Back to GetFilings.com
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 333-82363
---------------
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, 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)
91-1921377 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
None
---------------
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 (ss. 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. [_] (Not Applicable)
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) (Not Applicable)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Alaska Communications Systems Group, Inc.'s 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.
2
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE
PART I
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 23
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 27
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 52
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS F-1
SIGNATURES
1
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
Alaska Communications Systems Holdings, Inc. ("ACS Holdings" or "the
Company") is a wholly owned subsidiary of Alaska Communications Systems Group,
Inc. ("ACS Group"). ACS Holdings 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. In May 1999, the Company changed its name from
ALEC Acquisition Corp. to Alaska Communications Systems Holdings, Inc.
ACS Holdings 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:
Former Name New Name
- ----------- --------
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.
ACS Holdings 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. The Company 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 Holdings evaluates opportunities for establishing
or acquiring other telecommunications businesses through acquisitions or
otherwise in Alaska and, through ACS Group, elsewhere in the United States, and
may make investments in such businesses in the future. ACS Holdings has focused
its attention on local telephone, cellular, interexchange network and data
services, and Internet businesses. On September 30, 1999, ACS Holdings acquired
a 67% interest in Alaskan Choice Television, LLC ("ACTV"), which provides
wireless 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 ACTV, together with certain FCC licenses and, on February 14, 2000,
completed the acquisition.
LOCAL TELEPHONE. With over 325,000 access lines, representing
approximately 75% of the access lines in Alaska, ACS Holdings is the largest
local exchange carrier in Alaska and the 15th largest in the U.S. The
2
4
Company provides service to all of the state's major population centers,
including Anchorage, Juneau and Fairbanks.
CELLULAR. ACS Holdings 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 Holdings 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. The Company 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 Holdings 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 Holdings 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 Holdings also owns 100% of ACTV, effective February 14, 2000, which
is a provider of wireless television services in the Fairbanks and Anchorage
service areas. ACS Holdings expects to expand its offering of wireless cable
services using digital compression technology.
PRODUCTS SERVICES AND REVENUE SOURCES
ACS Holdings 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 Holdings' revenues
on a pro forma combined basis for the periods presented:
COMBINED REVENUE FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999
---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------ ------ ------
(DOLLARS IN MILLIONS)
REVENUE BY SOURCE:
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%
====== ====== ====== =====
3
5
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 Holdings' 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 Holdings' 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 Holdings' service areas, as compared to the national
average of $34.55. See "Business - Introduction" for a discussion of the
Company'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.
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
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%
On June 1, 1999, as part of the consolidation of its operating and
billing systems, ACS Holdings 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 Holdings, 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
4
6
- population growth in ACS Holdings' service areas.
Enhanced Services. Enhanced services consist of services such as call
waiting, call forwarding, call return, continuous redial, caller ID and voice
mail. These services are generally billed on a monthly basis 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 Holdings' 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 Holdings generates intrastate access
revenue when an intrastate long distance call that involves 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 Holdings'
intrastate service is regulated by the RCA.
Interstate Access Charges. ACS Holdings generates interstate access
revenue when an interstate long distance call is originated from a local calling
area in one state to a local calling area in another state. 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.
CELLULAR SERVICES
ACS Holdings' 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 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 Holdings 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.
5
7
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
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%
Although ACS Holdings 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 Holdings 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 Holdings' 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 Holdings 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 Holdings' long
distance operations have generated operating losses.
In April 1999, ACS Holdings 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 Holdings' 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 Holdings
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 Holdings agreed to purchase additional capacity in 2001
for $19.5 million. ACS Holdings 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.
6
8
ACS Holdings 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 Holdings' 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 Holdings 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 Holdings 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
Holdings 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 Holdings is offering high speed
Digital Subscriber Line service, or DSL, to its Internet subscribers.
ACS Holdings 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 Holdings owns ACTV, a wireless cable
television provider. ACTV provides wireless cable television services over
assigned UHF frequencies to approximately 3,000 customers in the Company's
Anchorage and Fairbanks service areas. As of December 31, 1999, ACS Holdings
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,
7
9
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 on January 1, 2000 and would be
applicable to ACS Holdings' 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 Holdings 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 Holdings' 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 Holdings' 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 Holdings 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 Holdings' 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 Holdings' 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 Holdings' markets.
Customer care centers are located in Anchorage, Fairbanks, Juneau and
Kenai/Soldotna.
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 Holdings 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
Holdings expects to complete by the second quarter of 2000. ACS Holdings expects
to complete the implementation of Nortel's SUCCESSION NETWORK(TM) by year-end
2002. Planned network
8
10
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 Holdings
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 Holdings 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 Holdings uses Saville Systems and for its accounting systems it
uses SAP. ACS Holdings 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 Holdings 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
- 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
9
11
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 Holdings' 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, and on
October 11, 1999, the RCA, which replaced the APUC on July 1, 1999, sustained
the APUC's order. As a result, ACS Holdings 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 Holdings 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 Holdings 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, in
particular, 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 landline 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 Holdings
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 Holdings currently
competes 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 Holdings 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 Holdings currently offers long
10
12
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
Holdings' service areas. ACS Holdings 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 Holdings 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 Holdings has two basic types of customers for its local services:
- business and residential customers located in their local service
areas that pay for local phone service
- interexchange carriers that pay the Company for access to long
distance calling customers located within its local service
areas.
Approximately 57% of ACS Holdings' retail access lines served
residential customers, while 43% served business customers. In addition, no
single ACS Holdings' 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 Holdings 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:
- marketing current and future service offerings aggressively,
including packaged service offerings,
- centralizing marketing functions
- enhancing direct sales efforts.
ACS Holdings 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.
11
13
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 Holdings 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 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 and training and incentive
compensation programs for call center employees.
ENVIRONMENTAL REGULATIONS
ACS Holdings' 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 Holdings' 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 Holdings' 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
ACS Holdings 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
Holdings 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.
12
14
REGULATION
OVERVIEW
ACS Holdings' operations are subject to the separate but concurrent
jurisdictional control of both the Federal Communications Commission ("FCC") and
the State of Alaska. 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 Holdings' 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 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 Holdings' 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 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 the provisioning of unbundled
network elements and of wholesale discounted resale of end user services.
STATE REGULATION
Telecommunications companies subject to the RCA's jurisdiction are
required to obtain certificates of public convenience and necessity prior to
operating as a public utility in Alaska. The RCA is responsible for approving
new 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 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 Holdings' 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 Holdings' rural local exchange carriers to bundle service
offerings with ATU Long Distance, Inc.
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, ACS Holdings 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
13
15
telecommunications services and to earn a reasonable rate of return on the
investment required to provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services
and enhanced service offerings,
- access charges to interexchange carriers for originating and
terminating interstate and intrastate interexchange calls,
- interconnection charges, wholesale service charges and other
rates to competing carriers interconnecting with 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, a
local exchange carrier must first determine its aggregate costs and then
allocate those costs between regulated and nonregulated services.
After identifying the regulated costs of providing local telephone
service, a local exchange carrier must allocate those costs among its various
local exchange and interstate and intrastate interexchange services and between
state and federal jurisdictions. This process is complicated by the difficulty
of allocating specific pieces of plant and equipment to a particular service
because a local exchange carrier's plant and equipment are utilized for
different services, such as local telephone and interstate and intrastate
access. This process is referred to as "separations" and is governed primarily
by the FCC's rules and regulations. The underlying legal purpose of separations
rules is to define how a carrier's expenses are allocated and recovered from
federal and state jurisdictions. The FCC is considering whether to modify or
eliminate the current separations process. This decision could indirectly
increase or reduce earnings of carriers subject to separations rules.
INTERSTATE END-USER RATES
The deployment of the local telephone network from the switching
facility to the customer is known as the "local loop" and is one of the most
significant costs incurred by a local exchange carrier in providing telephone
service. The FCC has established a rate structure that provides for the recovery
of a portion of the cost of the local loop allocated to 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, leaving such carriers
with little alternative other than to charge higher rates for intrastate
services. Accordingly, the FCC provides for additional interstate recovery by
eligible telecommunications carriers through the federal Universal Service Fund.
The federal Universal Service Fund is available to carriers whose local loop
costs are significantly above the national average as calculated pursuant to FCC
rules. Recent FCC rulings have made this high-cost support available to a
competitive carrier, on an averaged per line basis, for those lines serving
customers switching to the competitive carrier.
14
16
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 Holdings' 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 Holdings, cannot be predicted at this time.
INTRASTATE END USER RATES
The levels of rates charged to end-users for the provision of basic
local service are generally subject to rate-of-return regulation administered by
the RCA. Local rates are typically set at a level that will allow recovery of
embedded costs for local service divided by the number of services and
customers. Recognized costs include an allowance for a rate of return on
investment in plant used to provide local service. Rate cases are typically
infrequent, carrier-initiated and require the carrier to meet substantial
burdens of proof. The last APUC-authorized rates of return were 12.55% and
11.70% for 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 Holdings, 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:
15
17
- 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 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 Holdings' 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.
16
18
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,
- 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.
17
19
Competitors are required to compensate a local exchange carrier for the
cost of providing interconnection services. In the case of resale
interconnection, the rules provide that the rates charged should be on a
wholesale basis and reflect the current retail rates of the incumbent local
exchange carrier, excluding the portion of costs avoided by the incumbent local
exchange carrier. In the case of unbundled network element interconnection,
rates are based on costing methodologies that employ a forward-looking economic
cost pricing methodology known as total element long run incremental cost. While
the Supreme Court recently affirmed the FCC's authority to develop pricing
guidelines, the Supreme Court did not evaluate this pricing methodology. Some
incumbent local exchange carriers have argued that total element long run
incremental cost pricing methodology does not allow adequate compensation for
the provision of unbundled network elements. The Eighth Circuit Court of Appeals
heard oral arguments on this pricing issue on September 16, 1999, but has not
yet issued a ruling.
The Telecommunications Act 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. ATU has also
received requests for interconnection from Alaska Fiber Star, L.L.C. and
DSL.net.
ACS Holdings' 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 of interconnection agreements with potential competitors. ACS
Holdings 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 Holdings 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 Holdings 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
18
20
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 Holdings believes that the appeals are well founded, it cannot predict the
timing and outcome of this litigation.
In April 1999, a bill was proposed in the Alaska State senate to open to
competition many local telephone markets in which ACS Holdings 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
Holdings 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 Holdings local exchange carriers benefiting from rural
exemptions accounted for 42.4% of its consolidated operating revenues and 38.0%
of its consolidated operating income. Loss of the rural exemptions, absent
compensating measures, such as rate increases, or market structure reforms, such
as the replacement of implicit subsidies by explicit support mechanisms, or rate
deaveraging, could adversely affect 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 Holdings' 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
19
21
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 Holdings 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. 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 Holdings' 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:
20
22
- 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 Holdings is subject to the
general requirement that its charges and terms for its 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 Holdings, 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 that this newly issued order will have on ACS Holdings' advertising is
still 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 Holdings' 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
Holdings' Internet services is difficult to predict.
OTHER PROCEEDINGS
A number of other FCC, state and judicial proceedings are currently pending or
may be initiated in the future which could materially affect 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
21
23
carrier's freedom of speech. At least one interested party has
asked the U.S. Supreme Court to review the Tenth Circuit's
decision. If the FCC's rules are upheld, it may impose
significant restrictions on ACS Holdings' 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 Holdings 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.
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 Holdings' 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 Holdings' business. The Company cannot predict the outcome
of these or any other proceeding before the FCC, the RCA or the courts.
22
24
ITEM 2. PROPERTIES
At December 31, 1999, ACS Holdings' 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 Holdings' 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 Holdings leases
its corporate headquarters located in Anchorage.
ACS Holdings' 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 Holdings 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 Companies 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 Holdings, Inc.
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Parent are 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.
23
25
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the executive officers and directors of ACS Holdings
as of the date hereof:
NAME AGE POSITION
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 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
CHARLES E. ROBINSON, ACS Holding'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 Holding'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 PacifiCorp 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 20 years. Mr. Wonnell served as Vice
24
26
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 Holdings' Senior Vice President and Chief
Financial Officer since January 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 August 1995, Mr.
Ayers held various leadership positions with Pacific Telecom and its
subsidiaries, including Executive Vice President of Pacific Telecom Services
Company, with responsibility for strategic planning, marketing and business
development, and Executive Vice President and General Manager of Alascom, Inc.,
Alaska's largest interexchange carrier. Mr. Ayers holds a bachelor's degree in
management from Golden Gate University.
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 Holdings 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 attended the Stanford University
School of Business for Executives in 1983 and the Amos Tuck School of Business
at Dartmouth College in 1986.
25
27
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 Holdings.
J. RUSSELL TRIEDMAN, a director since June 1999, left the board in
October 1999 for personal reasons unrelated to ACS Holdings.
JASON B. HURWITZ, a director since October 1999, left the board in
January 2000 for personal reasons unrelated to ACS Holdings.
26
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of ACS Group, and as such has
no publicly traded equity securities. 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:
1999 QUARTERS HIGH LOW
------------- ----- ---
4th (from November 18 through December 31) 16 12
The approximate number of holders of record of Common Stock of ACS Group
as of March 13, 2000 was 46.
DIVIDENDS
The Company's parent, ACS Group, has never declared or paid any cash
dividends on its common stock. ACS Group 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, ACS Group's ability to declare and pay cash dividends on its common
stock is restricted by covenants in ACS Holdings' senior credit facility and in
the indentures governing its senior discount debentures and ACS Holdings' senior
subordinated notes.
27
29
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of ACS Holdings. 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 Holdings and the related notes which are included elsewhere in this Form
10-K.
28
30
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
For the Year Ended December 31, 1999
(Dollars in Thousands)
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 (37,517)
Interest and other income 426
Equity in loss of minority investments (198)
---------
Total other income and expense (37,289)
---------
Loss before income tax benefit (21,002)
Income tax benefit 301
---------
Net Loss (20,701)
=========
OTHER FINANCIAL DATA:
Cash used by operating activities $ (50,648)
Cash used by investing activities (774,368)
Cash provided by financing activities 833,741
EBITDA 56,593
EBITDA margin 29.2%
Capital expenditures (74,052)
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 $ 937,711
Long-term debt including current portion 598,407
Stockholders' equity 266,541
29
31
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.
30
32
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
--------- --------- --------- --------- ---------
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
31
33
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 Holdings 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 Holdings 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 Holdings 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 Holdings, 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.
32
34
ATU
------------------------------------------------------------
1995 1996 1997 1998
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
33
35
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 HOLDINGS, INC.
ACS Holdings (formerly known as ALEC Acquisition Corp.) 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 Parent 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 Holdings 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 Holdings generates revenue through:
- the provision of local telephone services, including:
- basic local service to retail customers within ACS Holdings'
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 Holdings also recognizes its proportionate share of the net income
or loss of its minority-owned investments.
34
36
Within the telecommunications industry, local exchange carriers have
historically enjoyed stable revenue and cash flow from local exchange operations
resulting from the need for basic telecommunications services, the highly
regulated nature of the telecommunications industry and, in the case of rural
local exchange carriers, the underlying cost recovery settlement and support
mechanisms applicable to local exchange operations. Basic local service is
generally provided at a flat monthly rate and allows the user to place unlimited
calls within a defined local calling area. Access revenues are generated by
providing interexchange carriers access to the local exchange carrier's local
network and its customers. Universal service revenues are a subsidy paid to
rural local exchange carriers to support the high cost of providing service in
rural markets. Other service revenue is generated from ancillary services,
enhanced services and Internet access.
Changes in revenue are largely attributable to changes in the number of
access lines, local service rates and minutes of use. Other factors can also
impact revenue, including:
- intrastate and interstate revenue settlement methodologies,
- authorized rates of return for regulated services,
- whether an access line is used by a business or residential
subscriber,
- intrastate and interstate calling patterns,
- customers' selection of various local rate plan options,
- selection of enhanced calling services, such as voice mail, or
other packaged products, such as cellular and Internet and
- other subscriber usage characteristics.
Local exchange carriers have two basic tiers of customers:
- end users located in the local exchanges that pay for local
telephone service including, in ACS Holdings' 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 Holdings' 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
Holdings 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 Holdings expects that in future
periods operating expenses relating to leased circuits will be lower, but
depreciation relating to the purchased capacity will be higher.
35
37
RESULTS OF OPERATIONS
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS - TWELVE MONTHS ENDED DECEMBER 31, 1999
COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998
The following unaudited table summarizes ACS Holdings' 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 Holdings' 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 Holdings' financial data.
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999
--------- ---------
(in thousands)
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) (42,043)
Interest and other income 5,555 2,899
Equity in earnings (loss) of minority investments (2,945) (1,569)
--------- ---------
Total other income and expense (10,372) (40,713)
--------- ---------
Income (loss) before income taxes 32,435 (7,987)
Income taxes 9,218 3,643
--------- ---------
Net income (loss) $ 23,217 $ (11,630)
========= =========
36
38
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 Holdings. 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
37
39
costs associated with the acquisitions of CenturyTel's Alaska properties and ATU
of $8.2 million. The Company 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 $29.1 million, or 223.9%, for the twelve
months ended December 31, 1999 as compared to the year ended December 31, 1998
due to $591.7 million of debt incurred in connection with the acquisitions of
CenturyTel's Alaska properties and ATU.
38
40
INCOME TAXES
ACS Holdings 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 Holdings, 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 $29.1 million as a result of the
financing of the acquisitions.
39
41
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:
Year Ended December 31,
----------------------
1997 1998
-------- --------
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
======== ========
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:
Year Ended
December 31,
1997
------
Revenues $3,100
Operating expenses 1,643
Depreciation 424
------
Operating income $1,033
======
40
42
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
41
43
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.
42
44
ATU
The following table summarizes each component of ATU's revenue sources
for the years ended December 31, 1997 and 1998:
Year Ended December 31,
----------------------
1997 1998
-------- --------
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
======== ========
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
43
45
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
44
46
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 Holdings has not experienced any year
2000 issues that have materially affected its business. During 1999, ACS
Holdings spent approximately $24 million to upgrade and maintain its information
technology systems 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 Holdings' 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 Holdings' operations.
45
47
LIQUIDITY AND CAPITAL RESOURCES
ACS Holdings has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and subsequent
contribution of capital by its parent, ACS Group, 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
excluding advance to the Parent were $47.0 million. At December 31, 1999, the
Company had approximately $101.4 million in working capital, including
approximately $9.0 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 Holdings' 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 and received an equity capital infusion in the amount of $121.2
million. ACS Group issued senior discount debentures and warrants for $25.0
million in gross proceeds in a private placement, which were subsequently
contributed to the Company as equity. Substantially as a result of the financing
for these acquisitions, as of December 31, 1999 the Company had $598.4 million
of long-term debt. In addition $14.4 million of senior discount debentures are
recorded at ACS Group and are collateralized by substantially all assets of the
Company. Interest on ACS Group's senior discount debentures and ACS Holdings'
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 Holdings, 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. All net proceeds from the issuance of common stock by ACS Group were
subsequently contributed to ACS Holdings as paid in capital. On November 18,
1999, ACS Group began trading on the NASDAQ National Market under the symbol
"ALSK."
A portion of the proceeds of ACS Group'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 revolving
credit facility.
The local telephone network requires the timely maintenance of plant and
infrastructure. ACS Holdings' 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 Holdings' 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 $74.1 million in 1999. ACS
Holdings 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 Holdings' 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
46
48
changes in the Company's business strategy.
ACS Holdings' 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 ACTV 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 Holdings 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 Holdings 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 Holdings'
rural local exchange carriers, triggering interconnection
obligations under the Telecommunications Act of 1996 from which
the Company had previously been exempt; and
47
49
- the RCA has indicated that it does not intend to determine rates
and terms for interconnection through tariff processes and has
ordered ACS Holdings' rural local exchange carriers to negotiate
with potential competitors for the purpose of establishing the
terms and conditions of interconnection in their service areas,
subject to arbitration at the request of any party at any time
after December 10, 1999 if the parties are unable to reach
agreement.
- 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
Holdings 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
Holdings 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 Holdings 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 Holdings 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 Holdings 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 Holdings
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 Holdings 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 Holdings' 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.
48
50
Investors should also be aware that while ACS Holdings does, at various
times, communicate with securities analysts, it is against ACS Holdings' policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Holdings
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
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 subordinated notes and
has entered into a bank credit facility. ACS Group also issued senior discount
debentures. 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 Holdings, Inc.'s Consolidated
Financial Statements contain descriptions of the 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.
50
52
There- Total Fair
1999 2000 2001 2002 2003 2004 after Paid Value
---- ---- ---- ---- ---- ---- ----- ---- -----
(Dollars in Thousands)
Interest Rate Sensitivity:
Credit Facility - Tranche A: $ 150,000
Interest Amount $ 7,874 $ 13,630 $ 13,592 $ 13,506 $ 13,371 $ 13,271 $24,399 $99,643
Average interest rate (variable) 8.19% 8.94% 8.94% 8.94% 8.94% 8.94% 8.94% 8.83%
Credit Facility - Tranche B: $ 150,000
Interest Amount $ 8,114 $ 14,011 $ 13,973 $ 13,884 $ 13,745 $ 13,642 $38,285 $115,654
Average interest rate (variable) 8.44% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19% 9.08%
Credit Facility - Tranche C: $ 135,000
Interest Amount $ 7,519 $ 12,953 $ 12,918 $ 12,836 $ 12,707 $ 12,612 $ 41,448 $112,993
Average interest rate (variable) 8.69% 9.44% 9.44% 9.44% 9.44% 9.44% 9.44% 9.33%
Senior Subordinated Notes: $ 145,500
Interest Amount $ 8,894 $ 14,090 $ 14,051 $ 14,051 $ 14,051 $ 14,090 $ 61,437 $ 140,664
Average interest rate (fixed) 9.38% 9.38% 9.38% 9.38% 9.38% 9.38% 9.38% 9.38%
Capital leases and other $ 13,407
Interest Amount $ 750 $ 906 $ 524 $ 451 $ 408 $ 364 $ 1,302 $ 4,705
Average interest rate (fixed) 8.39% 9.07% 9.06% 8.65% 8.67% 8.65% 9.39% 8.84%
Credit Facility - $75 Million Revolver $ -
Interest Amount $ 439 $ - $ - $ - $ - $ - $ - $ 439
Average interest rate (variable) 8.30% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.30%
Commitment fee $ 84.00 $ 380 $ 380 $ 380 $ 380 $ 380 $ 521 $ 2,505
Average interest rate (fixed) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Variable to Fixed Interest Rate Swap
-- Credit Facility: $ (923)
Interest received $ - $ 413 $ 413 $ 198 $ - $ - $ - $ 1,024
Interest paid $ 698 $ - $ - $ - $ - $ - $ - $ 698
Average receive rate - 0.19% 0.19% 0.19% - - - 0.19%
Average pay rate 0.73% - - - - - - 0.73%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Combined and consolidated financial statements of Alaska Communications
Systems Holdings, Inc. and Subsidiaries, 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.
51
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 Holdings' 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.
52
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 Holdings 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 Schedules
Financial statement schedules for ACS Holdings 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.
(b) Reports on Form 8-K
The following item was reported on a Form 8-K filed October 14, 1999:
Item 5 Other Events - ACS Group 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 - ACS Group and 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
EXHIBIT NO. DESCRIPTION
----------- -----------
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*
53
55
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*
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
24.1 Powers of Attorney (included on signature page)***
27.1 Financial Data Schedule
- ------------------------
* 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
54
56
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 1999 and 1998 F-3
Consolidated Statement of Operations - Year Ended December 31, 1999 F-4
Consolidated Statement of Stockholder's Equity - Year Ended December 31, 1999 F-5
Consolidated Statements of Cash Flows - Year Ended December 31, 1999 and for F-6
the period July 16, 1998 (Date of Inception) through December 31, 1998
Notes to Consolidated Financial Statements - Year Ended December 31, 1999 F-7
Schedule II- Valuation and Qualifying Accounts F-22
CENTURYTEL ALASKA PROPERTIES
Independent Auditors' Reports F-23
Combined Balance Sheets--December 31, 1997 and December 31, 1998 F-25
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-26
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-27
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-28
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
Independent Auditors' Report F-41
Combined Balance Sheet--October 6, 1997 F-42
Combined Statements of Income and Fund Equity--Year Ended December 31, 1996
and Period Ended October 6, 1997 F-43
Combined Statements of Cash Flows--Year Ended December 31, 1996 and Period
Ended October 6, 1997 F-44
Notes to Combined Financial Statements--Year Ended December 31, 1996 and
Period Ended October 6, 1997 F-45
MUNICIPALITY OF ANCHORAGE TELEPHONE UTILITY FUND
Independent Auditors' Report F-48
Balance Sheets--December 31, 1997 and December 31, 1998 F-49
Statements of Revenues, Expenses, and Changes in Retained Earnings--
Years Ended December 31, 1996, 1997 and 1998 F-50
Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998 F-51
Notes to Financial Statements--Years Ended December 31, 1996, 1997 and 1998 F-52
57
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alaska Communications Systems Holdings, Inc.
Anchorage, Alaska
We have audited the consolidated balance sheets of Alaska Communications
Systems Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the year ended December 31, 1999, and the
consolidated statement of cash flows for the period from July 16, 1998 (date of
inception) through December 31, 1998. 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 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 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 audits provide 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 Holdings, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations, and their cash flows for the year
ended December 31, 1999, 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. 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
58
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
1999 1998
--------- ---------
Current assets:
Cash and cash equivalents $ 9,006 $ 281
Accounts receivable-trade, net of allowance of $5,203 49,323 --
Accounts receivable-affiliates 97,676 42
Materials and supplies 5,923 --
Prepayments and other current assets 3,533 --
--------- ---------
Total current assets 165,461 323
Investments 1,673 --
Property, plant and equipment 902,131 36
Less: Accumulated depreciation 452,304 --
--------- ---------
Property, plant and equipment, net 449,827 36
Goodwill, net of accumulated amortization of $4,243 250,346 --
Other assets 70,404 261
--------- ---------
Total assets $ 937,711 $ 620
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt 4,944 --
Accounts payable-trade 30,688 --
Accounts payable-affiliates 610 620
Advance billings and customer deposits 7,521 --
Accrued and other current liabilities 20,324 --
--------- ---------
Total current liabilities 64,087 620
Long-term debt, net of current portion 593,463 --
Unamortized investment tax credits 394 --
Other deferred credits and long-term liabilities 13,226 --
Commitments and contingencies -- --
Stockholder's equity:
Common stock, .01 par value; 1,000 authorized,
1 share issued and outstanding -- --
Contributed capital 287,242 --
Accumulated deficit (20,701) --
--------- ---------
Total stockholder's equity 266,541 --
--------- ---------
Total liabilities and stockholders' equity $ 937,711 $ 620
========= =========
See Notes to Consolidated Financial Statements
F-3
59
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
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 (37,517)
Interest income and other 426
Equity in earnings (loss) of investments (198)
---------
Total other income and expense (37,289)
---------
Loss before income taxes (21,002)
Income tax benefit 301
---------
Net loss $ (20,701)
=========
See Notes to Consolidated Financial Statements
F-4
60
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
COMMON CONTRIBUTED ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
--------- ----------- ----------- -------------
Balance, December 31, 1998 $ -- $ -- $ -- $ --
Contribution of capital -- 287,242 -- 287,242
Net loss -- -- (20,701) (20,701)
--------- --------- --------- ---------
Balance, December 31, 1999 $ -- $ 287,242 $ (20,701) $ 266,541
========= ========= ========= =========
See Notes to Consolidated Financial Statements
F-5
61
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM
JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,701) $ --
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 40,306 --
Amortization of debt issuance costs 2,855 --
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 3,196 --
Accounts receivable - affiliate (97,676) --
Accounts payable and other current liabilities 13,968 --
Other (567) --
--------- ---------
Net cash used by operating activities (50,648) --
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and capital expenditures, net of capitalized interest (74,052) (36)
Cost of acquisitions net of cash received (697,732) --
Other assets (2,584) (261)
Accounts receivable from employees and related party -- (42)
--------- ---------
Net cash used by investing activities (774,368) (339)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from stockholder -- 620
Proceeds from the issuance of long-term debt 592,927 --
Payments on long-term debt (3,269) --
Debt issuance costs (37,014) --
Contributed capital 281,097 --
--------- ---------
Net cash provided by financing activities 833,741 620
Increase in cash 8,725 281
Cash and equivalents at beginning of the period 281 --
--------- ---------
Cash and equivalents at the end of the period $ 9,006 $ 281
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 31,783 $ --
Income taxes paid -- --
SUPPLEMENTAL NONCASH TRANSACTIONS -
Property acquired under capital leases $ 740 $ --
See Notes to Consolidated Financial Statements
F-6
62
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Holdings, Inc. and Subsidiaries (the
"Company" or "ACS Holdings") (formerly ALEC Acquisition Corporation), 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 organized in July
of 1998 for the purpose of acquiring and operating telecommunications
properties. The principal activities in 1998 and through May 14, 1999 were the
preparation of systems and obtaining financing for pending acquisitions (see
Note 2). On May 14, 1999, the Company was acquired and became a wholly owned
subsidiary of Alaska Communications Systems Group, Inc. (the "Parent" or "ACS
Group") (formerly ALEC Holdings, Inc.).
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 Holdings, Inc. (formerly ALEC
Acquisition Corporation)
- 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 Alaska Communications
Systems Holdings, Inc. for the full year and CenturyTel Alaska properties, ATU
Long Distance, ATU Communications and MACtel since their acquisition on May 14,
1999, and ACTV since its acquisition on September 30, 1999.
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
63
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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:
Company: Carrying value Percent Owned
Alaska Network Services, Inc. $1,614 47.0%
Internet Alaska, Inc. 59 28.5%
------
$1,673
======
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 and senior subordinated notes 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 $2,855.
F-8
64
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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
if Application of FASB Statement No. 71, would not be material to the Company's
financial position, results of operations or cash flows.
The local telephone exchange activities of the Company are subject to
rate regulation by 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
65
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit Concentrations and Significant Customers
During 1999, no customer accounted for more than 10% of the consolidated
revenues of the Company.
Comprehensive Income (Loss)
The Company's comprehensive loss is equal to its net loss.
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 of financial position,
results of operations, or cash flows.
2. ACQUISITIONS
On May 14, 1999, ACS Holdings, acquired CenturyTel Alaska properties,
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 items 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.
CENTURYTEL
ALASKA
PROPERTIES ATU TOTAL
---------- --------- ---------
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
========= ========= =========
F-10
66
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
2. ACQUISITIONS (CONTINUED)
Net assets acquired were purchased for cash provided from the following sources:
Senior credit facility revolving loan $ 6,700
Senior credit facility term loans 435,000
9-3/8% senior subordinated notes due 2009 150,000
Contribution of capital 146,200
--------
Total sources $737,900
========
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.
1999 1998
--------- ---------
Revenues $ 300,525 $ 281,606
Net loss (23,965) (15,068)
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:
Accounts receivable:
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
=======
F-11
67
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 is
comprised of the following:
1999 1998
-------- --------
Property, plant and equipment:
Land, buildings and support assets $134,578 $ 3
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 33
-------- --------
902,131 36
Less accumulated depreciation and amortization 452,304 --
-------- --------
Property, plant and equipment, net $449,827 $ 36
======== ========
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:
2000 $2,028
2001 1,679
2002 1,457
2003 1,387
2004 842
Thereafter 602
------
$7,995
======
5. OTHER ASSETS
Other assets at December 31, 1999 and 1998 was comprised of the
following:
1999 1998
------- -------
Debt issue costs, net of amortization of $2,855 $34,159 $ --
Cellular, PCS, and UHF licenses, net of amortization of $347 25,431 --
Prepaid pension asset 3,530 --
Deferred charges and other assets 7,284 261
------- -------
$70,404 $ 261
======= =======
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist at December 31, 1999 was
comprised of the following:
Accrued payroll, benefits and related liabilities $ 7,928
Accrued personal time off 4,506
Accrued interest 2,904
Other 4,986
-------
$20,324
=======
F-12
68
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
DECEMBER 31,
1999
------------
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
Capital leases and other long-term obligations 13,407
--------
598,407
Less current portion 4,944
--------
Total long-term obligations $593,463
========
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 at
that provided under tranche A. The Company is required to pay on a quarterly
basis a commitment fee equal to .50% annually on the unused portion of the
revolving credit facility, subject to reductions based on the Company's
financial performance. There were no amounts outstanding on the revolving credit
facility at December 31, 1999.
F-13
69
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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.
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:
2000 4,944
2001 2,073
2002 4,904
2003 4,931
2004 4,987
Thereafter 576,568
--------
$598,407
========
Alaska Communications Systems. Group, Inc. Senior Discount Debentures
The Parent has senior discount debentures of $17,598 at December 31,
1999. As amended on October 29, 1999, interest accrues at 13% and is payable at
the Parent's option semiannually on May 15 and November 15, commencing May 15,
2000 until May 15, 2004 when the Parent will be required to semiannually pay
interest. The debentures will mature on May 15, 2011, and are redeemable, in
whole or in part, at the option of the Parent, 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. Although the debt is not recorded on the Company's books,
substantially all of the Company's assets are pledged to secure the Parent's
senior discount debentures. The Parent relies on the Company's cash flows to
service its obligations.
F-14
70
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
8. INCOME TAXES
The Company's combined federal income and state effective income tax
rate from continuing operations was 1.4% 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:
Computed federal income tax benefit at the 35% statutory rate $ (7,351)
Increase (reduction) in tax resulting from
Other 85
Amortization for Investment Tax Credits (301)
Valuation allowance 7,266
--------
Total income tax benefit $ (301)
========
The benefit for income taxes is summarized as follows:
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)
========
The effect of significant items comprising the Company's net deferred
tax liability were as follows:
Deferred tax liabilities:
Non-current:
Property Plant and Equipment $ (4,011)
Other (80)
Valuation allowance 4,091
--------
Net deferred tax liabilities $ --
========
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
Valuation allowance (13,065)
--------
Net deferred tax assets $ 275
========
The company generated a net operating loss carryforward of $26,278
during 1999, which will be lost if not utilized by the year 2018.
F-15
71
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
9. STOCK INCENTIVE PLANS
The Company's employees participate in various plans of ACS Group, which
through their Compensation Committee of the board of directors, may grant stock
options, stock appreciation rights and other awards to officers, employees and
non-employee directors of the Company. 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 Parent 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 Parent's
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 the Company (of which 125 subsequently were
forfeited). These performance vesting options became vested upon completion of
the Parent's IPO in November 1999, and resulted in the recording of $4,148 of
compensation expense. Compensation expense recorded represents the difference
between the Parent's 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 Parent's
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 Parent's stock of $10.12 and
the exercise price of $6.1542.
Information on outstanding options is summarized as follows:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
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
=======
The outstanding options at December 31, 1999 have the following
characteristics:
Outstanding Options Exercisable Options
-------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number Exercise
Range of Exercise Prices Shares Life (Years) Price Exercisable Price
- ------------------------ --------- ------------ --------- ----------- ---------
$ 6.15 3,154,500 8.48 $ 6.15 1,254,600 $ 6.15
========= ========= ========= ========= =========
F-16
72
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
9. STOCK INCENTIVE PLANS (CONTINUED)
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 the fair value on the date of the 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
on a pro forma bases for 1999 would have been as follows:
Net loss:
As reported $(20,701)
Pro forma (as adjusted for SFAS No. 123) (21,367)
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 Parent 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
Parent 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 Parent'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.
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
This plan was also adopted in connection with the Parent'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.
F-17
73
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
10. RETIREMENT PLANS
Pension benefits for substantially all of ACS Holdings' employees are
provided through the Alaska Electrical Pension Plan. ACS Holdings 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 Holdings' portion of the plan's pension cost for 1999 was $6,099.
ACS Holdings 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 Holdings 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 Holdings, covered employees ceased to accrue
benefits under the plan. ACS Holdings 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 benefits for the
ACS Retirement Plan for 1999:
Service cost $ --
Interest cost 149
Expected return on plan assets (170)
Net amortization and deferral --
-------
Net periodic pension benefit cost $ (21)
=======
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets for the ACS Retirement Plan:
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
=======
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
=======
F-18
74
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
10. RETIREMENT PLANS (CONTINUED)
The following table represents the funded status of the ACS Retirement
Plan at December 31, 1999:
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
=======
The actuarial assumptions used to account for the plan as of December
31, 1999 are as follows:
Discount rate 7.90%
Expected return on assets 5.50%
Rate of compensation increase 0.00%
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.
11. 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 ACS Holdings 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.
F-19
75
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
11. BUSINESS SEGMENTS (CONTINUED)
The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 1999:
LOCAL
TELEPHONE CELLULAR ALL OTHER TOTAL
--------- --------- --------- ---------
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) (37,267) (37,517)
Interest income 682 88 254 1,024
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 (34,420) (20,701)
Total assets $ 782,916 $ 73,451 $ 81,344 $ 937,711
Capital expenditures $ 43,606 $ 10,962 $ 19,484 $ 74,052
Operating revenues disclosed above include intersegment operating
revenues of $3,177 for the local telephone, $479 for the cellular, and $853 for
all other.
12. RELATED PARTY TRANSACTIONS
The Company has various intercompany transactions with the Parent and at
December 31, 1999 $97,676 is due from the Parent.
Fox Paine & Company, the majority stockholder of the Parent, 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 1998 Fox Paine Capital Fund advanced cash to allow the company to
operate until permanent funding was put in place at the close of the
acquisitions. Outstanding advances were $620 at December 31, 1998.
In 1998 the Company advanced cash to a related party to perform certain
consulting service in connection with the Company's pending acquisitions. Cash
used is capitalized as deferred acquisition costs. Any unused cash that was
advances to this related party is to be repaid to the Company. At December 31,
1998, the total amount of unused cash was $42.
13. 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.
F-20
76
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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:
Carrying Fair
Value Value
--------- ---------
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
Interest Rate Swap Agreement -- (923)
Capital leases and other long-term obligations 13,407 13,407
--------- ---------
$ 598,407 $ 592,984
========= =========
14. 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.
15. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)
Quarterly Financial Data
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Operating revenue $ -- $ 38,330 $ 75,747 $ 79,542
Operating income -- 2,374 10,602 3,311
Net loss -- (5,333) (3,987) (11,381)
The Company had no operations prior to the acquisitions of CenturyTel
Alaska properties and ATU on May 14, 1999. Fourth quarter operating income
included stock based compensation expense of $6,145.
F-21
77
Alaska Communications Systems Holdings, Inc.
Schedule II - Validation and Qualifying Accounts
(In Thousands)
Balance at Charged to Charged to Balance at
Beginning costs and other Deductions End
Description of Period expenses accounts(1) (2) of Period
- ----------- ---------- ---------- ------------ ---------- ----------
Allowance for doubtful accounts
1999 $ -- 1,130 4,798 725 5,203
====== ====== ====== ====== ======
(1) Represents the allowance for doubtful accounts at the date of acquisition,
and reserve 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-22
78
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-23
79
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-24
80
CENTURYTEL ALASKA PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------------
1997 1998
--------- ---------
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
========= =========
See accompanying notes to combined financial statements.
F-25
81
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
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
========= ========= ========= =========
See accompanying notes to combined financial statements.
F-26
82
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
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
See accompanying notes to combined financial statements.
F-27
83
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
F-28
84
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)
of revenues and expenses during the reporting period. Actual results may differ
from those estimates.
REVENUE RECOGNITION--Revenues are recognized when earned. The Company
participates in toll revenue pools with other telephone companies. Such pools
are funded by toll revenue and/or access charges regulated by the APUC within
the intrastate jurisdiction and the Federal Communications Commission within the
interstate jurisdiction. Much of the interstate toll service revenue earned
through various pooling processes is initially recorded based on estimates.
These estimates are derived from interim financial statements, available
separations studies and the most recent rate of return published by the National
Exchange Carriers Association. These estimates are subject to subsequent
adjustment in future accounting periods as refined operational information
becomes available. Any subsequent adjustments have not been material.
PROPERTY, PLANT, AND EQUIPMENT--Telephone plant is stated substantially
at original cost of construction. Telephone plant retired in the ordinary course
of business, together with cost of removal, less salvage, is charged to
accumulated depreciation with no gain or loss recognized. Renewals and
betterments of telephone plant are capitalized while repairs, as well as
renewals of minor items, are charged to operating expense.
The Company provides depreciation for telephone plant on the
straight-line method, using rates approved by the regulatory authorities.
Depreciation expense for telephone plant amounted to $13,774, $14,406, $1,737,
and $23,550 for the year ended December 31, 1996, eleven months ended November
30, 1997, one month ended December 31, 1997, and year ended December 31, 1998,
respectively. Included in 1998 expense is additional depreciation of
approximately $1,506 which was approved by the regulatory authorities. The
composite depreciation rate was 5.7% for the year ended December 31, 1996, 5.8%
for the eleven months ended November 30, 1997 and the one month ended December
31, 1997, and 6.1% for the year ended December 31, 1998.
Non-telephone plant is stated at cost and, when sold or retired, a gain
or loss is recognized. Depreciation of such property is provided on the
straight-line method over its estimated service lives ranging from 7 to 15
years. Depreciation for non-telephone plant amounted to $1,198, $922, $190, and
$583 for the year ended December 31, 1996, eleven months ended November 30,
1997, one month ended December 31, 1997, and the year ended December 31, 1998,
respectively.
LONG-LIVED ASSETS AND EXCESS COST OF NET ASSETS ACQUIRED (GOODWILL)--The
carrying value of long-lived assets, including allocated goodwill, is reviewed
for impairment at least annually, or whenever events or changes in circumstances
indicate that such carrying value may not be recoverable, by assessing the
recoverability of such carrying value through estimated undiscounted future net
cash flows expected to be generated by the assets. The excess cost of net assets
acquired is being amortized over 40 years. Amortization expense was $333 for the
year ended December 31, 1996, $455 during the 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-29
85
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-30
86
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:
1997 1998
--------- ---------
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
========= =========
The Company retired approximately $1,762 of telephone property, plant,
and equipment and a like amount of accumulated depreciation in 1998.
F-31
87
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:
1997 1998
-------- --------
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
======== ========
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-32
88
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:
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
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
======== ======== ======== ========
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate:
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
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%
======== ======== ======== ========
F-33
89
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:
1997 1998
-------- --------
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)
======== ========
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-34
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)
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:
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
======
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-35
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)
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-36
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)
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:
YEAR ENDED DECEMBER 31, 1996 TELEPHONE CELLULAR TOTAL
- ---------------------------- --------- -------- --------
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
F-37
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)
11. BUSINESS SEGMENTS (CONTINUED)
The following is a reconciliation of operating income to income before
income tax expense:
ELEVEN MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
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
======== ======== ======== ========
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-38
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)
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:
Fair value of assets acquired $ 86,750
Cash paid for net assets (85,000)
--------
Liabilities assumed $ 1,750
========
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-39
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)
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-40
96
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-41
97
TELEPHONE FUND OF FAIRBANKS
MUNICIPAL UTILITIES SERVICES
COMBINED BALANCE SHEET
OCTOBER 6, 1997
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Accounts receivable:
Customers, less allowance for doubtful accounts of $156 $ 903
Connecting companies and other 1,949
Material and supplies (at cost) 2,608
Prepayments 23
--------
Total current assets 5,483
PROPERTY, PLANT, AND EQUIPMENT, Net 50,279
--------
$ 55,762
========
LIABILITIES AND FUND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 290
Accrued expenses and other accrued liabilities 2,869
Advance billings and customer deposits (Note 1) 1,140
Capital leases 262
--------
Total current liabilities 4,561
DEFERRED CREDIT (Note 1) 1,180
FUND EQUITY 50,021
--------
$ 55,762
========
See accompanying notes to combined financial statements.
F-42
98
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)
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 1997
------------ ------------
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
======== ========
See accompanying notes to combined financial statements.
F-43
99
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)
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 1997
------------ ------------
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 $ -- $ --
======== ========
See notes to combined financial statements.
F-44
100
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-45
101
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:
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
=========
4. EMPLOYEE BENEFIT PLANS
All permanent employees of the Company are eligible to participate as
members of the State of Alaska Public Employees Retirement System ("PERS"), a
defined benefit agent multiple-employer public employee retirement system that
acts as a common investment and administrative agent for the State of Alaska and
any political subdivision or public organization that elects to join the system.
Eligible employees contribute 6.75% of their gross salary to PERS. The Company
is required to contribute the remaining amounts necessary to fund PERS, using
the actuarial basis specified by the PERS Board. Because actuarial information
regarding the status of the PERS plan
F-46
102
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(DOLLARS IN THOUSANDS)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
is computed for the Plan in total, the Company does not separately determine its
portion of the actuarial present value for the accumulated plan benefits,
projected benefit obligation, or net assets available for benefits. At June 30,
1997, the date of the latest actuarial evaluation for the Plan, Plan assets of
$70,726 exceeded the projected benefit obligation by approximately $33,837.
Certain employees of the Company are members of the International
Brotherhood of Electrical Workers ("IBEW") and are eligible to participate in
two different union-sponsored multiple employer defined benefit plans, a pension
plan and a thrift plan. Under the pension plan, the Company contributed between
$4 and $5.09 per compensable hour to the Alaska Electrical Pension Fund and the
total contribution was $782 for the period ended October 6, 1997 and $864 for
the year ended December 31, 1996. Under the thrift plan, the Company pays a
minimum of 4% of the participant's gross wages into the plan plus after one year
it matches the employee's contributions, to a maximum of 3%. The Company's
contributions to the thrift plan was $332 for the period ended October 6, 1997
and $298 for the year ended December 31, 1996.
5. EMPLOYEES' DEFERRED COMPENSATION
The Company offers its employees three deferred compensation plans which
are part of the MUS multiemployer plan. The plans are available to all Company
employees and permit them to defer a portion of their salary until future years.
Participants' rights under the plans are equal to those of general creditors of
MUS in an amount equal to the fair market value of the deferred account for each
participant. The fair market value of both the assets and liabilities for the
Plan in total at October 6, 1997 was $13,247.
6. COMMITMENTS AND CONTINGENCIES
Expenditures under the Company's 1998 construction and capital
expenditure program are expected to approximate $7,193.
F-47
103
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-48
104
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
BALANCE SHEETS
(IN THOUSANDS)
December 31,
------------------------
1997 1998
-------- --------
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
======== ========
See accompanying notes to financial statements.
F-49
105
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1996 1997 1998
--------- --------- ---------
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
========= ========= =========
See accompanying notes to financial statements.
F-50
106
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1996 1997 1998
-------- -------- --------
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
======== ======== ========
See accompanying notes to financial statements.
F-51
107
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:
Property and equipment $1,817
Cellular licenses 7,083
------
$8,900
======
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-52
108
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-53
109
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-54
110
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-55
111
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:
1996 1997 1998
-------- -------- --------
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
======== ======== ========
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:
ESTIMATED
PLANT AND EQUIPMENT LIFE
------------------- ---------
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
F-56
112
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-57
113
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-58
114
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:
1997 1998
--------- ---------
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
========= =========
F-59
115
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:
1997 1998
--------- ---------
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
========= =========
F-60
116
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
PRINCIPAL INTEREST TOTAL
--------- -------- --------
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
======== ======== ========
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-61
117
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(5) RETIREMENT PLANS
Substantially all employees are covered by one of the following plans.
International Brotherhood of Electrical Workers (IBEW) Plan
The IBEW Plan is a union sponsored defined benefit pension plan for
members of the IBEW #1547 Union. The Utility contributed $3.67 per compensable
employee hour to the Alaska Electrical Trust Fund in 1998, 1997 and 1996.
Utility contributions to this plan were $3,130, $3,379 and $3,608 for the years
ended December 31, 1998, 1997 and 1996, respectively. The hourly rate paid by
the Utility is determined by the collective bargaining process. The Utility's
obligation for IBEW employee retirement is limited to the amount paid to the
Alaska Electrical Trust Fund.
State Of Alaska Public Employees' Retirement System Plan
As discussed in note 1, the Utility adopted the provisions of GASB
Statement No. 27, Accounting For Pensions By State And Local Governmental
Employers (GASB 27), in 1998.
State Of Alaska Public Employees' Retirement System
A. Plan Description
The Utility contributes to the State of Alaska Public Employees'
Retirement System (PERS), a defined benefit, agent multiple-employer public
employee retirement system which was established and is administered by the
State of Alaska (State) to provide pension, postemployment healthcare, death and
disability benefits to eligible employees.
All full-time Utility employees not covered by the IBEW Plan are
eligible to participate in PERS. Benefit and contribution provisions are
established by State law and may be amended only by the State Legislature.
Each fiscal year, PERS issues a publicly available financial report that
includes financial statements and required supplementary information. That
report may be obtained by writing to the State of Alaska, Department of
Administration, Division of Retirement and Benefits, P.O. Box 110203, Juneau,
Alaska, 99811-0203 or by calling (907) 465-4460.
B. Funding Policy and Annual Pension Cost
Employee contribution rates are 6.75% as required by State statute. The
funding policy for PERS provides for periodic employer contributions at
actuarially determined rates that, expressed as a percentage of annual covered
payroll, are sufficient to accumulate sufficient assets to pay benefits when
due.
F-62
118
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:
POST-EMPLOYMENT
PENSION HEALTHCARE
---------------------- ---------------
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%
The components of annual pension cost for the year ended December 31,
1998 are as follows:
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 $ --
======
F-63
119
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:
PERCENTAGE
YEAR ENDED OF APC
DECEMBER 31 APC CONTRIBUTED NPO
----------- -------- ----------- --------
Pension 1996 $ 1,032 100% $ --
1997 827 100% --
1998 750 100% --
Post-employment healthcare 1996 $ 382 100% $ --
1997 306 100% --
1998 291 100% --
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:
UNFUNDED
ACTUARIAL
ACTUARIAL ACTUARIAL ACTUARIAL ACCRUED UAAL AS A
VALUATION VALUE ACCRUED LIABILITY PERCENTAGE
YEAR ENDED OF PLAN LIABILITY (ASSET) FUNDED COVERED OF COVERED
JUNE 30 ASSETS (AAL) (UAAL) RATIO PAYROLL PAYROLL
---------- ---------- --------- ---------- -------- -------- ----------
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%
(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
F-64
120
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)
has no liability for losses under the Plan but does have the duty of due care
that would be required of an ordinary prudent investor.
The municipality believes that it is unlikely that it will use the
assets to satisfy the claims of general creditors in the future.
In accordance with labor agreements, IBEW employees' medical/dental
coverage is provided through the Alaska Electrical Health and Welfare Trust
Fund. Utility contributions to this fund were $2,859, $3,143 and $2,888 for the
years ended December 31, 1998, 1997 and 1996, respectively.
(7) MINORITY INVESTMENTS
Minority investments held consist of the following at December 31:
1997 1998 OWNERSHIP %
------ ------ -----------
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
====== ======
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-65
121
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:
1997 1998
-------- --------
Carrying amount $153,532 $172,847
Fair value 161,000 181,000
(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-66
122
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.
LOCAL LONG
YEAR ENDED 1996 TELEPHONE DISTANCE CELLULAR TOTAL
- --------------- --------- -------- -------- --------
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
THREE MONTHS ENDED MARCH 31, 1998
Operating income (loss) $ 5,318 $ (753) $ 917 $ 5,482
Depreciation and amortization 6,184 -- 915 7,099
Total assets 304,132 2,494 44,564 351,190
THREE MONTHS ENDED MARCH 31, 1999
Operating income (loss) $ 5,807 $ (605) $ 916 $ 5,496
Depreciation and amortization 6,335 45 1,054 7,434
Total assets 292,581 3,083 51,032 346,696
(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-67
123
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 HOLDINGS, INC.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Charles E. Robinson Chief Executive Officer and Chairman of the Board March 16, 2000
-----------------------
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 Counsel and March 16, 2000
------------------- Secretary
Donn T. Wonnell
/s/ Michael E. Holmstrom Senior Vice President and Chief Financial Officer March 16, 2000
------------------------ (Principal Financial Officer)
Michael E. Holmstrom
/s/ John A. Ayers Senior Vice President of Marketing and Sales March 16, 2000
-----------------
John A. Ayers
/s/ F. Scott Davis Senior Vice President of Non-Regulated Operations March 17, 2000
------------------
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