<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
<TABLE>
<S> <C>
DELAWARE 52-2126573
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
510 L STREET, SUITE 500, ANCHORAGE, ALASKA 99501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (907) 297-3000
--------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER THREE MONTHS, IF CHANGED SINCE
LAST REPORT: Not Applicable
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF
NOVEMBER 6, 2000 WAS 32,928,814.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets (unaudited)
As of September 30, 2000 and December 31, 1999................................3
Consolidated Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 2000 and 1999...............4
Consolidated Statements of Stockholders' Equity (unaudited)
For the Nine Months Ended September 30, 2000 and 1999.........................5
Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2000 and 1999.........................6
Notes to Consolidated Financial Statements (unaudited)........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................21
Item 2. Changes in Securities and Use of Proceeds....................................23
Item 3. Defaults upon Senior Securities..............................................23
Item 4. Submission of Matters to a Vote of Security Holders..........................23
Item 5. Other Information............................................................23
Item 6. Exhibits and Reports on Form 8-K.............................................23
SIGNATURE...................................................................................24
</TABLE>
2
<PAGE> 3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 83,568 $ 101,994
Accounts receivable-trade, net of allowance of $9,395 and $5,203 46,143 49,323
Materials and supplies 9,631 5,923
Prepayments and other current assets 4,150 4,327
--------- ---------
Total current assets 143,492 161,567
Property, plant and equipment 943,134 902,131
Less: accumulated depreciation 489,401 452,304
--------- ---------
Property, plant and equipment, net 453,733 449,827
Goodwill, net of accumulated amortization of $9,814 and $4,243 260,150 250,346
Investments 1,520 1,673
Other assets 64,428 71,030
--------- ---------
Total assets $ 923,323 $ 934,443
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 4,020 4,845
Accounts payable-trade 25,956 31,212
Accounts payable-affiliates 880 610
Advance billings and customer deposits 9,541 7,521
Accrued and other current liabilities 20,857 20,756
--------- ---------
Total current liabilities 61,254 64,944
Long-term debt, net of current portion 611,184 607,911
Unamortized investment tax credits 238 394
Other deferred credits and long-term liabilities 17,477 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, 32,929
and 32,657 shares issued and outstanding 329 327
Paid in capital in excess of par value 275,029 273,119
Accumulated deficit (42,188) (25,478)
--------- ---------
Total stockholders' equity 233,170 247,968
--------- ---------
Total liabilities and stockholders' equity $ 923,323 $ 934,443
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Local telephone:
Local network service $ 22,133 $ 23,527 $ 69,752 $ 35,630
Network access revenue 21,779 26,352 79,835 39,514
Directory advertising 8,146 6,737 23,005 10,188
Deregulated and other revenue 6,016 5,175 16,958 8,260
--------- --------- --------- ---------
Total local telephone 58,074 61,791 189,550 93,592
Cellular 10,947 10,153 29,657 14,720
Interexchange network, data services and other 5,845 3,596 14,613 5,510
--------- --------- --------- ---------
Total operating revenues 74,866 75,540 233,820 113,822
Operating expenses:
Local telephone 37,570 38,456 113,487 60,440
Cellular 5,913 5,821 17,684 8,813
Interexchange network, data services and other 8,201 5,046 21,593 7,885
Unusual charges 2,083 -- 2,083 --
Depreciation and amortization 17,773 15,615 52,464 23,708
--------- --------- --------- ---------
Total operating expenses 71,540 64,938 207,311 100,846
--------- --------- --------- ---------
Operating income 3,326 10,602 26,509 12,976
Other income (expense):
Interest expense (16,417) (15,680) (48,253) (23,532)
Interest income and other 2,195 160 5,033 (197)
Equity in earnings (loss) of investments -- (170) (153) (81)
--------- --------- --------- ---------
Total other expense (14,222) (15,690) (43,373) (23,810)
--------- --------- --------- ---------
Loss before income taxes (10,896) (5,088) (16,864) (10,834)
Income tax benefit 20 174 154 174
--------- --------- --------- ---------
Net loss $ (10,876) $ (4,914) $ (16,710) $ (10,660)
========= ========= ========= =========
Net loss per share - basic and diluted $ (0.33) $ (0.23) $ (0.51) $ (0.51)
========= ========= ========= =========
Weighted average shares outstanding 32,927 21,598 32,806 21,085
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PAID IN NOTES
CAPITAL IN RECEIVABLE
COMMON EXCESS OF FROM UNEARNED ACCUMULATED STOCKHOLDERS'
STOCK PAR OFFICERS COMPENSATION DEFICIT EQUITY
--------- ---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 21,789,176 shares of
common stock, $.01 par 218 133,884 -- -- -- 134,102
Discount on warrants issued in
conjunction with long-term debt -- 5,089 -- -- -- 5,089
Officers loans in conjunction with
the issuance of stock -- -- (862) -- -- (862)
Unearned compensation -- 1,864 -- (1,864) -- --
Net loss -- -- -- -- (10,660) (10,660)
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 $ 218 $ 140,837 $ (862) $ (1,864) $ (10,660) $ 127,669
========= ========= ========= ========= ========= =========
Balance, December 31, 1999 $ 327 $ 273,119 $ -- $ -- $ (25,478) $ 247,968
Issuance of 271,871 shares of
common stock, $.01 par 2 1,910 -- -- -- 1,912
Net loss -- -- -- -- (16,710) (16,710)
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2000 $ 329 $ 275,029 $ -- $ -- $ (42,188) $ 233,170
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
5
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,710) $ (10,660)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 52,464 23,708
Amortization of debt issuance costs 3,425 1,752
Investment tax credits (156) (947)
Other deferred credits 5,580 (436)
Capitalized interest (681) --
Changes in components of working capital:
Accounts receivable and other current assets (3,829) 3,711
Accounts payable and other current liabilities (7,155) 545
Other 2,242 1,528
--------- ---------
Net cash provided by operating activities 35,180 19,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and capital expenditures, net of capitalized interest (44,910) (46,218)
Cost of acquisitions, net of cash received (5,598) (691,855)
Other -- (2,385)
--------- ---------
Net cash used by investing activities (50,508) (740,458)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term notes payable -- 10,000
Proceeds from the issuance of long-term debt, net of discounts -- 613,632
Debt issuance costs -- (37,900)
Payments on long-term debt (5,010) (1,275)
Issuance of common stock and warrants 1,912 138,354
--------- ---------
Net cash provided (used) by financing activities (3,098) 722,811
Increase (decrease) in cash (18,426) 1,554
Cash and cash equivalents at beginning of the period 101,994 --
--------- ---------
Cash and cash equivalents at the end of the period $ 83,568 $ 1,554
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 40,773 $ 11,148
Income taxes paid -- --
SUPPLEMENTAL NONCASH TRANSACTIONS:
Property acquired under capital lease 3,152 --
Note payable in connection with acquisition 2,250 --
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, 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") a Delaware corporation, is engaged principally in
providing local telephone, wireless, and interexchange network and data services
to its customers in the state of Alaska through its telecommunications
subsidiaries. The Company was formed in October of 1998 for the purpose of
acquiring and operating telecommunications properties.
The financial statements for the Company represent the consolidated
financial position, results of operations and cash flows of the following
entities:
- Alaska Communications Systems Group, Inc.
- Alaska Communications Systems Holdings, Inc. ("ACS Holdings")
- ACS of Alaska, Inc. ("ACSA") (formerly Telephone Utilities of
Alaska, Inc.)
- ACS of the Northland, Inc. ("ACSN") (formerly Telephone
Utilities of the Northland, Inc.)
- ACS of Fairbanks, Inc. ("ACSF") (formerly PTI Communications of
Alaska, Inc.)
- Alaska Communications Systems, Inc. ("ACS") (formerly Anchorage
Telephone Utility)
- ACS Wireless, Inc. ("ACSW") (formerly MACtel, Inc.)
- ACS Long Distance, Inc. ("ACSLD") (formerly ATU Long Distance,
Inc.)
- ACS Television, L.L.C. ("ACSTV") (formerly Alaskan Choice
Television, L.L.C.)
- ACS Internet, Inc. (formerly PTINet, Inc.)
- Internet Alaska, Inc. ("IAI")
The accompanying consolidated results of operations for the three and
nine months ended September 30, 1999 include the operations of the Company for
the three and nine months then ended and the operations of ACSA, ACSN, ACSF,
ACS, ACSW and ACSLD for the period from May 15, 1999 through September 30, 1999.
Prior to the acquisition of these acquired companies on May 14, 1999, the
Company had no significant operations.
On June 16, 2000, ACS Group acquired all outstanding shares of IAI, an
Internet service provider to over 25,000 customers in Alaska.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission; however the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. The consolidated financial statements and
footnotes included in the Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Certain reclassifications have been made to the 1999 financial
statements to make them conform to the current presentation.
Comprehensive loss is equal to the net loss for all periods presented.
In the opinion of management, the financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the consolidated financial position, consolidated results of operations
and cash flows for all periods presented. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results of operations which might be expected for the entire year or any
other interim periods.
7
<PAGE> 8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. STOCK INCENTIVE PLANS
Under various plans through the Compensation Committee of the Board of
Directors, ACS Group may grant stock options, stock appreciation rights and
other awards to officers, employees and non-employee directors. At September 30,
2000, ACS Group has reserved a total of 6,060 shares of authorized common stock
for issuance under the various plans. In general, options under the plans vest
ratably over three, four or five years and the plans terminate in approximately
10 years.
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 the acquired companies
on May 14, 1999. At September 30, 2000, 3,423 options have been granted under
the Plan at an exercise price of $6.1542 per share, generally vesting ratably
over five years or after nine years subject to acceleration upon the attainment
of certain performance goals. Of the options granted under the plan, 235 have
been exercised and 283 have been forfeited upon termination of the grantee. At
September 30, 2000 2,905 options are outstanding. The plan allows forfeited
options to be reissued and 270 remain available for grant under the plan. The
plan will terminate on May 14, 2009.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
This plan was adopted by the Company in November 1999 in connection with
its initial public offering. The Company has reserved 1,500 shares under this
plan. At September 30, 2000, 917 options have been granted, 70 have been
forfeited under the plan and 653 shares are available for grant under the plan.
The term of options granted under the plan may not exceed 10 years. Unless
otherwise determined by the Compensation Committee, options will vest ratably on
each of the first four anniversaries after the grant date and will have an
exercise price equal to the fair market value of the common stock on the date of
grant.
On February 9, 2000, the Board of Directors approved the grant of
options under the plan to purchase 887 shares to certain members of management
at an exercise price of $14.1354 per share, generally vesting over four years
ratably. On June 20, 2000, the Board of Directors approved the grant of options
under the plan to purchase 28 shares to certain members of management at an
exercise price of $12.625 per share, generally vesting over four years ratably.
On September 7, 2000, the Board of Directors approved the grant of options under
the plan to purchase two shares to a member of management at an exercise price
of $8.5819 per share, generally vesting over four years ratably.
Alaska Communications Systems Group, Inc. 1999 Non-Employee Director Stock
Compensation Plan
The non-employee director stock compensation plan was adopted by the
Company in connection with its initial public offering. The Company has reserved
150 shares under this plan. At September 30, 2000, 22 shares have been awarded
and 128 shares are available for grant under the plan. Directors are required to
receive not less than 25% of their annual retainer and meeting fees in the form
of the Company's stock, and may elect to receive up to 100% of director's
compensation in the form of stock.
During January of 2000, eight shares under the plan were awarded to a
director. On March 31, 2000, four shares under the plan were awarded to
directors, of which three were elected to be deferred until termination of
service by the directors. On June 30, 2000, four shares under the plan were
awarded to directors, of which three were elected to be deferred until
termination of service by the directors. On September 29, 2000, six shares under
the plan were awarded to directors, of which four were elected to be deferred
until termination of service by the directors.
8
<PAGE> 9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. 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. On June 30, 2000, 65 shares were issued under
the plan and 935 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.
3. BUSINESS SEGMENTS
The Company has two reportable segments: (1) local telephone, which
provides landline telecommunications services and consists of local telephone
service, network access, directory advertising, deregulated and other revenues;
and (2) cellular, which provides wireless telecommunications service. Each
reportable segment is a strategic business under separate management and
offering different services than those offered by the other segments. The
Company has aggregated its interexchange network, data services and wireless
cable television segments into "All Other" below. The Company also incurs
operating expenses, interest expense, interest income, equity in earnings
(losses) of minority investments and other nonoperating 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 corporate level 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 the Company or ACS
Holdings and are allocated below based on operating revenues. The accounting
policies of the segments are the same as those in the summary of significant
accounting policies described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. Intersegment revenues and expenses are
eliminated between the nonregulated entities. Due to the regulated nature of the
local telephone segment, intersegment revenues and expenses between the local
telephone and other segments are not eliminated.
The following table illustrates selected financial data for each segment
for the three months ended September 30, 2000.
<TABLE>
<CAPTION>
LOCAL INTERCOMPANY
TELEPHONE CELLULAR ALL OTHER ELIMINATIONS TOTAL
--------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 58,074 $ 10,954 $ 8,023 $ (2,185) $ 74,866
Depreciation and amortization 13,720 1,298 2,755 -- 17,773
Operating income (loss) 6,616 2,682 (5,972) -- 3,326
Interest expense (274) (3) (16,140) -- (16,417)
Interest income 686 71 1,490 -- 2,247
Income tax provision (benefit) 1,932 1,151 (3,103) -- (20)
Net income (loss) 4,400 1,607 (16,883) -- (10,876)
Total assets 722,048 118,950 82,325 -- 923,323
Capital expenditures 12,642 3,340 588 -- 16,570
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $3,008 for local telephone, $367 for the cellular, and $2,987 for
all other.
9
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. BUSINESS SEGMENTS, CONTINUED
The following table illustrates selected financial data for each segment
for the three months ended September 30, 1999.
<TABLE>
<CAPTION>
LOCAL INTERCOMPANY
TELEPHONE CELLULAR ALL OTHER ELIMINATIONS TOTAL
--------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 61,736 $ 10,167 $ 3,844 $ (207) $ 75,540
Depreciation and amortization 12,094 861 2,660 -- 15,615
Operating income (loss) 8,906 3,292 (1,596) -- 10,602
Interest expense (42) -- (15,638) -- (15,680)
Interest income 173 38 76 -- 287
Income tax provision (benefit) 4,603 1,199 (5,976) -- (174)
Net income (loss) 9,159 1,488 (15,561) -- (4,914)
Total assets 706,156 73,491 24,825 -- 804,472
Capital expenditures 13,751 5,223 13 -- 18,987
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $1,141 for local telephone, $15 for the cellular, and $193 for all
other.
The following table illustrates selected financial data for each segment
for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
LOCAL INTERCOMPANY
TELEPHONE CELLULAR ALL OTHER ELIMINATIONS TOTAL
--------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 189,550 $ 29,678 $ 20,675 $ (6,083) $ 233,820
Depreciation and amortization 41,280 3,661 7,523 -- 52,464
Operating income (loss) 35,741 5,745 (14,977) -- 26,509
Interest expense (842) (8) (47,403) -- (48,253)
Interest income 774 148 4,208 -- 5,130
Income tax provision (benefit) 11,707 2,457 (14,318) -- (154)
Net income (loss) 23,270 3,449 (43,429) -- (16,710)
Total assets 722,048 118,950 82,325 -- 923,323
Capital expenditures 32,703 9,932 5,427 -- 48,062
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $6,700 for local telephone, $712 for the cellular, and $7,979 for
all other.
The following table illustrates selected financial data for each segment
for the nine months ended September 30, 1999.
<TABLE>
<CAPTION>
LOCAL INTERCOMPANY
TELEPHONE CELLULAR ALL OTHER ELIMINATIONS TOTAL
--------- -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Operating revenues $ 92,787 $ 14,735 $ 6,555 $ (255) $ 113,822
Depreciation and amortization 19,743 1,237 2,728 -- 23,708
Operating income (loss) 12,272 4,445 (3,741) -- 12,976
Interest expense (114) (1) (23,417) -- (23,532)
Interest income 318 54 143 -- 515
Income tax provision (benefit) 6,497 1,869 (8,540) -- (174)
Net income (loss) 11,982 2,657 (25,299) -- (10,660)
Total assets 706,156 73,491 24,825 -- 804,472
Capital expenditures 21,154 5,549 19,515 -- 46,218
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $3,822 for local telephone, $250 for the cellular, and $498 for all
other.
10
<PAGE> 11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
4. RELATED PARTY TRANSACTIONS
Fox Paine & Company, the majority stockholder, receives an annual
management fee in the amount of 1% of the Company's net income before interest
expense, interest income, income taxes, depreciation and amortization and equity
in earnings (losses) of minority investments, calculated without regard to the
fee. The management fee expense for the nine months ended September 30, 2000 is
$904 of which $880 remains payable.
5. COMMITMENTS AND CONTINGENCIES
The Company has a commitment to acquire additional fiber optic circuit
capacity in the first quarter of 2001 at a purchase price of $19,500.
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes
that the disposition of claims currently pending under these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
6. UNUSUAL CHARGES
During the quarter ended September 30, 2000, ACS Group recorded $2.1
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association and $0.6 million of severance cost related to a reduction in
workforce of approximately 100 personnel.
7. SUBSEQUENT EVENTS
On October 11, 2000, the Company announced that its Board of Directors
had authorized the repurchase of up to $10,000 of the Company's outstanding
common stock at the discretion of management to be completed by December 31,
2000. Repurchased shares are to be held in treasury for future corporate use. As
of November 3, 2000, the Company had repurchased 439 shares at a total cost of
$3,046.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS
This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the rest of 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.
INTRODUCTION
On May 14, 1999, the Company acquired the incumbent providers of local
telephone services in Anchorage, Juneau, Fairbanks and approximately 70 rural
communities in Alaska, making it the largest provider of local telephone service
in the state and the fifteenth largest provider of local exchange services in
the United States. The Company also acquired on May 14, 1999 long distance
operations primarily serving the Anchorage market and cellular and Internet
services providing statewide coverage. On October 29, 1999, the Company changed
its name from ALEC Holdings, Inc. to Alaska Communications Systems Group, Inc.
The Company has unified its statewide branding under the ACS name.
Prior to the completion of these acquisitions, 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
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 television services.
ACS Group also recognizes its proportionate share of the net income or
loss of its minority-owned investments.
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RESULTS OF OPERATIONS
The following unaudited table summarizes ACS Group's consolidated
operations for the three and nine months ended September 30, 2000 and the three
months ended September 30, 1999 and its combined operations for the nine months
ended September 30, 1999. For the nine months ended September 30, 1999, the
summary information represents the historical combined operating results of
companies acquired on May 14, 1999 - prior to their ownership by ACS Group, from
January 1, 1999 through May 14, 1999, plus the consolidated results of ACS Group
from May 15, 1999 through September 30, 1999. Certain reclassifications have
been made to the 1999 combined operations to conform to the current presentation
of ACS Group's consolidated operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
CONSOLIDATED CONSOLIDATED CONSOLIDATED COMBINED
------------ ------------ ------------ ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Operating revenues
Local telephone:
Local network service $ 22,133 $ 23,527 $ 69,752 $ 70,238
Network access revenue 21,779 26,352 79,835 77,706
Directory advertising 8,146 6,737 23,005 20,386
Deregulated revenue and other 6,016 5,175 16,958 15,085
--------- --------- --------- ---------
Total local telephone 58,074 61,791 189,550 183,415
Cellular 10,947 10,153 29,657 25,925
Interexchange network, data services and other 5,845 3,596 14,613 11,246
--------- --------- --------- ---------
Total operating revenues 74,866 75,540 233,820 220,586
Operating expenses
Local telephone 37,570 38,456 113,487 114,374
Cellular 5,913 5,821 17,684 17,067
Interexchange network, data services and other 8,201 5,046 21,593 15,214
Unusual charges 2,083 -- 2,083 --
Depreciation and amortization 17,773 15,615 52,464 46,889
--------- --------- --------- ---------
Total operating expenses 71,540 64,938 207,311 193,544
--------- --------- --------- ---------
Operating income 3,326 10,602 26,509 27,042
Other income (expense):
Interest expense (16,417) (15,680) (48,253) (28,058)
Interest income and other 2,195 160 5,033 2,276
Equity in earnings (loss) of investments -- (170) (153) (1,452)
--------- --------- --------- ---------
Total other expense (14,222) (15,690) (43,373) (27,234)
--------- --------- --------- ---------
Income (loss) before income taxes (10,896) (5,088) (16,864) (192)
Income tax benefit (expense) 20 174 154 (3,770)
--------- --------- --------- ---------
Net income (loss) $ (10,876) $ (4,914) $ (16,710) $ (3,962)
========= ========= ========= =========
</TABLE>
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<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
OPERATING REVENUES
Operating revenues decreased $0.7 million, or 0.9% for the three months
ended September 30, 2000 compared to the three months ended September 30, 1999.
Local telephone revenues decreased while cellular and interexchange network,
data services and other revenues increased compared to the prior three month
period.
Local Telephone
Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, decreased $3.7 million, or 6.0%, for the three months ended September
30, 2000 compared to the three months ended September 30, 1999.
The local network service component of local telephone revenues was
$22.1 million during 2000 compared with $23.5 million during 1999. Revenue
decreased $1.4 million, or 5.9%, despite growth in average total access lines in
service of 3.5% and increased penetration of enhanced features. The net decrease
was due primarily to charges for uncollectible accounts and increased market
penetration of lower margin wholesale lines in the Anchorage market. The charges
for uncollectible accounts recorded against local network service revenue in
2000 were $2.1 million in excess of those recorded during 1999, accounting for
more than 100% of the decrease in local network service revenue. The charges for
uncollectible accounts were approximately $1.7 million in excess of industry
average collection rates. Collection processes have been improved and management
expects that charges for uncollectible accounts will be in line with industry
benchmarks going forward. Management also believes that the continued loss of
market share experienced in the Anchorage market is attributable to below cost
interconnection rates for unbundled network elements ("UNE's") currently in
place. The Regulatory Commission of Alaska ("RCA") has recently approved
arbitrated interconnection rates for UNE's for the Company's Fairbanks and
Juneau markets which, in the opinion of management, are also below cost. See
"Legal Proceedings" under Item 1 of Part II of this report for further
discussion.
Network access revenues decreased by $4.6 million, or 17.4%, from $26.4
million in 1999 to $21.8 million in 2000. Network access revenues were reduced
by $3.6 million in the third quarter of 2000 to reflect the uncertainty of
certain components of these revenues. The amounts being reserved relate to a
complaint filed with the FCC during the third quarter alleging that certain of
the Company's subsidiaries exceeded their federally authorized rates of return.
See "Legal Proceedings" under Item 1 of Part II of this report for further
discussion of this matter. An additional decrease of $1.0 million in network
access revenues over the corresponding quarter of 1999 is due primarily to
changes relating to cost allocation factors, rate base and expenses from period
to period. Network access revenues are based on a regulated return on rate base
and recovery of allowable expenses associated with the origination and
termination of toll calls. Management expects that network access revenues will
decline as a component of local telephone revenues for the foreseeable future.
Directory advertising revenues increased by $1.4 million, or 20.9%, from
$6.7 million in 1999 to $8.1 million in 2000. This growth corresponds with
additional penetration for the current directory phone book cycle combined with
the growth in average access lines in service during 2000 over 1999 from 320,508
during 1999 to 331,633 during 2000, or an increase of 3.5%.
Deregulated and other revenues, which grew $0.8 million or 16.3% over
1999, consists principally of billing and collection services, space and power
rents, deregulated equipment sales, paystation revenues and other miscellaneous
telephone revenues. The revenue increase was due primarily to increased sales of
deregulated equipment during 2000.
Cellular
Cellular revenues increased $0.8 million, or 7.8%, to $10.9 million for
the three months ended September 30, 2000 compared to $10.1 million for the
three months ended September 30, 1999. This growth in revenue is due to growth
in average cellular subscribers to 73,395 during the quarter ended
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<PAGE> 15
September 30, 2000 from 70,217 during 1999, or 4.5%, and an increase in average
revenue per unit from $48.20 in 1999 to $49.72 in 2000. The increase in average
revenue per unit is due to the introduction of new statewide and national
pricing programs and the benefits of the digital upgrade completed in the first
quarter of 2000.
Interexchange Network, Data Services and Other
Interexchange network, data services and other revenues include
principally long distance, data transmission and Internet services revenues.
These revenues increased from $3.6 million in 1999 to $5.8 million in 2000 -- an
increase of $2.2 million, or 62.5%. Long distance revenues increased from $2.4
million in 1999 to $3.0 million in 2000 due to increases in long distance
minutes of use and increases in circuit rent revenues. Internet revenues also
increased $1.4 million due to the revenues of IAI, which was acquired in June
2000.
OPERATING EXPENSES
Operating expenses increased $6.6 million, or 10.2%, from $64.9 million
for the three months ended September 30, 1999 to $71.5 million for the three
months ended September 30, 2000.
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 decreased from
$38.5 million for the three months ended September 30, 1999 to $37.6 million for
the three months ended September 30, 2000 - a decrease of $0.9 million, or 2.3%.
As a percent of local telephone revenue, local telephone expense was 64.7% for
the quarter ended September 30, 2000 compared to 62.2% for the quarter ended
September 30, 1999. This change in local telephone expense as a percentage of
local telephone revenue is primarily attributable to the $2.1 million in charges
for uncollectible accounts recorded against revenue during the third quarter of
2000 in excess of those recorded during 1999, as previously discussed. During
the third quarter of 2000, ACS Group also incurred $1.1 million of local
telephone expense associated with interconnection proceedings with competitive
local exchange carriers for which comparable costs were not incurred during the
corresponding quarter of 1999. Management expects to incur additional costs
associated with interconnection proceedings in the future.
Cellular
Cellular expenses remained flat for the three months ended September 30,
2000 compared to the three months ended September 30, 1999. As a percentage of
revenue, cellular expenses decreased from 57.3% for 1999 to 54.0% for 2000.
Interexchange Network, Data Services and Other
Interexchange network, data services and other expenses increased by
$3.2 million, or 62.5%, but was consistent as a percentage of revenue during the
three months ended September 30, 2000 and 1999 at 140.3%. 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. Internet expenses also increased $1.9 million due
to the expenses of IAI, which was acquired in June 2000.
Unusual charges
During the quarter ended September 30, 2000, ACS Group recorded $2.1
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association and $0.6 million of severance cost related to a reduction in
workforce of approximately 100 personnel. The reduction in workforce, along with
other cost structure
15
<PAGE> 16
improvements, is expected to result in annual expense reductions totaling
approximately $10 million, beginning with the fourth quarter of 2000.
Depreciation and Amortization
Depreciation and amortization expense increased $2.2 million, or 13.8%,
due principally to increases in plant in service for the three months ended
September 30, 2000 over the corresponding period of 1999.
INTEREST EXPENSE
Interest expense increased $0.7 million, or 4.7%, for the three months
ended September 30, 2000 as compared to the three months ended September 30,
1999. The increase is due to higher interest rates for the variable rate
components of debt in 2000 compared to 1999.
INCOME TAXES
ACS Group has fully reserved the income tax benefit resulting from the
consolidated losses incurred since May 14, 1999 - the date of the acquisition of
substantially all of its operations.
NET INCOME (LOSS)
The increase in the net loss is primarily a result of the factors
discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
OPERATING REVENUES
Operating revenues increased $13.2 million, or 6.0% for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Local telephone, cellular and interexchange network, data services and other
revenues all increased compared to the prior nine month period.
Local Telephone
Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, increased $ 6.1 million, or 3.3%, for the nine months ended September
30, 2000 compared to the same period in 1999.
The local network service component of local telephone revenues was
$69.8 million during 2000 compared with $70.2 million during 1999. Revenue
decreased $0.4 million or 0.7% over the prior year, despite growth in average
total access lines in service of 4.7% and increased penetration of enhanced
features. The net decrease was due primarily to charges for uncollectible
accounts and increased market penetration of lower margin wholesale lines in the
Anchorage market. The charges for uncollectible accounts recorded against local
network service revenue in 2000 were $2.9 million in excess of those recorded
during 1999, accounting for more than 100% of the decrease in local network
service revenue. The charges for uncollectible accounts were also approximately
$1.6 million in excess of industry average collection rates. Collection
processes have been improved and management expects that charges for
uncollectible accounts will be in line with industry benchmarks going forward.
Management also believes that the continued loss of market share experienced in
the Anchorage market is attributable to below cost interconnection rates for
UNE's currently in place. The RCA has recently approved arbitrated
interconnection rates for UNE's for the Company's Fairbanks and Juneau markets
which, in the opinion of management, are also below cost. See "Legal
Proceedings" under Item 1 of Part II of this report for further discussion.
Network access revenues increased by $2.1 million, or 2.7%, from $77.7
million in 1999 to $79.8 million in 2000. Network access revenues were reduced
by $3.6 million in the third quarter of 2000 to reflect the uncertainty of
certain components of these revenues. The amounts being reserved relate to a
16
<PAGE> 17
complaint filed with the FCC during the third quarter alleging that certain of
the Company's subsidiaries exceeded their federally authorized rates of return.
See "Legal Proceedings" under Item 1 of Part II of this report for further
discussion of this matter. Network access revenues are based on a regulated
return on rate base and recovery of allowable expenses associated with the
origination and termination of toll calls. The increase in telephone access
revenues over the corresponding period in 1999 is due primarily to changes
relating to cost allocation factors, rate base and expenses from period to
period. Management expects that network access revenues will decline as a
component of local telephone revenues for the foreseeable future.
Directory advertising revenues increased by $2.6 million, or 12.8%, from
$20.4 million in 1999 to $23.0 million in 2000. This growth corresponds with the
growth in average access lines in service during 2000 over 1999 from 314,061
during 1999 to 328,846 during 2000, or an increase of 4.7%, combined with
additional penetration for the current directory phone book cycle.
Deregulated and other revenues, which grew $1.9 million, or 12.4% over
1999, consists principally of billing and collection services, space and power
rents, deregulated equipment sales, paystation revenues and other miscellaneous
telephone revenues. The revenue increase was due primarily to increased
deregulated equipment sales in 2000.
Cellular
Cellular revenues increased $3.7 million, or 14.4%, to $29.7 million for
the nine months ended September 30, 2000 compared to $25.9 million for the nine
months ended September 30, 1999. This growth in revenue is due to growth in
average cellular subscribers to 73,132 in 2000 from 68,712 in 1999, or 6.4%, and
an increase in average revenue per unit from $41.92 in 1999 to $45.06 in 2000.
The increase in average revenue per unit is due to the introduction of new
statewide and national pricing programs and the benefits of the digital upgrade
completed in the first quarter of 2000.
Interexchange Network, Data Services and Other
Interexchange network, data services and other revenues include
principally long distance, data transmission and Internet services revenues.
These revenues increased from $11.2 million in 1999 to $14.6 million in 2000 --
an increase of $3.4 million, or 29.9%. Long distance revenues increased from
$7.4 million in 1999 to $8.5 million in 2000 due to increases in long distance
minutes of use from 51.3 million to 56.8 million and increases in circuit rent
revenues. Internet revenues also increased $1.7 million due to the additional
revenues from IAI, which was acquired in June of 2000, and wireless cable
revenues increased $0.9 million due to the additional revenues from ACSTV, which
was not consolidated during the third quarter of 1999.
OPERATING EXPENSES
Operating expenses increased $13.8 million, or 7.1%, from $193.5 million
for the nine months ended September 30, 1999 to $207.3 million for the nine
months ended September 30, 2000.
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 decreased from
$114.4 million for the nine months ended September 30, 1999 to $113.5 million
for the nine months ended September 30, 2000 - a decrease of $0.9 million or
0.8%. As a percentage of revenue, local telephone expense decreased from 62.4%
for 1999 to 59.9% for 2000. This change in local telephone expense as a
percentage of local telephone revenue improved despite approximately $2.9
million in charges for uncollectible accounts recorded against revenues during
2000 in excess of those recorded during 1999, as previously discussed. During
the nine months of 2000, ACS Group also incurred $1.1 million of local telephone
expense associated with interconnection proceedings with competitive local
exchange carriers for which comparable costs were not incurred during the
corresponding nine months of 1999. Management expects to incur additional costs
associated with interconnection proceedings in the future.
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<PAGE> 18
Cellular
Cellular expenses increased $0.6 million, or 3.6%, for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Cellular expense was 65.8% of cellular revenues for 1999 and 59.6% of cellular
revenues for 2000.
Interexchange Network, Data Services and Other
Interexchange network, data services and other expenses increased by
$6.4 million, or 41.9%, and increased as a percentage of revenue from 135.3% in
1999 to 147.8% in 2000. The increase in interexchange network, data services and
other was the result of additional circuit and other costs associated with
developing the Company's statewide network and Internet infrastructure, the
rollout of ADSL Internet service and increases in minutes of use for long
distance as discussed above. Internet expenses also increased $2.2 million due
to the additional expenses from IAI, which was acquired in June of 2000, and
wireless cable expenses increased $1.0 million due to the acquisition of ACSTV,
the operations of which were not consolidated during the nine months ended
September 30, 1999.
Unusual charges
During the nine months ended September 30, 2000, ACS Group recorded $2.1
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association and $0.6 million severance cost related to a reduction in workforce
of approximately 100 personnel. The reduction in workforce, along with other
cost structure improvements, is expected to result in annual expense reductions
totaling approximately $10 million, beginning with the fourth quarter of 2000.
Depreciation and Amortization
Depreciation and amortization expense increased $5.6 million, or 11.9%,
due principally to increases in plant in service for the nine months ended
September 30, 2000 over the corresponding period of 1999.
INTEREST EXPENSE
Interest expense increased $20.2 million, or 72.0%, for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999. This increase is due to $611.6 million of debt incurred by ACS Group in
connection with the acquisitions on May 14, 1999 of substantially all of its
operations.
INCOME TAXES
ACS Group has fully reserved the income tax benefit resulting from the
consolidated losses it has incurred since May 14, 1999 - the date of the
acquisition of substantially all of its operations. Income taxes reflected in
the combined financial statements are substantially those of the predecessor
entities.
NET INCOME
The decrease in net income is primarily a result of the factors
discussed above and, in particular, the increase in interest expense of $20.2
million as a result of the financing of the acquisitions.
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<PAGE> 19
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. At September 30, 2000, the Company had approximately $82.2 million in
working capital, with approximately $83.6 million in cash and cash equivalents.
As of September 30, 2000 the Company had $75.0 million of remaining capacity
under its revolving credit facility, representing 100% of available capacity.
The Company has a $435.0 million bank credit agreement ("senior credit
facility"), $150.0 million in 9.375% senior subordinated notes due 2009 and
$17.3 million in 13% senior discount debentures due 2011, representing
substantially all of the Company's long-term debt of $615.2 million as of
September 30, 2000. 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. The senior credit facility requires annual principal payments
commencing on May 14, 2002.
The Company employs an interest rate hedge transaction, which fixes at
5.99% the underlying variable rate on one-half of the borrowings under the
senior credit facility, or $217.5 million, expiring in June 2002. The underlying
variable rate for the senior credit facility is based on the London Interbank
Offer Rate ("LIBOR"), which is adjusted at each monthly, quarterly or
semi-annual rollover date.
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. In 1999 the
Company purchased fiber capacity for $19.5 million, which was funded with monies
borrowed to finance the acquisition of substantially all of its operations. The
Company has also agreed to purchase additional fiber capacity for $19.5 million
in the first quarter of 2001. ACS Group anticipates total capital expenditures
of approximately $65.0 million to $75.0 million in 2000. Capital expenditures
for the first nine months of 2000 were $48.1 million, including $3.2 million in
capital leases. The Company intends to fund its capital expenditures with cash
on hand, through internally generated cash flows, 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. 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 (now ACSTV) 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 ACSTV for $3.0 million.
On June 16, 2000, ACS Group acquired for an undisclosed amount all
outstanding shares of IAI, an Internet service provider with over 25,000
customers in Alaska. The acquisition was funded entirely with cash on hand.
ACS Group believes that it will have sufficient working capital provided
by operations and available borrowing capacity under the existing revolving
credit facility to fund its operations and capital expenditures over the next 12
months.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. There have been no material changes to the
Company's outstanding debt instruments since December 31, 1999.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes
that the disposition of claims currently pending under these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company's incumbent local exchange carriers ("ILECS") in the
Anchorage, Fairbanks, and Juneau markets have received additional requests for
interconnection under section 251 of the Telecommunications Act of 1996 ("1996
Act"), as well as requests for arbitration or to "pick and choose" provisions of
existing interconnection agreements under section 252 of the 1996 Act. The
Company expects that additional such requests will be received over time in the
future as additional entities seek to enter these markets.
As previously reported, ALLTEL Publishing Corporation has initiated
litigation alleging improper termination of certain directory publishing
contracts. Following various discovery proceedings in August and September 2000,
ALLTEL filed a second amended complaint on October 10, 2000, alleging new facts
in connection with its cause of action. Based upon this revised complaint, ACS
Group tendered the defense of this proceeding to CenturyTel ("CTE") on October
19, 2000, under the terms of the August 14, 1998 acquisition agreement between
CTE and ACS Group (then ALEC Acquisition Corp.). On October 23, 2000, CTE
declined to assume the defense of the proceeding. The Company is currently
reviewing the amended complaint and the CTE response, but cannot predict the
future course or outcome of this proceeding at this time. Trial remains
scheduled for January, 2001.
On August 24, 2000, General Communication, Inc. ("GCI"), filed a formal
complaint with the FCC under various provisions of the Communications Act of
1934 (as amended), alleging that certain of the Company's subsidiaries exceeded
their federally authorized rates of return related to the 1997-1998 monitoring
period. The principle issue raised in the complaint focuses on the proper
jurisdictional recognition (federal versus state) of minutes of use associated
with Internet service provider traffic. The final FCC disposition of the
complaint is expected to occur in January 2001. The Company believes it has
adhered to applicable legal requirements and is actively defending the
complaint, but cannot predict the ultimate outcome of the proceedings.
On September 5, 2000, the RCA issued orders largely ratifying the
findings of the arbiter in the Fairbanks and Juneau interconnection arbitration
proceedings involving the Company and GCI. On September 25, 2000, ACS Group
filed protective appeals in the state Superior Court and in the Federal District
Court for the District of Alaska, alleging various errors in the Commission
orders. On October 5, 2000, the RCA issued final orders affirming the
interconnection agreements arbitrated in these proceedings. On October 20, 2000,
ACS Group filed a petition for reconsideration with the RCA, seeking Commission
review and redetermination of specific elements in its final order. The RCA may,
but is not required, to reconsider its prior rulings, in whole or in part, and
the Commission's disposition of this petition cannot be predicted.
The Company previously reported on the decision of the United States
Court of Appeals for the Eighth Circuit in the case of Iowa Utilities Board, et
al. v. Federal Communications Commission (Case No. 96-3321 and consolidated
cases ("Iowa II"). On September 22, 2000, the Eighth Circuit suspended that
portion of its decision which had vacated the FCC pricing rule relating to
forward looking economic cost measurement based upon the most efficient
technology currently available and the lowest cost network configuration (set
out at 47 C.F.R. Section 51.505(b)(1)). This suspension was ordered by the Court
to permit parties to the proceeding to seek review of its Iowa II decision by
the U.S. Supreme Court. The Eighth Circuit did not suspend other portions of its
decision, including those portions vacating certain FCC rules purporting to
address the "rural exemption" provisions of 47 U.S.C. Section 251(f)(1). The
Company instituted previously reported litigation in the State Superior Court in
1999 against the RCA, alleging generally that the rural exemption had been
improperly terminated with respect to the Fairbanks and Juneau markets. The
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<PAGE> 22
Company is currently reviewing the effects of the recent Eighth Circuit
suspension order, but has made no decision with respect to further courses of
action in that litigation.
On October 26, 2000, the Federal Communication Commission granted the
petition of a subsidiary of ACS Group, ACS of Anchorage (previously filed under
the name of ATU), seeking a waiver of certain federal access charge rules. The
effect of the waiver is to permit ACS of Anchorage pricing flexibility through
the ability to offer term and volume discount pricing in connection with its
switched access services. The FCC waiver was granted, in part, upon findings
concerning the level of competition in the Anchorage marketplace, as
demonstrated in the record of the proceedings.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 September 30, 2000,
$89.8 million of the net proceeds were used for the following purposes:
- $10.6 million 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.
- $48.6 million was used to fund capital expenditures.
- $5.6 million was used to complete acquisitions.
Unused proceeds of the offering are invested, along with excess cash
flows from operations, in institutional money market funds and investment grade
corporate and U.S. Government securities. ACS Group currently intends to use the
remaining proceeds to fund acquisitions, capital expenditures and for debt
reduction.
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 November 6, 2000 3,747,519 option grants are outstanding under these plans
and 310,868 options have been exercised and converted into shares of the
Company's common stock. The proceeds of $1.9 million from these plans were used
to fund capital expenditures and operations. See Note 2, "Stock Incentive Plans"
to the Alaska Communications Systems Group, Inc. Consolidated Financial
Statements for further discussion.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 9, 2000 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
/s/ Kevin P. Hemenway
-------------------------
Kevin P. Hemenway
Senior Vice President and
Chief Financial Officer
(signing both in his capacity as
Senior Vice President on behalf of
the Registrant and as Chief
Financial Officer of the Registrant)
24
