e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 000-28167
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
52-2126573 |
(State or Other Jurisdiction
|
|
(I.R.S. Employer |
of Incorporation or Organization)
|
|
Identification No.) |
|
|
|
600 Telephone Avenue, Anchorage, Alaska 99503
(Address of Principal Executive Offices) (Zip Code)
(907) 297-3000
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former three months, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
o |
|
Accelerated filer
þ |
|
Non-accelerated filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrants Common Stock, as of July 23, 2009, was 44,309,195.
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
Number |
|
PART I. Financial Information |
|
|
|
|
|
|
|
|
|
Item 1. Financial Statements: |
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
28 |
|
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
2
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
(Unaudited, In Thousands except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,179 |
|
|
$ |
1,326 |
|
Restricted cash |
|
|
6,711 |
|
|
|
20,517 |
|
Accounts receivable-trade, net of allowance of $6,294 and $5,912 |
|
|
39,763 |
|
|
|
40,433 |
|
Materials and supplies |
|
|
10,096 |
|
|
|
9,404 |
|
Prepayments and other current assets |
|
|
7,110 |
|
|
|
6,515 |
|
Deferred income taxes |
|
|
18,464 |
|
|
|
21,145 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
90,323 |
|
|
|
99,340 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,408,839 |
|
|
|
1,392,951 |
|
Less: accumulated depreciation and amortization |
|
|
(922,604 |
) |
|
|
(891,899 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
486,235 |
|
|
|
501,052 |
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
|
1,005 |
|
|
|
1,005 |
|
Goodwill |
|
|
8,850 |
|
|
|
8,850 |
|
Intangible assets, net |
|
|
24,101 |
|
|
|
24,118 |
|
Debt issuance costs |
|
|
7,267 |
|
|
|
8,554 |
|
Deferred income taxes |
|
|
104,370 |
|
|
|
105,480 |
|
Deferred charges and other assets |
|
|
573 |
|
|
|
452 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
722,724 |
|
|
$ |
748,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
810 |
|
|
$ |
666 |
|
Accounts payable, accrued and other current liabilities |
|
|
64,474 |
|
|
|
74,028 |
|
Advance billings and customer deposits |
|
|
9,998 |
|
|
|
10,399 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
75,282 |
|
|
|
85,093 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
|
536,192 |
|
|
|
538,975 |
|
Other deferred credits and long-term liabilities |
|
|
95,937 |
|
|
|
98,693 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
707,411 |
|
|
|
722,761 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 145,000 authorized, 44,309 and
43,719 issued and outstanding, respectively |
|
|
443 |
|
|
|
437 |
|
Additional paid in capital |
|
|
214,962 |
|
|
|
231,813 |
|
Accumulated deficit |
|
|
(184,753 |
) |
|
|
(188,130 |
) |
Accumulated other comprehensive loss |
|
|
(15,339 |
) |
|
|
(18,030 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
15,313 |
|
|
|
26,090 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
722,724 |
|
|
$ |
748,851 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
(Unaudited, In Thousands except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
$ |
60,640 |
|
|
$ |
59,071 |
|
|
$ |
121,091 |
|
|
$ |
122,177 |
|
Wireless |
|
|
35,481 |
|
|
|
35,285 |
|
|
|
71,039 |
|
|
|
68,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
96,121 |
|
|
|
94,356 |
|
|
|
192,130 |
|
|
|
191,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and
amortization) |
|
|
46,691 |
|
|
|
43,972 |
|
|
|
93,028 |
|
|
|
87,242 |
|
Wireless (exclusive of depreciation and
amortization) |
|
|
19,415 |
|
|
|
20,802 |
|
|
|
37,888 |
|
|
|
40,923 |
|
Depreciation and amortization |
|
|
15,175 |
|
|
|
19,138 |
|
|
|
36,060 |
|
|
|
35,601 |
|
Loss on disposal of assets, net |
|
|
19 |
|
|
|
745 |
|
|
|
469 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,300 |
|
|
|
84,657 |
|
|
|
167,445 |
|
|
|
164,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,821 |
|
|
|
9,699 |
|
|
|
24,685 |
|
|
|
26,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(10,302 |
) |
|
|
(9,143 |
) |
|
|
(18,642 |
) |
|
|
(16,372 |
) |
Interest income |
|
|
17 |
|
|
|
706 |
|
|
|
51 |
|
|
|
1,009 |
|
Other |
|
|
(42 |
) |
|
|
(75 |
) |
|
|
(87 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(10,327 |
) |
|
|
(8,512 |
) |
|
|
(18,678 |
) |
|
|
(15,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
4,494 |
|
|
|
1,187 |
|
|
|
6,007 |
|
|
|
11,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(1,961 |
) |
|
|
(554 |
) |
|
|
(2,630 |
) |
|
|
(4,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,533 |
|
|
$ |
633 |
|
|
$ |
3,377 |
|
|
$ |
6,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,195 |
|
|
|
43,362 |
|
|
|
43,972 |
|
|
|
43,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
44,651 |
|
|
|
44,304 |
|
|
|
44,609 |
|
|
|
44,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Six months Ended June 30, 2009
(Unaudited, In Thousands except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity (Deficit) |
|
Balance, December 31, 2008 |
|
|
43,719 |
|
|
$ |
437 |
|
|
$ |
231,813 |
|
|
$ |
(188,130 |
) |
|
$ |
(18,030 |
) |
|
$ |
26,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,377 |
|
|
|
2,691 |
|
|
|
6,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(19,085 |
) |
|
|
|
|
|
|
|
|
|
|
(19,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation costs |
|
|
|
|
|
|
|
|
|
|
2,766 |
|
|
|
|
|
|
|
|
|
|
|
2,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of convertible bond
call options |
|
|
|
|
|
|
|
|
|
|
719 |
|
|
|
|
|
|
|
|
|
|
|
719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surrender of 225 shares to cover
withholding
taxes on stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(1,567 |
) |
|
|
|
|
|
|
|
|
|
|
(1,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
pursuant to stock plans, $.01 par |
|
|
590 |
|
|
|
6 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
|
44,309 |
|
|
$ |
443 |
|
|
$ |
214,962 |
|
|
$ |
(184,753 |
) |
|
$ |
(15,339 |
) |
|
$ |
15,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,377 |
|
|
$ |
6,409 |
|
Adjustments to reconcile net income to net cash
provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
36,060 |
|
|
|
35,601 |
|
Loss on disposal of assets, net |
|
|
469 |
|
|
|
759 |
|
Amortization of debt issuance costs and original issue discount |
|
|
3,453 |
|
|
|
2,004 |
|
Stock-based compensation |
|
|
2,565 |
|
|
|
2,515 |
|
Deferred income taxes |
|
|
2,630 |
|
|
|
4,684 |
|
Other non-cash expenses |
|
|
549 |
|
|
|
65 |
|
Changes in components of assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
|
75 |
|
|
|
311 |
|
Materials and supplies |
|
|
(692 |
) |
|
|
(372 |
) |
Accounts payable, accrued and other current liabilities |
|
|
2,428 |
|
|
|
(7,605 |
) |
Deferred charges and other assets |
|
|
(121 |
) |
|
|
(1,708 |
) |
Other deferred credits |
|
|
903 |
|
|
|
(2,478 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
51,696 |
|
|
|
40,185 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(20,673 |
) |
|
|
(70,582 |
) |
Change in unsettled construction and capital expenditures |
|
|
(12,104 |
) |
|
|
(160 |
) |
Change in unsettled acquisition costs |
|
|
(250 |
) |
|
|
|
|
Purchase of short-term investments |
|
|
|
|
|
|
(9,400 |
) |
Proceeds from sale of short-term investments |
|
|
|
|
|
|
9,815 |
|
Purchase of non-current investments |
|
|
|
|
|
|
(3,625 |
) |
Proceeds from sale of non-current investments |
|
|
|
|
|
|
2,275 |
|
Placement of funds in restricted accounts |
|
|
(25 |
) |
|
|
(71,460 |
) |
Release of funds from escrow accounts |
|
|
13,831 |
|
|
|
389 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(19,221 |
) |
|
|
(142,748 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(26,965 |
) |
|
|
(2,521 |
) |
Proceeds from the issuance of long-term debt |
|
|
21,500 |
|
|
|
125,000 |
|
Purchase of call options |
|
|
|
|
|
|
(20,431 |
) |
Sale of common stock warrants |
|
|
|
|
|
|
9,852 |
|
Debt issuance costs |
|
|
|
|
|
|
(4,253 |
) |
Payment of cash dividend on common stock |
|
|
(18,912 |
) |
|
|
(18,531 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(1,567 |
) |
|
|
(3,314 |
) |
Proceeds from issuance of common stock |
|
|
322 |
|
|
|
586 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(25,622 |
) |
|
|
86,388 |
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
6,853 |
|
|
|
(16,175 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
1,326 |
|
|
|
35,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
8,179 |
|
|
$ |
19,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
17,624 |
|
|
$ |
14,003 |
|
Income taxes paid |
|
$ |
|
|
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Transactions: |
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
660 |
|
|
$ |
58 |
|
Dividend declared, but not paid |
|
$ |
9,622 |
|
|
$ |
9,370 |
|
Asset retirement obligation |
|
$ |
3 |
|
|
$ |
32 |
|
See Notes to Consolidated Financial Statements
6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Group, Inc. and Subsidiaries (we, our, us, the Company,
ACS Group or ACS), a Delaware corporation, provides wireline, wireless and other
telecommunications and network services to consumer, business, and enterprise customers in the
State of Alaska and beyond using its statewide and interstate telecommunications network. The
Company was formed in October of 1998 for the purpose of acquiring and operating telecommunications
properties.
The accompanying consolidated financial statements for the Company represent the consolidated
financial position, results of operations and cash flows of ACS Group and the following wholly
owned subsidiaries:
|
|
|
Alaska Communications Systems Holdings, Inc. (ACS
Holdings) |
|
|
|
|
ACS of Alaska, Inc. (ACSAK) |
|
|
|
|
ACS of the Northland, Inc. (ACSN) |
|
|
|
|
ACS of Fairbanks, Inc. (ACSF) |
|
|
|
|
ACS of Anchorage, Inc. (ACSA) |
|
|
|
|
ACS Wireless, Inc. (ACSW) |
|
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
|
ACS Messaging, Inc. (ACSM) |
|
|
|
|
ACS Cable Systems, Inc. (ACSC) |
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission (SEC). However, the Company believes the disclosures made are adequate to
make the information presented not misleading. The consolidated financial statements and footnotes
included in this Form 10-Q should be read in conjunction with the consolidated financial statements
and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2008. Certain reclassifications have been made to the 2008 financial statements to make them
conform to the current year presentation. The most significant reclassification is related to our
convertible notes. The Company bifurcated the convertible notes into the portion related to the
debt instrument and the portion related to the conversion feature. See Note 4 Convertible Debt
Bifurcation for an in-depth discussion of this reclassification.
In the opinion of management, the financial statements contain all normal, recurring
adjustments necessary to present fairly the consolidated financial position, results of operations
and cash flows for all periods presented. The results of operations for the three and six months
ended June 30, 2009 are not necessarily indicative of the results of operations which might be
expected for the entire year or any other interim periods.
Revenue Recognition
Substantially all recurring service revenues are billed one month in advance and are
deferred until earned. Non-recurring and usage sensitive revenues are billed in arrears and are
recognized when earned. Certain of the Companys bundled products and services, primarily in
wireless, have been determined to be revenue arrangements with multiple deliverables. Total
consideration received in these arrangements is allocated and measured using units of accounting
within the arrangement based on relative fair values. Wireless offerings include wireless phones
and service contracts sold together in Company owned stores. The handset and accessory revenue
associated with these direct channel sales is recognized at the time the related wireless phone
is sold and is classified as equipment sales. Monthly service revenue is recognized as services
are rendered.
The Company establishes bad debt reserves against estimated uncollectible revenues each
period. These estimates are derived through a monthly analysis of account aging profiles and a
review of historical recovery experience. Receivables are charged against the allowance when
management believes the uncollectability of the receivable is
confirmed. Subsequent recoveries, if any, are credited to the allowance. Consistent with the
industry, the Company accounts for bad debt expense as a reduction of revenue.
7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Access revenue is recognized when earned. The Company participates in access revenue
pools with other telephone companies. Such pools are funded by toll revenue and/or access charges
regulated by the Federal Communications Commission (FCC) within the interstate jurisdiction. Much
of the interstate access 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 additional operational information becomes available for the Company
and the other telephone companies. To the extent that disputes arise over revenue settlements, the
Companys policy is to defer revenue collected until settlement methodologies are resolved and
finalized. At June 30, 2009 and December 31, 2008, the Company had deferred revenue of $6,087 and
$6,372, respectively, related to its estimate of refundable access revenue.
Wireless revenue is materially impacted by seasonal factors. Wireless revenue, particularly
roaming revenue, declines in the winter months and increases in the summer months due to Alaskas
northern latitude and the wide swing in available daylight and changes in weather patterns between
summer and winter and their effect on business, tourism and subscriber calling patterns. Revenue
from non-ACS customers roaming on the Companys network decreased to $4,937 from $5,497 for the
three months ended June 30, 2009 and 2008, respectively, and $8,661 and $9,241 for the six months
ended June 30, 2009 and 2008, respectively. This drop is due to a significant reduction in the
number of tourists visiting Alaska this year as compared to last year. The Companys wireline
segment also experiences seasonal effects, but management does not believe these effects are
material.
Regulatory Accounting and Regulation
The local telephone exchange operations of the Company account for costs in accordance with
the accounting principles for regulated enterprises. 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, 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.
The Companys cost studies and depreciation rates are subject to periodic audits that could
result in reductions of revenues.
The Company utilizes blended depreciation rates for financial reporting, which management
believes approximates the economical useful lives of the underlying plant. As a result, the
Company has recorded a regulatory asset related to depreciation of the regulated telephone plant
allocable to its intrastate and local jurisdictions. The balances at June 30, 2009 and December
31, 2008 are $64,418 and $63,363, respectively. The Company also has a regulatory liability of
$64,424 and $64,117 at June 30, 2009 and December 31, 2008, respectively, related to accumulated
removal costs for its local telephone subsidiaries. Non-regulated revenues and costs incurred by
the local telephone exchange operations and non-regulated operations of the Company are accounted
for in accordance with industry practice and regulatory requirements. The Company also does not
eliminate revenue generated between regulated and non-regulated group companies on consolidation.
These revenues totaled $10,727 and $9,998 for the three months ended June 30, 2009 and 2008,
respectively, and $21,096 and $19,949 for the six months ended June 30, 2009 and 2008,
respectively.
The local telephone exchange activities of the Company are subject to rate regulation by the
FCC for interstate telecommunication service and the Regulatory Commission of Alaska (RCA) for
intrastate and local exchange telecommunication service. The Company, as required by the FCC,
accounts for such activity separately. Long distance services of the Company are subject to
regulation as a non-dominant interexchange carrier by the FCC for interstate telecommunication
services and the RCA for intrastate telecommunication services. Wireless, Internet and other
non-common carrier services are not subject to rate regulation.
Traditionally, the Companys Incumbent Local Exchange Carriers (ILECs) have been subject to
rate-of-return regulation by the FCC. Under this regulation, rates are developed based on cost plus
an authorized maximum rate-of-return. However, the Company has enjoyed limited pricing flexibility
with respect to its switched access rates pursuant to a petition
for forbearance granted by the FCC on August 20, 2007. On April 17, 2009 the FCC granted the
Companys petition for waiver of certain FCC rules to facilitate the conversion of the Companys
ILECs to price-cap regulation, under which they will be able to set their interstate rates at any
level less than or equal to certain caps calculated in accordance with the FCCs rules. In order to
effect the conversion to price-cap regulation; the Companys ILECs have withdrawn from their
participation in certain tariffs and revenue pools administered by the National Exchange Carrier
Association (NECA), jointly filing with the
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FCC a price-cap tariff effective as of July 1, 2009, and continue to receive interstate common line
support from the universal service fund at the disaggregated per line levels received in 2008. The
average traffic sensitive rates of some of the Companys ILECs will be lowered over time, subject
to future FCC modifications to universal service programs, which cannot be predicted, until they
are less than or equal to the cap applicable to such rates. The Company will no longer be treated
as a non-dominant carrier for limited tariffing purposes specified in the FCCs August 20, 2007
order, but will enjoy the same types of pricing flexibility available to all price-cap carriers
under the FCCs rules.
Restricted Cash
During the quarter ended March 31, 2009 the Company released $8,578 from escrow representing
funds held pending completion by Tyco Telecommunications (Tyco) of specified milestones set forth
in the Companys agreement with Tyco for the construction of its Alaska Oregon Network (AKORN)
fiber optic cable system. Additionally, during the quarter ended June 30, 2009 the Company settled
an outstanding claim against the Crest Communications Corporation (Crest) selling shareholders
and released $4,250 from escrow, as well as a $1,000 CD upon the expiration of a contract liability
with the State of Alaska.
As of June 30, 2009, the Company had $5,511 remaining in escrow for the indemnification of the
Company in the event of breach by Crest of certain obligations, representations and warranties
specified in the Companys agreement to purchase Crest and the completion of certain capital
projects.
The remaining balance of $1,200 is held in certificates of deposit as required under the terms
of certain contracts to which the Company is a party. When the restrictions are lifted, the Company
will transfer these funds back into its operating accounts.
Recently Adopted Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued FSP 107-1 and APB 28-1
Interim Disclosures about Fair Value of Financial Instruments requiring companies to disclose the
fair value of financial instruments in interim financial reports. The information required by this
FSP is included in Note 3 Fair Value Measurements.
Also in April 2009, the FASB issued FAP 115-2 and 124-2 Recognition and Presentation of
Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities requiring
additional disclosure related to the impairment of certain debt and equity securities. The
information required by this FSP is included in Note 3 Fair Value Measurements.
In May 2009, the FASB issued FAS 165 Subsequent Events requiring companies to disclose the
date to which subsequent events were examined for disclosure. The Company adopted this
pronouncement for the quarter ended June 30, 2009.
In June 2009, the FASB issued FAS 168 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles which replaces the current
pronouncement system with the Accounting Standards Codification . The codification system is
required for financial statements issued for periods ending after September 15, 2009. The
codification is an attempt to encourage companies to use more plain English in financial statements
rather than simply citing pronouncement references. The Company has elected to adopt the
codification system early in these financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the Companys consolidated financial statements and
the accompanying notes. Actual results could differ from those estimates.
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
2. COMPONENTS OF COMPREHENSIVE INCOME
The following table describes the components of comprehensive income, net of tax, for the
three and six months ended June 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
2,533 |
|
|
$ |
633 |
|
|
$ |
3,377 |
|
|
$ |
6,409 |
|
Minimum pension liability adjustment |
|
|
40 |
|
|
|
52 |
|
|
|
291 |
|
|
|
104 |
|
Interest rate swap marked to market |
|
|
1,733 |
|
|
|
7,297 |
|
|
|
2,400 |
|
|
|
(334 |
) |
Auction rate securities temporary impairment |
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
4,306 |
|
|
$ |
8,089 |
|
|
$ |
6,068 |
|
|
$ |
6,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. FAIR VALUE MEASUREMENTS
The Company has developed valuation techniques based upon observable and unobservable inputs
to calculate the fair value of our non-short-term monetary assets and liabilities. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect
internal market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1- Quoted prices for identical instruments in active markets; |
|
|
|
|
Level 2- Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are
observable; and |
|
|
|
|
Level 3 - Significant inputs to the valuation model are unobservable. |
The fair values of cash and cash equivalents, accounts receivable and payable, and other
short-term monetary assets and liabilities approximate carrying values due to their short-term
nature.
Fair Value Measurements on a Recurring Basis
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Companys assessment of the
significance of a particular input to the fair value measurements requires judgment and may affect
the valuation of the assets and liabilities being measured, and their level within the fair value
hierarchy.
The following table presents the balances of assets and liabilities measured at fair value on
a recurring basis as of June 30, 2009 at each hierarchical level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
investments in
auction rate
securities |
|
$ |
1,005 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(19,840 |
) |
|
$ |
|
|
|
$ |
(19,840 |
) |
|
$ |
|
|
10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
3. FAIR VALUE MEASUREMENTS (Continued)
Non-current investments consist of Auction Rate Securities (ARS) that have maturity dates
greater than one year from June 30, 2009. The investments in ARS are included in Level 3 as no
active market or significant other observable inputs exist. The Company assigned a value to its ARS
portfolio by reviewing the value assigned to similar securities by brokerages, relative yields and
assessing credit risk. An assessment was also done in which management determined that the
securities were other-than-temporarily impaired, and in 2008, a charge was taken to the income
statement of $245. The fair value of ARS held by the Company at June 30, 2009 was unchanged from
the value at December 31, 2008 and no further impairment has been observed in 2009. Subsequent to
the quarter end on July 9, 2009, $100 of auction rate securities were redeemed by the issuer at
face value.
Derivative contracts, included in other deferred credits and long-term liabilities comprised
of out-of-the-money interest rate swaps that are valued using models based on readily observable
market parameters for all substantial terms of the derivative contracts and thus, are classified
within Level 2.
4. CONVERTIBLE DEBT BIFURCATION
In May 2008, FASB required that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be accounted for by separating the liability and
equity components of the instruments in a manner that will reflect the entitys non-convertible
debt borrowing rate when interest cost is recognized in subsequent periods. This was required as of
the beginning of an entitys first fiscal year beginning after December 15, 2008, which corresponds
to the Companys fiscal year beginning January 1, 2009, and must be applied retrospectively to all
periods presented. Early adoption was prohibited. The Company has retrospectively applied this to
the $125,000, 5.75% Convertible Notes issued on April 8, 2008, bifurcating the note into the
liability portion and the equity portion attributable to the conversion feature of the note. In
doing so, the Company used the discounted cash flow approach to value the debt portion of the
notes. The cash flow stream from the coupon interest payments and the final principal payment were
discounted at 11% to arrive at the valuations. The Company chose 11% as the appropriate discount
rate after examining the interest rates for similar instruments issued in the same time frame for
similar companies without the conversion option.
The effects on the Consolidated Balance Sheets as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As originally |
|
Retrospective |
|
As retrospectively |
|
|
reported |
|
adjustment |
|
applied |
Property, plant and equipment |
|
$ |
1,391,351 |
|
|
$ |
1,600 |
|
|
$ |
1,392,951 |
|
Debt issuance costs |
|
$ |
9,290 |
|
|
$ |
(736 |
) |
|
$ |
8,554 |
|
Non-current deferred income tax |
|
$ |
114,831 |
|
|
$ |
(9,351 |
) |
|
$ |
105,480 |
|
Long-term obligations, net of current portion |
|
$ |
560,857 |
|
|
$ |
(21,882 |
) |
|
$ |
538,975 |
|
Additional paid in capital |
|
$ |
217,740 |
|
|
$ |
14,073 |
|
|
$ |
231,813 |
|
Accumulated deficit |
|
$ |
(187,452 |
) |
|
$ |
(678 |
) |
|
$ |
(188,130 |
) |
The following table includes selected data regarding the convertible notes as of:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2009 |
|
2008 |
Net carrying amount of the equity component |
|
$ |
14,582 |
|
|
$ |
14,582 |
|
Principal amount of the convertible notes |
|
$ |
125,000 |
|
|
$ |
125,000 |
|
Unamortized debt discount |
|
$ |
19,716 |
|
|
$ |
21,882 |
|
Amortization period remaining |
|
44 months |
|
50 months |
Net carrying amount of the convertible notes |
|
$ |
105,284 |
|
|
$ |
103,118 |
|
11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
4.
CONVERTIBLE DEBT BIFURCATION (Continued)
The following table details the interest components of the convertible notes contained in the
Companys Statement of Operations for the three and six months ended June 30, 2009 and 2008,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Coupon interest expense |
|
$ |
1,777 |
|
|
$ |
1,643 |
|
|
$ |
3,554 |
|
|
$ |
1,643 |
|
Amortization of the debt discount |
|
|
1,098 |
|
|
|
907 |
|
|
|
2,166 |
|
|
|
907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included in interest expense |
|
$ |
2,875 |
|
|
$ |
2,550 |
|
|
$ |
5,720 |
|
|
$ |
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. CREST COMMUNICATIONS ACQUISITION
Effective October 30, 2008, the Company closed its purchase of 100% of the outstanding stock
of Crest Communications Corporation. The results of Crests operations have been included in the
Wireline segment of the consolidated financial statements since that date. Certain purchase price
adjustments are still under review and therefore the purchase price allocation is subject to
refinement.
The aggregate purchase price was $64,960, net of $1,072 in cash acquired and inclusive of
$4,169 cash consideration that was placed in an escrow account to be used for the settlement of any
potential claims of misrepresentations, breach of warranties or covenants or for other
indemnifications during the first eighteen months following the closing. During the second quarter
of 2009, a $4,250 settlement was reached regarding claims made by the Company against the selling
shareholders. The issue was appropriately excluded from the purchase price noted above; however,
the funds had been placed in escrow until the issue was resolved. The funds have now been released.
The Company and Crest have made customary representations, warranties and covenants in a stock
purchase agreement. The Company anticipates that all escrow issues will be resolved prior to the
expiration of the escrow period.
6. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common stock and
dilutive potential common share equivalents outstanding. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity. The Company
includes dilutive stock options based on the treasury stock method. Potential common share
equivalents, which consisted of options, restricted stock and stock-settled appreciation rights
(SSARs) granted to employees, and deferred shares granted to directors, resulted in dilutive
earnings per share for the three months ended June 30, 2009. Excluded from the calculation were
1,620 options and SSARs and 69 options which were out-of-the money and therefore anti-dilutive at
June 30, 2009 and June 30, 2008, respectively. Also excluded from the calculation were shares
related to the Companys convertible debt which were anti-dilutive for the three and six month
periods ending June 30, 2009 and 2008.
12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
6.
EARNINGS PER SHARE (Continued)
Earnings per share for the three and six months ended June 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator net income |
|
$ |
2,533 |
|
|
$ |
633 |
|
|
$ |
3,377 |
|
|
$ |
6,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
44,195 |
|
|
|
43,362 |
|
|
|
43,972 |
|
|
|
43,151 |
|
Dilutive impact of
restricted stock,
options
and deferred shares |
|
|
456 |
|
|
|
942 |
|
|
|
637 |
|
|
|
1,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
44,651 |
|
|
|
44,304 |
|
|
|
44,609 |
|
|
|
44,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. STOCK INCENTIVE PLANS
Total compensation cost for share-based payments was $2,565 and $2,515 for the six months
ended June 30, 2009 and 2008, respectively.
There were 511 and 628 restricted stock grants, inclusive of Performance Share Units, and 775
and zero SSARs granted during the six months ended June 30, 2009 and 2008, respectively. The
following table describes the assumptions used for valuation of equity instruments awarded during
the six months ended June 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Restricted stock: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0% - 0.25 |
% |
|
|
2.00% - 2.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected, per annum,
forfeiture rate |
|
|
0% - 5.47 |
% |
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Stock Options: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0.25 |
% |
|
|
|
|
Dividend yield |
|
|
9.29 |
% |
|
|
|
|
Expected volatility factor |
|
|
36.38 |
% |
|
|
|
|
Expected option life (years) |
|
|
3.2 |
|
|
|
|
|
Expected forfeiture rate |
|
|
0 |
% |
|
|
|
|
8. RETIREMENT PLANS
Pension benefits for substantially all of the Companys employees are provided through the
Alaska Electrical Pension Fund (AEPF). The Company 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 for, or allocated separately to, the
individual employer. During the second quarter of 2009 the Company received a notice of Zone
Freezing Election from the Joint Board of Trustees of the AEPF. The notice is a one time election
allowable under the Worker, Retiree and Employer Recovery act of 2008 which freezes the plans zone
status for the 2008 plan year at January 1, 2008 values. The notice certified that the plan was in
the Green or Safe Zone for the upcoming plan year. The Company can not accurately project any
change in the plan status in future years given the uncertainty of economic conditions or the
effect of actuarial valuations versus actual performance in the market.
13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
8. RETIREMENT PLANS (Continued)
The Company also provides a 401(k) retirement savings plan covering substantially all of its
employees.
The Company has a separate defined benefit plan that covers certain employees previously
employed by Century Telephone Enterprise, Inc. (CenturyTel Plan). This plan was transferred to
the Company in connection with the acquisition of CenturyTel, Inc.s Alaska properties. Existing
plan assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan
(Plan) on September 1, 1999. Accrued benefits under the Plan were determined in accordance with
the provisions of the CenturyTel Plan and upon completion of the transfer to the Company, covered
employees ceased to accrue benefits under the CenturyTel Plan. On November 1, 2000, the Plan was
amended to conform early retirement reduction factors and various other terms to those provided by
the AEPF. As a result of this amendment, prior service cost of $1,992 was recorded and will be
amortized over the expected service life of the plan participants at the date of the amendment. The
Company 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, as amended (ERISA). The Company uses a December 31
measurement date for the Plan. The Company made no contributions to the Plan in the first six
months of 2009 or 2008.
The following table represents the net periodic pension expense for the ACS Retirement Plan
for the three and six months ended June 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest cost |
|
$ |
210 |
|
|
$ |
202 |
|
|
$ |
420 |
|
|
$ |
404 |
|
Expected return on plan assets |
|
|
(182 |
) |
|
|
(258 |
) |
|
|
(364 |
) |
|
|
(516 |
) |
Amortization of loss |
|
|
195 |
|
|
|
37 |
|
|
|
390 |
|
|
|
74 |
|
Amortization of prior service cost |
|
|
51 |
|
|
|
51 |
|
|
|
102 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
274 |
|
|
$ |
32 |
|
|
$ |
548 |
|
|
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. BUSINESS SEGMENTS
The Companys segments and their principal activities consist of the following:
Wireline Wireline provides communication services including voice, broadband and data, next
generation internet protocol (IP) network services, network access, long distance and other
services to consumers, carriers, business and government customers.
Wireless Wireless products and services include voice and data products, other value-added
services and equipment sales.
The Company also incurs interest expense, interest income and other operating and
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 to
the business segments based on operating revenue. In accordance with industry practice and
regulatory requirements, affiliate revenue and expense between local telephone and all other
segments is not eliminated on consolidation. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
9. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the
three months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
64,598 |
|
|
$ |
35,491 |
|
|
$ |
2,431 |
|
|
$ |
(6,399 |
) |
|
$ |
96,121 |
|
Intersegment revenue |
|
$ |
14,042 |
|
|
$ |
653 |
|
|
$ |
2,431 |
|
|
$ |
|
|
|
$ |
17,126 |
|
Eliminated intersegment
revenue |
|
$ |
(3,958 |
) |
|
$ |
(10 |
) |
|
$ |
(2,431 |
) |
|
$ |
|
|
|
$ |
(6,399 |
) |
Income (loss) before income
tax |
|
$ |
1,893 |
|
|
$ |
12,129 |
|
|
$ |
(9,528 |
) |
|
$ |
|
|
|
$ |
4,494 |
|
Income tax (expense) benefit |
|
$ |
(1,722 |
) |
|
$ |
(4,986 |
) |
|
$ |
4,747 |
|
|
$ |
|
|
|
$ |
(1,961 |
) |
Net income (loss) |
|
$ |
171 |
|
|
$ |
7,143 |
|
|
$ |
(4,781 |
) |
|
$ |
|
|
|
$ |
2,533 |
|
Total assets |
|
$ |
529,822 |
|
|
$ |
186,680 |
|
|
$ |
6,222 |
|
|
$ |
|
|
|
$ |
722,724 |
|
Capital expenditures |
|
$ |
9,283 |
|
|
$ |
1,749 |
|
|
$ |
3,434 |
|
|
$ |
|
|
|
$ |
14,466 |
|
During the three months ended June 30, 2009, the Company recorded an adjustment to wireline
depreciation expense of $2,456 and wireline income tax expense of $1,085 to correct an immaterial
error in the calculation of depreciation expense on regulatory assets, and the related income tax
expense, which arose during the three months ended March 31, 2009.
The following table illustrates selected financial data for each segment as of and for the
three months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
62,809 |
|
|
$ |
35,294 |
|
|
$ |
5,743 |
|
|
$ |
(9,490 |
) |
|
$ |
94,356 |
|
Intersegment revenue |
|
$ |
13,086 |
|
|
$ |
659 |
|
|
$ |
5,743 |
|
|
$ |
|
|
|
$ |
19,488 |
|
Eliminated intersegment
revenue |
|
$ |
(3,738 |
) |
|
$ |
(9 |
) |
|
$ |
(5,743 |
) |
|
$ |
|
|
|
$ |
(9,490 |
) |
Income (loss) before income
tax |
|
$ |
(1,240 |
) |
|
$ |
10,556 |
|
|
$ |
(8,129 |
) |
|
$ |
|
|
|
$ |
1,187 |
|
Income tax (expense) benefit |
|
$ |
1,626 |
|
|
$ |
(4,342 |
) |
|
$ |
2,162 |
|
|
$ |
|
|
|
$ |
(554 |
) |
Net income (loss) |
|
$ |
386 |
|
|
$ |
6,214 |
|
|
$ |
(5,967 |
) |
|
$ |
|
|
|
$ |
633 |
|
Total assets |
|
$ |
540,387 |
|
|
$ |
227,170 |
|
|
$ |
14,348 |
|
|
$ |
(37,126 |
) |
|
$ |
744,779 |
|
Capital expenditures |
|
$ |
41,182 |
|
|
$ |
3,989 |
|
|
$ |
2,438 |
|
|
$ |
|
|
|
$ |
47,609 |
|
The following table illustrates selected financial data for each segment as of and for the six
months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
128,489 |
|
|
$ |
71,058 |
|
|
$ |
6,601 |
|
|
$ |
(14,018 |
) |
|
$ |
192,130 |
|
Intersegment revenue |
|
$ |
27,254 |
|
|
$ |
1,259 |
|
|
$ |
6,601 |
|
|
$ |
|
|
|
$ |
35,114 |
|
Eliminated intersegment
revenue |
|
$ |
(7,398 |
) |
|
$ |
(19 |
) |
|
$ |
(6,601 |
) |
|
$ |
|
|
|
$ |
(14,018 |
) |
Income (loss) before income
tax |
|
$ |
139 |
|
|
$ |
24,819 |
|
|
$ |
(18,951 |
) |
|
$ |
|
|
|
$ |
6,007 |
|
Income tax (expense) benefit |
|
$ |
(470 |
) |
|
$ |
(10,206 |
) |
|
$ |
8,046 |
|
|
$ |
|
|
|
$ |
(2,630 |
) |
Net income (loss) |
|
$ |
(331 |
) |
|
$ |
14,613 |
|
|
$ |
(10,905 |
) |
|
$ |
|
|
|
$ |
3,377 |
|
Total assets |
|
$ |
529,822 |
|
|
$ |
186,680 |
|
|
$ |
6,222 |
|
|
$ |
|
|
|
$ |
722,724 |
|
Capital expenditures |
|
$ |
15,024 |
|
|
$ |
2,258 |
|
|
$ |
4,054 |
|
|
$ |
|
|
|
$ |
21,336 |
|
15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
9. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the six
months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
128,923 |
|
|
$ |
68,974 |
|
|
$ |
8,886 |
|
|
$ |
(15,651 |
) |
|
$ |
191,132 |
|
Intersegment revenue |
|
$ |
25,406 |
|
|
$ |
1,308 |
|
|
$ |
8,886 |
|
|
$ |
|
|
|
$ |
35,600 |
|
Eliminated intersegment
revenue |
|
$ |
(6,746 |
) |
|
$ |
(19 |
) |
|
$ |
(8,886 |
) |
|
$ |
|
|
|
$ |
(15,651 |
) |
Income (loss) before income
tax |
|
$ |
4,163 |
|
|
$ |
20,707 |
|
|
$ |
(13,777 |
) |
|
$ |
|
|
|
$ |
11,093 |
|
Income tax (expense) benefit |
|
$ |
5 |
|
|
$ |
(8,517 |
) |
|
$ |
3,828 |
|
|
$ |
|
|
|
$ |
(4,684 |
) |
Net income (loss) |
|
$ |
4,168 |
|
|
$ |
12,190 |
|
|
$ |
(9,949 |
) |
|
$ |
|
|
|
$ |
6,409 |
|
Total assets |
|
$ |
540,387 |
|
|
$ |
227,170 |
|
|
$ |
14,348 |
|
|
$ |
(37,126 |
) |
|
$ |
744,779 |
|
Capital expenditures |
|
$ |
59,777 |
|
|
$ |
6,604 |
|
|
$ |
4,291 |
|
|
$ |
|
|
|
$ |
70,672 |
|
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business and has recorded litigation reserves of approximately $50 at June
30, 2009 against certain current claims and legal actions. The Company believes that the
disposition of these matters will not have a material adverse effect on the Companys consolidated
financial position, results of operations or cash flows.
11. SUBSEQUENT EVENTS
As a result of the approval of the Companys petition to be re-characterized from a
rate-of-return carrier to a price-cap carrier, the Company discontinued the application of
regulatory accounting effective July 1, 2009.
The Companys Consolidated Balance Sheets as of June 30, 2009 included regulatory liabilities
of $64,424 related to estimated removal costs embedded in accumulated depreciation as required by
regulators. Upon the discontinuance of regulatory accounting, these regulatory removal costs will
be reflected as an extraordinary gain on the Companys Consolidated Statement of Operations, offset
by the recording of estimated removal costs in accordance with GAAP, which the Company expects will
be significantly lower than its regulatory counterpart. The Companys June 30, 2009 financial
statements also contain regulatory assets of $64,418 related to depreciation of the regulated
telephone plant allocable to its intrastate and local jurisdictions.
Upon the discontinuance of regulatory accounting, the Company will also be required to
eliminate certain intercompany transactions with regulated affiliates that are not currently
eliminated during consolidation. In the three and six months ended June 30, 2009, $10,727 and
$21,096, respectively, of revenues (and related costs) would have been eliminated if the Company
were not following regulatory accounting. The Company will incur significant time and possible
costs as it makes the necessary changes to its computer and financial management reporting systems
and determines the
removal cost liability for its regulated subsidiaries. The Company believes a significant portion
of the costs are capitalizable as they will be enhancements to its computer and reporting systems.
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through July 31, 2009, the date the financial statements were
available to be issued.
16
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Forward Looking Statements and Analysts Reports
This Form 10-Q and future filings by ACS and its consolidated subsidiaries on Forms 10-K, 10-Q
and 8-K and the documents incorporated therein by reference include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934 (Exchange Act), as amended. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking statements in these
provisions. All statements other than statements of historical fact are forward-looking
statements for purposes of federal and state securities laws, including statements about
anticipated future operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business
prospects, strategic alternatives, business strategies, regulatory and competitive outlook,
investment and expenditure plans, financing needs and availability and other similar forecasts and
statements of expectation and statements of assumptions underlying any of the foregoing. Words such
as aims, anticipates, believes, could, estimates, expects, hopes, intends, may,
plans, projects, seeks, should and variations of these words and similar expressions are
intended to identify these forward-looking statements. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ materially from our
historical experience and our present expectations or projections. Forward-looking statements by us
are based on estimates, projections, beliefs and assumptions of management and are not guarantees
of future performance. Such forward-looking statements may be contained in this Form 10-Q under
Managements discussion and analysis of financial condition and results of operations and
elsewhere. Actual future performance, outcomes and results may differ materially from those
expressed in forward-looking statements made by us as a result of a number of important factors.
Examples of these factors include (without limitation):
|
|
|
our strongly competitive environment, which comprises national and local wireless and
wireline facilities-based competitors; |
|
|
|
|
our ability to manage, integrate, market, maintain and attract sufficient customers to
our Northstar and AKORN long-haul fiber facilities and our ability to develop attractive
integrated products and services making use of the facility; |
|
|
|
|
the continued availability of financing in the amounts, at the terms, and subject to the
conditions necessary, to support our future business; |
|
|
|
|
our ability to generate sufficient earnings and cash flows to continue to make dividend
payments to our stockholders; |
|
|
|
|
rapid technological developments and changes in the telecommunications industries; |
|
|
|
|
changes in revenue resulting from regulatory actions affecting inter-carrier
compensation; |
|
|
|
|
regulatory limitations on our ability to change our pricing for communications services; |
|
|
|
|
possible widespread or lengthy failures of our system or network cables, particularly
our non-redundant systems, including our primary fiber link connecting Alaska and the lower
48 states, which would cause significant delays or interruptions of service and/or loss of
customers; |
|
|
|
|
other unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps, fishing boats or natural disasters; |
|
|
|
|
changes in revenue from Universal Service Funds (USFs); |
|
|
|
|
changes in the demand for our products and services; |
|
|
|
|
changes in general industry and market conditions and growth rates; |
|
|
|
|
changes in interest rates or other general national, regional or local economic
conditions; |
|
|
|
|
worse-than-assumed economic and demographic experience for our postretirement benefit
plans (e.g., discount rates or investment returns); |
|
|
|
|
governmental and public policy changes; |
|
|
|
|
ongoing negotiations with our labor union, the International Brotherhood of Electrical
Workers Local 1547 (IBEW) and the potential outcome of such negotiations; |
|
|
|
|
the success of any future acquisitions and |
|
|
|
|
the matters described under Item 1ARisk Factors in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2008 and this Quarterly Report on Form 10-Q. |
In light of these risks, uncertainties and assumptions, you should not place undue reliance on
any forward-looking statements. Additional risks that we may currently deem immaterial or that are
not currently known to us could also cause the forward-looking events discussed in this Form 10-Q
or our other reports not to occur as described. Except as otherwise required by applicable
securities laws, we undertake no obligation to publicly update or revise any
17
forward-looking
statements, whether as a result of new information, future events, changed circumstances or
any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree 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 our responsibility.
Overview
We believe we are the leading provider of integrated communications services in Alaska. Our
wireline business comprises one of the most expansive end-to-end IP networks in Alaska and we are
the largest local exchange carrier network in the state. We believe our wireless business comprises
the most extensive, reliable wireless network in Alaska with third-generation (3G) data
transmission capabilities.
The sections that follow provide information about important aspects of our operations and
investments and include discussions of our results of operations, financial condition and sources
and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent
practicable. The content and organization of the financial and non-financial data presented in
these sections are consistent with information we use in evaluating performance and allocating
resources. We also monitor the state of the economy in general. In doing so, we compare Alaskan
economic activity with broader economic conditions. In general, we believe that the Alaskan
telecommunications market, as well as general economic activity in Alaska, is affected by certain
economic factors, which include:
|
|
|
activity in the oil and gas markets; |
|
|
|
|
military activity; |
|
|
|
|
the cost of long-haul telecommunications bandwidth; |
|
|
|
|
local customer preferences; |
|
|
|
|
average usage of Internet technology; |
|
|
|
|
unemployment levels and |
|
|
|
|
housing activity. |
We have observed variances in economic effect on Alaska when compared to the U.S. as a whole.
Some factors, particularly the price of oil and gas, may have the opposite effect on the Alaskan
economy than the U.S. economy as a whole. In forecasting the local economic conditions that affect
us, we take particular note of these factors.
Our results of operations, financial position and sources and uses of cash in the current and
future periods continue to reflect our focus on the following strategic imperatives:
|
|
|
Emphasis on Top-Line Growth: We emphasize revenue growth as well as growth in net cash
provided by operating activities. We devote more resources to higher growth markets such as
wireless, including wireless data, wireline broadband connections, including our long-haul
fiber investment connecting our network to the lower 48, as well as expanded strategic
services to business markets rather than to the traditional wireline voice market. |
|
|
|
|
Investment with Discipline: We focus on gaining market share in those markets that
contain high revenue producing customers. In our wireline business, we focus on deploying
and selling broadband connections in each market covered by our network. We have targeted
investment in deploying high speed fiber conductivity in and between Alaskas urban
centers. During 2008, we invested heavily in interstate capacity through our purchase of
Crest and construction of AKORN. We have increasingly targeted enterprise customers.
Revenues from these customers grew 47.2% and 49.1% in 2009 compared with the same three and
six months ended June 30, 2008, respectively, primarily driven by sales of advanced IP
services and increases in revenues from agreements with carriers to terminate their Alaskan
long distance traffic. We have directed resources towards offering wireless plans that
encourage customer adoption of large, monthly minute postpaid plans and unlimited postpaid
plans. By directing resources carefully, we seek to distinguish ourselves from our
competitors in a cost effective way. |
|
|
|
|
Profitability Improvement: We seek to increase operating income and margins. In support
of this goal, our capital spending continues to be directed toward growth markets. High
speed evolution data optimized (EVDO) and |
18
|
|
|
cutting-edge data services, deployment of our AKORN fiber facility coupled with the
complimentary purchase of Crest, as well as expanded services to enterprise customers,
including Metro Ethernet, are examples of initiatives designed to tap high growth markets.
As a result of our investment in AKORN, we expect 2009 capital expenditures to be lower than
2008 levels. We expect additional capital expenditures to support the growth of our wireless
network and enhance its reliability and data transmission speeds though an upgrade to EVDO
Rev A technology. |
|
|
|
|
Process Improvement: While focusing resources on revenue growth and market share gains,
we continually challenge our management team and employees at all levels to lower expenses
and improve the customer experience through process improvements. We expect to invest in
technology-assisted process improvement, including self-service initiatives. We expect
efforts such as call center routing improvements, self-pay kiosk deployment and customer
service tools, to improve our cost structure and maintain or improve operating income
margins. As a result of past successes, we have been able to serve more customers while
maintaining our workforce at or below prior levels. |
|
|
|
|
Pay for Performance: We embrace a culture of urgency and accountability. We establish
goals for all of our employees that are tied to the imperatives described above. We seek to
provide our non-represented employees cash incentives and equity compensation that are tied
to these goals. We carefully design executive compensation programs to align executives
and shareholders long-term interests. |
19
RESULTS OF OPERATIONS
All amounts are discussed at the consolidated level after the elimination of certain affiliate
revenue and expense.
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
The following table summarizes results of operations for the three months ended June 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, |
|
|
2009 |
|
2008 |
|
Change |
|
% Change |
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
22,537 |
|
|
$ |
23,900 |
|
|
$ |
(1,363 |
) |
|
|
-5.7 |
% |
Wholesale |
|
|
4,429 |
|
|
|
5,081 |
|
|
|
(652 |
) |
|
|
-12.8 |
% |
Access |
|
|
21,182 |
|
|
|
21,601 |
|
|
|
(419 |
) |
|
|
-1.9 |
% |
Enterprise |
|
|
12,492 |
|
|
|
8,489 |
|
|
|
4,003 |
|
|
|
47.2 |
% |
Wireless |
|
|
35,481 |
|
|
|
35,285 |
|
|
|
196 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
Total operating revenues |
|
|
96,121 |
|
|
|
94,356 |
|
|
|
1,765 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and amortization) |
|
|
46,691 |
|
|
|
43,972 |
|
|
|
2,719 |
|
|
|
6.2 |
% |
Wireless (exclusive of depreciation and amortization) |
|
|
19,415 |
|
|
|
20,802 |
|
|
|
(1,387 |
) |
|
|
-6.7 |
% |
Depreciation and amortization |
|
|
15,175 |
|
|
|
19,138 |
|
|
|
(3,963 |
) |
|
|
-20.7 |
% |
Loss on disposal of assets, net |
|
|
19 |
|
|
|
745 |
|
|
|
(726 |
) |
|
|
-97.4 |
% |
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,300 |
|
|
|
84,657 |
|
|
|
(3,357 |
) |
|
|
-4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,821 |
|
|
|
9,699 |
|
|
|
5,122 |
|
|
|
52.8 |
% |
Operating margin |
|
|
15.4 |
% |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(10,302 |
) |
|
|
(9,143 |
) |
|
|
(1,159 |
) |
|
|
12.7 |
% |
Interest income |
|
|
17 |
|
|
|
706 |
|
|
|
(689 |
) |
|
|
-97.6 |
% |
Other |
|
|
(42 |
) |
|
|
(75 |
) |
|
|
33 |
|
|
|
-44.0 |
% |
|
|
|
|
|
|
|
Total other income and expense |
|
|
(10,327 |
) |
|
|
(8,512 |
) |
|
|
(1,815 |
) |
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
4,494 |
|
|
|
1,187 |
|
|
|
3,307 |
|
|
|
278.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(1,961 |
) |
|
|
(554 |
) |
|
|
(1,407 |
) |
|
|
254.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,533 |
|
|
$ |
633 |
|
|
$ |
1,900 |
|
|
|
300.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Sources by Segment
We have two reportable business segments, wireline and wireless, which conduct the following
principal activities:
|
|
|
Wireline: We provide communications services including voice, data, broadband,
multi-protocol label switching services, network access, long distance and other services
to consumers, carriers, businesses and government customers throughout Alaska and to and
from Alaska. |
20
|
|
|
Wireless: We provide wireless voice and data services, products, other value-added
services and equipment sales across Alaska. |
Operating Revenues
Wireline
Retail: Retail revenue decreased in the three months ended June 30, 2009 over June 30, 2008
primarily due to a $0.7 million decline in local exchange revenue associated with residential line
losses, $0.4 million lower CPE sales to businesses and a $0.4 million decline in long distance
sales. These losses were offset, in part, by a $0.2 million increase in revenue from our Internet
Service Provider (ISP) subscriber base.
Declines in retail switched access lines in service in the second quarter were concentrated in
the residential market which is impacted by wireless substitution.
Wholesale: Wholesale revenues decreased due to declines in unbundled network elements
(UNEs) and wholesale local revenue primarily attributable to the ongoing migration of lines
leased to our key competitor as they continue to move to cable telephony. As a result of ongoing
declines in UNE and wholesale local lines, we expect that wholesale revenue will continue to
decline as a component of wireline revenue for the foreseeable future.
Access: Access revenues decreased in the second quarter of 2009 due to a decline in allocable
expenses eligible for cost recovery.
Enterprise: Enterprise revenue increased in the second quarter of 2009 primarily due to a
$3.5 million increase in carrier data revenue and a $1.0 million increase in sales of advanced
network services to large business and government customers, partially offset by a $0.6 million
decrease in long distance wholesale carrier voice revenue.
Wireless
In the quarter ended June 30, 2009, wireless revenue increased by $0.2 million as compared to
the same period ended June 30, 2008. Although we saw increases of $0.9 million in Competitive
Eligible Telecommunications Carrier (CETC) revenue, these increases were substantially offset by
a $0.6 million decline in roaming revenue reflecting the downturn in the global economy resulting
in fewer people traveling outside their own network coverage area.
Operating Expense
Operating expense decreased year over year for the three months ended June 30, 2009, with
increases in wireline expenses offset by decreases in wireless expenses and depreciation.
Wireline: Wireline expenses, which include local telephone, Internet, interexchange and cable
systems operating costs, increased for the quarter ended June 30, 2009 over June 30, 2008, due to a
$1.4 million increase in labor expense primarily related to our new cable operations, a $0.8
million increase in ISP access and leased circuit expenses, a $0.5 million increase in land and
building facilities related charges, and a $0.3 million increase in LD interstate COGS. These
increases were offset, in part, by a $0.4 million decrease in legal expenses resulting from
favorable settlements of contingent liabilities.
Wireless: Wireless expense decreased by $1.4 million primarily driven by reductions in
handset, accessory and data content expenses.
Depreciation and Amortization: Depreciation and amortization expense decreased primarily due
to reductions in the depreciation of assets that had reached their maximum depreciable lives and
lower depreciation charges for our regulatory assets related to our regulated telephone plant
allocable to intrastate and local jurisdictions.
Other Income and Expense: Other income and expense was a net expense of $10.3 million due to
lower levels of capitalized interest on fixed assets in the course of construction following the
commercial launch of AKORN in April 2009 and reduced interest income due to a reduced amount of
excess investible cash.
21
Income Taxes: Income taxes are currently being calculated using our estimated effective tax
rate for the second quarter of 2009 of 43.6%. At June 30, 2009 we had tax net operating loss
(NOL) carry forwards of approximately $152.5 million. Income tax expense will not involve a
significant cash outflow until these NOLs are utilized.
Net Income: The increase in net income is primarily a result of the factors discussed above.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
The following table summarizes results of operations for the six months ended June 30, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
% Change |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
45,488 |
|
|
$ |
47,546 |
|
|
$ |
(2,058 |
) |
|
|
-4.3 |
% |
Wholesale |
|
|
8,927 |
|
|
|
10,416 |
|
|
|
(1,489 |
) |
|
|
-14.3 |
% |
Access |
|
|
42,363 |
|
|
|
47,905 |
|
|
|
(5,542 |
) |
|
|
-11.6 |
% |
Enterprise |
|
|
24,313 |
|
|
|
16,310 |
|
|
|
8,003 |
|
|
|
49.1 |
% |
Wireless |
|
|
71,039 |
|
|
|
68,955 |
|
|
|
2,084 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
Total operating revenues |
|
|
192,130 |
|
|
|
191,132 |
|
|
|
998 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and amortization) |
|
|
93,028 |
|
|
|
87,242 |
|
|
|
5,786 |
|
|
|
6.6 |
% |
Wireless (exclusive of depreciation and amortization) |
|
|
37,888 |
|
|
|
40,923 |
|
|
|
(3,035 |
) |
|
|
-7.4 |
% |
Depreciation and amortization |
|
|
36,060 |
|
|
|
35,601 |
|
|
|
459 |
|
|
|
1.3 |
% |
Loss on disposal of assets, net |
|
|
469 |
|
|
|
759 |
|
|
|
(290 |
) |
|
|
-38.2 |
% |
|
|
|
|
|
|
|
Total operating expenses |
|
|
167,445 |
|
|
|
164,525 |
|
|
|
2,920 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
24,685 |
|
|
|
26,607 |
|
|
|
(1,922 |
) |
|
|
-7.2 |
% |
Operating margin |
|
|
12.8 |
% |
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(18,642 |
) |
|
|
(16,372 |
) |
|
|
(2,270 |
) |
|
|
13.9 |
% |
Interest income |
|
|
51 |
|
|
|
1,009 |
|
|
|
(958 |
) |
|
|
-94.9 |
% |
Other |
|
|
(87 |
) |
|
|
(151 |
) |
|
|
64 |
|
|
|
-42.4 |
% |
|
|
|
|
|
|
|
Total other income and expense |
|
|
(18,678 |
) |
|
|
(15,514 |
) |
|
|
(3,164 |
) |
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
6,007 |
|
|
|
11,093 |
|
|
|
(5,086 |
) |
|
|
-45.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(2,630 |
) |
|
|
(4,684 |
) |
|
|
2,054 |
|
|
|
-43.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,377 |
|
|
$ |
6,409 |
|
|
$ |
(3,032 |
) |
|
|
-47.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
22
Operating Revenues
Wireline
Retail: Retail revenue decreased in the six months ended June 30, 2009 over June 30, 2008
primarily due to a $1.4 million decline in local exchange revenue associated with residential line
losses, $0.6 million lower CPE sales to businesses and a $0.6 million decline in long distance
sales. These losses were offset, in part, by a $0.5 million increase in revenue from our Internet
Service Provider (ISP) subscriber base.
Declines in retail switched access lines in service in 2009 were concentrated in the
residential market which is impacted by wireless substitution.
Wholesale: Wholesale revenues decreased due to declines in unbundled network elements and
wholesale local revenue primarily attributable to the ongoing migration of lines leased to our key
competitor as they continue to move to cable telephony. As a result of ongoing declines in UNE and
wholesale local lines, we expect that wholesale revenue will continue to decline as a component of
wireline revenue for the foreseeable future.
Access: Access revenues decreased $5.5 million in the six months ended June 30, 2009 due to a
net decrease in reserve releases, from settlements, of $3.0 million in the first half of 2009.
These releases were attributable to a $4.2 million release in 2008 primarily related to refundable
USF support, offset in part by a $1.2 million reserve release in 2009 related to a reserve for
deferred tax asset study risk. The remaining decrease in allocable expenses is attributable to a
decline in eligible cost recovery.
Enterprise: Enterprise revenue increased in the first six months of 2009 primarily due to a
$5.8 million increase in carrier data and a $1.8 million increase in sales of advanced network
services to large business and government customers.
Wireless
In the six months ended June 30, 2009, wireless revenue increased 3.0% over the period ended
June 30, 2008. The increase is due primarily to $3.4 million in CETC revenue. These increases were
partially offset by a $0.6 million decline in roaming revenue reflecting the downturn in the global
economy resulting in fewer people traveling outside their own network coverage area and $0.4
million in handset and accessory sales. Additionally, lower-priced voice plans were initiated in
the prior year to match national price points for voice plans.
Operating Expense
Operating expense increased year over year for the six months ended June 30, 2009, with
increases in wireline expenses and depreciation partially offset by decreases in wireless expenses.
Wireline: Wireline expenses, which include local telephone, Internet, interexchange and cable
systems operating costs, increased for the six months ended June 30, 2009 over June 30, 2008, due
to a $3.0 million increase in labor expense primarily related to our new cable operations, a $1.5
million increase in land and building facilities related charges, a $0.9 million increase in ISP
access and leased circuit expenses, and a $0.8 million increase in LD interstate COGS. These
increases were offset, in part, by a $0.4 million decrease in legal expenses resulting from
favorable settlements of contingent liabilities.
Wireless: Wireless expense decreased by $3.0 million driven primarily by reductions in
handset, accessory and data content expenses.
Depreciation and Amortization: Depreciation and amortization expense increased slightly due
to additional depreciation on the assets purchased from Crest and additional depreciation related
to the completion of the AKORN fiber facility offset, in part, by reductions in the depreciation of
assets that had reached their maximum depreciable lives.
Other Income and Expense: Other income and expense was a net expense of $18.7 million due to
higher interest expense on the $125.0 million, 5.75% Convertible Notes issued April 8, 2008 offset
by a decline in interest income due to a reduced amount of excess investible cash.
23
Income Taxes: Income taxes are currently being calculated using our estimated effective tax
rate for the six months ended June 30, 2009 of 43.8%. At June 30, 2009 we had tax NOL carry
forwards of approximately $152.5 million. Income tax expense will not involve a substantial cash
outflow until these NOLs are utilized.
Net Income: The decrease in net income is primarily a result of the factors discussed above.
Liquidity and Capital Resources
|
|
Our major sources and uses of funds for the six months ended June 30, 2009 and 2008 are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2009 |
|
2008 |
Net cash provided by operating activities |
|
$ |
51,696 |
|
|
$ |
40,185 |
|
Capital expenditures |
|
$ |
(20,673 |
) |
|
$ |
(70,582 |
) |
Net settlement of capital expenditures
payable |
|
$ |
(12,104 |
) |
|
$ |
(160 |
) |
Net borrowings/(repayments) |
|
$ |
(5,465 |
) |
|
$ |
107,647 |
|
Dividends |
|
$ |
(18,912 |
) |
|
$ |
(18,531 |
) |
Sources
We have satisfied our cash requirements in the first six months of 2009 for operations,
capital expenditures and debt service primarily through internally generated funds. For the six
months ended June 30, 2009, our net cash flows provided by operating activities were $51.7 million.
At June 30, 2009, we had approximately $15.0 million in net working capital, of which approximately
$8.2 million was cash and cash equivalents and $6.7 million
was restricted cash. In the first six
months of 2009, $13.8 million cash that had previously been recorded as restricted cash was
released with $4.3 million flowing to us in settlement of an outstanding claim with Crest, $1.0
million to us for the expiration of a contract liability with the State of Alaska and $8.5 million
paid to Tyco for completion of the AKORN project. As of June 30, 2009, we had full access to our
$45.0 million revolving credit facility.
Our 2005 Senior Credit Facility contains a number of restrictive covenants and events of
default, including covenants limiting capital expenditures, incurrence of debt and payment of
dividends. The 2005 Senior Credit Facility also requires that we achieve certain financial ratios
quarterly and we are currently operating comfortably within their restrictions. We have entered
into a series of interest swap agreements that have effectively hedged London Inter-Bank Offered
Rate (LIBOR) on our entire term loan.
On April 8, 2008, we sold $125.0 million aggregate principal amount of our 5.75% Convertible
Notes due March 1, 2013. These notes are unsecured obligations, subordinate to our obligations
under the 2005 Senior Credit Facility, will pay interest semi-annually and will be convertible upon
satisfaction of certain conditions.
Uses
Our networks require the timely maintenance of plant and infrastructure. Our historical
capital expenditures have been, and continue to be, significant. Cash outflows for capital
expenditures for the six months ended June 30, 2009 were $32.8 million, inclusive of $12.1 million
in net settlements of capital expenditure payables since December 31, 2008. New capital acquisition
for 2009 totaled $20.7 million of which $7.8 million was expended on the build out of our AKORN
facility. We intend to fund future capital expenditures with cash on hand and net cash generated
from operations.
Since October 28, 2004, we have paid quarterly dividends on our common stock. Based on current
shares outstanding at July 23, 2009 of approximately 44.3 million shares and our current annual
dividend policy of $0.86 per share, maintenance of our current dividend policy would result in
$38.1 million cash being paid to common stockholders over the next four quarters. Dividends on our
common stock are not cumulative.
We believe that we will have sufficient cash on hand, cash provided by operations and
available borrowing capacity under our revolving credit facility to service our debt, pay our
quarterly dividends, and fund our operations, capital
24
expenditures and other obligations over the next 12 months. Our ability to meet such obligations
will be dependent upon our future financial performance, which is, in turn, subject to future
economic conditions and to financial, business, regulatory and other factors, many of which are
beyond our control. See Item 1ARisk Factors in our Annual Report on Form 10-K for further
information regarding these risks.
Legal
We are involved in various claims, legal actions, personnel matters and regulatory proceedings
arising in the ordinary course of business, and have recorded litigation reserves of $0.1 million
against certain claims and legal actions as of June 30, 2009. We believe that the disposition of
these matters will not have a material adverse effect on our consolidated financial position,
results of operations or cash flows beyond the amounts already recorded. Estimates involved in
developing these litigation reserves could change as these claims, legal actions and regulatory
proceedings progress.
Employees
As of June 30, 2009, we employed approximately 909 regular full-time employees, 13 regular
part-time employees and three full-time temporary employees. Of these employees, approximately 75%
are represented by the IBEW. Management considers employee relations to be satisfactory.
Recent Developments
None
Critical Accounting Policies and Accounting Estimates
We have identified certain policies and estimates as critical to our business operations and
the understanding of our past or present results of operations. For additional discussion on the
application of these and other significant accounting policies, see Note 1Summary of Significant
Accounting Policies to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
These policies and estimates are considered critical because they had a material impact, or have
the potential to have a material impact, on our financial statements and because they require
significant judgments, assumptions or estimates.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Among the significant estimates affecting the financial statements are those
related to the realizable value of accounts receivable, materials and supplies, long-lived assets,
goodwill and intangible assets, income taxes and network access revenue reserves. Actual results
may differ from those estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2009, we had outstanding debt under our 2005 Senior Credit Facility. This
on-balance sheet financial instrument, to the extent it provides for variable rates of interest,
exposes us 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 our 2005 Senior Credit Facility. In order to manage this risk, we
have entered into a series of floating-to-fixed interest rate swap agreements that effectively fix
LIBOR on the entire outstanding balance on the 2005 Senior Credit Facility. The term of these swap
agreements ranges from December 2009 through December 2011. On April 8, 2008, we sold $125.0
million aggregate principal amount of our 5.75% Convertible Notes due 2013 in a private placement.
The notes pay interest at a fixed rate and are subordinated to our obligations under our 2005
Senior Credit Facility as well as certain hedging agreements and other secured debt available under
the credit facility.
25
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures, as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective at the reasonable assurance level to ensure that information we are
required to disclose in reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance
that such information is accumulated and communicated to our management. Our disclosure controls
and procedures include components of our internal control over financial reporting. Managements
assessment of the effectiveness of our disclosure controls and procedures is expressed at the level
of reasonable assurance because a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control systems objectives will be met.
Changes in Internal Control over Disclosure and Reporting
There were no changes to the Companys internal control over financial reporting during the
quarter ended June 30, 2009 that materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in various claims, legal actions, personnel matters and regulatory proceedings
arising in the ordinary course of business. We believe that the disposition of these matters will
not have a material adverse effect on our consolidated financial position, results of operations or
cash flows.
ITEM 1A. RISK FACTORS.
There have been no material changes to the Companys risk factors as previously disclosed in
Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Working capital restrictions and other limitations on the payment of dividends
Our 2005 Senior Credit Facility contains a number of restrictive covenants and events of
default, including covenants limiting capital expenditures, incurrence of debt, and the payment of
dividends. Such credit facility also requires that we maintain certain financial ratios. In
addition, the Indenture governing our outstanding 5.75% Convertible Notes due March 1, 2013 also
contains a number of restrictive covenants.
In addition, our board of directors may, in its absolute discretion, amend or repeal our
dividend policy which may result in the decrease or discontinuation of dividends. Future dividends,
if any, will depend on, among other things, our results of operations, cash requirements, financial
condition, contractual restrictions, business opportunities, any competitive or technological
developments, our increased need to make capital expenditures, provisions of Delaware law or other
applicable law, and other factors that our board of directors may deem relevant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 12, 2009, Alaska Communications Systems Group, Inc. adjourned its 2009 Annual Meeting
without taking action on Proposals 1-5 as detailed in the Companys Notice of 2009 Annual
Meeting and Proxy Statement . The Company adjourned in order to provide its shareholders with
additional explanatory information regarding certain of the proposals and to file an amended Proxy
Statement 14A.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits:
|
31.1 |
|
Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of David Wilson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Liane Pelletier, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certification of David Wilson, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
Date: August 3, 2009 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. |
|
|
|
|
|
|
/s/ Liane Pelletier
|
|
|
Liane Pelletier |
|
|
Chief Executive Officer,
Chairman of the Board and President |
|
|
|
|
|
|
/s/ David Wilson
|
|
|
David Wilson |
|
|
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer) |
|
|
28