURYTEL'S ALASKA PROPERTIES
The following table sets forth selected historical combined financial
data of CenturyTel's Alaska properties. Consider the following points in
connection with the table:
- The Company 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 CenturyTel's Alaska properties
which are included elsewhere in this Form 10-K.
- The Company derived the selected historical combined financial data
for the year ended December 31, 1995 and as of December 31, 1995 and
1996, from the unaudited combined financial statements of
CenturyTel's Alaska properties which are not included in this
Form 10-K.
- Century acquired its Alaska properties on December 1, 1997 as part of
its acquisition of Pacific Telecom. This acquisition was accounted
for as a purchase, resulting in a pushdown of $248 million of
goodwill to CenturyTel's Alaska properties.
- The financial statements for the 11-month period ended November 30,
1997 and prior periods have been presented on Pacific Telecom's basis
of accounting, while the financial statements as of December 31,
1997, the one-month period ended December 31, 1997 and subsequent
periods have been presented on CenturyTel's basis of accounting.
- The financial statements of CenturyTel's Alaska properties include
the results of the City of Fairbanks Telephone Operation from October
6, 1997, the date of its acquisition. This acquisition was accounted
for as a purchase.
- On December 31, 1997, the cellular operations in Fairbanks were sold
to ATU. The Fairbanks cellular property had 5,497 subscribers at the
time of the sale.
The selected historical combined financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements of CenturyTel's
Alaska properties and the related notes which are included elsewhere in this
Form 10-K.
31
<PAGE> 33
<TABLE>
<CAPTION>
CenturyTel's Alaska Properties
-----------------------------------------------------------
Century Telephone
Pacific Telecom Enterprises, Inc.
---------------------------------- -----------------------
Jan. 1, 1997 Dec. 1, 1997 Year
to Nov. 30, to Dec 31, Ended
1995 1996 1997 1997 1998
-------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues:
Local telephone $ 70,540 $ 75,950 $ 79,330 $ 10,255 $121,933
Cellular 4,531 4,823 5,120 181 2,576
-------- -------- -------- -------- --------
Total operating revenues 75,071 80,773 84,450 10,436 124,509
Operating expenses:
Local telephone 38,043 41,789 42,404 6,434 72,008
Cellular 3,147 3,381 3,082 147 2,128
Depreciation and amortization 14,316 15,348 15,823 2,466 30,459
-------- -------- -------- -------- --------
Total operating expenses 55,506 60,518 61,309 9,047 104,595
Operating income 19,565 20,255 23,141 1,389 19,914
Interest expense, net (2,331) (1,996) (2,169) (171) (1,405)
Other income (expense) (1,020) (33) (298) 53 356
-------- -------- -------- -------- --------
Income before income taxes 16,214 18,226 20,674 1,271 18,865
Income taxes 5,713 6,737 7,746 736 9,218
-------- -------- -------- -------- --------
Net income $ 10,501 $ 11,489 $ 12,928 $ 535 $ 9,647
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Cash provided by operating activities $ 29,917 $ 34,589 $ 21,213 $ 5,588 $ 38,291
Cash provided (used) by investing activities (19,587) (20,611) (13,554) (3,279) (26,664)
Cash provided by financing activities (10,578) (12,947) (8,209) (2,563) (6,770)
EBITDA 32,861 35,570 38,666 3,908 50,729
EBITDA margin 43.8% 44.0% 45.8% 37.4% 40.7%
Capital expenditures 19,437 20,465 14,575 1,825 26,799
OTHER DATA (END OF PERIOD):
Access lines in service 77,660 82,969 - 124,869 131,858
Cellular subscribers 3,950 5,573 - 2,096 2,945
Cellular penetration 2.7% 3.8% - 3.7% 5.2%
BALANCE SHEET DATA (END OF PERIOD):
Total assets $161,323 $162,834 - $459,175 $472,660
Long-term debt including current portion 43,616 44,294 - 42,950 43,408
Stockholders' equity 90,841 92,137 - 391,314 400,962
</TABLE>
32
<PAGE> 34
SELECTED HISTORICAL FINANCIAL DATA--ATU
The following table sets forth selected historical financial data of
ATU. Consider the following points in connection with the table:
- ACS Group derived the selected historical financial data for each of
the three years in the period ended December 31, 1998 and as of
December 31, 1997 and 1998 from the audited financial statements and
the related notes of ATU which are included elsewhere in this Form
10-K.
- ACS Group derived the selected historical financial data for the year
ended December 31, 1995 and as of December 1995 and 1996 from the
audited financial statements of ATU which are not included in this
Form 10-K.
- "Other income (expense)" includes the equity in earnings (losses)
from minority investments.
- During the periods presented, ATU was a public utility of the
Municipality of Anchorage and was exempt from federal and state
income taxes.
- Net cash data includes information from ATU financial statements
prepared in accordance with governmental accounting standards. The
differences between governmental accounting standards and the
standards promulgated by the Financial Accounting Standards Board,
and their impact on ATU's financial statements are discussed in Note
1 to the financial statements of Municipality of Anchorage Telephone
Utility Fund which are included elsewhere in this Form 10-K.
- On June 1, 1999, as part of the consolidation of its operating and
billing systems, ACS Group conformed the methodology by which the
number of access lines is calculated across all of its local
exchanges to that used for CenturyTel's Alaska properties. If the
number of ATU's access lines in service at December 31, 1998 was
computed under this same method, the number of access lines at ATU
would increase by 4,940 and the total number of access lines would
equal 305,334 and the combined growth percentage would be 6.6% for
1999. Due to limited data available to ACS Group, no adjustments to
the access lines in service for any year prior to 1998 have been
computed.
The selected historical financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of ATU and the related
notes which are included elsewhere in this Form 10-K.
33
<PAGE> 35
<TABLE>
<CAPTION>
ATU
------------------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues:
Local telephone $ 110,011 $ 113,415 $ 116,555 $ 121,057
Cellular 12,670 16,897 21,845 29,225
Long distance - 2 1,541 6,815
--------- --------- --------- ---------
Total operating revenues 122,681 130,314 139,941 157,097
Operating expenses:
Local telephone 73,024 75,980 74,994 74,240
Cellular 9,727 12,379 14,455 19,961
Long distance - 543 4,644 10,395
Depreciation and amortization 19,258 20,496 26,839 29,608
--------- --------- --------- ---------
Total operating expenses 102,009 109,398 120,932 134,204
Operating income 20,672 20,916 19,009 22,893
Interest expense, net (6,706) (6,840) (6,768) (6,427)
Other income (expense) (322) (219) (123) (2,896)
--------- --------- --------- ---------
Income before income taxes 13,644 13,857 12,118 13,570
Income taxes - - - -
--------- --------- --------- ---------
Net income $ 13,644 $ 13,857 $ 12,118 $ 13,570
========= ========= ========= =========
OTHER FINANCIAL DATA:
Cash provided by operating activities $ 43,412 $ 42,120 $ 46,641 $ 53,207
Cash provided (used) by investing activities 1,057 (787) (3,665) (5,659)
Cash provided (used) by financing activities (53,518) (30,095) (46,916) (33,580)
EBITDA 39,608 41,193 45,725 49,605
EBITDA margin 32.3% 31.6% 32.7% 31.6%
Capital expenditures 27,958 24,958 35,187 29,644
OTHER DATA (END OF PERIOD):
Access lines in service 147,934 154,752 158,486 168,536
Cellular subscribers 24,855 37,651 53,035 63,627
Cellular penetration 8.4% 12.6% 13.3% 15.8%
BALANCE SHEET DATA (END OF PERIOD):
Total assets $ 289,903 $ 308,810 323,124 $ 350,245
Long-term debt including current portion 123,009 146,412 151,945 172,521
Stockholders' equity 126,839 132,596 136,414 141,884
</TABLE>
34
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This discussion and analysis should be read in conjunction with the
financial statements and related notes, and the other financial information
included elsewhere in this Form 10-K.
ALASKA COMMUNICATIONS SYSTEMS GROUP
ACS Group was formed in 1998 by Fox Paine & Company, members of the
former senior management team of Pacific Telecom, and other experienced
telecommunications industry executives. In May 1999, the Company acquired
CenturyTel's Alaska properties and Anchorage Telephone Utility or ATU.
CenturyTel's Alaska properties were the incumbent provider of local telephone
services in Juneau, Fairbanks and more than 70 rural communities in Alaska and
provided Internet services to customers statewide. CenturyTel's Alaska
properties included PTIC, TUA and TUNI. ATU was the largest local exchange
carrier in Alaska and provided local telephone and long distance services
primarily in Anchorage and cellular services statewide. ATU provided long
distance services through ATU Long Distance, Inc. and cellular services through
MACtel, Inc. On October 29, 1999, the Company changed its name from ALEC
Holdings, Inc. to Alaska Communications Systems Group, Inc.
Prior to the consummation of the acquisitions of CenturyTel's Alaska
properties and ATU in May 1999, ACS Group had no operations. Accordingly, the
following discussion should be read in conjunction with the Company's
consolidated financial statements and the related notes, the combined financial
statements and the related notes of CenturyTel's Alaska properties and the
financial statements and the related notes of ATU included herein.
Today, ACS Group generates revenue through:
- the provision of local telephone services, including:
- basic local service to retail customers within ACS Group's
service areas,
- wholesale service to competitive local exchange carriers,
- network access services to interexchange carriers for origination
and termination of interstate and intrastate long distance phone
calls,
- enhanced services,
- ancillary services, such as billing and collection, and
- universal service payments;
- the provision of wireless services;
- the provision of interexchange network services, data services and
other services, and;
- the provision of wireless cable television services.
ACS Group also recognizes its proportionate share of the net income or
loss of its minority-owned investments.
Within the telecommunications industry, local exchange carriers have
historically enjoyed stable revenue and cash flow from local exchange operations
resulting from the need for basic telecommunications services, the
35
<PAGE> 37
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 toplace
unlimited calls within a defined local calling area. Access revenues are
generated by providing interexchange carriers access to the local exchange
carrier's local network and its customers. Universal service revenues are a
subsidy paid to rural local exchange carriers to support the high cost of
providing service in rural markets. Other service revenue is generated from
ancillary services, enhanced services and Internet access.
Changes in revenue are largely attributable to changes in the number of
access lines, local service rates and minutes of use. Other factors can also
impact revenue, including:
- intrastate and interstate revenue settlement methodologies,
- authorized rates of return for regulated services,
- whether an access line is used by a business or residential
subscriber,
- intrastate and interstate calling patterns,
- customers' selection of various local rate plan options,
- selection of enhanced calling services, such as voice mail, or
other packaged products, such as cellular and Internet and
- other subscriber usage characteristics.
Local exchange carriers have two basic tiers of customers:
- end users located in the local exchanges that pay for local
telephone service including, in ACS Group's case, retail, resale
and unbundled network elements end users and
- interexchange carriers that pay the local exchange carrier for
access to customers located within that local exchange carrier's
local service area.
Local exchange carriers provide access service to numerous interexchange
carriers and may also bill and collect long distance charges from interexchange
carrier customers on behalf of the interexchange carriers. The amount of access
charge revenue associated with a particular interexchange carrier varies
depending upon long distance calling patterns and the relative market share of
each long distance carrier.
ACS Group's local service rates for end users are authorized by the RCA.
Authorized rates are set by the FCC and the RCA for interstate and intrastate
access charges, respectively, and may change from time to time.
ATU has historically provided long distance service both through leased
facilities and as a reseller of other carriers' long distance services. ACS
Group recently purchased $19.5 million of long distance fiber capacity for
high-speed links within Alaska and for termination of traffic in the lower 48
states. The Company has migrated long distance traffic from leased circuits onto
its own network infrastructure. As a result, ACS Group expects that in future
periods operating expenses relating to leased circuits will be lower, but
depreciation relating to the purchased capacity will be higher.
36
<PAGE> 38
RESULTS OF OPERATIONS
ALASKA COMMUNICATIONS SYSTEMS GROUP - TWELVE MONTHS ENDED DECEMBER 31, 1999
COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998
The following unaudited table summarizes ACS Group's combined operations
for the years ended December 31, 1999 and December 31, 1998. For the year ended
December 31, 1999, the summary information represents the combined historical
results of CenturyTel's Alaska properties and ATU from January 1, 1999 through
acquisition on May 14, 1999 and ACS Group's consolidated operating results for
the period from May 15, 1999 to December 31, 1999. For the year ended December
31, 1998, the summary information represents the historical combined operating
results of CenturyTel's Alaska properties and ATU. Certain reclassifications
have been made to the 1998 combined financial statements of CenturyTel's Alaska
properties and ATU in order to conform with the current presentation of ACS
Group's financial data.
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
--------- ---------
(in thousands)
<S> <C> <C>
Operating revenues
Local telephone:
Local network service $ 93,079 $ 95,999
Network access revenue 98,578 105,366
Directory advertising 26,507 27,911
Deregulated revenue and other 19,644 19,698
--------- ---------
Total local telephone 237,808 248,974
Cellular 31,801 36,090
Interexchange network, data services and other 11,997 15,461
--------- ---------
Total operating revenues 281,606 300,525
Operating expenses
Local telephone 141,933 160,200
Cellular 22,089 24,315
Interexchange network, data services and other 14,710 22,170
Depreciation and amortization 60,067 61,114
--------- ---------
Total operating expenses 238,799 267,799
--------- ---------
Operating income 42,807 32,726
Other income and expense:
Interest expense (12,982) (44,150)
Interest and other income 5,555 3,496
Equity in earnings (loss) of minority investments (2,945) (1,569)
--------- ---------
Total other income and expense (10,372) (42,223)
--------- ---------
Income (loss) before income taxes 32,435 (9,497)
Income taxes 9,218 3,643
--------- ---------
Income (loss) from continuing operations 23,217 (13,140)
Extraordinary item - early extinguishment of debt - (3,267)
--------- ---------
Net income (loss) $ 23,217 $ (16,407)
========= =========
</TABLE>
37
<PAGE> 39
OPERATING REVENUES
Operating revenues increased $18.9 million, or 6.7% for the twelve
months ended December 31, 1999 compared to the twelve months ended December 31,
1998. Local telephone, cellular and interexchange network, data services and
other revenues all increased compared to the prior twelve-month period.
Local Telephone
Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, increased $11.2 million, or 4.7%, for the twelve months ended December
31, 1999 compared to the twelve months ended December 31, 1998.
The local service revenue component of local telephone revenues was
$96.0 million during 1999 compared with $93.1 million during 1998 -- an increase
of $2.9 million or 3.1% over the prior year. This increase corresponds with the
growth in average total access lines in service of 6.7%, partially offset by the
growth in lower margin wholesale and unbundled network element lines as a
component of access line growth in the Anchorage market. Although there can be
no assurances, management believes that retail line losses to competition will
be minimal in the future.
Network access revenues increased by $6.8 million, or 6.9%, from $98.6
million in 1998 to $105.4 million in 1999. Approximately $3.7 million of this
increase is due to the recording by ATU of $1.9 million of 1998 revenue true-ups
in 1999, prior to its acquisition by ACS Group. Management expects that access
revenues will grow at a lesser rate than access line growth for the foreseeable
future.
Directory advertising revenues increased by $1.4 million, or 5.3%, from
$26.5 million in 1998 to $27.9 million in 1999. This growth corresponds with the
growth in average access lines in service during 1999 over 1998 from 295,580
during 1998 to 315,471 during 1999, or an increase of 6.7%.
Deregulated and other revenues, consists principally of billing and
collection services, space and power rents, deregulated equipment sales,
paystation revenues and other miscellaneous telephone revenues.
Cellular
Cellular revenues increased $4.3 million, or 13.5%, to $36.1 million for
the twelve months ended December 31, 1999 compared to $31.8 million for the
twelve months ended December 31, 1998. This growth in revenue is due to growth
in average cellular subscribers in service to 69,820 during 1999 from 60,852
during 1998, or a growth rate of 14.7%.
Interexchange Network Data Services and Other
Interexchange network, data services and other revenues include
principally long distance, data and Internet services revenues. These revenues
increased from $12.0 million in 1998 to $15.5 million in 1999 -- an increase of
$3.5 million, or 28.9%. $3.6 million of this increase is due to an increase in
long distance revenues from $6.8 million to $10.4 million and long distance
minutes of use from 41.5 million minutes to 67.7 million minutes for 1998 and
1999, respectively.
OPERATING EXPENSES
Operating expenses increased $29.0 million, or 12.1%, from $238.8
million for the twelve months ended December 31, 1998 to $267.8 million for the
twelve months ended December 31, 1999. Operating expenses increased to 89.1% of
revenues for the twelve months ended December 31, 1999 from 84.8% of revenues
for the twelve months ended December 31, 1998. During 1999, the Company incurred
one-time and transaction related costs associated with the acquisitions of
CenturyTel's Alaska properties and ATU of $8.2 million. The Company
38
<PAGE> 40
also incurred $6.1 million of compensation expense in connection with options
granted below fair value at the date of grant, which vested fully upon the
completion of ACS Group's initial public offering. Adjusted for these
non-recurring items, operating expenses would have been $253.5 million for 1999
compared with $238.8 million for 1998, or 84.4% and 84.8% of revenues for 1999
and 1998, respectively.
Local Telephone
The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and
property and other operating tax expense. Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expenses increased from
$141.9 million for the year ended December 31, 1998 to $160.2 million for the
year ended December 31, 1999 - an increase of $18.3 million, or 12.9%. These
expense categories included the one-time and transaction related costs
associated with the acquisitions of $7.1 million and approximately $5.7 of the
compensation expenses as described in the preceding paragraph. Without these
non-recurring costs and compensation expense, local telephone expense would have
been approximately $147.4 million for 1999 compared to $141.9 million in 1998,
or an increase of $5.5 million or 3.9%. As adjusted, local telephone expense
represented 59.7% of local telephone revenue for 1998 and 59.2% for 1999.
Cellular
Cellular expenses increased $2.2 million, or 10.1%, for the twelve
months ended December 31, 1999 compared to the twelve months ended December 31,
1998. Cellular expenses included approximately $300,000 of compensation expense
as previously described. Adjusted for the compensation expense, cellular expense
was $24.0 million in 1999 compared to $22.1 million in 1998 - an increase of
$1.9 million or 8.7% from 1998 to 1999. Cellular expense was 69.5% of cellular
revenues for 1998 and, as adjusted for compensation expense, 66.5% of cellular
revenues for 1999. Management expects that cellular expenses as a percentage of
cellular revenue will continue to decline as cellular penetration and
subscribers increase over time.
Interexchange Network, Data Services and Other
Interexchange network, data services and other expenses increased by
$7.5 million, or 50.7%, and increased as a percentage of revenue from 122.6% in
1998 to 143.4% in 1999. The increase in interexchange network, data services and
other was the result of additional circuit and other costs associated with
developing the Company's statewide network and Internet infrastructure and
increases in minutes of use for long distance as discussed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.0 million, or 1.7%,
due principally to increases in plant in service for the twelve months ended
December 31, 1999 over the corresponding period of 1998.
INTEREST EXPENSE
Interest expense increased $31.2 million, or 240.1%, for the twelve
months ended December 31, 1999 as compared to the year ended December 31, 1998
due to $611.6 million of debt incurred in connection with the acquisitions of
CenturyTel's Alaska properties and ATU.
EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
During the fourth quarter of 1999, ACS Group retired 35% of its 13%
senior discount debentures with proceeds generated from the Company's initial
public offering, resulting in extraordinary expense of $3.3 million. See Note 9,
"Extraordinary Item," to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements for further discussion.
39
<PAGE> 41
INCOME TAXES
ACS Group has fully reserved the income tax benefit resulting from the
consolidated losses incurred since the date of the acquisitions of CenturyTel's
Alaska properties and ATU. Income taxes reflected in the combined financial
statements are substantially those of the predecessor entities. See Note 8,
"Income Taxes," to the Alaska Communications Systems Group, Inc. Consolidated
Financial Statements for further discussion.
NET INCOME
The decrease in net income is primarily a result of the factors
discussed above and, in particular, the decrease in operating margin of $10.1
million and the increase in interest expense of $31.2 million as a result of the
financing of the acquisitions.
40
<PAGE> 42
CENTURYTEL'S ALASKA PROPERTIES
Century acquired its Alaska properties on December 1, 1997 as part of
its acquisition of Pacific Telecom from PacifiCorp Holdings, Inc. On October 6,
1997, prior to their acquisition by Century, CenturyTel's Alaska properties
acquired the assets of the City of Fairbanks Telephone Operation. On December
31, 1997, CenturyTel'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 CenturyTel's Alaska properties.
The following table summarizes each component of CenturyTel's Alaska
properties' revenue sources for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Local telephone:
Local service $ 26,937 $ 37,255
Network access 50,298 64,321
Other 12,350 20,357
---------- ----------
Total local telephone 89,585 121,933
Cellular 5,301 2,576
---------- ----------
Total $ 94,886 $ 124,509
========== ==========
</TABLE>
CenturyTel'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
CenturyTel'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
CenturyTel'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.
CENTURYTEL'S ALASKA PROPERTIES--FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO
FISCAL YEAR ENDED DECEMBER 31, 1997
The financial statements of CenturyTel's Alaska properties reflect the
combined results of CenturyTel's Alaska properties, including TUA, which
operates in Juneau, TUNI, which operates in numerous rural communities, and the
Alaska RSA #3 cellular property for the years ended December 31, 1997 and 1998.
Additionally, the results of the City of Fairbanks Telephone Operation are
reflected from the date of acquisition, October 6, 1997. The Alaska RSA #1
B-side cellular property was divested on December 31, 1997 to comply with FCC
cross-ownership restrictions. The operating results of this property are
included in the financial statements for the year ended December 31, 1997 as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
------------
<S> <C>
Revenues $3,100
Operating expenses 1,643
Depreciation 424
------
Operating income $1,033
======
</TABLE>
41
<PAGE> 43
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 TUA and TUNI, $1.5
million was due to higher local service revenues at TUA and TUNI 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 TUA and TUNI 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
42
<PAGE> 44
purchase accounting, higher authorized depreciation rates effective January 1,
1998, as approved by the APUC, and a full year of ownership of the City of
Fairbanks Telephone Operation.
INTEREST EXPENSE, NET
Interest expense, net decreased 40.0% to $1.4 million for the year ended
December 31, 1998 as compared to $2.3 million for the year ended December 31,
1997. The decrease was due to an increase of $4.9 million in cash and cash
equivalents and an increase of $11.5 million in affiliated receivable balances
at December 31, 1998 as compared to December 31, 1997.
OTHER INCOME (EXPENSE)
Other income (expense) is related primarily to non-recurring and
non-operating income and expenses. For the year ended December 31, 1998, other
income (expense) was $356,000 as compared to $(245,000) for the year ended
December 31, 1997.
INCOME TAXES
Income taxes increased 8.7% to $9.2 million for the year ended December
31, 1998 as compared to $8.5 million for the year ended December 31, 1997. The
increase in income taxes was due to increased taxable income in 1998 as compared
to 1997.
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.
43
<PAGE> 45
ATU
The following table summarizes each component of ATU's revenue sources
for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Local Telephone:
Local service $ 52,007 $ 50,863
Network access 34,369 34,740
Other 30,179 35,454
-------- --------
Total local telephone 116,555 121,057
Cellular 21,845 29,225
Long distance 1,541 6,815
-------- --------
Total $139,941 $157,097
======== ========
</TABLE>
ATU's operating expenses are categorized as: cost of sales and operating
expenses--local telephone; cost of sales and operating expenses--cellular; cost
of sales and operating expenses--long distance; and depreciation and
amortization. Cost of sales and operating expenses--local telephone are those
operating expenses incurred by ATU in connection with its local telephone
business, including the operation of its central offices and outside plant
facilities and related operations, customer service, marketing and other general
and administrative expenses and corporate expenses. These expenses included
allocations from the Municipality of Anchorage totaling $3.2 million, $3.7
million and $3.2 million for the years ended December 31, 1996, 1997 and 1998,
respectively. Management considers these expenses to be comparable to those
which would have been incurred on a stand-alone basis and to those it 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
cellular facilities and transmission of cellular services, customer service,
marketing and other general and administrative expenses and corporate expenses.
Cost of sales and operating expenses--long distance includes operating expenses
incurred by ATU in connection with the provisioning of long distance services.
ATU--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
44
<PAGE> 46
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. The Company expects 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 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 compared to $1.5 million for the year ended December 31,
1997 principally due to customer growth. The number of customers increased to
25,670 customers at December 31, 1998 from approximately 10,600 customers at
December 31, 1997.
OPERATING EXPENSES
Local Telephone
Cost of sales and operating expenses--telephone decreased marginally to
$74.2 million for the year ended December 31, 1998 as compared to $75.0 million
for the year ended December 31, 1997. Product sales and advertising expenses
increased $2.4 million in 1998 due to increased advertising campaigns resulting
from heightened competition in the local telephone market in 1998. These
increased expenses were offset by $3.5 million of reduced expenses, primarily
due to lower labor expenses associated with reduced full-time local telephone
employee levels in 1998 as compared to 1997.
Cellular
Cost of sales and operating expenses--cellular increased 38.1% to $20.0
million for the year ended December 31, 1998 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
45
<PAGE> 47
Cost of sales and operating expenses--long distance increased 123.8% to
$10.4 million for the year ended December 31, 1998 as compared to $4.6 million
for the year ended December 31, 1997. Increased expenses were due to additional
dedicated facilities leases, access payments, advertising and administrative
expenses to support increasing long distance traffic volumes. Traffic volumes
increased due to increases in the total number of long distance customers. As a
result, ATU's long distance operations incurred losses of $3.7 million in 1998
and $3.2 million in 1997.
Depreciation and Amortization
Depreciation and amortization expense increased 10.3% to $29.6 million
for the year ended December 31, 1998 as compared to $26.8 million for the year
ended December 31, 1997. Increases in plant in service balances and goodwill
amortization accounted for the increase. Higher depreciation and amortization
expense of $1.5 million in the local telephone operations and $1.3 million in
the cellular and long distance operations was incurred in 1998.
INTEREST EXPENSE, NET
Interest expense, net decreased 5.0% to $6.4 million for the year ended
December 31, 1998 as compared to $6.8 million for the year ended December 31,
1997. Interest expense increased by $1.1 million as a result of additional
outstanding long-term obligations associated with a bond issuance in 1998.
Increases in interest income from higher cash balances served to offset higher
interest expense. Reversal of previously accrued interest expense for revenue
that had been reserved in prior periods but recognized in 1998 reduced interest
expense for the year ended December 31, 1998 by $0.4 million.
OTHER INCOME (EXPENSE)
Other income (expense) includes equity in earnings (loss) of minority
interests and nonoperating other income and expenses ancillary to telephone
operations. ATU recognized losses in its minority investments of $2.9 million
for the year ended December 31, 1998 compared to earnings of $0.2 million for
the year ended December 31, 1997. For the year ended December 31, 1998, ATU
incurred $1.1 million in proportional losses from its minority investments, and
wrote down $1.5 million and $0.4 million of its investments in ACTV and Internet
Alaska, Inc., respectively.
NET INCOME AND INCOME TAXES
As a result of the factors described above, net income increased $1.5
million to $13.6 million for the year ended December 31, 1998 as compared to
$12.1 million for the year ended December 31, 1997. Because ATU was a public
utility of the Municipality of Anchorage, it was exempt from U.S. federal and
state income taxes.
YEAR 2000
Since the year 2000 rollover, ACS Group has not experienced any year
2000 issues that have materially affected its business. During 1999, ACS Group
spent approximately $24 million to upgrade and maintain its information
technology systems and to make them year 2000 compliant. The Company also took
significant steps to ensure that its switching and transmission facilities were
year 2000 compliant.
It is possible that ACS Group's computerized systems, switching and
transmission facilities could be affected in the future by the year 2000 issue.
The Company has numerous switching and computer interfaces with third parties
that are possibly vulnerable to failure if those third parties have not
adequately addressed their year 2000 issues. System failures resulting from
these issues could cause significant disruption to ACS Group's operations.
46
<PAGE> 48
LIQUIDITY AND CAPITAL RESOURCES
ACS Group has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and debt
financing. The twelve months ended December 31, 1999 include operations from
acquired telecommunications enterprises for the period from May 15, 1999 to
December 31, 1999. For this period, the Company's cash flows from operating
activities were $44.0 million. At December 31, 1999, the Company had
approximately $96.6 million in working capital, including approximately $102.0
million in cash and cash equivalents. As of December 31, 1999, the Company had
$75.0 million of remaining capacity under its revolving credit facility,
representing 100% of available capacity.
ACS Group's initial debt borrowings and equity contributions were
sufficient to fund the acquisitions of CenturyTel's Alaska properties and ATU
and the purchase of fiber capacity. On May 14, 1999 the Company entered into a
$435.0 million credit agreement ("senior credit facility"), issued $150.0
million aggregate principal amount of senior subordinated notes in a private
placement, issued senior discount debentures and warrants for $25.0 million in
gross proceeds in a private placement and received an equity capital infusion in
the amount of $121.2 million. Substantially as a result of the financing for
these acquisitions, as of December 31, 1999 the Company had $612.8 million of
long-term debt. Interest on ACS Group's senior discount debentures and the
senior subordinated notes is payable semiannually. Interest on borrowings under
the senior credit facility is payable monthly, quarterly or semi-annually at the
Company's option, and the senior credit facility requires annual principal
payments commencing on May 14, 2002. See Note 2 "Acquisitions" and Note 7
"Long-term Obligations" to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements for further discussion.
On July 24, 1999 the Company entered into a hedging transaction which
fixed at 5.99% the underlying variable rate on one-half of the borrowings under
the senior credit facility, or $217.5 million, for a three-year period.
Subsequent to the acquisition of ATU and CenturyTel's Alaska
properties, ACS Group issued 12,574,072 shares of its common stock. This
additional issuance included the sale in a private placement of 1,624,907 shares
to Cook Inlet for $10.0 million in cash and the sale of 10 million shares in an
initial public offering of ACS Group's stock for net proceeds of $127.9 million
in cash. On November 18, 1999, ACS Group began trading on the NASDAQ National
Market under the symbol "ALSK."
A portion of the proceeds of the Company's initial public offering were
used to pay off 35% or $10.6 million of ACS Group's outstanding senior discount
debentures, including a $1.3 million premium for early retirement and $25.0
million of its outstanding obligations under the Company's senior
revolving credit facility.
The local telephone network requires the timely maintenance of plant and
infrastructure. ACS Group's local network is of high quality and is technically
advanced and will have relatively predictable annual capital needs. The
Company's historical capital expenditures have been significant. The
construction and geographic expansion of ACS Group's cellular network required a
substantial amount of capital. The implementation of the Company's interexchange
network and data services strategy is also capital intensive. The Company
recently purchased fiber capacity for $19.5 million, which was funded with
monies borrowed to finance the acquisitions of CenturyTel's Alaska properties
and ATU. The Company also has agreed to purchase additional fiber capacity for
$19.5 million in the second quarter of 2001. See "Business - Network
Facilities". Total capital expenditures were $74.8 million in 1999. ACS Group
anticipates total capital expenditures of approximately $92.0 million in 2000.
The Company intends to fund these capital expenditures through internally
generated cash flow, a portion of the net proceeds from the recent public
offering and if necessary, through additional borrowings under the revolving
credit facility.
ACS Group's capital requirements may change, however, due to, among
other things: the Company's decision to pursue specific acquisition
opportunities, changes in technology, the effects of competition or changes in
the Company's business strategy.
47
<PAGE> 49
ACS Group's ability to satisfy its capital requirements will be
dependent upon its future financial performance, which is, in turn, subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
On September 30, 1999, the Company acquired an additional one-third
interest in Alaskan Choice Television for $1.9 million, increasing its ownership
to a two-thirds majority interest. On October 6, 1999, the Company entered into
an agreement to acquire the remaining one-third interest and on February 14,
2000, the Company completed the acquisition of the remaining one-third interest
in ACTV for $3.0 million.
ACS Group believes that it will have sufficient working capital provided
by operations and borrowings under the existing revolving credit facility to
fund its operations and capital expenditures over the next 12 months.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures those
instruments at fair value. This statement, as amended, is effective beginning
for the Company's fiscal year ending December 31, 2001. Currently, the Company
believes that adoption of this statement will not have a material impact on its
consolidated statements of financial position and results of operations.
OUTLOOK
ACS Group expects the demand for telecommunications services in Alaska
to grow, particularly as a result of:
- continuing growth in demand for core telephone services and enhanced
service offerings,
- increased access line demand stemming from growth in population and
the demand for multiple lines,
- increases in demand for cellular services and
- growth in demand for DSL and Internet access services due to higher
business and consumer bandwidth needs for Internet and data
services.
The Company believes that it will be able to capitalize on this demand
through its diverse service offerings on its owned facilities and new sales and
marketing initiatives directed toward basic, enhanced and data services.
There are currently a number of regulatory proceedings underway at the
state and federal levels that could have a significant impact on the Company's
operations.
At the state level:
- the RCA recently terminated the rural exemptions of ACS Group's
rural local exchange carriers, triggering interconnection
obligations under the Telecommunications Act of 1996 from which the
Company had previously been exempt; and
- the RCA has indicated that it does not intend to determine rates and
terms for interconnection through tariff processes and has ordered
ACS Group's rural local exchange carriers to negotiate with
potential competitors for the purpose of establishing the terms and
conditions of interconnection in
48
<PAGE> 50
their service areas, subject to arbitration at the request of any
party at any time after December 10, 1999 if the parties are unable
to reach agreement.
- the RCA has recently ruled that it will consider changes to the
unbundled network element rate for the Anchorage service area.
At the federal level:
- in October 1998 the FCC initiated proceedings, but has not reached a
decision, regarding the appropriate rate of return to be applied for
federal rate-making purposes to companies like ACS Group which are
not subject to price cap regulation;
- in September 1999 the FCC revised its list of unbundled network
elements applicable to the Company's ongoing negotiations regarding
interconnection, excluding some elements but increasing the number of
sub-elements associated with the local loop.
This is not an exhaustive list of regulatory matters that could affect
the Company's business, and it cannot predict the impact of these or future
regulatory developments on any of its businesses. See "Business - Regulation"
for further discussion.
The telecommunications industry is extremely competitive, and ACS Group
expects competition to intensify in the future. As the incumbent local exchange
carrier, the Company faces competition mainly from resellers, local providers
who lease unbundled network elements from ACS Group and, to a lesser degree,
from facilities-based providers of local telephone services. In addition, as a
result of the RCA's recent affirmation of the APUC's termination of the
Company's rural exemptions, ACS Group may be required to provide interconnection
elements and/or wholesale discounted services to competitors in all or some of
its rural service areas. Moreover, while cellular telephone services have
historically complemented traditional local exchange carrier services, the
Company anticipates that existing and emerging wireless technologies may
increasingly compete with local exchange carrier services. In cellular services,
ACS Group currently competes with at least one other cellular provider in each
of its cellular service areas. In long distance, the Company currently has less
than 2.5% of total long distance revenues in Alaska and faces competition from
the two major long distance providers in Alaska. In the highly competitive
business for Internet access services, ACS Group currently competes with a
number of established online service companies, interexchange carriers and cable
companies.
The telecommunications industry is subject to continuous technological
change. ACS Group expects that new technological developments in the future will
generally serve to enhance its ability to provide service to its customers.
However, these developments may also increase competition or require the Company
to make significant capital investments to maintain its leadership position in
Alaska.
IMPACT OF INFLATION
The effect of inflation on ACS Group's financial results has not been
significant in the periods presented.
FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS
This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the United States.
Investors should also be aware that while ACS Group does, at various
times, communicate with securities analysts, it is against ACS Group's policy to
disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Group agrees
with any statement or report issued by an analyst irrespective of the content of
the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of ACS Group.
49
<PAGE> 51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To finance the Company's operations and the acquisitions of CenturyTel's
Alaska properties and ATU, the Company has issued senior discount debentures,
senior subordinated notes and has entered into a bank credit facility. These
on-balance sheet financial instruments, to the extent they provide for variable
rates of interest, expose the Company to interest rate risk, with the primary
interest rate risk exposure resulting from changes in LIBOR or the prime rate,
which are used to determine the interest rates that are applicable to borrowings
under the Company's bank credit facilities. The Company uses off-balance sheet
derivative financial instruments, in particular an interest rate swap agreement,
to partially hedge variable interest transactions. The Company's derivative
financial instrument transaction has been entered into for non-trading purposes.
The terms and characteristics of the derivative financial instruments are
matched with the underlying on-balance sheet instrument or anticipated
transactions and do not constitute speculative or leveraged positions
independent of these exposures.
The information below summarizes the Company's sensitivity to market
risk associated with fluctuations in interest rates as of December 31, 1999. To
the extent that the Company's financial instruments expose the Company to
interest rate risk, they are presented within each market risk category in the
table below. The table presents principal cash flows and related interest rates
by year of maturity for the Company's senior discount debentures, bank credit
facilities, senior subordinated notes and capital leases and other long-term
obligations in effect at December 31, 1999. The cash flows related to the
variable portion of interest rate swaps are determined by dealers using
valuation models that estimate the future level of interest rates, with
consideration of the applicable yield curve as of December 31, 1999. For
interest rate swap agreements, the table presents notional amounts and the
related reference interest rates by year of maturity. Fair values included
herein have been determined based on (i) quoted market prices for senior
subordinated notes; (ii) the carrying value for the bank credit facility at
December 31, 1999 as interest rates are reset periodically; and (iii) estimates
obtained from dealers to settle interest rate swaps and interest rate protection
agreements. Alaska Communications Systems Group, Inc.'s Consolidated Financial
Statements contain descriptions of the senior discount debentures, senior
subordinated notes, credit facility, capital leases and other long-term
obligations and the interest rate swap agreement and should be read in
conjunction with the table below.
51
<PAGE> 52
<TABLE>
<CAPTION>
THERE-
1999 2000 2001 2002 2003 2004 AFTER
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity:
Senior Discount Debentures:
Interest Amount $ 1,798 $ 2,439 $ 2,264 $ 2,264 $ 2,264 $ 2,264 $ 14,433
Average interest rate (fixed) 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00%
Credit Facility - Tranche A:
Interest Amount $ 7,874 $ 13,630 $ 13,592 $ 13,506 $ 13,371 $ 13,271 $ 24,399
Average interest rate (variable) 8.19% 8.94% 8.94% 8.94% 8.94% 8.94% 8.94%
Credit Facility - Tranche B:
Interest Amount $ 8,114 $ 14,011 $ 13,973 $ 13,884 $ 13,745 $ 13,642 $ 38,285
Average interest rate (variable) 8.44% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19%
Credit Facility - Tranche C:
Interest Amount $ 7,519 $ 12,953 $ 12,918 $ 12,836 $ 12,707 $ 12,612 $ 41,448
Average interest rate (variable) 8.69% 9.44% 9.44% 9.44% 9.44% 9.44% 9.44%
Senior Subordinated Notes:
Interest Amount $ 8,894 $ 14,090 $ 14,051 $ 14,051 $ 14,051 $ 14,090 $ 61,437
Average interest rate (fixed) 9.38% 9.38% 9.38% 9.38% 9.38% 9.38% 9.38%
Capital leases and other
Interest Amount $ 750 $ 906 $ 524 $ 451 $ 408 $ 364 $ 1,302
Average interest rate (fixed) 8.39% 9.07% 9.06% 8.65% 8.67% 8.65% 9.39%
Credit Facility - $75 Million Revolver
Interest Amount $ 439 $ - $ - $ - $ - $ - $ -
Average interest rate (variable) 8.30% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Commitment fee $ 84.00 $ 380 $ 380 $ 380 $ 380 $ 380 $ 521
Average interest rate (fixed) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Variable to Fixed Interest Rate Swap
-- Credit Facility:
Interest received $ - $ 413 $ 413 $ 198 $ - $ - $ -
Interest paid $ 698 $ - $ - $ - $ - $ - $ -
Average receive rate - 0.19% 0.19% 0.19% - - -
Average pay rate 0.73% - - - - - -
<CAPTION>
TOTAL FAIR
PAID VALUE
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest Rate Sensitivity:
Senior Discount Debentures: $ 21,408
Interest Amount $ 27,726
Average interest rate (fixed) 13.00%
Credit Facility - Tranche A: $ 150,000
Interest Amount $ 99,643
Average interest rate (variable) 8.83%
Credit Facility - Tranche B: $ 150,000
Interest Amount $ 115,654
Average interest rate (variable) 9.08%
Credit Facility - Tranche C: $ 135,000
Interest Amount $ 112,993
Average interest rate (variable) 9.33%
Senior Subordinated Notes: $ 145,500
Interest Amount $ 140,664
Average interest rate (fixed) 9.38%
Capital leases and other $ 13,407
Interest Amount $ 4,705
Average interest rate (fixed) 8.84%
Credit Facility - $75 Million Revolver $ -
Interest Amount $ 439
Average interest rate (variable) 8.30%
Commitment fee $ 2,505
Average interest rate (fixed) 0.50%
Variable to Fixed Interest Rate Swap
-- Credit Facility: $ (923)
Interest received $ 1,024
Interest paid $ 698
Average receive rate 0.19%
Average pay rate 0.73%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Combined and consolidated financial statements of Alaska Communications
Systems Group, Inc. and Subsidiaries, Alaska Communications Systems Holdings,
Inc., CenturyTel's Alaska Properties, Telephone Fund of Fairbanks Municipal
Utilities Services, and Municipality of Anchorage Telephone Utility Fund are
submitted as a separate section of this Annual Report. See Index to Financial
Statements and Schedules which appears on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in ACS Group's
definitive proxy statement for its 2000 Annual Meeting of Stockholders (the
"Proxy Statement"), or by an amendment to this report to be filed on or before
April 10, and such information is incorporated herein by reference, except that
the information regarding ACS Group's executive officers and directors called
for by this item is included in Part I under the heading "Executive Officers and
Directors of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.
53
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Combined and consolidated financial statements of ACS Group and its
subsidiaries are submitted as a separate section of this Annual Report.
See Index to Combined and Consolidated Financial Statements and
Schedules which appears on page F-1 hereof.
2. Financial Statement Schedule
Financial statement schedules for ACS Group and its subsidiaries are
submitted as a separate section of this Annual Report. See Index to
Combined and Consolidated Financial Statements and Schedule which
appears on page F-1 hereof.
(b) Reports on Form 8-K
The following item was reported on a Form 8-K filed October 14, 1999:
Item 5 Other Events - Company press release announcing filing of a
registration statement related to a proposed initial public offering.
The following item was reported on a Form 8-K filed November 5, 1999:
Item 5 Other Events - The Company and its subsidiary, ACS Holdings,
entered into Amendment No. 1 to the Credit Agreement dated as of May 14,
1999, among ACS Group, ACS Holdings, the Lenders party thereto, The
Chase Manhattan Bank as Administrative Agent and Collateral Agent,
Canadian Imperial Bank of Commerce, as Syndication Agent, and Credit
Suisse First Boston, as Documentation Agent.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
2.1 Purchase Agreement, dated as of August 14, 1998, as amended, by
and among ALEC Acquisition Sub Corp., CenturyTel of the
Northwest, Inc. and CenturyTel Wireless, Inc.*
2.2 Asset Purchase Agreement, dated as of October 20, 1998, by and
between Alaska Communications Systems, Inc. and the Municipality
of Anchorage*
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen of Common Stock Certificate
4.2 Stockholders' Agreement, dated as of May 14, 1999, by and among
the Registrant and the Investors listed on the signature pages
thereto*
4.3 First Amendment to Stockholders' Agreement, dated as of July 6,
1999, by and among the Registrant and the Stockholders listed on
the signature pages thereto*
4.4 Second Amendment to Stockholders' Agreement, dated as of
November 16, 1999 by and among the Registrant and the
Stockholder's listed on the signature pages thereto
4.5 Indenture, dated as of May 14, 1999, by and between Alaska
Communications Systems Holdings, Inc., the Guarantors (as
defined therein) and IBJ Whitehall Bank & Trust Company*
4.6 Purchase Agreement, dated as of May 11, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Guarantors,
Chase Securities Inc., CIBC World Markets Corp. and Credit
Suisse First Boston Corporation*
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
<S> <C>
4.7 Indenture, dated as of May 14, 1999, by and between the
Registrant and The Bank of New York*
4.8 First Amendment, dated as of October 29, 1999, to Indenture
listed as Exhibit No. 4.7**
4.9 Form of Second Amendment dated as of November 17, 1999 to
Indenture listed as Exhibit No. 4.7
4.10 Purchase Agreement, dated as of May 11, 1999, by and among the
Registrant, DLJ Investment Partners, L.P., DLJ Investment
Funding, Inc. and DLJ ESC II, L.P.*
5.1 Opinion of Wachtell, Lipton, Rosen & Katz (including consent)
10.1 Exchange and Registration Rights Agreement, dated as of May 14,
1999, by and among Alaska Communications Systems Holdings, Inc.,
the Guarantors, Chase Securities Inc., CIBC World Markets Corp.
and Credit Suisse First Boston Corporation*
10.2 Exchange and Registration Rights Agreement, dated as of May 14,
1999, by and among the Registrant, DLJ Investment Partners,
L.P., DLJ Investment Funding, Inc. and DLJ ESC II L.P.*
10.3 Credit Agreement, dated as of May 14, 1999, by and among Alaska
Communications Systems Holdings, Inc., the Registrant, the
financial institutions Lenders party thereto, The Chase
Manhattan Bank, Credit Suisse First Boston and Canadian Imperial
Bank of Commerce*
10.4 Amendment No. 1, dated as of October 19, 1999 to Credit
Agreement listed as Exhibit No. 10.3**
10.5 Employment Agreement, dated as of March 12, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Registrant and
Charles E. Robinson*
10.6 Employment Agreement, dated as of March 12, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Registrant and
Wesley E. Carson*
10.7 ALEC Holdings, Inc. 1999 Stock Incentive Plan*
10.8 Alaska Communications Systems Group, Inc. 1999 Stock Incentive
Plan
10.9 Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Compensation Plan
10.10 Alaska Communications Systems Group, Inc. 1999 Employee Stock
Purchase Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Alaska Communications Systems Group,
Inc. as of December 31, 1999
23.1 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Alaska Communications Systems Holdings,
Inc. and subsidiaries as of December 31, 1998 and for the period
from June 16, 1998 (date of inception) through December 31, 1998
(included in Exhibit No. 23.1)
23.2 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
23.3 Consent of Deloitte & Touche LLP relating to the audited
combined financial statements of Telephone Fund of Fairbanks
Municipal Utilities Services as of October 6, 1997 and for the
year ended December 31, 1996 and the period ended October 6,
1997 (included in Exhibit No. 23.1)
23.4 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
23.5 Consent of Deloitte & Touche LLP relating to the audited
combined financial statements of CenturyTel Alaska Properties as
of December 31, 1997 and for the year ended December 31, 1996,
the eleven months ended November 30, 1997 and the one month
ended December 31, 1997 (included in Exhibit No. 23.1)
23.7 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit
No. 5.1)
24.1 Powers of Attorney (included on signature page)***
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-4 No. 333-82361
** Filed as an exhibit to the Registrant's Form 8-K filed on November 5,
1999
*** Previously filed on October 8, 1999
**** Previously filed on November 1, 1999
55
<PAGE> 56
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Independent Auditors' Report F-2
Consolidated Balance Sheet - December 31, 1999 F-3
Consolidated Statement of Operations - Year Ended December 31, 1999 F-4
Consolidated Statement of Stockholders' Equity - Year Ended December 31, 1999 F-5
Consolidated Statement of Cash Flows - Year Ended December 31, 1999 F-6
Notes to Consolidated Financial Statements - Year Ended December 31, 1999 F-7
Schedule II- Valuation and Qualifying Accounts F-23
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Independent Auditors' Report F-24
Consolidated Balance Sheets--December 31, 1998 F-25
Consolidated Statements of Cash Flows--Period from July 16, 1998 (Date of Inception)
through December 31, 1998 F-26
Notes to Consolidated Financial Statements--Period from July 16, 1998 (Date of
Inception) through December 31, 1998 F-27
CENTURYTEL ALASKA PROPERTIES
Independent Auditors' Reports F-29
Combined Balance Sheets--December 31, 1997 and December 31, 1998 F-31
Combined Statements of Income and Retained Earnings--Year Ended December 31, 1996,
Eleven Months Ended November 30, 1997, One Month Ended December 31, 1997 and
Year Ended December 31, 1998 F-32
Combined Statements of Cash Flows--Year Ended December 31, 1996, Eleven Months
Ended November 30, 1997, One Month Ended December 31, 1997 and Year Ended
December 31, 1998 F-33
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 F-34
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
Independent Auditors' Report F-47
Combined Balance Sheet--October 6, 1997 F-48
Combined Statements of Income and Fund Equity--Year Ended December 31, 1996
and Period Ended October 6, 1997 F-49
Combined Statements of Cash Flows--Year Ended December 31, 1996 and Period
Ended October 6, 1997 F-50
Notes to Combined Financial Statements--Year Ended December 31, 1996 and
Period Ended October 6, 1997 F-51
MUNICIPALITY OF ANCHORAGE TELEPHONE UTILITY FUND
Independent Auditors' Report F-54
Balance Sheets--December 31, 1997 and December 31, 1998 F-55
Statements of Revenues, Expenses, and Changes in Retained Earnings--
Years Ended December 31, 1996, 1997 and 1998 F-56
Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998 F-57
Notes to Financial Statements--Years Ended December 31, 1996, 1997 and 1998 F-58
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alaska Communications Systems Group, Inc.
Anchorage, Alaska
We have audited the consolidated balance sheet of Alaska Communications
Systems Group, Inc. and subsidiaries (the "Company") as of December 31, 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999. Our audit included the
financial statement schedule listed in Item 14(a)2 of Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 consolidated 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, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alaska
Communications Systems Group, Inc. and subsidiaries as of December 31, 1999, and
the results of their operations, and their cash flows for the year ended
December 31, 1999 in conformity with generally accepted accounting principles.
Also in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February 25, 2000
F-2
<PAGE> 58
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 101,994
Accounts receivable-trade, net of allowance of $5,203 49,323
Materials and supplies 5,923
Prepayments and other current assets 4,327
---------
Total current assets 161,567
Investments 1,673
Property, plant and equipment 902,131
Less: Accumulated depreciation 452,304
---------
Property, plant and equipment, net 449,827
Goodwill, net of accumulated amortization of $4,243 250,346
Other assets 71,030
---------
Total assets $ 934,443
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 4,845
Accounts payable-trade 30,688
Accounts payable-affiliates 610
Advance billings and customer deposits 7,521
Accrued and other current liabilities 21,280
---------
Total current liabilities 64,944
Long-term debt, net of current portion 607,911
Unamortized investment tax credits 394
Other deferred credits and long-term liabilities 13,226
Commitments and contingencies -
Stockholders' equity:
Preferred stock, no par, 5,000 authorized, no shares issued and outstanding -
Common stock, $.01 par value; 145,000 shares authorized,
32,657 shares issued and outstanding 327
Paid in capital in excess of par value 273,119
Accumulated deficit (25,478)
---------
Total stockholders' equity 247,968
---------
Total liabilities and stockholders' equity $ 934,443
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 59
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Operating revenues:
Local telephone:
Local network service $ 60,989
Network access revenue 67,174
Directory advertising 17,713
Deregulated and other revenue 13,275
---------
Total local telephone 159,151
Cellular 24,882
Interexchange network, data services and other 9,586
---------
Total operating revenues 193,619
Operating expenses:
Local telephone 106,266
Cellular 15,922
Interexchange network, data services and other 14,838
Depreciation and amortization 40,306
---------
Total operating expenses 177,332
---------
Operating income 16,287
Other income and expense:
Interest expense (39,624)
Interest income and other 1,023
Equity in earnings (loss) of investments (198)
---------
Total other income and expense (38,799)
---------
Loss before income taxes and extraordinary item (22,512)
Income tax benefit 301
---------
Loss from continuing operations (22,211)
Extraordinary item - early extinguishment of debt (3,267)
---------
Net loss $ (25,478)
=========
Net loss per share - basic and diluted:
Loss from continuing operations $ (0.95)
=========
Extraordinary item $ (0.14)
=========
Net loss $ (1.09)
=========
Weighted average shares outstanding 23,396
=========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 60
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PAID IN
CAPITAL IN
COMMON EXCESS OF ACCUMULATED STOCKHOLDERS'
STOCK PAR DEFICIT EQUITY
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ -- $ -- $ -- $ --
Issuance of 32,657 shares of
common stock, $.01 par 327 261,885 -- 262,212
Fair value of warrants issued
in conjunction with long term debt -- 5,089 -- 5,089
Stock based compensation -- 6,145 -- 6,145
Net loss -- -- (25,478) (25,478)
-------------- -------------- -------------- --------------
Balance, December 31, 1999 $ 327 $ 273,119 $ (25,478) $ 247,968
============== ============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 61
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (25,478)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 40,306
Amortization of debt issuance costs 3,199
Amortization of deferred compensation - stock options 6,145
Investment tax credits (301)
Other deferred credits 2,987
Capitalized interest (860)
Changes in components of working capital:
Accounts receivable and other current assets 3,154
Accounts payable and other current liabilities 15,544
Other (663)
---------
Net cash provided by operating activities 44,033
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and capital expenditures, net of capitalized interest (74,088)
Cost of acquisitions, net of cash received (697,732)
Other assets (2,833)
---------
Net cash used by investing activities (774,653)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 616,597
Payments on long-term debt (12,590)
Debt issuance costs (37,900)
Issuance of common stock and warrants 266,507
---------
Net cash provided by financing activities 832,614
Increase in cash 101,994
Cash and equivalents at beginning of the period --
---------
Cash and equivalents at the end of the period $ 101,994
=========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 31,840
Income taxes paid --
SUPPLEMENTAL NONCASH TRANSACTIONS:
Property acquired under capital leases $ 740
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 62
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Group, Inc. and Subsidiaries (the
"Company" or "ACS Group") (formerly ALEC Holdings, Inc.), a Delaware
corporation, is engaged principally in providing local telephone, wireless, and
inter-exchange network and data services to its customers in the State of Alaska
through its telecommunications subsidiaries. The Company was formed in October
of 1998 for the purpose of acquiring and operating telecommunications
properties.
The consolidated financial statements for the Company represent the
operating results of the following legal entities from the date of their
respective acquisition (see Note 2, Acquisitions):
- Alaska Communications Systems Group, Inc. (formerly ALEC Holdings,
Inc.)
- Alaska Communications Systems Holdings, Inc. (formerly ALEC
Acquisition Corporation, which was acquired at the closing of the
acquisitions on May 14, 1999)
- ALEC Acquisition Sub Corp., Inc., which acquired the stock of
Century Telephone Enterprises, Inc.'s Alaska companies ("CenturyTel
Alaska properties" ) at the closing of the acquisitions on May 14,
1999, comprised principally of the following entities:
- Telephone Utilities of Alaska, Inc. ("TUA")
- Telephone Utilities of the Northland, Inc. ("TUNI")
- PTI Communications of Alaska, Inc. ("PTIC")
- Alaska Communications Systems, Inc. which acquired the stock of ATU
Long Distance, ATU Communications, Inc. and MACtel Inc. on May 14,
1999 and purchased a majority interest in Alaskan Choice Television
("ACTV") on September 30, 1999.
A summary of significant accounting policies followed by the Company is
set forth below:
Basis Of Presentation
The accompanying consolidated financial statements are as of and for the
year ended December 31, 1999 and include the operations of the Company and
Alaska Communications Systems Holdings, Inc.,Century Telephone Enterprises,
Inc.'s Alaska companies, ATU Long Distance, ATU Communications and MACtel since
their acquisition on May 14, 1999, and ACTV since its acquisition on September
30, 1999. Prior to the completion of the acquisitions on May 14, 1999, the
Company's balance sheet was comprised of 100 shares of common stock and the
Company had no operations, therefore, no comparative data is presented for 1998
in this report.
The consolidated financial statements include all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.
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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
investments with a maturity at acquisition of three months or less to be cash
equivalents.
Materials and Supplies
Materials and supplies are carried in inventory at the lower of weighted
average cost or market.
F-7
<PAGE> 63
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
Investments in unconsolidated subsidiaries and other investees in which
the Company has 20% to 50% interest or otherwise exercises significant influence
are accounted for under the equity method.
Investments carried at equity consists of the following at December 31,
1999:
<TABLE>
<CAPTION>
Company: Carrying value Percent Owned
<S> <C> <C>
Alaska Network Services, Inc. $1,614 47.0%
Internet Alaska, Inc. 59 28.5%
------
$1,673
======
</TABLE>
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 as incurred. The Company provides for
depreciation of telephone plant on the straight-line method, using rates
approved by the regulatory authorities. The composite annualized rate of
depreciation for all classes of property, plant and equipment was 6.5% for
1999.
The company is the lessee of equipment and buildings under capital
leases expiring in various years through 2013. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation expense
for 1999.
Non-Telephone plant is stated at purchase cost and, when sold or
retired, a gain or loss is recognized. Depreciation of such property is provided
on the straight-line method over its estimated service live ranging from three
to 15 years.
Cellular, PCS, and UHF Licenses
Cellular, PCS, and UHF licenses are stated at purchased cost.
Amortization is computed on the straight-line method over an estimated useful
life of 40 years. These licenses are renewable at our option in perpetuity. The
amortization expense for 1999 is $347.
Goodwill
Goodwill represents the excess of cost of companies acquired over the
fair value of their net assets at dates of acquisition. Goodwill associated with
the purchase of telephone properties is amortized on the straight-line method
over 40 years. Goodwill associated with non-regulated properties is amortized
using the straight-line method over 15 years. The amortization expense for 1999
was $4,243.
Debt Issue Costs
Legal, accounting and financing fees, printing costs, and other expenses
associated with the senior credit facility, senior subordinated notes, and
discount debentures are being amortized on the straight-line method over the
term of the debt, which approximates the effective interest method. Amortization
expense included in interest expense for 1999 was $2,899.
Credit Concentrations and Significant Customers
During 1999, no customer accounted for more than 10% of the consolidated
revenues of the Company.
F-8
<PAGE> 64
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Recurring local service revenues are billed one month in advance and are
deferred until earned. Nonrecurring revenues are billed in arrears and are
recognized when earned. Additionally, the Company establishes estimated reserves
against uncollectible revenues incurred during the period.
Access 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 Regulatory Commission of Alaska
("RCA") within the intrastate jurisdiction and the Federal Communications
Commission ("FCC") within the interstate jurisdiction. Much of the interstate
access service revenue is initially recorded based on estimates. These estimates
are derived from interim financial statements, available separations studies and
the most recent information available about achieved rates of return. These
estimates are subject to adjustment in future accounting periods as refined
operational information becomes available. To the extent that disputes arise
over revenue settlements, the company's policy is to defer revenue collected
until settlement methodologies are resolved and finalized.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes reflect the temporary
differences between the financial and tax bases of assets and liabilities using
the enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance to
the extent that it is unlikely they will be realized. One of the acquired
companies had a remaining unamortized regulatory investment tax credit of $695,
of which $301 was amortized against income in 1999, leaving a remaining balance
of $394 at December 31, 1999.
Regulatory Accounting and Regulation
The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by Statements of Financial Accounting Standards ("SFAS") No. 71,
Accounting for the Effects of Certain Types of Regulation. This accounting
recognizes the economic effects of rate regulation by recording cost and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is
depreciated over lives approved by regulators and certain costs and obligations
are deferred based upon approvals received from regulators to permit recovery of
such amounts in future years. Depreciable lives of plant and equipment
approximate their estimated economic lives. Unregulated revenues and costs
incurred by the local telephone exchange operations and non-regulated operations
of the Company are not accounted for under SFAS No. 71 principals. The effect of
adopting SFAS 101 , Regulated Enterprises - Accounting for the Discontinuation
of Application of FASB Statement No. 71, would not be material to the Company's
financial position, operations or cash flows.
The local telephone exchange activities of the Company are subject to
rate regulation by the FCC for interstate telecommunication service, and the RCA
for intrastate and local exchange telecommunication service. The Company, as
required by the FCC, accounts for such activity separately. Long distance
services of the Company are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the RCA for intrastate telecommunication services. Cellular operations are not
subject to rate regulation.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of property, plant and
equipment and intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business. The Company adjusts the net
book value of underlying assets to fair value if the sum of expected future cash
flows is less than book value. The Company will continue to evaluate long-lived
assets if events or changes in circumstances indicate the carrying amount of
such assets may not be fully recoverable on an undiscounted cash flow basis.
F-9
<PAGE> 65
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (Loss)
The Company's comprehensive loss is equal to its net loss.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock outstanding from May 14, 1999 through December 31, 1999 (basic
earnings per share) and dilutive common equivalent shares from stock options and
warrants, using the treasury stock method (dilutive earnings per share). The
weighted average number of shares outstanding is calculated from May 14, 1999
because the Company had no significant operations or outstanding shares prior to
that date. Due to the Company's reported net loss, common equivalent shares,
which consisted of 3,154 options granted to employees, were anti-dilutive for
the year ended December 31, 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. This statement, as
amended, is effective beginning for the Company's fiscal year ending December
31, 2001. Currently, the Company believes that adoption of this statement will
not have a material impact on its consolidated statements.
2. ACQUISITIONS
On May 14, 1999, the Company acquired Alaska Communications Systems
Holdings Inc. ("ACS Holdings"), who acquired Century Telephone Enterprise,
Inc.'s Alaska holdings, including TUA, TUNI, PTIC, Pacific Telecom of Alaska
PCS, Inc., and Pacific Telecom Cellular of Alaska, Inc., excluding the assets,
liabilities and equity of Alaska RSA#1 (collectively, "CenturyTel Alaska
properties"). On the same date, ACS Holdings also acquired from the Municipality
of Anchorage ATU Communications, Inc. and its subsidiaries, MACtel and ATU Long
Distance (collectively, "ATU"). These holdings include local area exchange
service, 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 CenturyTel Alaska properties from
the date of acquisition. In total, the Company paid Century Telephone Enterprise
$411,784 for the CenturyTel Alaska properties and the Municipality of Anchorage
$265,115 for the assets acquired. Acquisition expenses totaling $19,802 were
also allocated to the purchase price. The purchase price information presented
is subject to final settlement of working capital adjustments with Century
Telephone Enterprises, Inc., 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.
<TABLE>
<CAPTION>
CENTURYTEL
ALASKA
PROPERTIES ATU TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Current assets $ 18,665 $ 43,758 $ 62,423
Property, plant and equipment 158,435 248,648 407,083
Other assets 13,680 20,665 34,345
Less liabilities assumed (19,365) (40,781) (60,146)
---------- ---------- ----------
Net assets acquired 171,415 272,290 443,705
Goodwill 248,349 4,647 252,996
---------- ---------- ----------
Total cost of acquisition 419,764 276,937 696,701
Acquisition expenses (7,980) (11,822) (19,802)
---------- ---------- ----------
Total purchase price paid $ 411,784 $ 265,115 $ 676,899
========== ========== ==========
</TABLE>
F-10
<PAGE> 66
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. ACQUISITIONS (CONTINUED)
Net assets acquired were purchased for cash provided from the following sources:
<TABLE>
<S> <C>
Senior credit facility revolving loan $ 6,700
Senior credit facility term loans 435,000
9-3/8% senior subordinated notes due 2009 150,000
13% senior discount debentures due 2011 19,911
Issuance of common stock and warrants 126,289
--------
Total sources $737,900
========
</TABLE>
These sources also provided $12,601 of working capital and entailed
$48,400 of transaction fees and expenses.
The following are the unaudited pro forma results for the years ended
December 31, 1999 and 1998, giving effect to the acquisitions as if they had
occurred at the beginning of the periods.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 300,525 $ 281,606
Loss from continuing operations (26,749) (17,276)
Net loss (30,016) (17,276)
Loss from continuing operations per share $ (0.82) $ (0.53)
Net loss per share (basic and dilutive) $ (0.92) $ (0.53)
</TABLE>
On September 30, 1999, the Company acquired a majority interest in
Alaskan Choice Television, LLC ("ACTV"'). The cash purchase price was
approximately $1,900. On February 14, 2000, the Company purchased the remaining
one-third interest of ACTV for $3,042, including a contingent purchase price
component of $2,250 based on the achievement of certain subscriber goals in the
future. This acquisition is not included in the pro forma results above as it
would not have had a significant effect.
3. ACCOUNTS RECEIVABLE
Accounts receivable - trade at December 31, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
Accounts receivable:
<S> <C>
Customers $36,163
Connecting companies 14,261
Other 4,102
-------
54,526
Less allowance for doubtful accounts 5,203
-------
Accounts receivable - trade, net $49,323
=======
</TABLE>
F-11
<PAGE> 67
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. PROPERTY PLANT AND EQUIPMENT
Property, plant, and equipment at December 31, 1999 is comprised of the
following:
<TABLE>
<S> <C>
Property, plant and equipment:
Land, buildings and support assets $134,578
Central office switching and transmission 257,301
Outside plant cable and wire facilities 437,813
Cellular switching and transmission systems 29,678
Other 7,231
Construction work in progress 35,530
--------
902,131
Less accumulated depreciation and amortization 452,304
--------
Property, plant and equipment, net $449,827
========
</TABLE>
Land and buildings include $8,974 of property under capital leases, and
accumulated depreciation and amortization includes $325 of amortization for
these leases.
The Company leases various land, buildings, right-of-ways, and personal
property under operating lease agreements. Rental expenses under operating
leases for 1999 were $1,030. Future minimum payments under these leases for the
next five years and thereafter are as follows:
<TABLE>
<S> <C>
2000 $2,028
2001 1,679
2002 1,457
2003 1,387
2004 842
Thereafter 602
------
$7,995
======
</TABLE>
5. OTHER ASSETS
Other assets at December 31, 1999 was comprised of the following:
<TABLE>
<S> <C>
Debt issue costs, net of amortization of $3,193 $34,701
Cellular, PCS, and UHF licenses, net of amortization of $347 25,431
Prepaid pension asset 3,530
Deferred charges and other assets 7,368
-------
$71,030
=======
</TABLE>
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist at December 31, 1999 was
comprised of the following:
<TABLE>
<S> <C>
Accrued payroll, benefits and related liabilities $ 7,928
Accrued personal time off 4,506
Accrued interest 2,904
Other 5,942
-------
$21,280
=======
</TABLE>
F-12
<PAGE> 68
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
Senior credit facility term loan - tranche A $ 150,000
Senior credit facility term loan - tranche B 150,000
Senior credit facility term loan - tranche C 135,000
9 3/8% senior subordinated notes due 2009 150,000
13% senior discount debentures due 2011 17,598
Original issue discount - 13% senior discount debentures due 2011 (3,249)
Capital leases and other long-term obligations 13,407
-------------
612,756
Less current portion 4,845
-------------
Total long-term obligations $ 607,911
=============
</TABLE>
Senior Credit Facility
On May 14, 1999, the Company entered into a credit agreement with a
syndicate of commercial banks which provides the Company's senior credit
facility. The senior credit facility provides $435 million of term loans and a
revolving credit facility with a $75 million line of credit. The Company's
obligations under the senior credit facility are unconditionally and irrevocably
guaranteed, joint and severally, by the Company and its subsidiaries, and
secured by collateral that includes substantially all of the Company and its
subsidiaries' assets. The senior credit facility contains a number of
restrictive covenants and events of default, including covenants limiting
capital expenditure, incurrence of debt, and the payment of dividends, and
requires the Company to achieve certain financial ratios. As of December 31,
1999 the Company was in compliance with all of the covenants of the senior
credit facility except one relating to the manner in which licenses are held,
for which a waiver was obtained.
The tranche A term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2006. The loan bears interest at an annual rate
equal (at the Company's option) to: (1) an adjusted London inter-bank offered
rate ("LIBOR") plus 2.75% or (2) a rate equal to 1.75% plus the greater of the
administrative agent's prime rate, a certificate of deposit rate plus 1.00% or
the federal funds rate plus .50%, in each case subject to reduction based on the
Company's financial performance. The rate of interest in effect at December 31,
1999 is 8.94% and is based on the LIBOR rate option.
The tranche B term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2007. The loan bears interest at an annual rate
equal (at the Company's option) to: (1) LIBOR plus 3.00% or (2) a rate equal to
2.00% plus the greater of the administrative agent's prime rate, a certificate
of deposit rate plus 1.00% or the federal funds rate plus .50%. The rate of
interest in effect at December 31, 1999 is 9.19% and is based on the LIBOR rate
option.
The tranche C term loan of $135 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on May 14, 2008. The loan bears interest at an annual rate equal (at
the Company's option) to: (1) LIBOR plus 3.25% or (2) a rate equal to 2.25% plus
the greater of the administrative agent's prime rate, a certificate of deposit
rate plus 1.00% or the federal funds rate plus .50%. The rate of interest in
effect at December 31, 1999 is 9.44% and is based on the LIBOR rate option.
The senior credit facility also provides a revolving credit facility in
the amount of $75 million which is available, in part, for up to $25 million in
letters of credit and up to $10 million in the form of swingline loans. This
revolving facility is available for seven years and outstanding balances
thereunder will bear interest at an annual interest rate option equivalent to
that provided under tranche A.
F-13
<PAGE> 69
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LONG-TERM OBLIGATIONS (CONTINUED)
On July 24, 1999 the Company entered into a interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate long-term
debt. This agreement fixed at 5.99% the underlying variable rate on one-half the
borrowings under the senior credit facility, or $217.5 million, for a three-year
period. The differential to be paid or received is recorded as interest expense
in the consolidated statement of operations in the period in which it is
recognized. The Company is exposed to credit losses from counterparty
nonperformance, but does not anticipate any losses from its agreement.
Senior Subordinated Notes
On May 14, 1999, the Company issued $150 million in aggregate principal
amount of 9 3/8 % senior subordinated notes due 2009. Interest on the notes is
payable semi-annually on May 15 and November 15, commencing November 15, 1999.
The notes will mature on May 15, 2009, and are redeemable, in whole or in part,
at the option of the Company, at any time on or after May 15, 2004 at 104.688%
of the principal amount declining to 100% of the principal amount on or after
May 15, 2007. The notes contain a number of restrictive covenants, including
covenants limiting incurrence of debt and the payment of dividends. As of
December 31, 1999 the Company was in compliance with all the covenants of the
notes.
The Senior Discount Debentures
On May 14, 1999 the Company issued $46.9 million in aggregate principal
amount of senior discount debentures due 2011 and 828 warrants, for gross
proceeds of $25 million. As amended on October 29, 1999, interest accrues at
13.00% and is payable at the Company's option semiannually on May 15 and
November 15, commencing May 15, 2000 until May 15, 2004 when the company will be
required to semiannually pay interest. After the consummation of our offering of
common stock, in December 1999 we redeemed 35% ($9,321) of the aggregate
principal amount of the discount debentures original issues, at a price equal to
their accreted value plus a premium of one year's interest at the stated rate.
The debentures will mature on May 15, 2011, and are redeemable, in whole or in
part, at the option of the Company, at any time on or after May 15, 2004 at
106.5% of the principal amount declining to 100% of the principal amount on or
after May 15, 2009. The debentures contain a number of restrictive covenants,
including covenants limiting incurrence of debt and the payment of dividends. As
of December 31, 1999 the Company was in compliance with all the covenants of the
debentures.
The original issue discount resulted from the issuance of detachable
warrants in connection with the 13.00% senior discount debentures. These
detachable warrants were exercisable into 828 shares of common stock at any time
from May 14, 1999 through May 15, 2011 at $0.01 per share. The original issue
discount represents the difference between the exercise price and the fair value
of the underlying shares at the date of issue. On November 18, 1999, these
warrants were exercised resulting in 828 shares of stock being issued.
Capital leases and other long-term obligations
The Company has entered into various capital leases and other debt
agreements totaling $13,407 with a weighted average interest rate of 8.978 % at
December 31, 1999.
The aggregate maturities of long-term debt and capital lease obligations
for each of the five years and thereafter subsequent to December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Total
-----------
<S> <C>
2000 $ 4,845
2001 1,950
2002 4,759
2003 4,761
2004 4,786
Thereafter 591,655
-----------
$ 612,756
===========
</TABLE>
F-14
<PAGE> 70
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. INCOME TAXES
The Company's combined federal income and state effective income tax
rate from continuing operations was 1.3% in 1999. The Company had no operations
during 1998. The difference between taxes calculated as if the statutory federal
rate of 35% was applied to income from continuing operations before income tax
and the recorded tax expense is reconciled as follows:
<TABLE>
<S> <C>
Computed federal income tax benefit at the 35% statutory rate $(7,774)
Increase (reduction) in tax resulting from
Original issue discount interest 908
Other 85
Amortization for Investment Tax Credits (301)
Valuation allowance 6,781
-------
Total income tax benefit $ (301)
=======
</TABLE>
The benefit for income taxes is summarized as follows:
<TABLE>
<S> <C>
Current:
Federal income tax $ --
State income tax --
-----
Total Current --
-----
Deferred:
Federal income tax --
State income tax --
-----
Total Deferred --
Amortization of investment tax credits (301)
-----
Total income tax benefit $(301)
=====
</TABLE>
The effect of significant items comprising the Company's net deferred
tax liability were as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Non-current:
Property Plant and Equipment $ (4,011)
Other (80)
--------
Long-term deferred tax liabilities $ (4,507)
--------
Deferred tax assets:
Current:
Accrued Compensation $ 1,433
Accrued Bad Debts 997
Deferred Investment Tax Credit 162
Regulatory Liabilities 113
Net operating loss from operations 9,292
Extraordinary net operating loss 1,343
--------
Current deferred tax assets 14,090
--------
Valuation allowance (9,308)
--------
Net deferred tax asset $ 275
========
</TABLE>
The company generated a net operating loss carryforward of $27,693
during 1999, which will be lost if not utilized by the year 2018.
F-15
<PAGE> 71
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. EXTRAORDINARY ITEM
On December 3, 1999 the Company retired 35% ($9,321) of the senior
discount debentures due in 2011 with a portion of the proceeds from its initial
public offering of common stock in November. The Company paid a premium of 13%
of the retired principal in the amount of $1,219. Additionally, 35% of the debt
issue costs and original issue discount resulting from the warrants associated
the senior discount debentures were written off in the amounts of $294, and $
1,754, respectively. The transaction resulted in an extraordinary charge of
$3,267 ($.14 per share). The income tax benefit of $1,343 was offset by a
valuation allowance.
10. STOCK INCENTIVE PLANS
Under various plans, ACS Group, through the Compensation Committee of
the board of directors, may grant stock options, stock appreciation rights and
other awards to officers, employees and non-employee directors. At December 31,
1999, ACS Group has reserved a total of 6,060 shares of authorized common stock
for issuance under the various plans. In general, options under the plans vest
ratably over three, four or five years and the plans terminate in approximately
10 years.
ALEC Holdings, Inc. 1999 Stock Incentive Plan
The Company has reserved 3,410 shares under this plan, which was adopted
in connection with the completion of the acquisition of CenturyTel Alaska
properties and ATU. At December 31, 1999, 3,423 options have been granted under
the Plan at an exercise price of $6.1542 per share, generally vesting ratably
over five years or after nine years subject to acceleration upon the attainment
of certain performance goals. Of the options granted under the plan, 39 have
been exercised, and 230 have been forfeited upon termination of the grantee. The
plan allows forfeited options to be reissued.
During May, June and July of 1999, 2,919 of these options were granted
at an exercise price equivalent to the then fair value of the underlying stock
as evidenced by sales to third parties. Of the options granted in May, 654 are
variable plan performance vesting options granted to certain officers and
management of ACS Group (of which 125 subsequently were forfeited). These
performance vesting options became vested upon completion of the IPO in November
1999, and resulted in the recording of $4,148 of compensation expense.
Compensation expense recorded represents the difference between the initial
public offering price of $14.00 and the exercise price of $6.1542. During
September, October, and November 1999, 504 options were granted, all at exercise
prices below the fair value of the underlying stock at the time of issuance,
which was an average of $10.12 per share. These options vested upon completion
of the initial public offering ("IPO") in November of 1999, and resulted in the
recording of compensation expense of $1,997. Compensation expense recorded for
these options represents the difference between the fair value of the underlying
stock of $10.12 and the exercise price of $6.1542.
Information on outstanding options is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
<S> <C> <C>
Outstanding January 1, 1999 -- --
Granted 3,423 $ 6.15
Exercised (39) 6.15
Canceled or expired (230) 6.15
----------
Outstanding December 31, 1999 3,154 6.15
==========
</TABLE>
F-16
<PAGE> 72
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. STOCK INCENTIVE PLANS (CONTINUED)
The outstanding options at December 31, 1999 have the following
characteristics:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
--------------------------------------------------- ---------------------------------
Weighted Weighted
Average Average
Number of Remaining Exercise Number Exercise
Range of Exercise Prices Shares Life (Years) Price Exercisable Price
- ------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 6.15 3,154 8.48 $6.15 1,255 $6.15
=============== =============== =============== =============== ===============
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," in accounting for its plan.
Accordingly, no compensation cost has been recognized for options with exercise
prices equal to or greater than fair value on the date of grant. If compensation
costs for the Company's plan had been determined consistent with SFAS No. 123
"Accounting for Stock-Based Compensation", the Company's net loss and net loss
per share on a pro forma bases for 1999 would have been as follows:
<TABLE>
<S> <C>
Net loss:
As reported $(25,478)
Pro forma (as adjusted for SFAS No. 123) (26,144)
Net loss per share - basic and diluted:
As reported $ (1.09)
Pro forma (as adjusted for SFAS No. 123) (1.12)
</TABLE>
The fair value for these options was estimated at the date of grant,
using a Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1999: risk free interest rate of 5.5%, dividend yield
of 0%, expected volatility factor of 40.3%, and expected option life of 7 years.
The plan will terminate on May 14, 2009.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
This plan was adopted by the Company in November 1999 in connection with
its initial public offering. At December 31, 1999, 1,500 shares are available
for grant. No shares were awarded under this plan during 1999. The term of
options granted under the plan may not exceed 10 years. Unless otherwise
determined by the Compensation Committee, options will vest ratably on each of
the first four anniversaries after the grant date and will have an exercise
price equal to the fair market value of the common stock on the date of grant.
On February 9, 2000, the Board of Directors approved the grant of
options under the plan to purchase 887 shares to certain members of management
at an exercise price of $14.1354 per share, generally vesting over four years
ratably.
ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
The non-employee director stock compensation plan was adopted by the
Company in connection with its initial public offering. At December 31, 1999,
150 shares are available for grants under the plan. Directors are required to
receive not less than 25% of their annual retainer and meeting fees in the form
of the Company's stock, and may elect to receive up to 100% of directors
compensation in the form of stock. No shares had been granted under the plan as
of December 31, 1999. During January of 2000, eight shares under the plan were
awarded to a director.
F-17
<PAGE> 73
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. STOCK INCENTIVE PLANS (CONTINUED)
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
This plan was also adopted in connection with the Company's initial
public offering in November 1999. At December 31, 1999, 1,000 shares are
available for issuance and sale. The plan will terminate on December 31, 2009.
All ACS Group employees and all of the employees of designated subsidiaries
generally will be eligible to participate in the purchase plan, other than
employees whose customary employment is 20 hours or less per week or is for not
more than five months in a calendar year, or who are ineligible to participate
due to restrictions under the Internal Revenue Code.
A participant in the purchase plan may authorize regular salary
deductions of a maximum of 15% and a minimum of 1% of base compensation. The
fair market value of shares which may be purchased by any employee during any
calendar year may not exceed $25. The amounts so deducted and contributed will
be applied to the purchase of full shares of common stock under options to
purchase shares at 85% of the lesser of the fair market value of such shares on
the date of purchase or on the offering date for such offering period. The
offering dates will be January 1 and July 1 of each purchase plan year, and each
offering period will consist of one six-month purchase period. The first
offering period under the plan commenced on January 1, 2000. Shares will be
purchased on the open market or issued from authorized but unissued shares on
behalf of participating employees on the last business days of June and December
for each purchase plan year and each such participant will have the rights of a
stockholder with respect to such shares. Approximately 37% of eligible employees
elected to participate in the offering period commencing January 1, 2000.
11. RETIREMENT PLANS
Pension benefits for substantially all of ACS Group's employees are
provided through the Alaska Electrical Pension Plan. ACS Group pays a
contractual hourly amount based on employee classification or base compensation.
As a multi-employer defined benefit plan, the accumulated benefits and plan
assets are not determined or allocated separately to the individual employer.
ACS Group's portion of the plan's pension cost for 1999 was $6,099.
ACS Group also has a separate defined benefit plan that covers certain
employees previously employed by Century Telephone Enterprise, Inc. ("CenturyTel
Plan"). This plan was transferred to ACS Group in connection with the
acquisition of CenturyTel Alaska properties. Existing plan assets and
liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan
on September 1, 1999. Accrued benefits under the ACS Retirement Plan were
determined in accordance with the provisions of the CenturyTel Plan. Upon
completion of the transfer to ACS Group, covered employees ceased to accrue
benefits under the plan. ACS Group uses the traditional unit credit method for
the determination of pension cost for financial reporting and funding purposes
and complies with the funding requirements under the Employee Retirement Income
Security Act of 1974. Since the plan is adequately funded, no contribution was
made in 1999.
The following table represents the net periodic pension benefit for the
ACS Retirement Plan for 1999:
<TABLE>
<S> <C>
Service cost $ --
Interest cost 149
Expected return on plan assets (170)
Net amortization and deferral --
-----
Net periodic pension benefit $ (21)
=====
</TABLE>
F-18
<PAGE> 74
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. RETIREMENT PLANS (CONTINUED)
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets for the ACS Retirement Plan:
<TABLE>
<S> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ --
Acquisition 5,780
Service cost --
Interest cost 149
Effect of change in discount rate assumption (205)
Benefits paid --
-------
Benefit obligation at end of year $ 5,724
=======
</TABLE>
<TABLE>
<S> <C>
Change in plan assets
Fair value of plan assets at beginning of year $ --
Acquisition 9,289
Return on plan assets 275
Employer contributions --
Benefits paid --
------
Fair value of plan assets at end of year $9,564
======
</TABLE>
The following table represents the funded status of the ACS Retirement
Plan at December 31, 1999:
<TABLE>
<S> <C>
Projected benefit obligation $(5,724)
Plan assets at fair value 9,564
-------
Funded Status 3,840
-------
Unrecognized net prior obligation --
Unrecognized prior service cost --
Unrecognized net gain (310)
-------
Pension asset at end of year $ 3,530
=======
</TABLE>
The actuarial assumptions used to account for the plan as of December
31, 1999 are as follows:
<TABLE>
<S> <C>
Discount rate 7.90%
Expected return on assets 5.50%
Rate of compensation increase 0.00%
</TABLE>
The Company also provides a 401(k) retirement savings plan covering
substantially all of its employees. The plan allows for discretionary matching
contributions as determined by the Board of Directors, subject to Internal
Revenue Code limitations. There was no matching contribution for 1999.
F-19
<PAGE> 75
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. BUSINESS SEGMENTS
The Company has two reportable segments: local telephone, which provides
landline telecommunications services, and consists of local telephone service,
network access, directory advertising, deregulated and other revenues, and
cellular, which provides wireless telecommunications service. Each reportable
segment is a strategic business under separate management and offering different
services than those offered by the other segments. The Company also has
interexchange network, and data services segments which do not meet the criteria
for a reportable segment and are therefore included in "All Other" below. The
Company also incurs interest expense, interest income, equity in earnings of
minority investments and other non operating income and expense at the corporate
level which are not allocated to the business segments, nor are they evaluated
by the chief operating decision maker in analyzing the performance of the
business segments. These non operating income and expense items are provided in
the accompanying table under the caption "All Other" in order to assist the
users of these financial statements in reconciling the operating results and
total assets of the business segments to the consolidated financial statements.
Common use assets are held at either at the Company or ACS Holdings, Inc. and
are allocated below based on operating revenues. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.
The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 1999:
<TABLE>
<CAPTION>
LOCAL
TELEPHONE CELLULAR ALL OTHER TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $ 159,151 $ 24,882 $ 9,586 $ 193,619
Depreciation and amortization 33,100 2,159 5,047 40,306
Operating income (loss) 17,517 6,801 (8,031) 16,287
Interest expense (240) (10) (39,374) (39,624)
Interest income 682 88 851 1,621
Equity in earnings of minority investments -- -- (198) (198)
Income tax provision (benefit) 7,793 2,890 (10,984) (301)
Net income (loss) 9,663 4,056 (39,197) (25,478)
Extraordinary item -- -- (3,267) (3,267)
Total assets $ 780,167 $ 73,042 $ 81,234 $ 934,443
Capital expenditures $ 43,606 $ 10,962 $ 19,520 $ 74,088
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $3,177 for local telephone, $479 for the cellular, and $853 for all
other.
13. RELATED PARTY TRANSACTIONS
Fox Paine & Company, the majority stockholder, receives an annual
management fee in the amount of 1% of the Company's net income before interest
expense, interest income, income taxes, depreciation and amortization, and
equity in earnings (losses) of minority investments, calculated without regard
to the fee. The management fee expense for 1999 is $610 all of which was payable
at December 31, 1999.
In addition, Fox Paine & Company received aggregate advisory fees in
the amount of $14,200 upon consummation of the acquisitions of CenturyTel Alaska
properties and ATU and was reimbursed for pre-closing costs of $9,941.
In connection with stock grants, the company loaned officers of the
company $757 with an interest rate of the federal funds rate or 8%, whichever is
greater. The loans are secured by shares of the Company's common stock owned by
the individual officers. At December 31, 1999 the balances of the officer loans
were $794. These loans were repaid in their entirety on January 3, 2000.
F-20
<PAGE> 76
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and short-term investments, accounts receivable
and payable, and other short-term assets and liabilities approximate carrying
values due to their short-term nature. The fair values of the Company's term
loan facilities also approximate carrying values due to the variable interest
rate nature of the debt.
The fair value for the Company's senior subordinated notes is estimated
based on quoted market prices. The fair value of the Company's term loan
facilities approximates carrying values due to the variable interest rate nature
of the debt. The fair value of the Company's senior discount debentures is
estimated based on market interest rates currently available to the Company. The
Company employs an interest rate swap agreement to manage interest rate
exposure. Amounts payable or receivable under the agreement are recognized as
adjustments to interest expense in the periods in which they accrue. The fair
value of the Company's interest rate swap agreement represents the estimated
amount the Company would receive or pay to terminate the agreement, calculated
based on the present value of expected payments or receipts based on the current
market interest rate.
The following table summarizes the Company's carrying values and fair
values of the debt components of its financial instruments at December 31, 1999:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
--------- ---------
<S> <C> <C>
Senior credit facility term debt - tranche A $ 150,000 $ 150,000
Senior credit facility term debt - tranche B 150,000 150,000
Senior credit facility term debt - tranche C 135,000 135,000
9 3/8% senior subordinated notes 150,000 145,500
13% senior discount debentures due 2011 17,598 21,408
Original issue discount - 13% senior discount debentures due 2011 (3,249) (3,249)
Interest Rate Swap Agreement -- (923)
Capital leases and other long-term obligations 13,407 13,407
--------- ---------
$ 612,756 $ 611,143
========= =========
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company has a commitment to acquire additional fiber optic circuit
capacity in the first quarter of 2001 at a purchase price of $19,500.
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
F-21
<PAGE> 77
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarterly Financial Data
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenue $ -- $ 38,330 $ 75,747 $ 79,542
Operating income -- 2,374 10,602 3,311
Income (loss) from continuing operations -- (5,746) (4,914) (11,551)
Extraordinary item -- -- -- (3,267)
Net loss -- (5,746) (4,914) (14,818)
Loss per share - basic:
Net loss before extraordinary item -- (0.29) (0.23) (0.43)
Extraordinary item -- -- -- (0.12)
Net loss -- (0.29) (0.23) (0.55)
Loss per share - diluted
Net loss before extraordinary item -- (0.29) (0.23) (0.43)
Extraordinary item -- -- -- (0.12)
Net loss -- (0.29) (0.23) (0.55)
</TABLE>
The Company had no operations prior to the acquisitions of Alaska
Communications Systems Holdings, Inc., CenturyTel Alaska properties, and ATU on
May 14, 1999. Fourth quarter operating income included stock based compensation
expense of $6,145.
F-22
<PAGE> 78
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning costs and other End
Description of Period expenses accounts(1) Deductions(2) of Period
- ----------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1999 $ -- 1,130 4,798 725 5,203
=============== =============== =============== =============== ===============
</TABLE>
(1) Represents the allowance for doubtful accounts at the date of acquisition,
and reserves for accounts receivable collected on the behalf of others.
(2) Represents credit losses written off during the period, less collection of
amounts previously written off.
F-23
<PAGE> 79
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.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
March 24, 1999
F-24
<PAGE> 80
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $281,236
Receivable from employees and related party (Note 2) 41,771
--------
Total current assets 323,007
PROPERTY, PLANT, AND EQUIPMENT, Net (Notes 1 and 3) 36,536
DEFERRED ACQUISITION AND FINANCING COSTS (Note 1) 248,637
DEPOSITS 11,820
--------
$620,000
========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accrued Liabilities $ -
Advances payable to stockholder (Note 2) 620,000
--------
Total current liabilities 620,000
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5) -
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares;
outstanding, 1 share -
--------
$620,000
========
</TABLE>
See Notes To Consolidated Financial Statements.
F-25
<PAGE> 81
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from July 16,
1999 (Date of
Inception) Through
December 31, 1998
-----------------
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property, plant, and equipment $ (36,536)
Deferred acquisition costs (248,637)
Deposits (11,820)
Accounts receivable from employees and related party (41,771)
Accrued liabilities -
---------
Net cash used in investing activities (338,764)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from stockholder 620,000
---------
NET (DECREASE) INCREASE IN CASH 281,236
CASH, BEGINNING OF PERIOD -
---------
CASH, END OF PERIOD $ 281,236
=========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 82
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
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
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-27
<PAGE> 83
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
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>
<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-28
<PAGE> 84
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.
/s/ KPMG LLP
Shreveport, Louisiana
February 26, 1999
F-29
<PAGE> 85
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.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
March 25, 1999
F-30
<PAGE> 86
CENTURYTEL ALASKA PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 871 $ 5,728
Accounts receivable:
Customers, less allowance for doubtful accounts of $376, and $164 at
December 31, 1997 and 1998, respectively 5,071 8,446
Affiliates (Note 8) 20,404 31,922
Connecting companies 4,146 10,984
Receivable from sale of cellular license 5,022 -
Miscellaneous accounts receivable and other 2,760 1,213
Material and supplies (at cost) 2,653 2,072
Prepayments 1,513 610
--------- ---------
Total current assets 42,440 60,975
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT - Net (Note 4) 158,590 161,710
--------- ---------
OTHER ASSETS:
Excess cost of net assets acquired, less accumulated amortization of $5,056,
and $6,853 at December 31, 1997 and 1998, respectively (Note 1) 248,948 242,632
Investments, at cost 997 976
Other, net 8,200 6,367
--------- ---------
Total other assets 258,145 249,975
--------- ---------
TOTAL ASSETS $ 459,175 $ 472,660
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5) $ 1,316 $ 1,427
Accounts payable 3,275 5,322
Accrued expenses and other accrued liabilities:
Salaries and benefits 2,434 1,949
Taxes 1,123 1,008
Other 684 1,849
Advance billings and customer deposits (Note 1) 1,643 2,019
--------- ---------
Total current liabilities 10,475 13,574
--------- ---------
LONG TERM DEBT (Note 5) 41,634 41,981
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes (Note 6) 11,297 13,523
Deferred investment tax credits 1,421 909
Other 3,034 1,711
--------- ---------
Total deferred credits and other liabilities 15,752 16,143
--------- ---------
SHAREHOLDER'S EQUITY:
Common stock (103 and 104 shares authorized and 23 and 24 issued
and outstanding, respectively) 23 24
Paid-in capital 393,026 393,026
Retained earnings (1,735) 7,912
--------- ---------
Total shareholder's equity 391,314 400,962
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 459,175 $ 472,660
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE> 87
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<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>
OPERATING REVENUES:
Telephone 75,950 79,330 10,255 121,933
Cellular 4,823 5,120 181 2,576
--------- --------- --------- ---------
Total operating revenues 80,773 84,450 10,436 124,509
OPERATING EXPENSES:
Cost of sales and operating
expenses-telephone 41,789 42,404 6,434 72,008
Cost of sales and operating
expenses-cellular 3,381 3,082 147 2,128
Depreciation and amortization 15,348 15,823 2,466 30,459
--------- --------- --------- ---------
Total operating expenses 60,518 61,309 9,047 104,595
--------- --------- --------- ---------
OPERATING INCOME 20,255 23,141 1,389 19,914
OTHER INCOME (EXPENSE):
Interest expense (3,176) (3,027) (253) (3,588)
Interest income (Note 8) 1,180 858 82 2,183
Other income (expense) - Net (33) (298) 53 356
--------- --------- --------- ---------
Total other income (expense) (2,029) (2,467) (118) (1,049)
INCOME BEFORE INCOME TAX
EXPENSE 18,226 20,674 1,271 18,865
INCOME TAX EXPENSE (Note 6) 6,737 7,746 736 9,218
--------- --------- --------- ---------
NET INCOME 11,489 12,928 535 9,647
========= ========= ========= =========
RETAINED EARNINGS AT
BEGINNING OF PERIOD 63,216 61,079 - (1,735)
Less dividends to shareholder 13,626 7,080 2,270 -
--------- --------- --------- ---------
RETAINED EARNINGS AT END
OF PERIOD $ 61,079 $ 66,927 $ (1,735) $ 7,912
========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE> 88
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<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>
OPERATING ACTIVITIES:
Net income 11,489 12,928 535 9,647
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,348 15,823 2,466 30,459
Deferred income taxes and unamortized
investment tax credits, net 1,538 1,160 65 24
Change in current assets and liabilities:
Accounts receivable 14,476 (1,383) 3,873 (3,644)
Accounts payable (6,828) (2,986) (1,527) 1,479
Other current assets and liabilities, net (1,434) (4,329) 176 2,427
Other, net - - - (2,101)
--------- --------- --------- ---------
Net cash provided by operating activities 34,589 21,213 5,588 38,291
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Payments for property, plant, and equipment (20,465) (14,575) (1,825) (26,799)
Other, net (146) 1,021 (1,454) 135
--------- --------- --------- ---------
Net cash provided (used) by investing activities (20,611) (13,554) (3,279) (26,664)
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)
Change in affiliate balance - - - (5,448)
--------- --------- --------- ---------
Net cash used by financing activities (12,947) (8,209) (2,563) (6,770)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,031 (550) (254) 4,857
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 644 1,675 1,125 871
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,675 $ 1,125 $ 871 $ 5,728
========= ========= ========= =========
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
Interest paid 3,510 2,706 261 3,434
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE> 89
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
(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. Inter-company 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 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.
F-34
<PAGE> 90
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
(IN THOUSANDS)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-35
<PAGE> 91
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
(IN THOUSANDS)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-36
<PAGE> 92
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
(IN THOUSANDS)
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
Non-regulated 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>
The Company retired approximately $1,762 of telephone property, plant,
and equipment and a like amount of accumulated depreciation in 1998.
F-37
<PAGE> 93
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
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1998 is summarized below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
First mortgage notes:
5.0%-6.5%, due in installments to 2027 $ 29,226 $ 28,546
7.2%-9.4%, due in installments to 2020 10,820 10,588
10.1%-11.8%, due in installments to 2017 2,904 2,672
Unsecured note at 3%, due in installments to 2007 - 1,602
-------- --------
Subtotal 42,950 43,408
Less current maturities (1,316) (1,427)
-------- --------
Total long-term debt, excluding current maturities $ 41,634 $ 41,981
======== ========
</TABLE>
The approximate annual debt maturities for the five years
subsequent to December 31, 1998 are as follows: 1999, $1,427; 2000, $1,527;
2001, $1,637; 2002, $1,755; and 2003, $1,551.
At December 31, 1998, under the most restrictive covenant of the
Company's long-term debt agreement, all of the Company's retained earnings were
available for the payment of cash dividends.
Substantially all of the Company's telephone property, plant, and
equipment is pledged to secure the first mortgage notes.
F-38
<PAGE> 94
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
(IN THOUSANDS)
6. INCOME TAXES
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31, November 30, December 31, December 31,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Federal:
Current $ 4,733 $ 5,689 $ 575 $ 7,093
Deferred 265 109 (12) (177)
State:
Current 1,388 1,708 170 2,101
Deferred 351 240 3 201
------- ------- ------- -------
Income tax expense $ 6,737 $ 7,746 $ 736 $ 9,218
======= ======= ======= =======
</TABLE>
The following is a reconciliation from the statutory federal income tax rate to
the Company's effective income tax rate:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31, November 30, December 31, December 31,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Statutory federal income tax rate 35.00% 35.00% 35.00% 35.00%
Sate income taxes, net of federal income tax
benefit 6.00% 6.00% 8.44% 7.90%
Amortization of nondeductible excess cost of
net assets acquired - - 14.20% 10.10%
Amortization of excess deferred income taxes (1.67)% (1.32)% (2.18)% (1.60)%
Amortization of deferred investment tax credits (3.15)% (2.27)% (3.76)% (2.70)%
Other, net 0.78% 0.06% 6.20% 0.20%
----- ----- ----- -----
Effective income tax rate 36.96% 37.47% 57.90% 48.90%
===== ===== ===== =====
</TABLE>
F-39
<PAGE> 95
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
(IN THOUSANDS)
6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Regulatory liability $ 18 $ 388
Deferred investment tax credits 991 374
Other 829 567
-------- --------
Total gross deferred tax assets 1,838 1,329
Less: Valuation allowances - -
-------- --------
Net Deferred tax assets 1,838 1,329
-------- --------
Deferred tax liabilities:
Property, plant, and equipment, primarily due to
depreciation differences (13,088) (14,112)
Excess costs of net assets acquired (47) (740)
-------- --------
Total gross deferred tax liabilities (13,135) (14,852)
-------- --------
Net deferred tax liability $(11,297) $(13,523)
======== ========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company, except those who are members
of the International Brotherhood of Electrical Workers ("IBEW"), are covered by
a pension plan (the "Plan") which is sponsored by PTI before the Acquisition and
CNI subsequently which includes other affiliated companies. The Plan provides
benefits based upon employees' total years of service and the highest five years
compensation during their last 10 years of service. The Company's portion of
pension income was $57 during the year ended December 31, 1996, $219 during the
eleven months ended November 30, 1997, $23 during the one month ended December
31, 1997, and $384 for the year ended December 31, 1998. Because actuarial
information regarding the status of the Plan is computed for the Plan in total,
the Company does not separately determine its portion of the actuarial present
value of the accumulated plan benefits, projected benefit obligation, or net
assets available for benefits.
In accordance with the purchase agreement with Alaska Communications
Systems Holdings, Inc., formerly known as ALEC Acquisition Corporation ("ALEC")
(see Note 13), the Plan assets and obligations will be valued at the closing
date. Based on this valuation, assets equaling the actuarial present value of
the accrued benefits of the Company's employees, plus an additional $250, will
be transferred to a replacement plan.
F-40
<PAGE> 96
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
(IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company participates in a post retirement 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 post retirement benefits over
the active service period of its employees. PTI's policy was to fund annually an
amount of the post retirement 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 post retirement 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
post-retirement benefit cost was $846 during the year ended December 31, 1996,
$485 during the eleven months ended November 30, 1997, $41 during the one month
ended December 31, 1997, and $471 during the year ended December 31, 1998, as
follows:
<TABLE>
<S> <C>
Service cost $ 183
Interest cost 392
Amortization of transition obligation 116
Amortization of unrecognized prior service cost (4)
Expected return on assets (216)
-----
Net periodic postretirement benefit cost $ 471
=====
</TABLE>
At the time of adoption of SFAS 106, Employers' Accounting For
Postretirement Benefits Other Than Pensions, the Company elected to amortize the
transition obligation, at the date of implementation, over 20 years.
In accordance with the purchase agreement with ALEC (see Note 13), the
purchaser assumes the liability for post retirement benefits related to
employees that retire subsequent to the closing date.
F-41
<PAGE> 97
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
(IN THOUSANDS)
8. CERTAIN TRANSACTIONS
The Company purchases certain plant materials and other services
(including certain operating expenses) from PTI, CenturyTel, and other
affiliated companies. Materials and services purchased by the Company from PTI
prior to acquisition and CenturyTel and its subsidiaries subsequently totaled
approximately $9,227 for the year ended December 31, 1996, $8,581 for the eleven
months ended November 30, 1997, $1,626 for the one month ended December 31,
1997, and $29,306 (which included $15,648 of operating expenses) during the year
ended December 31, 1998. Many of the costs that are allocated to the Alaska
companies are based on time distribution and are, therefore, representative of
what costs would have been on a stand-alone basis. General and administrative
costs are allocated based on expense levels of all companies. Such costs, when
allocated to the subsidiaries, include a reasonable rate of return on investment
to the related affiliate and, therefore, are representative of what costs would
have been on a stand-alone basis.
Prior to the Acquisition, short-term advances were made to PTI under an
agreement providing interest at the prime commercial rate for funds held more
than 90 days. Interest income on these advances was $1,052 during the year ended
December 31, 1996, $797 during the eleven months ended November 30, 1997, and
$81 during the one month ended December 31, 1997.
Subsequent to the Acquisition, the Company participates in a Central
Depository Account ("CDA") with CenturyTel and other affiliates. The Company is
assessed or receives interest on the net amount of its CDA balance and the net
accounts receivable or payable to CenturyTel and its affiliates. Related
interest income amounted to $2,156 for the year ended December 31, 1998. The
rate used to calculate the related interest income was the three month U.S.
T-Bill rate. Related interest expense amounted to $637 for the year ended
December 31, 1998. The rate used to calculate the related interest expense was
the weighted average rate of CenturyTel's debt.
9. BUSINESS AND CREDIT CONCENTRATIONS
The Company provides telephone services to customers (business and
residential) located in the state of Alaska. Receivables from connecting
companies represent the amounts due from various long distance carriers such as
AT&T and the Bell operating companies.
The ultimate realization of the Company's balance in the CDA discussed
above is dependent upon the financial resources of CenturyTel.
10. COMMITMENTS AND CONTINGENCIES
Expenditures for property, plant, and equipment are anticipated to be
approximately $19,469 for telephone operations and $615 for wireless operations
during 1999.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-42
<PAGE> 98
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
(IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's operations are subject to federal, state and local laws
and regulations governing the use, storage, disposal of, and exposure to,
hazardous materials, the release of pollutants into the environment and the
remediation of contamination. As an owner or operator of property and a
generator of hazardous wastes, the Company could be subject to certain
environmental laws that impose liability for the entire cost of cleanup at
contaminated sites, regardless of fault or the lawfulness of the activity that
resulted in contamination. The Company believes, however, that its operations
are in substantial compliance with applicable environmental laws and regulations
and that there is no material exposure to loss related to environmental issues.
Many of the Company's properties formerly contained, or currently
contain, underground and aboveground storage tanks used for the storage of fuel
or wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.
11. BUSINESS SEGMENTS
The Company is engaged in providing local exchange telephone services
and cellular telephone services in Alaska. The following tables illustrate
selected financial data for each segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 TELEPHONE CELLULAR TOTAL
- ---------------------------- ------------------ -------------- -----------------
<S> <C> <C> <C>
Operating revenues $ 75,950 $ 4,823 $ 80,773
Depreciation and amortization 14,383 965 15,348
Operating income 19,778 477 20,255
Capital expenditures 19,694 771 20,465
ELEVEN MONTHS ENDED NOVEMBER 30, 1997 TELEPHONE CELLULAR TOTAL
- ------------------------------------- ------------------ -------------- -----------------
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
ONE MONTH ENDED DECEMBER 31, 1997 TELEPHONE CELLULAR TOTAL
- --------------------------------- ------------------ -------------- -----------------
Operating revenues $ 10,255 $ 181 $ 10,436
Depreciation and amortization 2,375 91 2,466
Operating income 1,446 (57) 1,389
Capital expenditures 1,732 93 1,825
Total assets 450,155 9,020 459,175
YEAR ENDED DECEMBER 31, 1998 TELEPHONE CELLULAR TOTAL
- ---------------------------- ------------------ -------------- -----------------
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>
F-43
<PAGE> 99
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
(IN THOUSANDS)
11. BUSINESS SEGMENTS (CONTINUED)
The following is a reconciliation of operating income to income before
income tax expense:
<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>
Operating income $ 20,255 $ 23,141 $ 1,389 $ 19,914
Interest expense (3,176) (3,027) (253) (3,588)
Interest income 1,180 858 82 2,183
Other income (expense), net (33) (298) 53 356
-------- -------- -------- --------
Income before income tax expense $ 18,226 $ 20,674 $ 1,271 $ 18,865
======== ======== ======== ========
</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-44
<PAGE> 100
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
(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>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 86,750
Cash paid for net assets (85,000)
--------
Liabilities assumed $ 1,750
========
</TABLE>
On December 1, 1997, PTI was sold to CenturyTel for approximately $2.2
billion (including assumed debt). As a result of this transaction, the Company
recorded all previously retained earnings as paid-in capital and pushed down
excess costs of approximately $208 million to the Alaskan entities to reflect
the change from PTI's to CenturyTel's basis of accounting.
In August 1998 CNI and CT Wireless entered into a definitive agreement
to sell the stock of the Company to ALEC for approximately $409 million, subject
to certain adjustments. The transaction is anticipated to close in 1999 subject
to regulatory approvals and various closing conditions.
F-45
<PAGE> 101
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
(IN THOUSANDS)
14. YEAR 2000 (UNAUDITED)
The Company has initiated a plan ("Year 2000 Plan") to identify, assess,
and remediate "Year 2000" issues within each of its significant computer
programs and certain equipment which contain micro-processors. The Year 2000
Plan is addressing the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000, if a
program or chip uses only two digits rather than four to define the applicable
year. The Company has divided the Year 2000 Plan into four major
phases--assessment, planning, implementation, and testing. After completing the
assessment and planning phases earlier this year, the Company is currently in
the implementation and testing phases. Systems which have been determined not to
be Year 2000 compliant are being either replaced or reprogrammed, and thereafter
tested for Year 2000 compliance. The Year 2000 Plan anticipates that by October
1999 the implementation and testing phases will be completed.
The Company is identifying and contacting critical suppliers and
customers whose computerized systems interface with the Company's systems,
regarding their plans and progress in addressing their Year 2000 issues. The
Company has received varying information from such third parties on the state of
compliance or expected compliance. Contingency plans are being developed in the
event that any critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity, and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether consequences of Year 2000 failures will
have a material impact on the Company's operations, liquidity, or financial
condition.
F-46
<PAGE> 102
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.
/s/ Deloitte & Touche LLP
Portland, Oregon
March 25, 1999
F-47
<PAGE> 103
TELEPHONE FUND OF FAIRBANKS
MUNICIPAL UTILITIES SERVICES
COMBINED BALANCE SHEET
OCTOBER 6, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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-48
<PAGE> 104
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-49
<PAGE> 105
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-50
<PAGE> 106
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-51
<PAGE> 107
TELEPHONE FUND OF FAIRBANK 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>
<CAPTION>
<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 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.
F-52
<PAGE> 108
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)
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-53
<PAGE> 109
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.
/s/ KPMG LLP
Anchorage, Alaska
February 19, 1999
F-54
<PAGE> 110
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 10,474 $ 25,755
Accounts receivable, net of uncollectibles of $1,586 and $1,343
in 1998 and 1997 21,216 23,733
Inventories 4,415 3,074
-------- --------
Total current assets 36,105 52,562
RESTRICTED CASH 2,067 754
RESTRICTED INVESTMENTS 12,895 14,838
NET TELEPHONE PLANT 250,669 257,703
OTHER ASSETS
Cellular licenses 9,670 16,315
Minority investments 7,983 5,535
Other 3,735 2,538
-------- --------
Total other assets 21,388 24,388
-------- --------
TOTAL ASSETS $323,124 $350,245
======== ========
FUND EQUITY AND LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 23,211 $ 24,366
Accrued interest 1,730 2,227
Compensated absences payable 3,297 2,786
Accrued employee benefits 2,141 1,938
Advance billings and customer deposits 4,386 4,523
Current installments of long-term obligations 16,719 17,614
-------- --------
Total current liabilities 51,484 53,454
LONG-TERM OBLIGATIONS 135,226 154,907
FUND EQUITY
Retained Earnings 136,414 141,884
-------- --------
TOTAL FUND EQUITY AND LIABILITIES $323,124 $350,245
======== ========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 111
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Local telephone $ 113,415 $ 116,555 $ 121,057
Cellular 16,897 21,845 29,225
Long distance 2 1,541 6,815
--------- --------- ---------
Total operating revenue 130,314 139,941 157,097
OPERATING EXPENSES
Cost of sales and operating
expenses--local 75,980 74,994 74,240
Cost of sales and operating
expenses--cellular 12,379 14,455 19,961
Cost of sales and operating
expenses--long distance 543 4,644 10,395
Depreciation and amortization 20,496 26,839 29,608
--------- --------- ---------
Total operating expenses 109,398 120,932 134,204
--------- --------- ---------
OPERATING INCOME 20,916 19,009 22,893
Interest expense (9,187) (9,308) (9,394)
Equity in earnings (loss) of minority
investments (45) 158 (2,945)
Interest income 2,347 2,540 2,967
Other income (expense), net (174) (281) 49
--------- --------- ---------
Net other expense (7,059) (6,891) (9,323)
--------- --------- ---------
NET INCOME 13,857 12,118 13,570
========= ========= =========
RETAINED EARNINGS, JANUARY 1 126,839 132,596 136,414
Utility Revenue Distribution to
Municipality of Anchorage (8,100) (8,300) (8,100)
--------- --------- ---------
RETAINED EARNINGS, PERIOD END $ 132,596 $ 136,414 $ 141,884
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 112
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from operations $ 20,477 $ 19,005 $ 22,548
Adjustments to reconcile income from operations to
net cash provided by operating activities
Depreciation and amortization 20,496 26,839 29,608
Provision for uncollectible accounts 1,112 1,113 1,643
Loss on disposition of fixed assets 288 100 174
Non-regulated income and other 439 43 95
Changes in assets and liabilities which increase (decrease) cash
Accounts receivable (996) (4,040) (4,160)
Inventory of materials, supplies, and goods for resale 159 (504) 1,341
Other assets (364) 120 1,244
Accounts payable (25) 4,172 1,155
Accrued employee benefits and compensated absences payable 1,198 194 (713)
Customer deposits (620) (262) (292)
Advance billings 306 558 428
Other liabilities (350) (697) 136
-------- -------- --------
Net cash provided by operating activities 42,120 46,641 53,207
-------- -------- --------
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)
Short-term advance from Municipality of Anchorage General Fund (12,000) - -
Principal payments on long-term obligations (22,002) (19,617) (17,340)
Bond issuance 43,659 24,790 29,592
Interest payments on long-term obligations (6,513) (7,952) (8,011)
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)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Interests 2,347 2,325 2,968
Minority investments (2,398) (5,227) (7,283)
Proceeds from sale of restricted investments 12,865 12,109 13,912
Purchase of restricted investments (13,601) (12,872) (15,256)
-------- -------- --------
Net cash used by investing activities (787) (3,665) (5,659)
-------- -------- --------
NET CHANGE IN CASH 11,238 (3,940) 13,968
CASH, JANUARY 1 5,243 16,481 12,541
-------- -------- --------
CASH, PERIOD END (including Restricted Cash (see Note 1)) $ 16,481 $ 12,541 $ 26,509
======== ======== ========
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
-------- -------- --------
Total Non-cash Capital, Financing, and Investing Activities $ 7,124 $ 9,077 $ 11,944
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 113
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-58
<PAGE> 114
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Regulation
The Utility is subject to rate regulation by the FCC for interstate
telecommunication service, and the APUC for intrastate and local exchange
telecommunication service. The Utility, as required by the FCC, accounts for
such activity separately.
The services of ATU LD are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the APUC for intrastate telecommunication services. The operations of MACtel are
not subject to rate regulation.
Basis Of Accounting
The accounting records of the Utility conform to Part 32 Uniform System
of Accounts as prescribed by the FCC and the APUC.
The accompanying financial statements are prepared on the accrual basis
of accounting. The accounting policies of the Utility are in conformity with the
requirements of the FCC and the APUC. The Utility prepares its financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation". Accounting
under SFAS No. 71 is appropriate as long as rates are established by or subject
to approval by independent third-party regulators; rates are designed to recover
the specific enterprise's cost-of-service; and in view of demand for service, it
is reasonable to assume that rates are set at levels that will recover costs and
can be collected from customers.
Under Governmental Accounting Standards Board (GASB) Statement No. 20,
Accounting And Financial Reporting For Proprietary Funds And Other Governmental
Entities That Use Proprietary Fund Accounting, the Utility applies all
applicable GASB pronouncements and all Financial Accounting Standards Board
(FASB) Statements and Interpretations, Accounting Principles, Board Opinions and
Accounting Research Bulletins, unless they conflict with or contradict GASB
pronouncements. ATU follows the provisions of GASB Statement No. 27 to account
for pension and post-retirement costs, which differs from FAS Statement No. 87
and FAS Statement No. 106 regarding the methodology for calculation of such
costs and how they are recorded and disclosed. Specifically, GASB Statement No.
27 requires that annual pension cost be equal to the annual required
contributions of the employer (ARC) to the plan for that year calculated via an
actuarial valuation performed in accordance with specific parameters. These
parameters address such matters as the frequency of actuarial valuations,
acceptable actuarial cost methods, asset valuation methodology, minimum and
maximum amortization periods and the amortization method. Generally, employers
are required to record a net pension obligation (NPO) if the ARC calculated in
accordance with the parameters exceeds actual contributions made. Annual pension
cost is calculated as the ARC, one year's interest on the NPO, and certain
required adjustments. Under GASB Statement No. 27, employers are permitted to
apply the measurement and recognition requirements of GASB Statement No. 27 to
postemployment healthcare benefits.
F-59
<PAGE> 115
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to GASB Statement No. 27, the Municipality of Anchorage
Telephone Utility Fund recorded annual pension cost of $1,041,000 for the year
ended December 31, 1998, of which $749,520 related to pension benefits and
$291,480 related to postemployment healthcare benefits. As of December 31, 1998
and 1997, there is no NPO.
Under FASB Statement No. 87, Employers' Accounting For Pensions, the
following components are included in the net pension cost recognized for a
period by an employer sponsoring a defined benefit pension plan:
- Service cost
- Interest cost
- Actual return on plan assets, if any
- Amortization of unrecognized prior service cost, if any
- Gain or loss (including the effects of changes in assumptions) to
the extent recognized
- Amortization of the unrecognized net obligation (and loss or
cost) or unrecognized net asset (and gain) existing at the date
of initial application of FASB Statement No. 87.
The service component of net periodic pension cost, the projected
benefit obligation, and the accumulated benefit obligation are based on an
attribution of pension benefits to periods of employee service and on the use of
actuarial assumptions to calculate the actuarial present value of those
benefits. Actuarial assumptions reflect the time value of money (discount rate)
and the probability of payments (assumptions as to mortality, turnover, early
retirement, and so forth).
Under FASB Statement No. 87, a liability (unfunded accrued pension cost)
is recognized if net periodic pension cost recognized pursuant to FASB Statement
No. 87 exceeds amounts the employer has contributed to the plan. An asset
(prepaid pension cost) is recognized if net periodic pension cost is less than
amounts the employer has contributed to the plan.
If the accumulated benefit obligations exceeds the fair value of plan
assets, the employer shall recognize in the statement of financial position a
liability (including unfunded accrued pension cost) that is at least equal to
the unfunded accumulated benefit obligation. Recognition of an additional
minimum liability is required in certain other circumstances.
Accounting for post retirement benefits pursuant to FASB Statement No.
106, Employers' Accounting For Postretirement Benefits Other Than Pensions, is
similar to the accounting proscribed for pension benefits in accordance with
FASB Statement No. 87.
It is not practicable to quantify the differences between the statements
without an additional complete actuarial valuation because the actuarial
calculations for FAS Statement No. 87 purposes require different assumptions and
represent different measurement bases. Other differences between GASB and FAS
have been evaluated and have been determined not to be material for the periods
presented.
F-60
<PAGE> 116
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates. The more significant accounting and reporting
policies and estimates applied in the preparation of the accompanying financial
statements are discussed below.
Cash Pools And Restricted Investments
The Municipality uses a central treasury to account for all cash and
investments to maximize interest income. Interest income from cash pool
investments is allocated to the Utility based on its monthly closing cash pool
equity balance. Restricted investments are recorded at fair value. All amounts
in the cash pools and in restricted investments are interest bearing and consist
primarily of repurchase agreements, banker's acceptances or U.S. Government
securities. The Utility adopted GASB Statement No. 31, Accounting And Financial
Reporting For Certain Investments And For External Investment Pools, during
1998. The impact of adopting this statement was not material to the financial
statements.
Under GASB Statement No. 3, Deposits With Financial Institutions,
Investments (Including Repurchase Agreements), And Reverse Repurchase
Agreements, the Utility's cash and investments are classified in credit risk
category 1 because they are insured or registered or are securities held by the
Utility or its agent in the Utility's name.
Statement Of Cash Flows
The Utility has adopted GASB Statement No. 9, Reporting Cash Flows Of
Proprietary And Nonexpendable Trust Funds And Governmental Entities That Use
Proprietary Fund Accounting. For purposes of the statement of cash flows, the
Utility has defined cash as the demand deposits and investments maintained in
the general and construction cash pools, including restricted and unrestricted
balances, as well as cash balances maintained separately from the cash pools.
Maturity periods of investments have been disregarded, since the Utility uses
the general and construction cash pools as demand deposit accounts.
F-61
<PAGE> 117
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Equity in general cash pool 14,427 9,401 19,254
Cash 963 1,073 6,501
------- ------- -------
Total cash 15,390 10,474 25,755
Amounts included with restricted investments:
Equity in construction cash pool - 927 -
Equity in general cash pool reserved for customer deposits 1,091 830 537
Cash included in revenue bond reserve investments - 310 217
------- ------- -------
$16,481 $12,541 $26,509
======= ======= =======
</TABLE>
Inventories
The Utility's inventories, consisting primarily of parts and supplies,
are valued at the lower of weighted average cost or market.
Telephone Plant
Telephone plant is stated at cost. The additions to telephone plant in
service are recorded at the original cost of contracted services, direct
materials and labor, and indirect overhead charges. When property is retired,
the cost of the property unit, plus removal costs, less salvage, is charged to
accumulated depreciation. Gain or loss on the retirement of regulated telephone
plant is not recognized except for extraordinary retirements.
The Utility's depreciation is computed using the straight-line method
over the estimated lives of the assets. Current rates on regulated plant were
implemented January 1, 1997 and were based on APUC Docket U-96-78. MACtel and
ATU LD property and equipment are depreciated using the straight-line and
declining balance methods over the estimated useful asset lives.
The estimated life in years of major plant and equipment categories
follows:
<TABLE>
<CAPTION>
ESTIMATED
PLANT AND EQUIPMENT LIFE
<S> <C>
Buildings 56
Central office equipment 9-10
Cable, wire and conduit 12-46
Furniture, computers and support equipment 7-22
Vehicles 11-19
Leasehold improvements 2-3
Nonregulated 3-10
</TABLE>
F-62
<PAGE> 118
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Minority Investments
Minority investments consist of investments in companies which are
accounted for using the equity method.
Cellular Licenses
Cellular licenses are stated at net book value. Amortization is computed
on the straight-line method over an estimated useful life of 40 years.
Discount On Revenue Bonds Payable
The discount on revenue bonds payable is amortized over the life of the
related bond issue using the effective interest method.
Revenue Recognition
Recurring revenues are billed one month in advance and are deferred
until the month earned. Nonrecurring revenues are billed in arrears and are
recognized when earned.
During 1998 the Utility participated in both interstate and intrastate
common line pooled settlements. During 1998 the Utility did not participate in
any traffic-sensitive pools. Pooled revenues are based on settlements with the
applicable pool's administrator. Intrastate pooled revenues are settled on a
monthly basis with the Alaska Exchange Carrier Association (AECA) and are final
at the time of settlement. Participation in the AECA pool was discontinued
effective January 1, 1999. Interstate pooled revenues are settled on a monthly
basis with the National Exchange Carrier Association (NECA). The NECA
settlements may be adjusted for a period of up to twenty-four months. Interstate
traffic sensitive revenue is based on rates and charges defined in the Utility's
interstate tariff approved by the FCC. Interstate traffic sensitive revenue is
recognized when earned for both recurring and nonrecurring charges.
To the extent that disputes arise over revenue settlement procedures,
the Utility's policy is to defer revenue collected until settlement
methodologies are resolved and finalized.
Municipal Utility Service Assessment
The Municipal Utility Service Assessment (MUSA) is assessed by the
Municipality and is calculated based on the net book value of telephone plant in
the prior year. Net book value for each tax district is multiplied by the
current mill rate to determine the assessment. The Utility also pays a gross
receipt tax, which is 1.25% of gross operating revenues, excluding nonregulated
revenues.
Advertising
Advertising costs are expensed in the period in which they are incurred.
F-63
<PAGE> 119
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Internal Revenue Code provides that gross income for tax purposes
does not include income accruing to a state or territory, or any political
subdivision thereof, which is derived from the exercise of any essential
governmental function or from any public utility. The Utility is a public
utility of the Municipality and is therefore exempt from federal and state
income taxes. ACI and its subsidiaries are exempt from federal and state income
taxes because ACI is a holding company owned 100% by the Utility.
GASB NO. 27
The Utility adopted GASB Statement No. 27, Accounting For Pensions By
State And Local Governmental Employers, during 1998. GASB No. 27 establishes
standards for the measurement, recognition and display of pension expense and
related liabilities, assets, note disclosure and applicable required
supplementary information in the financial reports of state and local
governmental employers. The impact of adopting GASB No. 27 was not material to
the financial statements.
Impairment Of Long-Lived Assets
The Utility has adopted FASB Statement No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of.
Under the provisions of this statement, the Utility has evaluated its long-lived
assets for financial impairments and will continue to evaluate them if events or
changes in circumstance indicate the carrying amount of such assets may not be
fully recoverable.
Reclassifications
Certain reclassifications have been made to the December 31, 1997 and
1996 financial statements to conform to the current year's presentation.
F-64
<PAGE> 120
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(2) TELEPHONE PLANT
A summary of telephone plant and equipment at December 31, follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Plant in Service
Cable, wire and conduit $ 166,055 $ 169,705
Central office equipment 124,199 126,364
Buildings 43,908 44,207
Furniture, computers and support equipment 21,580 21,380
Non-regulated 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-65
<PAGE> 121
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)
Less: 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-66
<PAGE> 122
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:
Long-Term Obligations
<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 lesser 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 lesser 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-67
<PAGE> 123
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-68
<PAGE> 124
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>
POST-EMPLOYMENT
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 5.50% N/A
Health cost trend N/A 5.50%
</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-69
<PAGE> 125
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>
PERCENTAGE OF
YEAR ENDED APC
DECEMBER 31 APC CONTRIBUTED NPO
--------------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Pension 1996 $1,032 100% $ -
1997 827 100% -
1998 750 100% -
Post-employment 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 ACCRUED UAAL AS A
ACTUARIAL ACTUARIAL ACCRUED LIABILITY PERCENTAGE OF
VALUATION YEAR VALUE OF PLAN LIABILITY (ASSET) FUNDED COVERED COVERED
ENDED 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%
Post-employment 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 prudent
investor.
F-70
<PAGE> 126
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)
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
F-71
<PAGE> 127
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)
ended December 31, 1998, 1997, and 1996, respectively.
These costs are allocated to ATU from the Municipality of Anchorage
through an inter-governmental charge system ("IGC") based upon ATU's
proportionate share of certain cost drivers, such as manned positions, building
square footage or number of transactions processed, depending upon the type of
cost being allocated. Certain IGC's are based upon work orders for specific
projects between departments. Management believes that the methodology utilized
is reasonable. It is not practicable to quantify what such costs would have been
on a stand-alone basis.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Significant differences can
arise between the fair value and carrying amount of financial instruments that
are recognized at historical cost amounts.
The following methods and assumptions were used by the Utility in
estimating fair value disclosures for financial instruments:
Cash, restricted investments, accounts receivable, accounts payable
and accrued liabilities, accrued interest, customer deposits and accrued
employee benefits--The carrying amounts at December 31, 1998 and 1997
approximate the fair values due to the short maturity of these
instruments.
Long-term debt--The fair value of the Utility's long-term debt is
estimated by discounting the future cash flows of the various
instruments at rates currently available to the Utility for similar debt
instruments of comparable maturities.
The carrying amount of long-term debt and its estimated fair value at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Carrying amount $ 153,532 $ 172,847
Fair value 161,000 181,000
</TABLE>
(10) BUSINESS SEGMENTS
The Utility has adopted FASB Statement No. 131, Disclosures About
Segments Of An Enterprise And Related Information. The Utility has three
reportable segments: local telephone, long distance and cellular. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each reportable segment is a strategic business
offering different services and is managed separately.
F-72
<PAGE> 128
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 $ 22,869
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
</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-73
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles E. Robinson Chief Executive Officer and Chairman of March 16, 2000
------------------------ the Board
Charles E. Robinson
/s/ Wesley E. Carson President and Chief Operating Officer March 16, 2000
------------------------
Wesley E. Carson
/s/ Donn T. Wonnell Executive Vice President, General March 16, 2000
------------------------ Counsel and Secretary
Donn T. Wonnell
/s/ Michael E. Holmstrom Senior Vice President and Chief March 16, 2000
------------------------ Financial Officer (Principal Financial
Michael E. Holmstrom Officer)
/s/ John A. Ayers Senior Vice President of Marketing and March 16, 2000
------------------------ Sales
John A. Ayers
/s/ F. Scott Davis Senior Vice President of Non-Regulated March 17, 2000
------------------------ Operations
F. Scott Davis
/s/ Kevin P. Hemenway Vice President and Treasurer March 16, 2000
------------------------ (Principal Accounting Officer)
Kevin P. Hemenway
/s/ Carl A. Marrs Director March 16, 2000
------------------------
Carl A. Marrs
/s/ Byron I. Mallott Director March 16, 2000
------------------------
Byron I. Mallott
/s/ W. Dexter Paine III Director March 17, 2000
------------------------
W. Dexter Paine III
/s/ Saul A. Fox Director March 17, 2000
------------------------
Saul A. Fox
/s/ Wray T. Thorn Director March 16, 2000
------------------------
Wray T. Thorn
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
SUBSIDIARY DBA JURISDICTION OF INCORPORATION
<S> <C> <C>
Alaska Communications Systems Holdings, Inc. Delaware
ALEC Acquisition Sub Corp. Delaware
Telephone Utilities of the Northland, Inc. PTI Communications Alaska
Telephone Utilities of Alaska, Inc. PTI Communications Alaska
PTI Communications of Alaska, Inc. PTI Communications Alaska
Alaska Communications Systems, Inc. ATU Telecommunications Delaware
ACS Wireless, Inc. Alaska
MACtel License Sub, Inc. Delaware
ATU Long Distance, Inc. Alaska
ATU LD License Sub, Inc. Delaware
ATU Communications, Inc. Alaska
Pacific Telecom of Alaska PCS, Inc. Alaska
Peninsula Cellular Services, Inc. Alaska
Alaskan Choice Television, LLC Utah
ACS Internet, Inc. Delaware
</TABLE>
59
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-92091 of Alaska Communications Systems Group, Inc. on Form S-8 of our
reports on the following financial statements of the following companies (for
the periods indicated) appearing in the Annual Report on Form 10-K of Alaska
Communications Systems Group, Inc. for the year ended December 31, 1999:
- Our report dated February 25, 2000 on the consolidated balance sheet
of Alaska Communications Systems Group, Inc. and subsidiaries as of December 31,
1999 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1999.
- Our report dated March 24, 1999 on the consolidated balance sheet of
Alaska Communications Systems Holdings, Inc. and Subsidiaries as of December 31,
1998 and the related consolidated statement of cash flows for the period from
July 16, 1998 (date of inception) through December 31, 1998.
- Our report dated March 25, 1999 on the combined financial statements
of CenturyTel Alaska Properties as of December 31, 1997 and for the year ended
December 31, 1996, the eleven months ended November 30, 1997, and one month
ended December 31, 1997.
- Our report dated March 25, 1999 on the combined financial statements
of Telephone Fund of Fairbanks Municipal Utilities Services as of October 6,1997
and for the year ended December 31, 1996 and the period ended October 6, 1997.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
March 20, 2000
60
<PAGE> 1
EXHIBIT 23.3
The Board of Directors
CenturyTel, Inc.:
We consent to the incorporation by reference in the Registration Statement (No.
333-92091) on Form S-8 of Alaska Communications Systems Group, Inc., of our
report dated February 26, 1999, on CenturyTel's Alaska Properties as of and for
the year ended December 31, 1998, which report appears in the December 31, 1999,
annual report on Form 10-K of Alaska Communications Systems Group, Inc.
/s/ KPMG LLP
Shreveport, Louisiana
March 20, 2000
61
<PAGE> 1
EXHIBIT 23.5
The Honorable Mayor and Members of the Assembly
Municipality of Anchorage Telephone Utility Fund
We consent to incorporation by reference in the Registration Statement (No.
333-92091) on Form S-8 of Alaska Communications Systems Group, Inc. of our
report dated February 19, 1999 relating to the balance sheets 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, which report appears in the December 31, 1999 annual report
on Form 10-K of Alaska Communications Systems Group, Inc. 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.
/s/ KPMG LLP
Anchorage, Alaska
March 20, 2000
62
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 101,994,000
<SECURITIES> 0
<RECEIVABLES> 54,526,000
<ALLOWANCES> 5,203,000
<INVENTORY> 5,923,000
<CURRENT-ASSETS> 161,567,000
<PP&E> 902,131,000
<DEPRECIATION> 452,304,000
<TOTAL-ASSETS> 934,443,000
<CURRENT-LIABILITIES> 64,944,000
<BONDS> 607,911,000
0
0
<COMMON> 327,000
<OTHER-SE> 247,968,000
<TOTAL-LIABILITY-AND-EQUITY> 934,443,000
<SALES> 193,619,000
<TOTAL-REVENUES> 193,619,000
<CGS> 0
<TOTAL-COSTS> 177,332,000
<OTHER-EXPENSES> 198,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,624,000
<INCOME-PRETAX> (22,512,000)
<INCOME-TAX> (301,000)
<INCOME-CONTINUING> (22,211,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,267,000)
<CHANGES> 0
<NET-INCOME> (25,478,000)
<EPS-BASIC> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
