e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 R 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)
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Delaware
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52-2126573 |
(State or Other Jurisdiction
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(I.R.S. Employer |
of Incorporation or Organization)
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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 such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated and large accelerated filer in Rule
12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
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 15, 2011, was 45,201,442.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
(Unaudited, In Thousands except Per Share Amounts)
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June 30, |
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December 31, |
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2011 |
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2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
20,219 |
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$ |
15,316 |
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Restricted cash |
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4,914 |
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4,912 |
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Accounts receivable-trade, net of allowance of $5,531 and $6,616 |
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40,099 |
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36,985 |
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Materials and supplies |
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8,382 |
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6,533 |
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Prepayments and other current assets |
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3,968 |
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3,999 |
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Deferred income taxes |
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12,591 |
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10,949 |
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Total current assets |
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90,173 |
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78,694 |
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Property, plant and equipment |
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1,413,728 |
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1,416,718 |
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Less: accumulated depreciation and amortization |
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(1,012,349 |
) |
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(1,005,736 |
) |
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Property, plant and equipment, net |
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401,379 |
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410,982 |
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Non-current investments |
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355 |
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355 |
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Goodwill |
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8,850 |
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8,850 |
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Intangible assets, net |
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24,118 |
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24,118 |
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Debt issuance costs |
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10,802 |
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8,584 |
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Deferred income taxes |
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74,136 |
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76,813 |
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Equity method investment |
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2,060 |
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2,060 |
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Other assets |
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3,758 |
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10,159 |
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Total assets |
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$ |
615,631 |
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$ |
620,615 |
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Liabilities and Stockholders Equity (Deficit)
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Current liabilities: |
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Current portion of long-term obligations |
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$ |
5,687 |
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$ |
5,213 |
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Accounts payable, accrued and other current liabilities |
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54,870 |
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62,539 |
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Advance billings and customer deposits |
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9,192 |
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9,568 |
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Total current liabilities |
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69,749 |
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77,320 |
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Long-term obligations, net of current portion |
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564,233 |
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548,096 |
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Other long-term liabilities |
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19,312 |
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15,688 |
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Total liabilities |
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653,294 |
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641,104 |
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Commitments and contingencies |
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Stockholders equity (deficit): |
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Common stock, $.01 par value; 145,000 authorized, 45,201 and
44,704 issued and outstanding, respectively |
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452 |
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447 |
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Additional paid in capital |
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153,583 |
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166,259 |
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Accumulated deficit |
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(189,116 |
) |
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(188,160 |
) |
Accumulated other comprehensive income (loss) |
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(2,582 |
) |
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965 |
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Total stockholders deficit |
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(37,663 |
) |
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(20,489 |
) |
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Total liabilities and stockholders equity (deficit) |
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$ |
615,631 |
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$ |
620,615 |
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See Notes to Consolidated Financial Statements
3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
(Unaudited, In Thousands except Per Share Amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Operating revenues |
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$ |
84,943 |
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$ |
84,532 |
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$ |
171,536 |
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$ |
166,979 |
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Operating expenses: |
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Cost of services and sales |
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33,490 |
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32,067 |
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66,375 |
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64,466 |
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Selling, general and administrative |
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20,986 |
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22,052 |
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44,264 |
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42,822 |
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Depreciation and amortization |
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14,183 |
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18,607 |
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29,118 |
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37,368 |
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(Gain) loss on disposal of assets, net |
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76 |
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119 |
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(488 |
) |
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Total operating expenses |
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68,735 |
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72,726 |
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139,876 |
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144,168 |
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Operating income |
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16,208 |
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11,806 |
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31,660 |
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22,811 |
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Other income and expense: |
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Interest expense |
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(9,594 |
) |
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(8,096 |
) |
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(19,286 |
) |
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(16,844 |
) |
Loss on extinguishment of debt |
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(13,445 |
) |
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(13,445 |
) |
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Interest income |
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8 |
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9 |
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16 |
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23 |
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Total other income and expense |
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(23,031 |
) |
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|
(8,087 |
) |
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|
(32,715 |
) |
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(16,821 |
) |
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Income (loss) before income tax benefit (expense) |
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(6,823 |
) |
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3,719 |
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(1,055 |
) |
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5,990 |
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|
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|
|
|
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|
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Income tax benefit (expense) |
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3,168 |
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(31,392 |
) |
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|
99 |
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|
(32,393 |
) |
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Net loss |
|
$ |
(3,655 |
) |
|
$ |
(27,673 |
) |
|
$ |
(956 |
) |
|
$ |
(26,403 |
) |
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Net loss per share: |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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Basic and diluted |
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$ |
(0.08 |
) |
|
$ |
(0.62 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.59 |
) |
|
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|
|
|
|
|
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Weighted average shares outstanding: |
|
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|
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|
|
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|
|
|
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Basic and
diluted |
|
|
45,169 |
|
|
|
44,570 |
|
|
|
44,989 |
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|
44,532 |
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|
|
|
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|
|
|
|
|
|
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|
See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity
(Deficit)
Six Months Ended June 30, 2011
(Unaudited, In Thousands except Per Share Amounts)
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Accumulated |
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Additional |
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Other |
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Common |
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Paid in |
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Accumulated |
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Comprehensive |
|
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Stockholders |
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Shares |
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|
Stock |
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Capital |
|
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Deficit |
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|
Income (loss) |
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|
Equity (Deficit) |
|
Balance, December 31, 2010 |
|
|
44,704 |
|
|
$ |
447 |
|
|
$ |
166,259 |
|
|
$ |
(188,160 |
) |
|
$ |
965 |
|
|
$ |
(20,489 |
) |
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(956 |
) |
|
|
(3,547 |
) |
|
|
(4,503 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(19,454 |
) |
|
|
|
|
|
|
|
|
|
|
(19,454 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,432 |
|
|
|
|
|
|
|
|
|
|
|
1,432 |
|
Equity
component of convertible notes issuance, net of tax |
|
|
|
|
|
|
|
|
|
|
8,500 |
|
|
|
|
|
|
|
|
|
|
|
8,500 |
|
Debt issuance, net of tax |
|
|
|
|
|
|
|
|
|
|
(565 |
) |
|
|
|
|
|
|
|
|
|
|
(565 |
) |
Tax benefit of convertible bond call options |
|
|
|
|
|
|
|
|
|
|
3,589 |
|
|
|
|
|
|
|
|
|
|
|
3,589 |
|
Extinguishment of convertible bond options |
|
|
|
|
|
|
|
|
|
|
(4,350 |
) |
|
|
|
|
|
|
|
|
|
|
(4,350 |
) |
Surrender of shares to cover withholding taxes on stock-based compensation |
|
|
|
|
|
|
|
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|
|
(2,022 |
) |
|
|
|
|
|
|
|
|
|
|
(2,022 |
) |
Issuance of shares of common stock
pursuant to stock plans, $.01 par |
|
|
497 |
|
|
|
5 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011 |
|
|
45,201 |
|
|
$ |
452 |
|
|
$ |
153,583 |
|
|
$ |
(189,116 |
) |
|
$ |
(2,582 |
) |
|
$ |
(37,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
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Six Months Ended |
|
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|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(956 |
) |
|
$ |
(26,403 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,118 |
|
|
|
37,368 |
|
Amortization of debt issuance costs and debt discount |
|
|
10,086 |
|
|
|
3,700 |
|
Stock-based compensation |
|
|
1,432 |
|
|
|
1,478 |
|
Deferred
income tax expense (benefit) |
|
|
(99 |
) |
|
|
35,061 |
|
Provision for uncollectible accounts |
|
|
1,059 |
|
|
|
1,942 |
|
Other non-cash (income) expenses |
|
|
434 |
|
|
|
(112 |
) |
Changes in operating assets and liabilities |
|
|
(9,356 |
) |
|
|
(8,756 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
31,718 |
|
|
|
44,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(18,272 |
) |
|
|
(14,047 |
) |
Change in unsettled construction and capital expenditures |
|
|
(1,337 |
) |
|
|
(4,648 |
) |
Net change in non-current investments |
|
|
|
|
|
|
400 |
|
Net change in restricted accounts |
|
|
(2 |
) |
|
|
955 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(19,611 |
) |
|
|
(17,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(101,248 |
) |
|
|
(12,362 |
) |
Proceeds from the issuance of long-term debt |
|
|
120,000 |
|
|
|
12,000 |
|
Debt issuance costs |
|
|
(4,784 |
) |
|
|
|
|
Payment of cash dividend on common stock |
|
|
(19,349 |
) |
|
|
(19,171 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(2,022 |
) |
|
|
(192 |
) |
Proceeds from the issuance of common stock |
|
|
199 |
|
|
|
326 |
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(7,204 |
) |
|
|
(19,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
4,903 |
|
|
|
7,539 |
|
Cash and cash equivalents, beginning of period |
|
|
15,316 |
|
|
|
6,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
20,219 |
|
|
$ |
13,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
17,222 |
|
|
$ |
14,055 |
|
Income tax refunds |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-cash Transactions: |
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
1,162 |
|
|
$ |
1 |
|
Dividend declared, but not paid |
|
|
9,733 |
|
|
|
9,606 |
|
Additions to ARO asset |
|
|
14 |
|
|
|
50 |
|
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. (we, our, us, the Company, ACS and Alaska
Communications®), 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
rebranded as Alaska Communications in September of 2010.
The accompanying consolidated financial statements represent the consolidated financial position,
results of operations and cash flows of Alaska Communications Systems Group, Inc. and the following
wholly owned subsidiaries:
|
|
|
|
|
|
|
Alaska Communications Systems |
|
Crest Communications Corporation (Crest) |
|
|
Holdings, Inc. (ACS Holdings) |
|
WCI Cable, Inc. |
|
|
ACS of Alaska, Inc. (ACSAK)
|
|
WCIC Hillsboro, LLC. |
|
|
ACS of the Northland, Inc. (ACSN)
|
|
Alaska Northstar Communications, LLC. |
|
|
ACS of Fairbanks, Inc. (ACSF)
|
|
WCI Lightpoint, LLC. |
|
|
ACS of Anchorage, Inc. (ACSA)
|
|
Worldnet Communications, Inc. |
|
|
ACS Wireless, Inc. (ACSW)
|
|
Alaska Fiber Star, LLC. |
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
|
ACS Messaging, Inc. (ACSM) |
|
|
|
|
ACS Cable Systems, Inc. (ACSC) |
|
|
In addition to the wholly owned subsidiaries, the Company has a 49% interest in TekMate LLC
(TekMate) which is represented in the Companys consolidated financial statements as an equity
method investment.
Basis of Presentation
The consolidated financial statements and footnotes included in this Quarterly Report on 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, 2010. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAAP) 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.
In the opinion of management, the consolidated 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, 2011, are not necessarily indicative of the results of operations which might be
expected for the entire year or any other interim periods.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the Companys consolidated
financial statements and the accompanying notes, including estimates of probable losses and
expenses. Actual results could differ materially from those estimates.
7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
2. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
The following table describes the components of comprehensive loss, net of tax, for the three and
six months ended June 30, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(3,655 |
) |
|
$ |
(27,673 |
) |
|
$ |
(956 |
) |
|
$ |
(26,403 |
) |
Minimum pension liability adjustment |
|
|
175 |
|
|
|
140 |
|
|
|
367 |
|
|
|
383 |
|
Tax effect of pension liability |
|
|
(72 |
) |
|
|
(58 |
) |
|
|
(151 |
) |
|
|
(157 |
) |
Interest rate swap marked to fair value |
|
|
(6,659 |
) |
|
|
1,614 |
|
|
|
(6,389 |
) |
|
|
2,778 |
|
Tax effect of interest rate swap |
|
|
2,737 |
|
|
|
(663 |
) |
|
|
2,626 |
|
|
|
(1,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
(3,819 |
) |
|
|
1,033 |
|
|
|
(3,547 |
) |
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(7,474 |
) |
|
$ |
(26,640 |
) |
|
$ |
(4,503 |
) |
|
$ |
(24,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3. FAIR VALUE MEASUREMENTS
The Company has developed valuation techniques based upon observable and unobservable inputs
to calculate the fair value of 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, restricted stock, net accounts receivable, and
payable, other short-term monetary assets and liabilities and capital leases approximate carrying
values due to their nature. The fair value of the Companys 2010 Senior Credit Facility,
convertible notes and other long-term obligations of $573,151 at June 30, 2011 was estimated based
on quoted market prices. The carrying values of these liabilities were $569,920 at June 30, 2011.
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, as well as 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, 2011 and December 31, 2010, at each hierarchical level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$ |
355 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
355 |
|
|
$ |
355 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
355 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
479 |
|
|
$ |
|
|
|
$ |
479 |
|
|
$ |
|
|
|
$ |
6,868 |
|
|
$ |
|
|
|
$ |
6,868 |
|
|
$ |
|
|
Non-current investments consist of Auction Rate Securities (ARS) that have maturity dates greater
than one year from June 30, 2011. The investments in ARS are included in Level 3 as no active
market or significant
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
3. FAIR
VALUE MEASUREMENTS (Continued)
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.
Subsequent to quarter end, the fair value of ARS held at June 30, 2011 decreased to zero due to the
redemption of 100% of the remaining balance by issuers. The transaction resulted in a gain on the
income statement of $174, for balances previously impaired in 2008, which will be reflected in the
September 30, 2011 10-Q.
The Company uses derivative financial instruments to hedge variable interest rate debt to manage
interest rate risk. To the extent that derivative financial instruments are outstanding as of a
period end, the fair value of those instruments, represented by the estimated amount the Company
would receive or pay to terminate the agreement, is reported on the balance sheet.
Derivative contracts, included in other long-term assets, were comprised of interest rate swaps
that are valued using models based on readily observable market parameters for all substantial
terms and are classified within Level 2.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 2011 and December 31, 2010,
respectively:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
2010 senior credit facility term loan due 2016 |
|
$ |
437,800 |
|
|
$ |
440,000 |
|
Debt discount - 2010 senior credit facility term loan due 2016 |
|
|
(3,895 |
) |
|
|
(4,257 |
) |
6.25% convertible notes due 2018 |
|
|
120,000 |
|
|
|
|
|
Debt discount - 6.25% convertible notes due 2018 |
|
|
(14,173 |
) |
|
|
|
|
5.75% convertible notes due 2013 |
|
|
26,660 |
|
|
|
125,000 |
|
Debt discount - 5.75% convertible notes due 2013 |
|
|
(2,120 |
) |
|
|
(12,628 |
) |
Capital leases and other long-term obligations |
|
|
5,648 |
|
|
|
5,194 |
|
|
|
|
|
|
|
|
|
|
|
569,920 |
|
|
|
553,309 |
|
Less current portion |
|
|
(5,687 |
) |
|
|
(5,213 |
) |
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
$ |
564,233 |
|
|
$ |
548,096 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term obligations for each of the five years and thereafter
subsequent to June 30, 2011 are as follows:
|
|
|
|
|
2011 (July 1 December 31) |
|
$ |
2,830 |
|
2012 (January 1 December 31) |
|
|
5,746 |
|
2013 (January 1 December 31) |
|
|
32,055 |
|
2014 (January 1 December 31) |
|
|
4,652 |
|
2015 (January 1 December 31) |
|
|
4,694 |
|
2016 (January 1 December 31) |
|
|
418,342 |
|
Thereafter |
|
|
121,789 |
|
|
|
|
|
|
|
$ |
590,108 |
|
|
|
|
|
On May 10, 2011, the Company closed the sale of $120,000 aggregate principal amount of its 6.25%
Convertible Notes due 2018 (6.25% Notes) to certain initial purchasers in a private placement.
The Company received net proceeds from the offering of $115,300 after underwriter fees and other
associated costs. The Company used $98,340 of the proceeds to repurchase its 5.75% notes at a
premium of 7%.
In connection with the repurchase, the Company recognized a loss on
extinguishment of debt of $13,445 for the difference between the net
carrying amount of the notes and the repurchase amount.
The 6.25% Notes are fully and unconditionally guaranteed (Note Guarantees), on a joint and
several unsecured basis, by all of the Companys existing, majority owned subsidiaries, other than
its license subsidiaries, and certain of the Companys future domestic subsidiaries (Guarantors).
The 6.25% Notes will pay interest semi-annually on May 1 and November 1 at a rate of 6.25% per year
and will mature on May 1, 2018.
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
4. LONG-TERM OBLIGATIONS (Continued)
The 6.25% Notes will be convertible at an initial conversion rate of 97.2668 shares of Common Stock
per $1,000 principal amount of the 6.25% Notes, which is equivalent to an initial conversion price
of approximately $10.28 per share of Common Stock. The Company may not redeem the 6.25% Notes prior
to maturity.
Beginning on February 1, 2018, the 6.25% Notes will be convertible by the holder at any time until
5:00 p.m., New York City time, on the second scheduled trading-day immediately preceding the stated
maturity date.
Prior to February 1, 2018, holders may convert the 6.25% Notes:
|
|
|
During any fiscal quarter beginning after June 30, 2011 following any previous fiscal
quarter in which the trading price of the Companys common stock equals or exceeds 130% of
the conversion price of the 6.25% Notes for at least 20 trading-days during the last 30
trading-days of the previous fiscal quarter; |
|
|
|
During any five business day period following any five trading-day period in which the
trading price of the 6.25% Notes is less than 98% of parity value on each day of that five
trading-day period; and |
|
|
|
Upon the occurrence of certain significant corporate transactions, holders who convert
their 6.25% Notes, in connection with a change of control, may be entitled to a make-whole
premium in the form of an increase in the conversion rate. In addition, upon a change in
control, liquidation, dissolution or delisting, the holders of the 6.25% Notes may require
the Company to repurchase for cash all or any portion of their 6.25% Notes for 100% of the
principal amount plus accrued and unpaid interest. As of June 30, 2011, none of the
conditions allowing holders of the 6.25% Notes to convert, or requiring the Company to
repurchase the 6.25% Notes, had been met. |
Additionally, the 6.25% Notes contain events of default which, if they occur, entitle the holders
of the 6.25% Notes to declare them to be immediately due and payable. Those events of default
include: (i) payment defaults on either the notes themselves or other large obligations; (ii)
failure to comply with the terms of the notes; and (iii) most bankruptcy proceedings.
The 6.25% Notes are unsecured obligations, subordinated in right of payment to the Companys
obligations under its Senior Credit Facility as well as certain hedging agreements within the
meaning of the Companys Senior Credit Facility. The 6.25% Notes also rank equally in right of
payment with all of the Companys other existing and future senior indebtedness and are senior in right of payment to all of the Companys
future subordinated obligations. The Note Guarantees are subordinated in right of payment to the
Guarantors obligations under the Companys Senior Credit Facility as well as certain hedging
agreements within the meaning of the Companys Senior Credit Facility.
Convertible debt instruments that may be settled in cash upon conversion, including partial cash
settlement, must be accounted for by bifurcating the liability and equity components of the
instruments in a manner that reflects the entitys non-convertible debt borrowing rate when
interest cost is recognized in subsequent periods. The Company applied this rate to the $120,000
6.25% Notes, bifurcating the notes into the liability portion and the equity portion attributable
to the conversion feature of the notes. 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 8.57% to arrive at the valuations. The
Company used 8.57% 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 feature.
Further, while it is the Companys intent to settle the principal portion of this debt in cash,
under the provisions of Accounting Standards Codification (ASC) 260-10-45-44, the Company must
use the if converted method in calculating the diluted earnings per share effect of the assumed
conversion of the contingently convertible debt. Under the if converted method, the after tax
effect of interest expense related to the convertible securities is added back to net income, and
the convertible debt is assumed to have been converted into common stock at the earlier of the
debt issuance date or the beginning of the period.
10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
5. STOCK INCENTIVE PLANS
Alaska Communications Systems Group, Inc. 2011 Incentive Award Plan
On June 10, 2011, ACS shareholders approved the Alaska Communications Systems Group, Inc. 2011
Incentive Award Plan (2011 Plan) which permits the granting of stock options, restricted stock,
stock settled appreciation rights (SSARs) and other awards to officers, employees, consultants
and non-employee directors. Upon the effective date of the 2011 Plan, the Company has ceased
awarding new grants under the ACS 1999 Stock Incentive Plan and the ACS 1999 Director Stock
Compensation Plan (Prior Plans). The Company has reserved 3,810 shares under the 2011 Plan and
1,627 shares remain subject to outstanding awards under the Prior Plans. To the extent that any
outstanding awards under Prior Plans are forfeited or expire or such awards are settled in cash,
the shares will again be available for future grants under the 2011 Plan. In the six months ended
at June 30, 2011, 7 equity instruments were granted under the 2011 Plan and 1 equity instrument was
granted under the Prior Plans. Additionally, 2 equity instruments were forfeited and are available
for re-granting under the 2011 Plan. At June 30, 2011 a total of 3,805 shares were available for
grant under the 2011 Plan.
As of June 2011, non-employee director stock awards will be granted from the 2011 Plan. Since
January 2008, the Company has maintained a policy which requires that Directors receive a portion
of their annual retainer in the form of ACS Groups stock. Once a year, the Directors elect the
method by which they receive their stock (issued or deferred). During the six months ended June 30,
2011, 7 shares under the 2011 Plan were awarded to directors, of
which 3 were deferred until
termination of service.
Total compensation cost for share-based payments was $1,432 and $1,478 for the six months ended
June 30, 2011 and 2010, respectively.
There were 8 and 453 restricted stock units granted in the six months ended June 30, 2011 and 2010,
respectively.
The following table describes the assumptions used for valuation of equity instruments awarded
during the six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2011 |
|
2010 |
Restricted stock: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0 |
% |
|
|
0 |
% |
Quarterly dividend per share |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected, per annum, forfeiture rate |
|
|
0 |
% |
|
|
0% - 6.47 |
% |
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. Due to the
Companys net loss for the three and six months
ended June 30, 2011, 1,696 potential common share equivalents, which consisted of options,
restricted stock and SSARs granted to employees, and deferred shares granted to directors, were
anti-dilutive and excluded from the calculation. Also excluded from the calculation were shares related to the
Companys 5.75% and 6.25% Convertible Notes which were anti-dilutive for the three and six month
periods ended June 30, 2011 and 2010.
11
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, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,655 |
) |
|
$ |
(27,673 |
) |
|
$ |
(956 |
) |
|
$ |
(26,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
45,169 |
|
|
|
44,570 |
|
|
|
44,989 |
|
|
|
44,532 |
|
Restricted stock, options and deferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
45,169 |
|
|
|
44,570 |
|
|
|
44,989 |
|
|
|
44,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.62 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7. 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. Further, the Company cannot accurately project any change in the funding
status in future years given the uncertainty of economic conditions or the effect of actuarial
valuations versus actual performance in the market.
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 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 has been
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 net periodic pension expense for the Plan was $130 and $316 for
the three and six months ended June 30, 2011 and $105 and $373 for the three and six months ended
June 30, 2010. The Company made no contributions to the Plan in the three and six months ended June 30, 2011
and 2010, respectively. No additional contribution is expected in the remainder of 2011.
8. BUSINESS SEGMENTS
The Companys segments and their principal activities consist of the following:
Wireline The wireline segment comprises four lines of business: Enterprise, Retail, Wholesale
and Access. The segment provides communication and Information Technology (IT) services including
voice, broadband, multi-protocol label switching (MPLS), Metro Ethernet, network access, long
distance and other IT infrastructure hosting and management services to consumer, carrier, business
and government customers throughout Alaska and to and from Alaska.
12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
8. BUSINESS SEGMENTS (Continued)
Wireless The Wireless segment provides facilities-based voice and data services and other
value-added services and equipment sales statewide across Alaska with roaming coverage available in
the contiguous states, Hawaii and Canada.
The Company also incurs interest expense, interest income and other operating and non-operating
income and expense 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 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 by ACS Holdings and are allocated to the business segments based on operating
revenue. The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies.
The following tables illustrate selected financial data for each segment as of and for the three
months ended June 30, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
63,193 |
|
|
$ |
36,892 |
|
|
$ |
1,890 |
|
|
$ |
(17,032 |
) |
|
$ |
84,943 |
|
Intersegment revenue |
|
|
14,865 |
|
|
|
277 |
|
|
|
1,890 |
|
|
|
|
|
|
|
17,032 |
|
Income (loss) before income tax benefit (expense) |
|
|
4,777 |
|
|
|
10,642 |
|
|
|
(22,242 |
) |
|
|
|
|
|
|
(6,823 |
) |
Income tax benefit (expense) |
|
|
(4,385 |
) |
|
|
(4,374 |
) |
|
|
11,927 |
|
|
|
|
|
|
|
3,168 |
|
Net income (loss) |
|
|
392 |
|
|
|
6,268 |
|
|
|
(10,315 |
) |
|
|
|
|
|
|
(3,655 |
) |
Total assets |
|
|
426,813 |
|
|
|
186,225 |
|
|
|
2,593 |
|
|
|
|
|
|
|
615,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
63,275 |
|
|
$ |
35,347 |
|
|
$ |
1,476 |
|
|
$ |
(15,566 |
) |
|
$ |
84,532 |
|
Intersegment revenue |
|
|
13,661 |
|
|
|
429 |
|
|
|
1,476 |
|
|
|
|
|
|
|
15,566 |
|
Income (loss) before income tax benefit (expense) |
|
|
480 |
|
|
|
10,605 |
|
|
|
(7,366 |
) |
|
|
|
|
|
|
3,719 |
|
Income tax benefit (expense) |
|
|
71 |
|
|
|
(4,360 |
) |
|
|
(27,103 |
) |
|
|
|
|
|
|
(31,392 |
) |
Net income (loss) |
|
|
551 |
|
|
|
6,245 |
|
|
|
(34,469 |
) |
|
|
|
|
|
|
(27,673 |
) |
Total assets |
|
|
459,757 |
|
|
|
165,960 |
|
|
|
1,634 |
|
|
|
|
|
|
|
627,351 |
|
The following tables illustrate selected financial data for each segment as of and for
the six months ended June 30, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
126,451 |
|
|
$ |
73,958 |
|
|
$ |
3,765 |
|
|
$ |
(32,638 |
) |
|
$ |
171,536 |
|
Intersegment revenue |
|
|
28,316 |
|
|
|
557 |
|
|
|
3,765 |
|
|
|
|
|
|
|
32,638 |
|
Income (loss) before income tax benefit (expense) |
|
|
7,269 |
|
|
|
22,756 |
|
|
|
(31,080 |
) |
|
|
|
|
|
|
(1,055 |
) |
Income tax benefit (expense) |
|
|
(7,863 |
) |
|
|
(9,357 |
) |
|
|
17,319 |
|
|
|
|
|
|
|
99 |
|
Net income (loss) |
|
|
(594 |
) |
|
|
13,399 |
|
|
|
(13,761 |
) |
|
|
|
|
|
|
(956 |
) |
Total assets |
|
|
426,813 |
|
|
|
186,225 |
|
|
|
2,593 |
|
|
|
|
|
|
|
615,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
126,134 |
|
|
$ |
68,285 |
|
|
$ |
2,889 |
|
|
$ |
(30,329 |
) |
|
$ |
166,979 |
|
Intersegment revenue |
|
|
26,557 |
|
|
|
883 |
|
|
|
2,889 |
|
|
|
|
|
|
|
30,329 |
|
Income (loss) before income tax expense |
|
|
940 |
|
|
|
20,635 |
|
|
|
(15,585 |
) |
|
|
|
|
|
|
5,990 |
|
Income tax expense |
|
|
(29 |
) |
|
|
(8,487 |
) |
|
|
(23,877 |
) |
|
|
|
|
|
|
(32,393 |
) |
Net income (loss) |
|
|
911 |
|
|
|
12,148 |
|
|
|
(39,462 |
) |
|
|
|
|
|
|
(26,403 |
) |
Total assets |
|
|
459,757 |
|
|
|
165,960 |
|
|
|
1,634 |
|
|
|
|
|
|
|
627,351 |
|
13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
9. 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 $350 at June 30,
2011. 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.
On April 19, 2010, the Internal Revenue Service (the Service) issued a Notice of Proposed
Adjustment (NOPA) with respect to the 2006, 2007 and 2008 taxable years of Crest, which was
acquired by the Company on October 30, 2008. Crest had acquired certain entities out of bankruptcy
in 2002. The original majority stockholder of these entities, an Australian insurance company, AMP,
had made certain advances to the entities. These entities entered into bankruptcy in 2001 and the
bankruptcy court approved a plan which effectively subordinated these advances to all other
creditors. Upon acquiring the entities in 2002, Crest characterized the advances as equity for tax
purposes. The Service is asserting that characterization of the AMP advances as equity was
incorrect and that Crest had additional taxable income due to the cancellation of debt.
On November 2, 2010, the Service reissued their original NOPA and issued four additional NOPAs
which restated their original position on debt versus equity and assessed the Company for accuracy
related penalties and for adjustments to the tax treatment of optical cables, fibers and related
conduit. The cancellation of indebtedness income at the amounts set out in the combined NOPAs could
result in a charge to income tax expense of approximately $93,285, $53,795 of which would be a
result of additional taxes payable and $39,490 of which would be a result of the reduction in
recognized deferred tax assets.
On May 31, 2011, the Service issued a 30-day letter and revenue agents report which restated the
Services position in the NOPAs while adding certain additional adjustments. The adjustments in the
30-day letter reduced the impact of the Services position and could result in a charge to income
tax expense of approximately $89,559, $50,069 of which would be a result of additional taxes
payable and $39,490 of which would be a result of the reduction in recognized deferred tax assets.
The Company believes there are errors within the adjustments asserted by the Service. If the
Service accepts the corrections the Company believes are appropriate, but prevails on the
underlying debt versus equity issue, the result is expected to be a receivable from the Service for
the overpayment of alternative minimum tax of $2,781, a charge to income tax expense of
approximately $29,678 and a net reduction in recognized deferred tax assets. The Company believes
it is more likely than not that it will prevail on the factual errors included in the NOPAs;
however, it is unable to conclude it is more likely than not it will prevail on the underlying debt
versus equity issue. Therefore, in accordance with the guidance in ASC Topic 740 -Income Taxes
(ASC 740), the Company recorded $29,678 in additional income tax expense and a $2,781 receivable
in the second quarter of 2010. To date, managements position has not changed and no further
entries have been recorded pending resolution with the Service.
The additional income tax
expense is made up of two components: the first representing $11,018 for the tax effect of losing
net operating loss (NOLs) while the remaining $18,660 represents a deferred tax liability for the
difference in outside basis in certain Crest subsidiaries. ASC 740 requires recognition of a
deferred tax liability for outside basis differences. An outside basis difference represents the
amount by which the book basis of an investment in a domestic subsidiary for financial reporting
purposes exceeds the tax basis in such subsidiary. For certain Crest subsidiaries, the cancellation
of debt created a difference in outside basis that the Company cannot recover in a tax-free manner
and as such, a deferred tax liability was established. Through enforcing indemnification rights,
preserving the corporate structure of the Crest subsidiaries and other proactive steps, it is
possible to mitigate most or all of the cash impact of the $18,660 deferred tax liability for as
long as the Company remains a going concern.
The Stock Purchase Agreement (SPA) underlying the Companys acquisition of Crest provides for
indemnification to the Company by the former stockholders (Selling Stockholders) of Crest in an
amount not to exceed the amount of consideration each Selling Stockholder received. This indemnity
was entered into with the intent to mitigate the impact on the Company of potential tax exposure
items such as those raised by the NOPAs. The Company and the Selling Stockholders are contesting
all issues raised by the Service through various avenues of appeal. However, should the appeals
process fail to overturn the Services positions, should the Company be unable to preserve the
corporate structure of the Crest subsidiaries and should the Company
14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
9. COMMITMENTS AND CONTINGENCIES (Continued)
prove unable to effectively
enforce the indemnification provisions in the SPA or should any amounts exceed the indemnity
obligation, or ability to pay, of the indemnifying parties under the SPA, this could have a
material adverse effect on the Companys consolidated financial position, results of operations,
cash flows and liquidity.
15
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Forward-Looking Statements and Analysts Reports
This Form 10-Q and our future filings 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. 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 Item 2 -
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; |
|
|
|
|
the entry of one or more additional facilities-based carriers into the Alaska
market; |
|
|
|
|
governmental and public policy changes, including changes in our revenues resulting
from regulatory actions affecting inter-carrier compensation or changes in revenue from
Universal Service Funds (USFs); |
|
|
|
|
our substantial debt which requires us to dedicate a substantial portion of our cash
flow from operations to make debt payments and places pressure on our ability to access
the capital markets and to fund capital opportunities; |
|
|
|
|
the availability of future financing in the amounts, at the terms, and subject to
the conditions necessary, to support our business and pursue growth opportunities; |
|
|
|
|
our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders; |
|
|
|
|
our ability to keep pace with rapid technological developments and changing
standards in the telecommunications industry, including our ability to obtain new
devices, spectrum, bandwidth, and other network elements; |
|
|
|
|
our ability to develop attractive integrated products and services making use of our
substantial investments in fiber optic cable facilities, including our Alaska Oregon
Network (AKORN®)and Northstar fiber optic cables that connect Alaska to
the contiguous states; |
|
|
|
|
unanticipated damage to one or more of our fiber optic cables resulting from
construction or digging mishaps, fishing boats or natural phenomena; |
|
|
|
|
changes in general industry and market conditions, and structural declines within
the telecommunications industry; |
|
|
|
|
a maintenance failure of our network or data centers; |
|
|
|
|
a failure of back-office information technology systems; |
|
|
|
|
a third party claim that the Company is infringing upon their intellectual property,
resulting in significant litigation or licensing expenses, or the loss of our ability
to sell or support certain products; |
|
|
|
|
changes in overall national, regional or local economic conditions; |
|
|
|
|
unanticipated costs required to fund our post-retirement benefit plans; |
|
|
|
|
the financial and business performance of TekMate LLC, an information technology
company, of which we acquired 49% in August 2010 and our ability to use that investment
to drive future sales growth; |
16
|
|
|
the success or failure of any future acquisitions; |
|
|
|
|
the outcome of an ongoing Internal Revenue Service audit and the ability of certain
third parties to fulfill their indemnity obligations to us in the event that there is
an assessment as a result of that audit; and |
|
|
|
|
the matters described under Item 1A Risk Factors in our Annual Report on Form
10-K for the fiscal year ended December 31, 2010, this report and subsequent 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 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 provide leading integrated communications services in Alaska. Our wireline and wireless
communications networks extend throughout Alaska and connect to the contiguous states via our two
diverse undersea fiber optic cable systems.
Our wireline business comprises one of the most expansive end-to-end Internet Protocol (IP)
networks in Alaska and forms the foundation of our enterprise business. Our wireless business
includes a statewide third generation (3G) wireless network.
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 our own performance and
allocating our 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:
|
|
|
investment activity in the oil and gas markets; |
|
|
|
|
tourism levels; |
|
|
|
|
governmental spending and activity of military personnel; |
|
|
|
|
the price of terrestrial and IP based telecommunications bandwidth; |
|
|
|
|
the growth in demand for IP based services; |
|
|
|
|
local customer preferences; |
|
|
|
|
unemployment levels; and |
|
|
|
|
housing activity. |
We have observed variances in the factors affecting the Alaskan economy as compared to the U.S. as
a whole. Some factors, particularly the price of oil and gas, usually have the opposite effect on
the Alaskan economy than the U.S. economy as a whole.
17
2011 Focus
Our results of operations, financial position and sources and uses of cash in the current and
future periods reflect our focus on the following imperatives:
|
|
|
Grow Enterprise Revenue. We seek to serve business, government and carrier customers by
providing or partnering to provide redundant, scalable and managed high bandwidth data
connections, data hosting, information technology and cloud-based services throughout
Alaska and to the contiguous states and beyond. We believe that by providing these
customers connectivity with value-added services will enable us to successfully
differentiate ourselves from our competitors. |
|
|
|
|
Protect and Grow Our Wireless Subscribers. While our wireless business faces strong
competition, we believe that recently acquired smartphone devices on the Android and other
platforms combined with our high quality network and future positioning initiatives will
allow us to protect the significant cash flow generated by this piece of our business. |
|
|
|
|
Enhance Our Customers Experience. Our reputation for customer service is critical to
our success. Our renewed focus on our customers is a key to protecting and growing our
business. |
|
|
|
|
Enhance Our People Relations. Our business relies on our highly skilled workforce of
approximately 820 employees. With a motivated, engaged and stable workforce, combined with
greater engagement in the communities in which we serve, we can more successfully face the
challenges and risks to our business. |
|
|
|
|
Reduce Our Costs of Doing Business. While focusing resources on revenue growth and
market share gains, we continually challenge our management team and employees at all
levels of the organization to lower expenses. |
|
|
|
|
Enhance Our Systems/Process Capabilities. We expect to continue to invest in
technology-assisted process improvement. We expect efforts such as deploying enhanced
self-service tools to customers on our web site to improve our cost structure and maintain
or improve operating income margins. |
We believe we can create value for our shareholders by carefully investing cash flows generated by
the business in specific opportunities and transactions that support these imperatives.
Additionally, our Board of Directors has established an annual dividend of $0.86 per share
returning approximately $9.7 million and $19.3 million in cash dividends to our stockholders during
the three and six months ended June 30, 2011.
18
RESULTS OF OPERATIONS
All amounts are discussed at the consolidated level after the elimination of affiliate revenue and
expense.
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise |
|
$ |
12,615 |
|
|
$ |
11,800 |
|
|
$ |
815 |
|
|
|
6.9 |
% |
Retail |
|
|
20,427 |
|
|
|
20,720 |
|
|
|
(293 |
) |
|
|
-1.4 |
% |
Wholesale |
|
|
2,031 |
|
|
|
2,428 |
|
|
|
(397 |
) |
|
|
-16.4 |
% |
Access |
|
|
13,255 |
|
|
|
14,666 |
|
|
|
(1,411 |
) |
|
|
-9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
48,328 |
|
|
|
49,614 |
|
|
|
(1,286 |
) |
|
|
-2.6 |
% |
Wireless |
|
|
36,615 |
|
|
|
34,918 |
|
|
|
1,697 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
84,943 |
|
|
|
84,532 |
|
|
|
411 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
18,409 |
|
|
|
18,980 |
|
|
|
(571 |
) |
|
|
-3.0 |
% |
Selling, general and administrative |
|
|
15,611 |
|
|
|
16,298 |
|
|
|
(687 |
) |
|
|
-4.2 |
% |
Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
15,081 |
|
|
|
13,087 |
|
|
|
1,994 |
|
|
|
15.2 |
% |
Selling, general and administrative |
|
|
5,375 |
|
|
|
5,754 |
|
|
|
(379 |
) |
|
|
-6.6 |
% |
Depreciation and amortization |
|
|
14,183 |
|
|
|
18,607 |
|
|
|
(4,424 |
) |
|
|
-23.8 |
% |
Loss on disposal of assets |
|
|
76 |
|
|
|
|
|
|
|
76 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
68,735 |
|
|
|
72,726 |
|
|
|
(3,991 |
) |
|
|
-5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
16,208 |
|
|
|
11,806 |
|
|
|
4,402 |
|
|
|
37.3 |
% |
Operating margin |
|
|
19.1 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(9,594 |
) |
|
|
(8,096 |
) |
|
|
(1,498 |
) |
|
|
18.5 |
% |
Loss on extinguishment of debt |
|
|
(13,445 |
) |
|
|
|
|
|
|
(13,445 |
) |
|
|
100.0 |
% |
Interest income |
|
|
8 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
-11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(23,031 |
) |
|
|
(8,087 |
) |
|
|
(14,944 |
) |
|
|
184.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit (expense) |
|
|
(6,823 |
) |
|
|
3,719 |
|
|
|
(10,542 |
) |
|
|
-283.5 |
% |
Income tax benefit (expense) |
|
|
3,168 |
|
|
|
(31,392 |
) |
|
|
34,560 |
|
|
|
-110.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,655 |
) |
|
$ |
(27,673 |
) |
|
$ |
24,018 |
|
|
|
-86.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, MPLS,
Metro Ethernet, network access, long distance, data hosting and IT management and
cloud-based services with TekMate, to consumer, carrier, business and government
customers. |
|
|
|
|
Wireless: We provide wireless facilities-based voice and data services, products,
other value-added services and equipment sales statewide across Alaska with roaming
coverage available in the contiguous states, Hawaii and Canada. |
19
Operating Revenue
Wireline
Enterprise: Enterprise revenue increased $0.8 million in the quarter ended June 30, 2011 over
June 30, 2010 with higher data revenue of $0.8 million offset, in part, by a $0.1 million
reduction in carrier voice revenues.
Retail: Declines in retail switched access lines in service during 2011 were concentrated in
the residential market which we believe continues to be impacted by wireless substitution.
Retail revenue decreased $0.3 million in the three months ended June 30, 2011 over June 30,
2010, primarily due to a $0.4 million decline in local exchange revenue associated with
residential and business line losses, a $0.4 million decrease in voice mail revenue due to plan
changes offering free voice mail services and a $0.3 million decline in long distance sales.
These losses were offset, in part, by a $0.8 million increase in revenue from our Internet
Service Provider (ISP) subscriber base as customers move to higher bandwidth rate plans.
Wholesale: Wholesale revenues decreased $0.4 million from the same quarter in the prior year
due to continued decline in leases of our unbundled network elements (UNEs). We believe this
decline is primarily attributable to the on-going migration of lines by our key competitor to its
propriety cable telephony plant and the decision of another competitor, and wholesale customer,
to exit the market. We expect wholesale revenue will continue to decline.
Access: Access revenue decreased by $1.4 million from June 30, 2011 over June 30, 2010. The
decrease is primarily due to $0.9 million lower high cost loop support and $0.4 million lower
customer billed interstate revenue due to fewer access lines in service and rate reductions in
the current year.
Wireless
Wireless revenue increased $1.7 million in the three months ended June 30, 2011, from the same
quarter in the prior year, primarily driven by an increase of $3.4 million in revenue from non-ACS
customers roaming on our network. Partially offsetting this increase were decreases of $1.1 million
in service revenue due to a decline in subscribers, $0.5 million in equipment revenue driven by
equipment subsidies on higher gross activations, and $0.1 million in wholesale and other revenue.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange and
cable systems operating costs, decreased $1.3 million in the quarter ended June 30, 2011 over June
30, 2010.
Cost of Services and Sales Wireline cost of services and sales decreased $0.6 million due to
decreases of $0.6 million in labor, $0.5 million in LD COGS and $0.3 million in advanced network
services COGS. These decreases are partially offset by increases of $0.6 million in ISP access
and leased circuits, $0.2 million in maintenance expense and $0.1 million in land and building
related charges.
Selling, General and Administrative Wireline SG&A expenses decreased $0.7 million driven by a
$1.2 million favorable settlement of a contract dispute with a bankrupt vendor and a $0.2
million decrease in bad debt expense. Offsetting these decreases were increases of $0.4 million
in various consulting service and $0.2 million in labor.
Wireless
Cost of Services and Sales Wireless cost of services and sales increased $2.0 million
primarily due to $1.1 million increase in handset, accessory and data content driven by
equipment subsidies on higher gross activations and $1.0 million in network costs associated
with the growth in data usage from ACS customers roaming in the Lower 48.
Selling, General and Administrative SG&A expenses decreased $0.4 million primarily due to a
decrease of $0.2 million in labor expense, $0.2 million bad debt expense and a $0.2 million
favorable settlement of a contract dispute with a bankrupt vendor. These decreases were
partially offset by an increase of $0.2 million in advertising expense.
Depreciation and Amortization: Depreciation and amortization expense decreased $4.4 million in the
three months ended June 30, 2011, from the same period in the prior year, due primarily to a number
of pooled asset
20
classes reaching their maximum depreciable lives. These declines were offset by additions to
our asset base from the build out of our network.
Other Income and Expense: Other income and expense for the three months ended June 30, 2011 is a
net expense of $23.0 million. The net increase of $14.9 million in expense over the same period in
the prior year is primarily due to $13.4 million in charges related to the extinguishment of our
5.75% Convertible Notes and $1.5 million related to the October 2010 refinancing of our 2005 Senior
Credit Facility, resulting in an increase in interest expense.
Income
Taxes: At June 30, 2011 we had federal tax NOLs carry
forwards of approximately $173.0
million. Income tax expense will not involve a significant cash outflow until these NOLs are
exhausted.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise |
|
$ |
24,892 |
|
|
$ |
23,517 |
|
|
$ |
1,375 |
|
|
|
5.8 |
% |
Retail |
|
|
40,657 |
|
|
|
41,362 |
|
|
|
(705 |
) |
|
|
-1.7 |
% |
Wholesale |
|
|
4,136 |
|
|
|
5,032 |
|
|
|
(896 |
) |
|
|
-17.8 |
% |
Access |
|
|
28,450 |
|
|
|
29,666 |
|
|
|
(1,216 |
) |
|
|
-4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
98,135 |
|
|
|
99,577 |
|
|
|
(1,442 |
) |
|
|
-1.4 |
% |
Wireless |
|
|
73,401 |
|
|
|
67,402 |
|
|
|
5,999 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
171,536 |
|
|
|
166,979 |
|
|
|
4,557 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
37,271 |
|
|
|
38,329 |
|
|
|
(1,058 |
) |
|
|
-2.8 |
% |
Selling, general and administrative |
|
|
33,263 |
|
|
|
31,977 |
|
|
|
1,286 |
|
|
|
4.0 |
% |
Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
29,104 |
|
|
|
26,137 |
|
|
|
2,967 |
|
|
|
11.4 |
% |
Selling, general and administrative |
|
|
11,001 |
|
|
|
10,845 |
|
|
|
156 |
|
|
|
1.4 |
% |
Depreciation and amortization |
|
|
29,118 |
|
|
|
37,368 |
|
|
|
(8,250 |
) |
|
|
-22.1 |
% |
(Gain) loss on disposal of assets |
|
|
119 |
|
|
|
(488 |
) |
|
|
607 |
|
|
|
-124.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
139,876 |
|
|
|
144,168 |
|
|
|
(4,292 |
) |
|
|
-3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
31,660 |
|
|
|
22,811 |
|
|
|
8,849 |
|
|
|
38.8 |
% |
Operating margin |
|
|
18.5 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(19,286 |
) |
|
|
(16,844 |
) |
|
|
(2,442 |
) |
|
|
14.5 |
% |
Loss on extinguishment of debt |
|
|
(13,445 |
) |
|
|
|
|
|
|
(13,445 |
) |
|
|
100.0 |
% |
Interest income |
|
|
16 |
|
|
|
23 |
|
|
|
(7 |
) |
|
|
-30.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(32,715 |
) |
|
|
(16,821 |
) |
|
|
(15,894 |
) |
|
|
94.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax (expense) benefit |
|
|
(1,055 |
) |
|
|
5,990 |
|
|
|
(7,045 |
) |
|
|
-117.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
(expense) benefit |
|
|
99 |
|
|
|
(32,393 |
) |
|
|
32,492 |
|
|
|
-100.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(956 |
) |
|
$ |
(26,403 |
) |
|
$ |
25,447 |
|
|
|
-96.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Operating Revenue
Wireline
Enterprise: Enterprise revenue increased $1.4 million in the six months ended June 30, 2011
over June 30, 2010 due to higher data revenue of $1.7 million offset, in part, by a $0.4 million
decrease in carrier voice revenues.
Retail: Declines in retail switched access lines in service during 2011 were concentrated in
the residential market which we believe continues to be impacted by wireless substitution.
Retail revenue decreased $0.7 million in the six months ended June 30, 2011 over June 30, 2010,
primarily due to a $0.8 million decline in local exchange revenue associated with residential
and business line losses, a $0.8 million decrease in voice mail revenue due to plan changes
offering free voice mail services and a $0.6 million decline in long distance sales. These
losses were offset, in part, by a $1.6 million increase in revenue from our ISP subscriber base
as customers move to higher bandwidth rate plans.
Wholesale: Wholesale revenues decreased $0.9 million from the same period in the prior year due
to continued decline in leases of our UNEs. We believe this decline is primarily attributable to
the ongoing migration of lines by our key competitor to its propriety cable telephony plant and
the decision of another competitor, and wholesale customer, to exit the market. We expect
wholesale revenue will continue to decline.
Access: Access revenue decreased by $1.2 million in the six months from June 30, 2011 over June
30, 2010. The decrease is primarily due to $1.6 million lower high cost loop support and $1.2
million lower customer billed interstate revenue due to fewer access lines in service and rate
reductions in the current year. Partially offsetting these decreases are $1.8 million in
out-of-period settlements in the first quarter of 2011.
Wireless
Wireless revenue increased $6.0 million in the six months ended June 30, 2011, from the same period
in the prior year, primarily driven by an increase of $5.4 million in revenue from non-ACS
customers roaming on our network and a $3.8 million increase in wholesale and other revenue,
inclusive of $3.1 million of Competitive Eligible Telecommunications Carrier (CETC) related to a
reserve release in the first quarter of 2011 for prepaid phones. This is partially offset by
decreases of $2.3 million in service revenue due to a decline in subscribers and $0.9 million in
equipment revenue driven by equipment subsidies on higher gross activations.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange and
cable systems operating costs, increased $0.2 million in the six months ended June 30, 2011 over
June 30, 2010.
Cost of Services and Sales Wireline cost of services and sales decreased $1.1 million due to
reductions of $1.3 million in labor, $0.9 million in LD COGS and $0.3 million in advanced
network services COGS. These decreases are partially offset by increases of $0.8 million in ISP
access and leased circuits, $0.5 million in maintenance expense and $0.2 million in land and
building related charges.
Selling, General and Administrative Wireline SG&A expenses increased $1.3 million driven by
increases of $1.7 million in labor, $0.7 million in legal reserves and $0.5 million in various
consulting service. Offsetting these increases were a $1.2 million favorable settlement of a
contract dispute with a bankrupt vendor and a $0.4 million decrease in bad debt expense.
Wireless
Cost of Services and Sales Wireless cost of services and sales increased $3.0 million
primarily due to a $1.2 million increase in handset, accessory and data content driven by
equipment subsidies on higher gross activations and $2.0 million in network costs associated
with the growth in data usage from ACS customers roaming in the Lower 48.
Selling, General and Administrative SG&A expenses increased $0.2 million primarily due to an
increase of $0.3 million in labor expense partially offset by a $0.2 million favorable
settlement of a contract dispute with a bankrupt vendor.
Depreciation and Amortization: Depreciation and amortization expense decreased $8.3 million in the
six months ended June 30, 2011, from the same period in the prior year, due primarily to a number
of pooled asset
22
classes reaching their maximum depreciable lives. These declines were offset by additions to our
asset base from the build out of our network.
Other Income and Expense: Other income and expense for the six months ended June 30, 2011 is a net
expense of $32.7 million. The net increase of $15.9 million in expense over the same period in the
prior year is primarily due $13.4 million in charges related to the extinguishment of our 5.75%
Convertible Notes and $2.4 million related to the October 2010 refinancing of our 2005 Senior
Credit Facility, resulting in an increase in interest expense.
Income
Taxes: At June 30, 2011 we had federal tax NOLs carry
forwards of approximately $173.0
million. Income tax expense will not involve a significant cash outflow until these NOLs are
exhausted.
Liquidity and Capital Resources
Our major sources and uses of funds in the six months ended June 30, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
(in thousands) |
|
2011 |
|
2010 |
Net cash provided by operating activities |
|
$ |
31,718 |
|
|
$ |
44,278 |
|
Net change in funds held in restricted accounts |
|
$ |
(2 |
) |
|
$ |
955 |
|
Investment in construction and capital expenditures |
|
$ |
(18,272 |
) |
|
$ |
(14,047 |
) |
Change in unsettled construction and capital expenditures |
|
$ |
(1,337 |
) |
|
$ |
(4,648 |
) |
Net borrowings (repayments) |
|
$ |
18,752 |
|
|
$ |
(362 |
) |
Debt issuance costs |
|
$ |
(4,784 |
) |
|
$ |
|
|
Interest paid |
|
$ |
(17,222 |
) |
|
$ |
(14,055 |
) |
Payment of cash dividend on common stock |
|
$ |
(19,349 |
) |
|
$ |
(19,171 |
) |
Payment of withholding taxes on stock-based compensation |
|
$ |
(2,022 |
) |
|
$ |
(192 |
) |
Sources
We have satisfied our cash requirements in the first six months of 2011 for operations, capital
expenditures and debt service primarily through internally generated funds. In the six months ended
June 30, 2011, our net cash flows provided by operating activities were $31.7 million. At June 30,
2011, we had approximately $20.4 million in net working capital. Included in current assets were
approximately $20.2 million in cash and cash equivalents and $4.9 million in restricted cash. As of
June 30, 2011, we had access to $30.0 million under our revolving credit facility, representing
100% of available capacity.
On May 10, 2011, we closed the sale on $120.0 million aggregate principal amount 6.25% Convertible
Notes due 2018 to certain initial purchasers in a private placement. We received net proceeds from
the offering of $115.3 million after underwriter fees and other associated costs and used a portion
of the proceeds to repurchase $98.3 million of our 5.75% notes at a premium of 7%. The notes will
pay interest semi-annually on May 1 and November 1 at a rate of 6.25% per year and will mature on
May 1, 2018. These notes are collateralized by substantially all of our assets.
Our existing Senior Credit Facility matures on October 21, 2016 and the revolver matures on October
21, 2015, except that the maturity date for our term loan and our revolver will be December 19,
2012 if we have not repurchased or refinanced at least $100.0 million of our 5.75% Convertible
Notes as required under our Senior Credit Facility. Both are collateralized by substantially all of
our assets. We intend to access the capital markets to raise new capital to repurchase in open
market transactions from time to time, at varying prices, up to the remaining $26.7 million of our
5.75% Convertible Notes prior to December 19, 2012.
Our 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.
The Senior Credit Facility also requires that we maintain certain financial ratios.
Uses
Our networks require timely maintenance of plant and infrastructure. Our historical capital
expenditures have been, and continue to be, significant. Cash outflows for capital expenditures in
the six months ended June 30,
23
2011 were $19.6 million, inclusive of $1.3 million in net settlements of capital expenditure
payables. We intend to fund future capital expenditures primarily 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 15, 2011 of approximately 45.2 million and our current annual dividend
rates of $0.86 per share, maintaining our current dividend policy would result in $38.9 million
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 and cash provided by operations to service our
debt; pay our quarterly dividends; and fund our operations, capital expenditures and other
obligations over the next twelve months. However, our ability to make such an assessment is
dependent upon our future financial performance, which is subject to future economic conditions and
to financial, business, regulatory and many other factors, many of which are beyond our control.
See Item 1A Risk Factors in our Annual Report on Form 10-K and subsequent Forms10-Q, and this
report, 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 as of June 30, 2011 we have recorded litigation
reserves of $0.4 million against certain claims and legal actions. 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. See also Part II, Item 1, Legal
Proceedings.
Employees
As of
June 30, 2011 we employed 795 full-time employees, 14 part-time employees and 11 temporary
employees. Approximately 73% of our employees are represented by the International Brotherhood of
Electrical Workers, Local 1547 (IBEW). Our Master Collective Bargaining Agreement with the IBEW,
as amended, that governs the terms and conditions of employment for all IBEW represented employees
working for us in the state of Alaska expires on December 31, 2012. Management considers employee
relations to be generally good.
Additional Information
On August 10, 2010 Verizon Wireless purchased a 700 Mhz block of wireless spectrum that covers the
state of Alaska. Verizon has been utilizing this spectrum to build fourth generation (4G)
wireless networks in the contiguous Lower 48 states. This spectrum has certain build out
requirements that require that service be provided to a portion of the affected geographic area by
June 13, 2013. Should Verizon build in Alaska, they would represent the fourth wireless provider in
the marketplace. Our wireless service and roaming revenue would be affected by the emergence of a
new competitor. While we cannot anticipate Verizons plans, to the extent they enter the market,
the nature of the affect on our roaming revenue will be influenced by the following factors:
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1. |
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The timing of their entrance; |
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2. |
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Their decision to build 4G only or a combination of 3G and 4G; |
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3. |
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The time it takes them to build a new network and extent that this network
overlays our existing network; |
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4. |
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The pace that their 3G customers in the contiguous 48 states migrate from 3G
handsets to 4G handsets. |
We cannot reliably predict the size and pace of impact on our revenues. Yet, given our knowledge
and experience of construction seasons in Alaska, we believe it is highly unlikely we will see any
erosion in our roaming revenue stream until 2013 at the earliest, and given the ever increasing use
of wireless data, we expect to see increases in roaming revenue in the near to medium term.
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 1 Summary of Significant
Accounting Policies to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
These policies and estimates are considered critical
24
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, intangible assets, equity method investments, deferred income taxes and network access
revenue reserves. Actual results may differ from those estimates as the collection of those
balances is not reasonably assured.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2011 we had outstanding debt under our Senior Credit Facility. Our credit facility
exposes us to risk from changes in interest rates, specifically from changes in LIBOR, or, in
certain cases, the prime rate, which are used to determine the interest rates that are applicable
to borrowings under the credit facility. To manage this risk, we have entered into a series of
forward floating-to-fixed interest rate swap agreements and a buy back of the 1.5% LIBOR floor that
effectively fixes LIBOR on $385.0 million of the outstanding balance. These forward swaps begin
June 30, 2012 and expire on September 30, 2015. We also purchased an interest rate cap that
effectively caps LIBOR at 3.0% from January 1, 2011 to June 30, 2012.
On June 30, 2011 we also had outstanding $26.7 million aggregate principal amount of our 5.75%
Convertible Notes and $120.0 million of our 6.25% Convertible Notes. The notes pay interest at a
fixed rate and are subordinated to our obligations under our Senior Credit Facility as well as
certain hedging agreements and other secured debt available under our Senior Credit Facility.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In the
quarter ended June 30, 2011 we identified a material weakness in the operation
of our internal controls over the review of journal entries
specifically related to the extinguishment of our 5.75% Notes.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934, as amended. Based on the evaluation, our Chief Executive Officer and our Chief Financial
Officer believe that, as of the end of the period covered by this Quarterly Report on Form 10-Q,
due to the weakness noted above,
our disclosure controls and procedures were ineffective.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not
expect that our disclosure controls and internal control over financial reporting will prevent all
error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision making can be faulty and that
breakdowns can occur because of a simple error or mistake. Additionally, controls may be
circumvented by the individual acts of some persons, by collusion of two or more people or by
management override of the controls.
The design of any system of controls also is based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, a control may become
inadequate because of changes in conditions or
the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
25
There was no change in our internal controls over financial reporting that occurred in the second
quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting. However, we are currently
implementing changes to our internal controls over financial reporting
to correct the weakness noted above.
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. As of June 30, 2011 we have recorded litigation
reserves of $0.4 million against certain current claims and legal actions. 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
Other than as described below, 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, 2010. The risk factors described below should be read in conjunction with those disclosed in our
Form 10-K.
Maintaining the Companys networks and data centers requires significant capital expenditures,
and our inability or failure to maintain and upgrade our networks and data centers would have a
material impact on its market share and ability to generate revenue.
The Company currently operates an extensive network and multiple data centers. In order to provide
guaranteed levels of service to our customers and remain competitive, we must expend significant
amounts of capital. In many cases, we must rely on outside vendors whose performance and costs may
not be sufficiently within our control. Additionally, other Alaskan and national wireless carriers
are upgrading their networks with various technologies including 4G. Our full implementation of 4G
technology will likely take several years and the Company may lag behind competitors. If we cannot
adequately maintain and upgrade our network, it could have a material adverse effect on our
business, operating results, margins and financial condition.
A failure of back-office information technology systems could adversely affect the Companys
results of operations and financial condition.
The efficient operation of the Companys business depends on back-office information technology
systems. The Company relies on back-office information technology systems to effectively manage
customer billing, business data, communications, supply chain, order entry and fulfillment and
other business processes. A failure of the Companys information technology systems to perform as
anticipated could disrupt the Companys business and result in a failure to collect accounts
receivable, transaction errors, processing inefficiencies, and the loss of sales and customers,
causing the Companys reputation and results of operations to suffer. In addition, information
technology systems may be vulnerable to damage or interruption from circumstances beyond the
Companys control, including fire, natural disasters, systems failures, security breaches and
viruses. Any such damage or interruption could have a material adverse effect on our business,
operating results, margins and financial condition.
Third parties may claim that the Company is infringing upon their intellectual property, and the
Company could suffer significant litigation or licensing expenses or be prevented from selling
products.
Although the Company does not believe that any of its products or services infringe upon the valid
intellectual property rights of third parties, the Company may be unaware of intellectual property
rights of others that may cover some of its technology, products or services. Any litigation
growing out of third-party patents or other intellectual property claims could be costly and
time-consuming and could divert the Companys management and key personnel from its business
operations. The complexity of the technology involved and the uncertainty of intellectual property
litigation increase these risks. Resolution of claims of intellectual property infringement might
also require the Company to enter into costly license agreements. Likewise, the Company may not be
able to obtain license agreements on acceptable terms. The Company also may be subject to
significant damages or injunctions against development and sale of certain of its products.
Further, the Company often
relies on licenses of third party intellectual property for its
businesses. The Company cannot ensure these licenses will be available in the future on favorable
terms or at all. If any of these risks materialize, it could have a material adverse effect on our
business, operating results, margins and financial condition.
26
If failures occur in our undersea fiber optic cable systems, our ability to immediately restore
our service may be limited.
Our undersea fiber optic cable systems carry a large portion of our traffic to and from the
contiguous Lower 48 states. If a failure occurs and we are not able to secure alternative
facilities, some of the communications services we offer to our customers could be interrupted, which could have a material adverse effect
on our business, financial position, results of operations or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Working capital restrictions and other limitations on the payment of dividends
On May 10, 2011, the Company issued $120.0 million aggregate principal amount of its 6.25%
Convertible Notes due 2018. The Company offered and sold the Notes to certain Initial Purchasers in
reliance on an exemption from registration provided by Section 4(2) of the Securities Act. The
Initial Purchasers then sold the Notes to qualified institutional buyers pursuant to the exemption
from registration provided by Rule 144A under the Securities Act. The Company relied on these
exemptions from registration, in part, based on representations made by the Initial Purchasers in
the Purchase Agreement. The Initial Purchasers purchased the Notes from the Company at 97% of their
principal amount.
Our 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.
The Senior Credit Facility also requires that we maintain certain financial ratios.
In addition, our Board of Directors may at any time, 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.
ITEM 4.
Removed and Reserved.
ITEM 5. OTHER INFORMATION
None.
27
ITEM 6. EXHIBITS
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Exhibit |
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Number |
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Exhibit |
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Where Located |
4.1
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Indenture, dated as of May 10, 2011, by and among
the Company, the Guarantors named therein and The
Bank of New York Mellon Trust Company, N.A., as
trustee, with respect to 6.25% Convertible Notes
due 2018.
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Exhibit 4.1 to to
Form 8-K (filed May
11, 2011) |
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5.7
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Submission of Matters to a Vote of Security Holders.
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Exhibit 5.07 to
Form 8-K (filed
June 16, 2011) |
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10.1
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Employment Agreement between Alaska Communications
Systems Group, Inc., and Anand Vadapalli entered
into on February 21, 2011.
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Exhibit 10.1 to
Form 8-K (filed Feb
24, 2011) |
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10.2
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Purchase Agreement, dated May 4, 2011, by and among
the Company, the Guarantors named therein and J.P.
Morgan Securities LLC, as representative of the
several initial purchasers named therein.
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Exhibit 10.1 to
Form 8-K (filed May
11, 2011) |
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31.1
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Certification of Anand Vadapalli, Chief Executive
Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Filed with this
document |
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31.2
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Certification of Wayne Graham, Chief Financial
Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Filed with this
document |
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32.1
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Certification of Anand Vadapalli, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of the Sarbanes-Oxley Act of
2002.
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Filed with this
document |
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32.2
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Certification of Wayne Graham, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of the Sarbanes-Oxley Act of
2002.
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Filed with this
document |
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101.INS
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XBRL Instance Document |
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Filed with this document
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101.SCH
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XBRL Taxonomy Extension Schema Document |
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Filed with this document
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101.CAL
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XBRL Taxonomy Extension Calculation
Linkbase Document
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Filed with this document
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101.DEF
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XBRL Taxonomy Extension Label
Definition Document
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Filed with this document
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101.LAB
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XBRL Taxonomy Extension Label
Linkbase Document
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Filed with this document
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101.PRE
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XBRL Taxonomy Extension
Presentation Linkbase Document
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Filed with this document
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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.
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Date: August 1, 2011 |
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. |
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/s/ Anand Vadapalli
Anand Vadapalli
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Chief Executive Officer, |
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President |
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/s/ Wayne Graham
Wayne Graham
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Chief Financial Officer, |
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(Principal Accounting Officer) |
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29