DELAWARE 6719 52-2126573
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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MICHAEL E. HOLMSTROM WITH COPIES OF ALL COMMUNICATIONS TO:
SENIOR VICE PRESIDENT AND ELLIOTT V. STEIN, ESQ.
CHIEF FINANCIAL OFFICER WACHTELL, LIPTON, ROSEN & KATZ
ALEC HOLDINGS, INC. 51 WEST 52ND STREET
510 L. STREET, SUITE 500 NEW YORK, NEW YORK 10019
ANCHORAGE, ALASKA 99501 (212) 403-1000
(907) 297-3000
(Name, Address, Including Zip Code,
and Telephone Number, Including Area
Code, of Agent for Service)
------------------------
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If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
We do not intend to list the exchange debentures on any national securities exchange, and no public market for the exchange debentures is anticipated.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
PAGE
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Summary........................................ 1
Risk Factors................................... 15
Forward-Looking Statements..................... 23
The Exchange Offer............................. 24
The Acquisitions............................... 33
Use of Proceeds................................ 34
Capitalization................................. 35
Selected Historical Consolidated Financial
Data--ALEC Holdings.......................... 36
Selected Historical Combined Financial
Data--Century's Alaska Properties............ 38
Selected Historical Financial Data--ATU........ 40
Unaudited Pro Forma Combined Financial and
Operating Data............................... 42
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 45
Industry Overview.............................. 66
Business....................................... 68
PAGE
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Regulation..................................... 80
Management..................................... 87
Ownership of Capital Stock..................... 95
Insider Relationships and Related Party
Transactions................................. 98
Description of Other Indebtedness.............. 99
Description of the Exchange Debentures......... 104
Exchange and Registration Rights Agreement..... 130
Book-Entry, Delivery and Form.................. 133
Federal Income Tax Considerations.............. 137
Plan of Distribution........................... 143
Available Information.......................... 143
Experts........................................ 144
Validity of the Exchange Debentures............ 144
Index to Financial Statements.................. F-1
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This prospectus incorporates important business and financial information about us from documents that are not included in or delivered with this document. You can obtain documents incorporated by reference in this prospectus (other than exhibits to those documents) by requesting them in writing or by telephone from us at the following address:
ALEC Holdings, Inc.
510 L. Street, Suite 500
Anchorage, Alaska 99501
Attention: Michael E. Holmstrom
Telephone: (907) 297-3000
You will not be charged for any documents that you request. If you would like to request documents, please do so by , 1999 in order to receive them before the exchange offer expires on , 1999.
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE EXCHANGING YOUR OLD DEBENTURES FOR EXCHANGE DEBENTURES, AND YOU ARE ENCOURAGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THIS PROSPECTUS INCLUDES SPECIFIC TERMS OF THE EXCHANGE DEBENTURES WE ARE OFFERING, AS WELL AS INFORMATION ABOUT OUR BUSINESS AND DETAILED FINANCIAL DATA.
We own all of the capital stock of Alaska Communications Systems Holdings, Inc., and that capital stock accounts for substantially all of our assets. On May 14, 1999, we completed two acquisitions through Alaska Communications Systems Holdings, prior to which we had no operations:
- the acquisition of the Alaska telecommunications properties of Century Telephone Enterprises, Inc. for $411.8 million in cash. Century's Alaska properties, except for its cellular properties located in Fairbanks that we did not acquire, are the incumbent provider of local telephone services to over 131,000 access lines in Juneau, Fairbanks and more than 70 rural communities in Alaska; and
- the acquisition of substantially all of the assets and liabilities of the Anchorage Telephone Utility, commonly known as ATU, from the Municipality of Anchorage for $265.1 million in cash. ATU is the incumbent provider of local telephone services to over 168,000 access lines in Anchorage and surrounding communities.
With these acquisitions, we, through Alaska Communications Systems Holdings, are the leading diversified, full-service telecommunications provider in Alaska, offering local telephone, wireless, long distance and internet services to business and residential customers throughout the state. We have over $875 million invested in our network, a state-of-the-art telecommunications infrastructure that includes over 485 miles of fiber optic cable and 176 switching facilities.
Century's Alaska properties and ATU have achieved strong operating results through stable internal growth and strategic acquisitions. For the year ended December 31, 1998, we would have had pro forma combined revenues of $282 million, operating income of $41 million, a net loss of $19 million and EBITDA (as defined) of $102 million.
On May 14, 1999, we completed the private offering of the old, unregistered 13% senior discount debentures. We entered into an exchange and registration rights agreement with the initial purchasers in the private offering in which we agreed to deliver to you this prospectus as part of the exchange offer and agreed to complete the exchange offer within 180 days after the date of original issuance of the old debentures. You are entitled to exchange in the exchange offer your old debentures for exchange debentures which are identical in all material respects to the old debentures except:
- the exchange debentures have been registered under the Securities Act;
- the exchange debentures are not entitled to some registration rights which are applicable to the old debentures under the exchange and registration rights agreement; and
- contingent interest rate provisions, except for those relating to our failure to keep effective a shelf registration statement, are no longer applicable.
THE EXCHANGE OFFER............ We are offering to exchange up to $46,928,435 aggregate
principal amount of old debentures for up to $46,928,435
aggregate principal amount of exchange debentures. You may
exchange old debentures only in integral multiples of
$1,000.
RESALE........................ Based on an interpretation by the staff of the SEC set forth
in no-action letters issued to third parties, we believe
that the exchange debentures issued pursuant to the exchange
offer in exchange for old debentures may be offered for
resale, resold and otherwise transferred by you (unless you
are an "affiliate" of us within the meaning of Rule 405
under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that you are acquiring the exchange
debentures in the ordinary course of your business and that
you have not engaged in, do not intend to engage in, and
have no arrangement or understanding with any person to
participate in, a distribution of the exchange debentures.
Each participating broker-dealer that receives exchange
debentures for its own account under the exchange offer in
exchange for old debentures that were acquired as a result
of market-making or other trading activity must acknowledge
that it will deliver a prospectus in connection with any
resale of the exchange debentures. See "Plan of
Distribution."
Any holder of old debentures who:
- is our affiliate;
- does not acquire exchange debentures in the ordinary
course of its business; or
- tenders in the exchange offer with the intention to
participate, or for the purpose of participating, in a
distribution of exchange debentures
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cannot rely on the position of the staff of the SEC stated
in Exxon Capital Holdings Corporation, Morgan Stanley & Co.
Incorporated or similar no-action letters and, in the
absence of an exemption, must comply with the registration
and prospectus delivery requirements of the Securities Act
in connection with the resale of the exchange debentures.
EXPIRATION OF THE EXCHANGE
OFFER; WITHDRAWAL OF
TENDER...................... The exchange offer will expire at 5:00 p.m., New York City
time, on , 1999, or a later date and time to which we
extend it. We do not currently intend to extend the
expiration of the exchange offer. You may withdraw your
tender of old debentures pursuant to the exchange offer at
any time before expiration of the exchange offer. Any old
debentures not accepted for exchange for any reason will be
returned without expense to you promptly after the
expiration or termination of the exchange offer.
CONDITIONS TO THE EXCHANGE
OFFER....................... The exchange offer is subject to customary conditions, which
we may waive. Please read the section under the caption "The
Exchange Offer--Conditions" of this prospectus for more
information regarding the conditions to the exchange offer.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........... If you wish to participate in the exchange offer, you must:
- complete, sign and date the accompanying letter of
transmittal, or a facsimile of the letter of transmittal,
according to the instructions contained in this prospectus
and the letter of transmittal; and
- mail or otherwise deliver the letter of transmittal, or a
facsimile of the letter of transmittal, together with your
old debentures and any other required documents, to the
exchange agent at the address set forth on the cover page
of the letter of transmittal.
If you hold old debentures through The Depository Trust
Company and wish to participate in the exchange offer, you
must comply with DTC's Automated Tender Offer Program
procedures, by which you will agree to be bound by the
letter of transmittal. By signing, or agreeing to be bound
by, the letter of transmittal, you will represent to us
that, among other things:
- you acquired your old debentures in the ordinary course of
your business;
- you have no arrangement or understanding with any person
or entity to participate in a distribution of the exchange
debentures;
- if you are a broker-dealer that will receive exchange
debentures for your own account in exchange for old
debentures that were acquired as a result of market-making
activities, that you will deliver a prospectus, as
required by law, in connection with any resale of those
exchange debentures; and
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- you are not an "affiliate," as defined in Rule 405 of the
Securities Act, of us or, if you are an affiliate, that
you will comply with any applicable registration and
prospectus delivery requirements of the Securities Act.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........... If you are a beneficial owner of old debentures that are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, and you want to tender old
debentures in the exchange offer, you should contact the
registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on
your own behalf, you must, before completing and executing
the letter of transmittal and delivering your old
debentures, either make appropriate arrangements to register
ownership of the old debentures in your name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time and may not be able to be completed before expiration
of the exchange offer.
GUARANTEED DELIVERY
PROCEDURES.................. If you wish to tender your old debentures and your old
debentures are not immediately available or you cannot
deliver your old debentures, the letter of transmittal or
any other documents required by the letter of transmittal or
comply with the applicable procedures under DTC's Automated
Tender Offer Program, before expiration of the exchange
offer, you must tender your old debentures according to the
guaranteed delivery procedures set forth under the caption
"The Exchange Offer--Guaranteed delivery procedures."
EFFECT ON HOLDERS OF
OUTSTANDING NOTES........... By making the exchange offer and by accepting for exchange
all validly tendered old debentures under the exchange
offer, we will have fulfilled a covenant contained in the
registration rights agreement. Accordingly, there will be no
increase in the interest rate on the old debentures under
the circumstances described in the registration rights
agreement. If you are a holder of old debentures and you do
not tender your old debentures in the exchange offer, you
will continue to hold your old debentures and will be
entitled to all the rights and subject to all the
limitations applicable to the old debentures in the
indenture, except for any rights under the registration
rights agreement that terminate upon the completion of the
exchange offer.
The trading market for old debentures could be adversely
affected if some but not all of the old debentures are
tendered and accepted in the exchange offer.
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CONSEQUENCES OF FAILURE TO
EXCHANGE.................... All untendered old debentures will remain subject to the
restrictions on transfer provided for in the old debentures
and in the indenture. In general, the old debentures may not
be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities laws. Other than in connection
with the exchange offer, we do not currently anticipate that
we will register the old debentures under the Securities
Act.
FEDERAL INCOME TAX
CONSIDERATIONS.............. The exchange of old debentures for exchange debentures in
the exchange offer will not be a taxable event for U.S.
federal income tax purposes. See "Federal Income Tax
Considerations" for a more detailed description of the tax
consequences of the exchange.
USE OF PROCEEDS............... We will not receive any cash proceeds from the issuance of
exchange debentures pursuant to the exchange offer.
EXCHANGE AGENT................ The Bank of New York is the exchange agent for the exchange
offer. The address and telephone number of the exchange
agent are set forth under the caption "The Exchange
Offer--Exchange agent" of this prospectus.
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ISSUER.............................. ALEC Holdings, Inc.
SECURITIES OFFERED.................. $46,928,435 aggregate principal amount of 13% Senior
Discount Debentures due 2011.
MATURITY............................ May 15, 2011.
INTEREST PAYMENT DATES.............. May 15 and November 15 of each year, commencing on
November 15, 2004.
OPTIONAL REDEMPTION................. On or after May 15, 2004, we may redeem some or all
of the exchange debentures at the redemption prices
listed under the caption "Description of the Exchange
Debentures--Optional Redemption."
Before May 15, 2002, we may redeem up to 35% of the
exchange debentures with the proceeds of sales of
equity in our Company at the redemption price listed
under the caption "Description of the Exchange
Debentures-- Optional Redemption."
CHANGE OF CONTROL................... If we experience a change of control, you will have
the right to require us to repurchase your exchange
debentures at a price equal to 101% of the principal
amount of the exchange debentures, together with
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the Exchange
Debentures--Change of Control."
RANKING............................. The exchange debentures will be unsecured and:
- rank equally with all of our other existing and
future senior debt;
- rank senior to all of our senior subordinated debt;
and
- rank senior to all of our existing and future
subordinated debt.
On June 30, 1999:
- Alaska Communications Systems Holdings had $451.2
million of senior debt;
- we did not have any senior debt other than the old
debentures;
- Alaska Communications Systems Holdings' guarantor
subsidiaries had $1.6 million of senior debt;
- Alaska Communications Systems Holdings did not have
any senior subordinated debt other than the Alaska
Communications Systems Holdings senior subordinated
notes, and we and Alaska Communications Systems
Holdings' guarantor subsidiaries did not have any
senior subordinated debt, other than the guarantees
of the Alaska Communications Systems Holdings
senior subordinated notes; and
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- we, Alaska Communications Systems Holdings and
Alaska Communications Systems Holdings' guarantor
subsidiaries did not have any subordinated debt.
RESTRICTIVE COVENANTS............... We will issue the exchange debentures under an
indenture with The Bank of New York, as the trustee.
The indenture will, among other things, restrict our
ability and the ability of our subsidiaries and
future subsidiaries, to:
- incur debt;
- make investments;
- pay dividends on stock or purchase stock;
- sell assets or stock of our subsidiaries;
- engage in transactions with our affiliates;
- engage in mergers, consolidations and sales of
assets; and
- engage in business activities that are unrelated to
our current business.
The indenture will also limit the extent to which we
can permit restrictions on the ability of our
subsidiaries to pay dividends and make other
distributions.
See "Description of the Exchange
Debentures--Restrictive Covenants."
ABSENCE OF ESTABLISHED MARKET FOR
THE NOTES......................... The exchange debentures are a new issue of
securities, and there is no established trading
market for the exchange debentures. We do not intend
to apply for the exchange debentures to be listed on
any securities exchange or to arrange for quotation
on any automated dealer quotation system. The initial
purchasers in the private placement of the old
debentures have advised us that they intend to make a
market in the exchange debentures and any new notes
issued in exchange for the exchange debentures, but
they are not obligated to do so. The initial
purchasers may discontinue any market making in the
exchange debentures or any new notes issued in
exchange for the exchange debentures at any time in
their sole discretion. We cannot assure you that a
liquid market will develop for the exchange
debentures.
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* * * * *
We are located at 510 L. Street, Suite 500, Anchorage, Alaska 99501. Our telephone number is (907) 297-3000.
The following summary unaudited pro forma combined financial and operating data are based on the financial statements of Century's Alaska properties and ATU, as adjusted to illustrate the estimated effects of
- the acquisition of Century's Alaska properties;
- the acquisition of ATU;
- the purchase of fiber capacity for $19.5 million; and
- the financings necessary to complete these acquisitions,
as if these transactions had occurred on January 1, 1998 for the Operating Data and Other Financial Data and on June 30, 1999 for the Other Data and Balance Sheet Data.
The summary unaudited pro forma combined financial and operating data do not purport to be indicative of what our financial position or results of operations would actually have been had these transactions been completed on the dates indicated or to project our results of operations for any future period. More complete data can be found under "Unaudited Pro Forma Combined Financial and Operating Data."
You should also keep the following points in mind as you read the table.
- "Other income (expense)" includes the
- net operating results of Century's Alaska properties' and ATU's equipment sales and rental, payphone and internet businesses and
- equity in earnings (losses) of minority investments.
For the year ended December 31, 1998, these amounts represented earnings of $1,431,000 and losses of $2,945,000, respectively. For the six months ended June 30, 1999 "other income (expense) "includes non-operating revenues of $1,046,000 primarily as a result of non-recurring items, non-operating expenses of $545,000 and loss in equity interest of minority investments of $1,282,000.
- Net cash data includes information from ATU financial statements prepared according to governmental accounting standards.
- "Defined EBITDA," as used here and in other summary financial tables in
this prospectus, is net income before interest expense, interest income,
income taxes, depreciation and amortization, and equity in earnings
(loss) of minority investments, which was $(2,945,000) for the year ended
December 31, 1998 and $(1,282,000) for the six months ended June 30,
1999. Defined EBITDA includes the net operating results of equipment
sales and rental, payphone and internet businesses and the estimated
annual management fee to be paid to Fox Paine & Company, LLC. Defined
EBITDA is not intended to represent cash flow from operations as defined
by GAAP and should not be considered as an alternative to net income as
an indicator of our operating performance or cash flows. Defined EBITDA
is included in this prospectus because management believes it provides
additional information with respect to our ability to satisfy its debt
service, capital expenditure and working capital requirements. While
Defined EBITDA is frequently used as a measure of operations and the
ability of a company to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to the differences in methods of calculation.
- "Adjusted EBITDA" is Defined EBITDA increased by
- unrealized access revenues in the amount of $417,000 for the year ended December 31, 1998 that were not recovered in 1998 but are being recovered in 1999 and in future years and
- the net effect of reduced operating expenses, primarily leased circuit expenses, partially offset by higher maintenance expenses, that would have been experienced had the purchase of fiber capacity occurred on January 1, 1998, in the amount of $2,047,000. Operating cash flows would have also increased by a like amount if the purchase of the fiber capacity had occurred on January 1, 1998. Adjusted EBITDA for the six months ended June 30, 1999 is Defined EBITDA
- increased by $1,023,500 net cost savings related to the purchase of fiber capacity and $6,577,000 of non-recurring expenses and transaction costs and
- decreased by $1,570,000 of revenues related to prior periods.
The net of these three adjustments increased operating cash flows by a like amount for the six months ended June 30, 1999.
- "Pro forma cash interest expense" is defined as interest expense exclusive of amortization of deferred financing costs.
- For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before extraordinary items, income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of deferred financing costs and the component of rental expense believed by management to be representative of the interest component of rental expense. Earnings were inadequate to cover fixed charges by $19,017,000 for the year ended December 31, 1998 and by $11,639,000 for the six months ended June 30, 1999.
- "Access lines in service" includes all revenue producing lines, whether connected to retail or wholesale customers.
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue............................................................... $ 281,606 $ 145,236
Operating expenses.............................................................. 240,986 127,059
-------- -------------
Operating income................................................................ 40,620 18,177
Interest expense................................................................ (57,097) (29,035)
Other income (expense).......................................................... (2,540) (781)
-------- -------------
Loss before income taxes........................................................ (19,017) (11,639)
Income taxes.................................................................... -- --
-------- -------------
Net loss........................................................................ $ (19,017) $ (11,639)
-------- -------------
-------- -------------
OTHER FINANCIAL DATA:
Net cash provided by operating activities....................................... $ 50,567 $ 57,246
Net cash used by investing activities........................................... (32,323) (704,986)
Net cash provided (used) by financing activities................................ (40,350) 605,576
Defined EBITDA.................................................................. 102,097 47,596
Adjusted EBITDA................................................................. 105,960 53,627
Pro forma cash interest expense................................................. 53,198 19,950
Capital expenditures............................................................ 56,443 30,242
Depreciation and amortization................................................... 61,221 28,918
Ratio of earnings to fixed charges.............................................. N/A N/A
Ratio of Adjusted EBITDA to pro forma cash interest expense..................... 2.0x 2.7x
Ratio of total debt to Adjusted EBITDA (annualized)............................. 5.9x 5.7x
OTHER DATA (END OF PERIOD):
Access lines in service......................................................... 300,394 320,096
Cellular subscribers............................................................ 66,572 69,581
Cellular penetration............................................................ 14.5% 15.1%
BALANCE SHEET DATA (END OF PERIOD):
Total assets.................................................................... $ 796,007 $ 796,346
Long-term debt including current portion........................................ 624,245 614,013
Stockholders' equity............................................................ 121,155 122,219
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The following table sets forth summary historical combined financial data of Century's Alaska properties. You should keep the following points in mind as you read the table.
- We derived the summary historical combined financial data for each of the three years in the period ended December 31, 1998 and as of December 31, 1997 and 1998 from the audited combined financial statements and the related notes of Century's Alaska properties included elsewhere in this prospectus.
- We derived the summary historical combined financial data for each of the two years in the period ended December 31, 1995 and as of December 31, 1994, 1995 and 1996 from the unaudited combined financial statements of Century's Alaska properties which are not included in this prospectus and which, in our opinion of management, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- We derived the summary combined financial data for each of the three month periods ended March 31, 1998 and 1999 and as of March 31, 1998 and 1999 from the unaudited combined financial statements of Century's Alaska properties which are included in this prospectus and which, in our opinion, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- The financial statements of Century's Alaska properties include the results of the telephone operation of the City of Fairbanks from October 6, 1997, the date of its acquisition. This acquisition was accounted for as a purchase.
- Century acquired the Alaska properties on December 1, 1997 as part of its acquisition of Pacific Telecom. The data for the year ended December 31, 1997 represent the results of Century's Alaska properties for the 11 months ended November 30, 1997, as owned by Pacific Telecom, and the one month ended December 31, 1997, as owned by Century.
- In conjunction with Century's acquisition of Pacific Telecom on December 1, 1997, the purchase method of accounting was utilized, resulting in the push down of $208 million of goodwill to Century's Alaska properties.
- On December 31, 1997, the cellular operations in Fairbanks were sold to ATU. The Fairbanks cellular property had 5,497 subscribers at the time of the sale.
The summary historical combined financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited combined financial statements of Century's Alaska properties, and the related notes, included elsewhere in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue.................. $ 69,402 $ 75,071 $ 80,773 $ 94,886 $ 124,509 $ 28,375 $ 31,361
Operating expenses................. 52,795 55,506 60,518 70,356 104,595 23,990 25,451
--------- --------- --------- --------- ---------- --------- ---------
Operating income................... 16,607 19,565 20,255 24,530 19,914 4,385 5,910
Interest expense, net.............. (2,459) (2,331) (1,996) (2,340) (1,405) (302) (358)
Other income (expense)............. 1,094 (1,020) (33) (245) 356 357 80
--------- --------- --------- --------- ---------- --------- ---------
Income before income taxes......... 15,242 16,214 18,226 21,945 18,865 4,440 5,632
Income taxes....................... 5,962 5,713 6,737 8,482 9,218 2,214 2,709
--------- --------- --------- --------- ---------- --------- ---------
Net income......................... $ 9,280 $ 10,501 $ 11,489 $ 13,463 $ 9,647 $ 2,226 $ 2,923
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities....................... 22,510 29,917 $ 34,589 $ 26,801 $ 38,291 $ 11,025 $ 14,103
Net cash provided (used) by
investing activities............. (21,151) (19,587) (20,611) (16,833) (26,664) 1,947 (2,339)
Net cash used by financing
activities....................... (1,659) (10,578) (12,947) (10,722) (6,770) (11,587) (6,753)
Defined EBITDA..................... 30,790 32,861 35,570 42,574 50,729 11,951 13,775
Defined EBITDA margin.............. 44.4% 43.8% 46.4% 48.4% 45.1% 46.3% 49.6%
Capital expenditures............... $ 21,001 $ 19,437 $ 20,465 $ 16,400 $ 26,799 $ 2,321 $ 2,200
Depreciation and amortization...... 13,098 14,316 15,348 18,289 30,459 7,209 7,785
OTHER DATA (END OF PERIOD):
Access lines in service............ 73,563 77,660 82,969 124,869 131,858 128,023 134,276
Cellular subscribers............... 3,058 3,950 5,573 2,096 2,945 2,546 3,417
Cellular penetration............... 2.1% 2.7% 3.8% 3.7% 5.2% 4.6% 5.2%
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The following table sets forth summary historical financial data of ATU. You should keep the following points in mind as you read the table.
- We derived the summary historical financial data for each of the three years in the period ended December 31, 1998 and as of December 31, 1997 and 1998 from the audited financial statements and the related notes of ATU included elsewhere in this prospectus.
- We derived the summary historical financial data for each of the two years in the period ended December 31, 1995 and as of December 31, 1994, 1995 and 1996 from the audited financial statements of ATU which are not included in this prospectus.
- We derived the summary financial data for each of the three month periods ended March 31, 1998 and 1999 and as of March 31, 1998 and 1999 from the unaudited financial statements of ATU which are included in this prospectus and which, in our opinion, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- ATU was a public utility of the Municipality of Anchorage and was exempt from federal and state income taxes.
- Net cash data includes information from ATU financial statements prepared in accordance with governmental accounting principles.
- Defined EBITDA does not include equity in earnings (loss) of minority investments of $(46,158), $158,000, and $(2,945,000) for the years ended December 31, 1996, 1997 and 1998 and $(250,000) and $(509,000) for the three months ended March 31, 1998 and 1999.
The summary historical financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements of ATU, and the related notes, included elsewhere in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue............. $ 117,911 $ 122,681 $ 130,314 $ 139,941 $ 157,097 $ 36,758 $ 39,757
Operating expenses............ 96,970 102,009 109,398 120,932 134,204 31,276 34,261
---------- ---------- ---------- ---------- ---------- --------- ---------
Operating income.............. 20,941 20,672 20,916 19,009 22,893 5,482 5,496
Interest expense, net......... (7,565) (6,706) (6,840) (6,768) (6,427) (1,840) (1,585)
Other income (expense)........ (328) (322) (219) (123) 2,896 (183) (423)
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before income taxes.... 13,048 13,644 13,857 12,118 13,570 3,459 3,488
Income taxes.................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income.................... $ 13,048 $ 13,644 $ 13,857 $ 12,118 $ 13,570 $ 3,459 $ 3,488
---------- ---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- ---------- --------- ---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities.................. $ 42,382 $ 43,412 $ 42,120 $ 46,641 $ 53,207 $ 8,394 $ 10,735
Net cash by investing
activities.................. 13,577 1,057 (787) (3,665) (5,659) (8,044) (1,568)
Net cash provided (used) by
financing activities........ (57,169) (53,518) (30,095) (46,916) (33,580) 16,631 (12,150)
Defined EBITDA................ 39,549 39,608 41,239 45,567 52,550 12,648 13,016
Defined EBITDA margin......... 37.5% 36.1% 35.6% 36.4% 37.1% 3.5% 35.6%
Capital expenditures.......... $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
Depreciation and
amortization................ 18,936 19,258 20,496 26,839 29,608 7,099 7,434
OTHER DATA (END OF PERIOD):
Access lines in service....... 144,869 147,934 154,752 158,486 168,536 164,569 170,343
Cellular subscribers.......... 13,684 24,855 37,651 53,035 63,627 54,436 63,779
Cellular penetration.......... 4.7% 8.4% 12.6% 13.3% 15.8% 13.7% 15.8%
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YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO EXCHANGE YOUR OLD DEBENTURES FOR EXCHANGE DEBENTURES.
OUR SUBSTANTIAL DEBT INCREASES THE RISK THAT WE WILL NOT BE ABLE TO SATISFY OUR OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
We have a significant amount of debt, which may impair our ability to service the exchange debentures. As of June 30, 1999, we had outstanding $627.8 million aggregate principal amount of debt, excluding unused commitments, of which $25.0 million was our senior debt and of which $602.8 million was senior and senior subordinated debt of Alaska Communications Systems Holdings, and stockholders' equity of $121.2 million.
In addition, we and our subsidiaries may incur substantial additional debt in the future. Alaska Communications Systems Holdings' senior credit facility provides that Alaska Communications Systems Holdings may borrow up to $75.0 million under a revolving credit facility. The indenture does not prohibit us or our subsidiaries from incurring additional debt, although there are restrictions, which are described under "Description of the Exchange Debentures--Restrictive Covenants."
WE MAY HAVE INSUFFICIENT ASSETS TO REPAY ALL AMOUNTS DUE UNDER THE EXCHANGE DEBENTURES AND ANY OTHER SENIOR DEBT THAT WILL RANK EQUALLY WITH THE EXCHANGE DEBENTURES.
The right to payment on the exchange debentures will rank equally with all of our existing and future senior debt, including our guarantee of Alaska Communications Systems Holdings' borrowings under the senior credit facility. In the event of a bankruptcy or similar proceeding with respect to us, our assets will be available to pay obligations on the exchange debentures only on a ratable basis with all other outstanding senior debt paid. As a result, there may not be sufficient assets remaining to make payment of amounts due on any or all of the exchange debentures then outstanding.
- we had $25.0 million of senior debt outstanding, in addition to our guarantee of Alaska Communications Systems Holdings' borrowings under the senior credit facility, and our guarantee of the Alaska Communications Systems Holdings senior subordinated notes was subordinate to all of our outstanding senior debt;
- Alaska Communications Systems Holdings had $451.2 million of senior debt outstanding under its senior credit facility and $150.0 million from the issuance of the Alaska Communications Systems Holdings senior subordinated notes; and
- Alaska Communications Systems Holdings' subsidiaries had $1.6 million of senior debt outstanding, in addition to their guarantees of Alaska Communications Systems Holdings' borrowings under the senior credit facility.
OUR HOLDING COMPANY STRUCTURE LIMITS THE EXTENT TO WHICH WE CAN USE THE ASSETS OF OUR SUBSIDIARIES TO SATISFY OUR OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
Because we are a holding company, any right we have to participate in any distribution of the assets of any of our subsidiaries upon the liquidation, reorganization or insolvency of that subsidiary, and your right to participate in any distribution as holders of exchange debentures, will be subject to the prior claims of that subsidiary's creditors. Moreover, the obligations of our subsidiaries under the senior credit facility are secured by substantially all of their assets. See "Description of Other Indebtedness." The exchange debentures will thus be effectively subordinated to all existing and future
OUR SUBSIDIARIES MAY BE UNABLE TO DISTRIBUTE TO US THE FUNDS WE REQUIRE TO MAKE PAYMENTS ON THE EXCHANGE DEBENTURES.
If we do not receive dividends from Alaska Communications Systems Holdings and its subsidiaries that are sufficient for us to satisfy our obligations under the exchange debentures, then, unless we can refinance those obligations, a default under the indenture governing the exchange debentures could occur and payment of all amounts outstanding under the exchange debentures could be accelerated.
Our only material asset is Alaska Communications Systems Holdings' capital stock. We do not expect to undertake any business activities, other than in connection with:
- our ownership of Alaska Communications Systems Holdings' capital stock;
- the performance of our obligations as a guarantor of Alaska Communications Systems Holdings' senior credit facility and of the Alaska Communications Systems Holdings senior subordinated notes; and
- the issuance of the exchange debentures and warrants to purchase our capital stock.
As a result, we will be dependent upon dividends from Alaska Communications Systems Holdings and its subsidiaries for the funds necessary to satisfy our obligations, including payment of principal of the exchange debentures upon their scheduled maturity or if their maturity is accelerated, unless they could be refinanced, and, after May 15, 2004, payment of interest on the exchange debentures. We will also be dependent upon dividends from Alaska Communications Systems Holdings and its subsidiaries for the funds needed to purchase any exchange debentures tendered upon an offer to purchase following a "change of control," as defined in the indenture governing the exchange debentures, or sales of assets.
The indenture governing the exchange debentures will limit restrictions on the ability of our subsidiaries to pay dividends or make other distributions, but these limitations are subject to a number of significant qualifications and exceptions. In addition,
- Alaska Communications Systems Holdings' senior credit facility and the indenture governing the Alaska Communications Systems Holdings senior subordinated notes will restrict the ability of our subsidiaries to pay dividends or make other distributions; and
- the ability of our subsidiaries to pay dividends or make other distributions may be restricted by applicable laws and regulations, as well as by agreements our subsidiaries enter with other parties.
LENDERS UNDER ALASKA COMMUNICATIONS SYSTEMS HOLDINGS' SENIOR CREDIT FACILITY COULD CAUSE A DEFAULT UNDER THE INDENTURE BY FORECLOSING UPON THE CAPITAL STOCK OF ALASKA COMMUNICATIONS SYSTEMS HOLDINGS AND PREVENTING YOU FROM RECEIVING PAYMENTS UNDER THE EXCHANGE DEBENTURES.
In connection with Alaska Communications Systems Holdings' senior credit facility, we granted the senior lenders a first priority lien on all of the capital stock of Alaska Communications Systems Holdings we own. If Alaska Communications Systems Holdings defaults under the senior credit facility or if we default on our guarantee of the senior credit facility, the lenders under the senior credit facility could foreclose upon the Alaska Communications Systems Holdings capital stock we own. If the
UPON A CHANGE OF CONTROL, WE AND ALASKA COMMUNICATIONS SYSTEMS HOLDINGS MAY NOT HAVE SUFFICIENT ASSETS TO SATISFY ALL OF OUR OBLIGATIONS UNDER ALASKA COMMUNICATIONS HOLDINGS' SENIOR CREDIT FACILITY, THE INDENTURE GOVERNING THE ALASKA COMMUNICATIONS SYSTEMS HOLDINGS SENIOR SUBORDINATED NOTES AND THE EXCHANGE DEBENTURES.
Upon the occurrence of a "change of control," as defined in the indenture governing the exchange debentures, each holder of the exchange debentures will have the right to require us to repurchase the holder's exchange debentures at a price equal to 101% of the principal amount of the exchange debentures, together with accrued and unpaid interest, if any, to the date of repurchase. However:
- Alaska Communications Systems Holdings' senior credit facility will effectively prevent the repurchase of the exchange debentures by us in the event of a change of control, unless all amounts outstanding under our senior credit facility are repaid in full;
- our failure to repurchase the exchange debentures would be a default under the indenture governing the exchange debentures, which would be a default under our senior credit facility; and
- our failure to repay all amounts outstanding under our senior credit facility upon a default would be a default under the indenture governing the exchange debentures.
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT OUR FINANCIAL AND OPERATING FLEXIBILITY AND ADVERSELY AFFECT OUR ABILITY TO COMPETE.
The indentures governing the exchange debentures and the Alaska Communications Systems Holdings senior subordinated notes and the credit agreement relating to Alaska Communications Systems Holdings' senior credit facility will, among other things, restrict our financial and operating flexibility. These restrictions could impair our ability to compete or to achieve our strategic objectives. If we do not comply with these restrictions, or if Alaska Communications Systems Holdings fails to satisfy the financial ratios and tests under Alaska Communications Systems Holdings' senior credit facility, holders of the exchange debentures may accelerate payments due them, and the lenders could accelerate payment of all amounts outstanding under Alaska Communications Systems Holdings' senior credit facility.
FAILURE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS MAY PREVENT US FROM REALIZING OPERATING GAINS AND EFFICIENCIES WHICH WE EXPECT TO HELP SATISFY OUR OBLIGATIONS UNDER THE EXCHANGE DEBENTURES.
Our ability to operate successfully is dependent on our ability to integrate the acquisitions of Century's Alaska properties and ATU. Because we acquired both Century's Alaska properties and ATU at the same time, there may be unanticipated difficulties or complexities that would interfere with our ability to integrate these businesses. Our success will depend on our ability to, among other things:
- transfer general and administrative support services and information technology platforms that are currently provided to Century's Alaska properties by Century to ATU's systems;
- modify ATU's current information technology platforms to support the operations of both Century's Alaska properties and ATU; and
THE REVOCATION OF SUBSTANTIAL PROTECTIONS FROM COMPETITION GRANTED TO CENTURY'S ALASKA PROPERTIES UNDER THE TELECOMMUNICATIONS ACT OF 1996 COULD RESULT IN INCREASED COMPETITION, THUS LOWERING REVENUES AND EARNINGS.
To encourage competition, the Telecommunications Act of 1996 generally requires incumbent local exchange carriers to allow competitors to interconnect with their local networks. Historically, each of Century's Alaska rural local operating companies qualified for protections under the Telecommunications Act that exempted it from or permitted suspension or modification of these obligations. For the first three months of 1999, these companies accounted for 42.3% of our revenues and 52.3% of our operating income.
On June 30, 1999 (its last day of existence), the Alaska Public Utilities Commission, commonly known as the APUC, voted to revoke the rural exemptions held by each of Century's Alaska rural local exchange operating companies and directed the commencement of negotiations under Section 252 of the Telecommunications Act between those companies and GCI, Inc., a competitor which had been seeking interconnection with Century's Alaska rural local exchange carriers. Without rural exemptions, all or some of these companies will be required to negotiate with their competitors the terms under which the competitors would be allowed to interconnect with our local networks. We cannot assure you that the terms or rates for this interconnection will be sufficient to cover our costs or otherwise mitigate the financial impacts of competition or that we will be able to compete effectively with these competitors. See "Regulation."
Section 252 provides for a maximum negotiation and arbitration period of nine months for approval of an interconnection agreement. In its opinion revoking the rural exemptions, the APUC did not address the rights of Century's Alaska local exchange operating companies regarding suspension and modification of interconnection duties under a separate provision of the Telecommunications Act. Century's Alaska local exchange carriers have pursued reconsideration of the APUC ruling by the new Regulatory Commission of Alaska, or RCA, the state regulatory agency that succeeded the APUC, and may also consider seeking judicial review of the APUC ruling. On September 1, 1999, we filed a petition with the RCA seeking suspension or modification of interconnection duties and other market structure reforms for Century's Alaska local exchange carriers in selected markets. We also requested the removal or reduction of regulatory limitations on these local exchange carriers. If granted, our petition would give Century's Alaska local exchange carriers increased operating and marketing flexibility and could potentially mitigate the impact of the revocation of the rural exemptions. However, we cannot predict whether or to what extent the RCA will grant our petition. See "Regulation."
Additionally, during the last session, a bill was proposed in the Alaska state senate that proposed to open to competition many local telephone markets within Alaska having 5,000 or more access lines, effectively depriving incumbent local exchange carriers in those markets of their rural exemptions. We cannot predict at this time whether or to what extent proposals included in the bill will be offered again and enacted into law. To the extent the markets of Century's Alaska rural local exchange carriers are opened to competition by the APUC's termination of their rural exemptions, we do not believe that the marginal effect of passage of the proposed bill on our business would be material.
A REDUCTION OF THE RATES WE CHARGE OUR LOCAL TELEPHONE CUSTOMERS BY THE RCA WOULD REDUCE OUR REVENUES AND EARNINGS.
The rates we charge our local telephone customers are based, in part, on a rate of return on capital invested in our networks for our local telephone operating companies that is authorized by the RCA. These authorized rates are subject to review and change by the RCA at any time. If the RCA
REVENUES FROM ACCESS CHARGES MAY BE REDUCED OR LOST.
Century's Alaska properties received 45.3% of their revenues in 1998 from access charges paid by interstate and intrastate interexchange carriers for originating and terminating calls in their service areas. The amount of revenue that Century's Alaska properties receives from access charges is calculated in accordance with guidelines set by the FCC and the RCA. Any change in the guidelines may reduce our revenue.
A REDUCTION IN THE UNIVERSAL SERVICE SUPPORT CURRENTLY RECEIVED BY SOME OF OUR SUBSIDIARIES WOULD REDUCE OUR REVENUES AND EARNINGS.
Century's Alaska properties received 11.9% of their revenues in 1998 from the federal Universal Service Fund, which was established to compensate for the high cost of providing universal telecommunications services in rural markets. If the subsidies received from this fund were materially reduced or discontinued, some of Century's Alaska local operating companies might not be able to operate profitably.
Various reform proceedings are underway at the FCC to change the method of calculating the amount of subsidies paid under the universal service support system. Future reforms are expected to replace the current historical cost system with a system based upon forward-looking costs. We cannot be certain that this method or any other method we are required to use to determine the allocation of costs in the future will accurately reflect all of the costs Century's Alaska properties incur or that Century's Alaska properties will continue to receive the subsidies they currently receive, and, therefore, we cannot assure you that we will be able to recover these costs.
Reform proceedings are also underway within the state jurisdiction to review carriers' support from the Alaska Universal Service Fund. These proceedings could change the method of calculating the support paid to some of Century's Alaska operating companies. For example, the staff of the APUC proposed to reduce or eliminate carriers' receipt of support for switching costs. By the staff's calculations, some of Century's Alaska local operating companies receive $1.5 million of switching support from the Alaska Universal Service Fund. Depending on the RCA's actions, the guidelines under which some of Century's Alaska local operating companies receive support from the Alaska Universal Service Fund may change, impacting their ability to recover its costs.
In addition, the APUC proposed funding public interest pay telephones from the state universal service fund. Carriers would be required to place pay telephones in locations required in the public interest, supported by the Alaska Universal Service Fund. We cannot assure you that the method that the RCA may adopt for compensating carriers for their public interest pay telephone costs will ensure full cost recovery. Finally, the APUC's establishment of the Alaska Universal Service Fund has been
THE TELECOMMUNICATIONS INDUSTRY IS EXTREMELY COMPETITIVE, AND WE MAY HAVE DIFFICULTY OVERCOMING SIGNIFICANT ADVANTAGES ENJOYED BY MANY OF OUR COMPETITORS.
The telecommunications industry is extremely competitive. We face many of the same types of competitive challenges in our local telephone, wireless, long distance and internet access businesses. In each case, the companies against which we compete have or may in the future have advantages over us, including:
- greater financial and technical resources;
- stronger brand name recognition; and
- fewer regulatory burdens.
Aggressive competition could result in, among other things:
- reductions in our customer base;
- the lowering of rates and other prices in order to compete; and
- increased marketing expenditures and use of discounting and promotional campaigns that would adversely affect our margins.
OUR LONG DISTANCE STRATEGY MAY CAUSE US TO INCUR HIGH FIXED COSTS OR PAY HIGH PRICES FOR NEEDED CAPACITY.
We currently offer long distance services as a reseller, relying on other long distance carriers to provide transmission and termination services for our long distance services. As a result, we are subject to changes in the policies and available capacity of the carriers from which we lease our transmission capacity. Furthermore, in negotiating resale agreements with carriers to provide us with these services, we must estimate future supply and demand for transmission capacity, as well as the calling patterns and traffic levels for our future customers. If we:
- overestimate our needs for transmission services, we may be obligated to incur excessive fixed costs; or
- underestimate our needs for transmission services, we may be obligated to pay higher prices for needed capacity or may find that this capacity is unavailable and, therefore, be unable to provide adequate service to our customers.
In response to these concerns and as part of the settlement of a number of outstanding disputes, including opposition to our recent acquisitions of Century's Alaska properties and ATU, we recently purchased capacity between Alaska's major population centers and between Alaska and the contiguous 48 states of the U.S. We cannot assure you that we will generate sufficient revenues in our long distance business to recover the costs of these investments. See "Business--Products Services and Revenue Sources--Long Distance Services."
We believe that, if we or our important vendors or suppliers experience year 2000 problems, the problems could create a material disruption to our business processes and relationships with our customers, or could require the expenditure of material financial and other resources. We have conducted a review of the computer systems and related software and equipment that we acquired upon completion of our acquisitions of Century's Alaska properties and ATU. We have identified a number of systems that are not year 2000 compliant and have implemented a plan that we believe will ensure that these systems, software and equipment store and process information properly in the year 2000 and later years. We expect that the action items required by this plan will be largely completed by October, 1999. We have also made efforts to verify the year 2000 readiness of our important vendors and suppliers. Although we believe the processes we have initiated are adequate to remedy year 2000 deficiencies, we cannot assure you that these remedies will be timely or effectively implemented.
We can make no assurances that we are immune to any adverse impacts from year 2000 deficiencies suffered by us or third parties that may in some way affect our business in a materially adverse manner. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed discussion of our year 2000 readiness.
YOUR INTERESTS AS HOLDERS OF THE EXCHANGE DEBENTURES MAY CONFLICT WITH THOSE OF OUR CONTROLLING STOCKHOLDER.
Fox Paine & Company beneficially owns approximately 90% of the outstanding shares of our voting capital stock. As a result, Fox Paine & Company has the power to:
- elect our directors and the directors of Alaska Communications Systems Holdings; and
- approve any action requiring the approval of our stockholders or the stockholders of Alaska Communications Systems Holdings.
The directors elected by Fox Paine & Company have the authority to make decisions affecting our capital structure and the capital structure of Alaska Communications Systems Holdings, including the issuance of additional debt or equity. Fox Paine & Company also has the ability to make decisions regarding any merger, consolidation or sale of assets involving us or Alaska Communications Systems Holdings.
Fox Paine & Company may in the future make significant investments in other telecommunications companies. Some of these companies may be our competitors. Fox Paine & Company and its affiliates are not obligated to advise us of any investment or business opportunities of which they are aware.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE EXCHANGE DEBENTURES, AND ANY MARKET FOR THE EXCHANGE DEBENTURES MAY BE ILLIQUID.
We cannot assure you that a liquid market will develop for the exchange debentures, that you will be able to sell your exchange debentures at a particular time or that the prices that you receive when you sell will be favorable. The exchange debentures are a new issue of securities with no established trading market. Moreover, we do not intend to apply for the exchange debentures to be listed on any securities exchange or to arrange for quotation on any automated dealer quotation system, and the initial purchasers are not obligated to make a market in the exchange debentures. If issued under an effective registration statement, the exchange debentures generally may be resold or otherwise
Future trading prices of the exchange debentures will depend on many factors, including:
- our operating performance and financial condition;
- prevailing interest rates; and
- the market for similar securities.
IF YOU ARE DEEMED TO HAVE RECEIVED RESTRICTED SECURITIES IN EXCHANGE FOR YOUR OLD DEBENTURES, YOU MAY FACE SIGNIFICANT TRANSFER RESTRICTIONS IF YOU ATTEMPT TO RESELL THEM.
If you exchange your old debentures in the exchange offer, you will be deemed to have represented, by your acceptance of the exchange offer, that you acquired the exchange debentures in the ordinary course of business and that you are not engaged in, and do not intend to engage in, a distribution of the exchange debentures. If the SEC determines otherwise, however, you may be deemed to have received restricted securities. If so, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.
IF YOU DO NOT EXCHANGE YOUR OLD DEBENTURES, THEY MAY BE DIFFICULT TO RESELL.
It may be difficult for you to sell old debentures that are not exchanged in the exchange offer. If you do not tender your old debentures or if we do not accept some of your old debentures, those old notes will continue to be subject to transfer and exchange restrictions.
These restrictions on transfer of your old debentures arise because we issued the old debentures pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the old debentures if they are registered under the Securities Act and applicable state securities laws, or offered and sold pursuant to an exemption from the Securities Act and applicable state securities laws. If you intend to make use of an exemption, you must, if requested by us, deliver to us an opinion of independent counsel, reasonably satisfactory in form and substance to us, that the exemption is available. We do not intend to register the old debentures under the Securities Act.
Based on interpretations of the SEC staff, exchange debentures issued pursuant to the exchange offer may be offered for resale, resold or otherwise transferred by their holders, other than any holder that is our "affiliate" within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holders acquired the exchange debentures in the ordinary course of the holders' business and the holders have no arrangement or understanding with respect to the distribution of the exchange debentures to be acquired in the exchange offer. Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the exchange debentures:
- cannot rely on the applicable interpretations of the SEC; and
- must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.
To the extent the old debentures are tendered and accepted in the exchange offer, the trading market, if any, for the old debentures would be adversely affected due to a reduction in market liquidity.
This prospectus contains forward-looking statements, including, in particular, statements about our plans, strategies and prospects under the captions "Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" (particularly under the subheadings "Liquidity and Capital Resources" and "Outlook") and "Business." We have based these forward-looking statements on our current assumptions, expectations and projections about future events. When used in this prospectus, the words "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These forward-looking statements speak only as of the date of this prospectus. Neither we nor the initial purchasers undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct or that savings or other benefits anticipated in the forward-looking statements will be achieved. Important factors, some of which may be beyond our control, that could cause actual results to differ materially from management's expectations ("cautionary statements") are disclosed in this prospectus, including in conjunction with the forward-looking statements included in this prospectus and under "Risk Factors." Prospective purchasers are cautioned not to place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements. See "Risk Factors." These forward-looking statements are subject to risks, uncertainties and assumptions about us, including, among other things:
- our substantial debt and significant debt service obligations;
- our ability to integrate our recent acquisitions of Century's Alaska properties and ATU;
- developments in, or changes to, the laws and regulations governing our telecommunications business;
- our ability to improve existing operations;
- the increasingly competitive nature of the telecommunications industry;
- changes in technology;
- our ability to keep key personnel required to operate the business;
- the potential effect of year 2000 compliance issues; and
- changes in economic conditions in Alaska.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We have entered into an exchange and registration rights agreement with the initial purchasers of the old debentures in which we agreed to file a registration statement relating to an offer to exchange the old debentures for exchange debentures. We also agreed to use our reasonable best efforts to cause the exchange offer to be consummated within 180 days following the original issue of the old debentures. The exchange debentures will have terms substantially identical to the old debentures except that the exchange debentures will not contain terms with respect to transfer restrictions, registration rights and additional interest for our failure to observe as obligations in the registration rights agreement. The old debentures were issued on May 14, 1999.
Under the circumstances set forth below, we will use our reasonable best efforts to cause the SEC to declare effective a shelf registration statement with respect to the resale of the old debentures and keep the statement effective for up to two years after the original issue of the old debentures. These circumstances include:
- if any changes in law, SEC rules or regulations or applicable interpretations by the staff of the SEC do not permit us to effect the exchange offer as contemplated by the registration rights agreement;
- if any old debentures validly tendered in the exchange offer are not exchanged for exchange debentures within 180 days after the original issue of the old debentures;
- if any initial purchaser of the old debentures requests within 20 days of completion of the exchange offer, but only with respect to any old debentures not eligible to be exchanged for exchange debentures in the exchange offer;
- if any holder of the old debentures is not permitted by any law or applicable interpretations by the staff of the SEC to participate in the exchange offer;
- if any holder of old debentures that participates in the exchange offer and does not receive fully tradeable exchange notes requests within 20 days of completion of the exchange offer; or
- if we elect to file a shelf registration statement with respect to the resale of the old debentures.
If we fail to comply with our obligations under the registration rights agreement, we may be required to pay additional interest to holders of the old debentures. Please read the section captioned "Exchange and Registration Rights Agreement" for more details regarding the registration rights agreement.
RESALE OF EXCHANGE DEBENTURES
Based on interpretations of the SEC staff set forth in no-action letters issued to unrelated third parties, we believe that exchange debentures issued under the exchange offer in exchange for old debentures may be offered for resale, resold and otherwise transferred by any exchange debenture holder without compliance with the registration and prospectus delivery provisions of the Securities Act, if:
- the holder is not our "affiliate" within the meaning of Rule 405 under the Securities Act;
- the exchange debentures are acquired in the ordinary course of the holder's business; and
- the holder does not intend to participate in a distribution of the exchange debentures.
- cannot rely on the position of the staff of the SEC set forth in "Exxon Capital Holdings Corporation" or similar interpretive letters; and
- must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.
This prospectus may he used for an offer to resell, resale or other retransfer of exchange debentures. With regard to broker-dealers, only broker-dealers that acquired the old debentures as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives exchange debentures for its own account in exchange for old debentures, where the old debentures were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange debentures. Please read the section captioned "Plan of Distribution" for more details regarding the transfer of exchange debentures.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange any old debentures properly tendered and not withdrawn before expiration of the exchange offer. We will issue $1,000 principal amount of exchange debentures in exchange for each $1,000 principal amount of old debentures surrendered under the exchange offer. Old debentures may be tendered only in integral multiples of $1,000.
The form and terms of the exchange debentures will be substantially identical to the form and terms of the old debentures except the exchange debentures:
- will be registered under the Securities Act;
- will not bear legends restricting their transfer; and
- will not provide for any additional interest upon our failure to fulfill our obligations under the registration rights agreement to file, and cause to be effective, a registration statement.
The exchange debentures will evidence the same debt as the old debentures. The exchange debentures will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the old debentures. Consequently, both series will be treated as a single class of debt securities under that indenture. For a description of the indenture, see "Description of Exchange Debentures" below.
The exchange offer is not conditioned upon any minimum aggregate principal amount of old debentures being tendered for exchange.
As of the date of this prospectus, $46.9 million aggregate principal amount of the old debentures are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of old debentures. There will be no fixed record date for determining registered holders of old debentures entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC. Old debentures that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits their holders have under the indenture relating to the old debentures.
Holders who tender old debentures in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old debentures. We will pay all charges and expenses, other than applicable taxes described below, in connection with the exchange offer. It is important that you read the section labeled "--Fees and expenses" below for more details regarding fees and expenses incurred in the exchange offer.
EXPIRATION OF THE EXCHANGE OFFER; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
[ ], 1999, unless, in our sole discretion, we extend it.
In order to extend the exchange offer, we will notify the exchange agent orally (confirmed in writing) or in writing of any extension. We will notify the registered holders of old debentures of the extension no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration of the exchange offer.
Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish, advertise, or otherwise communicate any public announcement, other than by making a timely release to a financial news service.
CONDITIONS
Despite any other term of the exchange offer, we will not be required to accept for exchange, or exchange any exchange debentures for, any old debentures, and we may terminate the exchange offer as provided in this prospectus before accepting any old debentures for exchange if in our reasonable judgment:
- the exchange debentures to be received will not be tradeable by the holder, without restriction under the Securities Act, the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of the U.S.;
- the exchange offer, or the making of any exchange by a holder of old debentures, would violate applicable law or any applicable interpretation of the staff of the SEC; or
- any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer.
In addition, we will not be obligated to accept for exchange the old debentures of any holder that has not made to us:
- the representations described under "--Purpose and effect of the exchange offer," "--Procedures for tendering" and "Plan of Distribution"; and
- any other representations that may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange debentures under the Securities Act.
We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any old debentures not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. We will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the old debentures as promptly as practicable. In the case of any extension, the notice of extension will be issued no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration of the exchange offer.
These conditions are solely for our benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of the foregoing rights, this failure will not constitute a waiver of that right. Each of these rights will be deemed an ongoing right that we may assert at any time or at various times.
In addition, we will not accept for exchange any old debentures tendered, and will not issue exchange debentures in exchange for any old debentures, if at that time a stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of record of old debentures may tender old debentures in the exchange offer. To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and deliver the letter of transmittal or facsimile to the exchange agent prior to the expiration date; or
- comply with DTC's Automated Tender Offer Program procedures described below.
In addition, either:
- the exchange agent must receive old debentures along with the letter of transmittal; or
- the exchange agent must receive, before expiration of the exchange offer, a timely confirmation of book-entry transfer of old debentures into the exchange agent's account at DTC according to the procedure for book-entry transfer described below or a properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described below.
To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at the address set forth below under "--Exchange agent" before expiration of the exchange offer.
The tender by a holder that is not withdrawn before expiration of the exchange offer will constitute an agreement between that holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal.
Any beneficial owner whose old debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct it to tender on the owner's behalf. If the beneficial owner wishes to tender on its own behalf, it must, prior to completing and executing the letter of transmittal and delivering its old debentures, either:
- make appropriate arrangements to register ownership of the old debentures in the owner's name; or
- obtain a properly completed bond power from the registered holder of old debentures.
The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described below must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the U.S. or another "eligible institution" within the meaning of Rule 17Ad-15 under the Exchange Act, unless the old debentures are tendered:
- by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the letter of transmittal; or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the registered holder of any old debentures, the old debentures must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder's name appears on the old debentures and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old debentures or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, these persons should so indicate when signing. Unless we waive this requirement, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may use DTC's Automated Tender Offer Program to tender. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the old debentures to the exchange agent in accordance with its procedures for transfer. DTC will then send an agent's message to the exchange agent. The term "agent's message" means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, to the effect that:
- DTC has received an express acknowledgment from a participant in its Automated Tender Offer Program that is tendering old debentures that are the subject of the book-entry confirmation;
- the agreement may be enforced against the participant.
We will determine in our sole discretion all questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered old debentures and withdrawal of tendered old debentures. Our determination will be final and binding. We reserve the absolute right to reject any old debentures not properly tendered or any old debentures the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old debentures. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old debentures must be cured within the time that we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old debentures, neither we, the exchange agent nor any other person will incur any liability for failure to give notification. Tenders of old debentures will not be deemed made until those defects or irregularities have been cured or waived. Any old debentures received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.
In all cases, we will issue exchange debentures for old debentures that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:
- old debentures or a timely book-entry confirmation that old debentures have been transferred into the exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent's message.
By signing the letter of transmittal, each tendering holder of old debentures will represent to us that, among other things:
- any exchange debentures that the holder receives will be acquired in the ordinary course of its business;
- the holder has no arrangement or understanding with any person or entity to participate in the distribution of the exchange debentures;
- if the holder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the exchange debentures;
- if the holder is a broker-dealer that will receive exchange debentures for its own account in exchange for old debentures were acquired as a result of market-making activities or other trading activities, that it will deliver a prospectus, as required by law, in connection with any resale of those exchange debentures (see "Plan of Distribution"); and
- the holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of us or, if the holder is an affiliate, it will comply with any applicable registration and prospectus delivery requirements of the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect to the old debentures at DTC for purposes of the exchange offer promptly after the date of this prospectus; and any financial institution participating in DTC's system may make book-entry delivery of old debentures by causing
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their old debentures but whose old debentures are not immediately available or who cannot deliver their old debentures, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC's Automated Tender Offer Program before expiration of the exchange offer may tender if:
- the tender is made through an eligible institution;
- before expiration of the exchange offer, the exchange agent receives from the eligible institution either a properly completed and duly executed notice of guaranteed delivery, by facsimile transmission, mail or hand delivery, or a properly transmitted agent's message and notice of guaranteed delivery:
- setting forth the name and address of the holder and the registered number(s) and the principal amount of old debentures tendered;
- stating that the tender is being made by guaranteed delivery; and
- guaranteeing that, within three New York Stock Exchange trading days after expiration of the exchange offer, the letter of transmittal, or facsimile thereof, together with the old debentures or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and
- the exchange agent receives the properly completed and executed letter of transmittal, or facsimile thereof, as well as all tendered old debentures in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after expiration of the exchange offer.
Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their old debentures according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of old debentures may withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective:
- the exchange agent must receive a written notice, which may be by telegram, telex, facsimile transmission or letter, of withdrawal at one of the addresses set forth below under "--Exchange agent"; or
- holders must comply with the appropriate procedures of DTC's Automated Tender Offer Program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the old debentures to be withdrawn;
- identify the old debentures to be withdrawn, including the principal amount of the old debentures to be withdrawn; and
If certificates for old debentures have been delivered or otherwise identified to the exchange agent, then, prior to the release of those certificates, the withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible institution, unless the withdrawing holder is an eligible institution.
If old debentures have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old debentures and otherwise comply with the procedures of the facility. We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal, and our determination shall be final and binding on all parties. We will deem any old debentures so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. We will return any old debentures that have been tendered for exchange but that are not exchanged for any reason to their holder without cost to the holder, or in the case of old debentures tendered by book-entry transfer into the exchange agent's account at DTC according to the procedures described above, those old debentures will be credited to an account maintained with DTC for old debentures, as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. You may retender properly withdrawn old debentures by following one of the procedures described under "--Procedures for tendering" above at any time on or before expiration of the exchange offer.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows:
By Registered or Certified Mail: By Hand or Overnight Delivery:
The Bank of New York The Bank of New York
101 Barclay Street, 101 Barclay Street, Ground Level
Floor 7 East Corporate Trust Services Window
New York, New York 10286 New York, New York 10286
Attention: Reorganization Section Attention: Reorganization Section
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By Facsimile Transmission (for Eligible Institutions Only):
To Confirm by Telephone or for Information Call: (212) 815-2824
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SHOWN ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitations by telegraph, telephone or in person by our officers and regular employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange offer. The expenses are estimated in the aggregate to be approximately $80,000. They include:
- SEC registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees; and
- printing and mailing costs.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old debentures under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:
- certificates representing old debentures for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old debentures tendered;
- tendered old debentures are registered in the name of any person other than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old debentures under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with the letter of transmittal, the amount of any transfer taxes will be billed to the tendering holder.
ACCOUNTING TREATMENT
We will record the exchange debentures in our accounting records at the same carrying value as the old debentures, which is the aggregate principal amount, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes in connection with the exchange offer. We will record the expenses of the exchange offer as incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. We urge you to consult your financial and tax advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old debentures in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. However, we have no present plans to acquire any old debentures that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered old debentures.
THE ACQUISITION AGREEMENTS
On August 14, 1998, we entered into a purchase agreement with CenturyTel of the Northwest, Inc. and CenturyTel Wireless, Inc., both of which are wholly owned subsidiaries of Century, relating to the acquisition of Century's Alaska properties. We acquired all of the capital stock of Century's Alaska properties for $411.8 million in cash on May 14, 1999.
On October 20, 1998, we entered into an asset purchase agreement with the Municipality of Anchorage relating to the acquisition of ATU. Under the ATU purchase agreement, we acquired substantially all of the assets and liabilities of ATU for $265.1 million in cash on May 14, 1999.
These acquisitions and the related transactions and expenses were funded with $441.7 million of senior bank financing at Alaska Communications Systems Holdings, the issuance by Alaska Communications Systems Holdings of $150 million of 9 3/8% senior subordinated notes, our issuance of $25 million in gross proceeds of old debentures and $121.2 million in equity from Fox Paine Capital Fund, members of management and other investors.
The Century purchase agreement contains customary representations, warranties and covenants, as well as limited indemnification provisions under which the sellers agreed to indemnify us for specified losses and we agreed to indemnify the sellers for specified losses. The ATU purchase agreement contains customary representations, warranties and covenants. The Century purchase agreement and the ATU purchase agreement have each been filed as exhibits to the registration statement of which this prospectus is a part and are incorporated by reference herein.
RELATED AGREEMENTS
LICENSE AGREEMENT. Under a license agreement entered into on May 14, 1999 among the sellers of Century's Alaska properties and us, the sellers granted to us an exclusive, royalty-free license to use several trade names, trademarks and service marks owned by Century, including Pacific Telecom, PTI, PTINet-SM-, PTI Communications-SM- and Cellulink-SM-, throughout Alaska in connection with our provisioning of telecommunications services. The license agreement also contains customary provisions relating to maintaining the quality of the names and marks, protection against infringement and limited cross-indemnification provisions. The license agreement is perpetual unless terminated by the sellers of Century's Alaska properties upon 30 days' written notice to us upon a material breach of the license agreement by us, which breach has not been cured or discontinued within 90 days of notification by the sellers. The license agreement may also be terminated under other limited circumstances.
TRANSITION SERVICES AGREEMENT. Under a transition services agreement dated August 14, 1998, by and among Century's Alaska properties, on the one hand, and Century and its affiliates, on the other hand, Century and its affiliates and Century's Alaska properties formalized intercompany arrangements under which suppliers provided Century's Alaska properties, among other transition services, accounting, financial, information and data, technical, construction and engineering, customer and purchasing and contract administration services prior to the closing date. Century and its affiliates also agreed to continue to provide the transition services until August 31, 1999.
Century and its affiliates agreed to provide the transition services in a manner consistent with past practice in all material respects at their actual cost plus operating costs and other costs relating to the provision of cellular services. In addition, we agreed to pay Century and its affiliates a one-time payment of $1.0 million in consideration for the continued provision of the transition services.
We contributed all of the proceeds from our offering of old debentures of $25 million and the equity contributions from Fox Paine Capital Fund, members of management and other investors of $121.2 million to Alaska Communications Systems Holdings as common equity.
Alaska Communications Systems Holdings used the proceeds from its offering of the Alaska Communications Systems Holdings senior subordinated notes, the equity contributions from us and borrowings under the senior credit facility of $688 million, after deducting discounts to the initial purchasers in the private placement of the senior subordinated notes and other fees and expenses of the acquisitions and related transactions, to:
- finance the aggregate consideration paid to Century in connection with the acquisition of Century's Alaska properties, including repayment of outstanding indebtedness of $43 million;
- finance the aggregate consideration paid to the Municipality of Anchorage in connection with the ATU acquisition; and
- finance general corporate needs, including the purchase of fiber capacity for $19.5 million.
The table below outlines the sources and uses of funds at Alaska Communications Systems Holdings for the acquisitions and the related expenses. You should keep the following points in mind as you read the table.
- The revolving credit facility allows for total borrowings of up to $75.0 million, of which $66.3 million remains available. See "Description of Other Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A facility, $150.0 million of term loan B facility and $135.0 million of term loan C facility.
- The purchase of Century's Alaska properties includes the repayment of existing indebtedness.
- Working capital was used to fund in part the purchase of $19.5 million of fiber capacity.
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
SOURCES:
Revolving credit facility (of Alaska Communications Systems Holdings)............... $ 6.7
Term loan facilities (of Alaska Communications Systems Holdings).................... 435.0
9 3/8% Senior subordinated notes due 2009 (of Alaska Communications Systems
Holdings)......................................................................... 150.0
13% Senior discount debentures due 2011............................................. 19.9
Equity contributions................................................................ 126.3
------
Total sources..................................................................... $ 737.9
------
------
USES:
Purchase of Century's Alaska properties............................................. $ 411.8
Purchase of ATU..................................................................... 265.1
Working capital..................................................................... 12.6
Transaction fees and expenses....................................................... 48.4
------
Total uses........................................................................ $ 737.9
------
------
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The following table sets forth our capitalization as of June 30, 1999. This table should be read in conjunction with "Use of Proceeds," "Unaudited Pro Forma Combined Financial and Operating Data" and the historical financial statements of Century's Alaska properties and ATU, and the related notes, included in this prospectus.
You should keep the following points in mind as you read the table.
- Total borrowings of up to $75.0 million are available to Alaska Communications Systems Holdings under the revolving credit facility, of which $66.3 million remains available. See "Description of Other Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A facility, $150.0 million of term loan B facility and $135.0 million of term loan C facility.
- Stockholders' equity consists of the proceeds of $128.0 million of common equity contributed by Fox Paine Capital Fund, members of management and other investors to us, all of which we contributed to Alaska Communications Systems Holdings.
JUNE 30, 1999
-------------------
(DOLLARS IN
MILLIONS)
Total debt (including current portion):
Capital lease obligations............................................... $ 7.5
Revolving credit facility (of Alaska Communications Systems Holdings)... 8.7
Term loan facilities (of Alaska Communications Systems Holdings)........ 435.0
9 3/8% Senior subordinated notes due 2009 (of Alaska Communications
Systems Holdings)..................................................... 150.0
13% Senior discount debentures due 2011................................. 19.9
Other................................................................... 1.6
------
Total debt............................................................ 622.7
Total stockholders' equity................................................ 122.2
------
Total capitalization.................................................. $ 744.9
------
------
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The following table sets forth selected historical consolidated financial data of ALEC Holdings. You should keep the following points in mind as you read the table.
- We derived the selected historical consolidated financial data for the six months ended June 30, 1999 and as of June 30, 1999 from the unaudited consolidated financial statements of ALEC Holdings, which are included in this prospectus and which, in the opinion of management, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- "Other income (expense)" includes the net operating results of ALEC Holdings' equipment sales and rental, payphone and internet businesses.
- "Defined EBITDA" is net income before interest expense, interest income, income taxes, depreciation and amortization and equity earnings (loss) of minority investments. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses. Defined EBITDA is not intended to represent cash flow from operations as defined by GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or cash flows. Defined EBITDA is included in this prospectus to provide additional information with respect to our ability to satisfy our debt service, capital expenditure and working capital requirements. While Defined EBITDA is frequently used as a measure of operations and the ability of a company to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to the differences in methods of calculation.
- For purposes of calculating the ratio of earnings to fixed charges, "earnings" consist of earnings before extraordinary items, income taxes and fixed charges. "Fixed charges" consist of interest expense, amortization of debt financing costs, and the component of rental expense believed by management to represent the interest component of rental expense. Earnings were inadequate to cover fixed charges by $5,746,000 for the six months ended June 30, 1999.
The selected historical consolidated financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the unaudited consolidated financial statements of ALEC Holdings and the related notes, included in this prospectus.
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
(IN
THOUSANDS)
-------------
OPERATING DATA:
Operating revenue
Local telephone.................................................................................. $ 32,375
Cellular......................................................................................... 4,568
Long distance.................................................................................... 1,387
-------------
Total operating revenue...................................................................... 38,330
Operating expenses
Local telephone.................................................................................. 23,249
Cellular......................................................................................... 3,039
Long distance.................................................................................... 1,575
Depreciation and amortization.................................................................... 8,093
-------------
Total operating expenses..................................................................... 35,956
-------------
Operating income................................................................................... 2,374
Interest expense, net.............................................................................. (7,624)
Other income (expense)............................................................................. (496)
-------------
Income (loss) before income taxes.................................................................. (5,746)
Income taxes....................................................................................... --
-------------
Net loss........................................................................................... $ (5,746)
-------------
-------------
OTHER FINANCIAL DATA:
Defined EBITDA..................................................................................... $ 9,971
Defined EBITDA margin.............................................................................. 26.0%
Capital expenditures............................................................................... $ 27,231
Ratio of earnings to fixed charges................................................................. N/A
OTHER DATA (END OF PERIOD):
Access lines in service............................................................................ 320,096
Cellular subscribers............................................................................... 69,581
Cellular penetration............................................................................... 15.1%
BALANCE SHEET DATA (END OF PERIOD)
Total assets....................................................................................... $ 796,346
Long-term debt including current portion........................................................... 614,013
Stockholders' equity............................................................................... 122,219
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The following table sets forth selected historical combined financial data of Century's Alaska properties. You should keep the following points in mind as you read the table.
- We derived the selected historical combined financial data for each of the three years in the period ended December 31, 1998 and as of December 31, 1997 and 1998 from the audited combined financial statements and the related notes of Century's Alaska properties included in this prospectus.
- We derived the selected historical combined financial data for each of the two years in the period ended December 31, 1995 and as of December 31, 1994, 1995 and 1996, from the unaudited combined financial statements of Century's Alaska properties, which are not included in this prospectus and which, in the opinion of management, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- We derived the summary combined financial data for each of the three month periods ended March 31, 1998 and 1999 and as of March 31, 1998 and 1999 from the unaudited combined financial statements of Century's Alaska properties which are included in this prospectus and which, in the opinion of management, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- The financial statements of Century's Alaska properties include the results of the City of Fairbanks Telephone Operation from October 6, 1997, the date of its acquisition. This acquisition was accounted for as a purchase.
- Century acquired the Alaska properties on December 1, 1997. The financial statements for the 11-month period ended November 30, 1997 and prior periods have been presented on Pacific Telecom's basis of accounting, while the financial statements as of December 31, 1997, the one-month period ended December 31, 1997 and subsequent periods have been presented on Century's basis of accounting.
- "Other income (expense)" includes the net operating results of Century's Alaska properties' equipment sales and rental, payphone and internet businesses.
- On December 31, 1997, the cellular operations in Fairbanks were sold to ATU. The Fairbanks cellular property had 5,497 subscribers at the time of the sale.
The selected historical combined financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited combined financial statements of Century's Alaska properties, and the related notes, included in this prospectus.
CENTURY'S ALASKA PROPERTIES
-------------------------------------------------------------------------------------
CENTURY
-------------------------------------
PACIFIC TELECOM THREE
---------------------------------------------- MONTHS
ENDED
YEAR ENDED DECEMBER 31, JAN. 1, 1997 DEC. 1, 1997 YEAR ENDED MARCH 31,
------------------------------- TO TO DEC. 31, ---------
1994 1995 1996 NOV. 30, 1997 DEC. 31, 1997 1998 1998
--------- --------- --------- ------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue
Local telephone........................ $ 66,636 $ 70,540 $ 75,950 $ 79,330 $ 10,255 $ 121,933 $ 27,967
Cellular............................... 2,766 4,531 4,823 5,120 181 2,576 408
--------- --------- --------- ------------- ------------- ----------- ---------
Total operating revenue............ 69,402 75,071 80,773 84,450 10,436 124,509 28,375
Operating expenses
Local telephone........................ 37,664 38,043 41,789 42,404 6,434 72,008 16,451
Cellular............................... 2,042 3,147 3,381 3,082 147 2,128 330
Depreciation and amortization.......... 13,089 14,316 15,348 15,823 2,466 30,459 7,209
--------- --------- --------- ------------- ------------- ----------- ---------
Total operating expenses........... 52,795 55,506 60,518 61,309 9,047 104,595 23,990
--------- --------- --------- ------------- ------------- ----------- ---------
Operating income......................... 16,607 19,565 20,255 23,141 1,389 19,914 4,385
Interest expense, net.................... (2,459) (2,331) (1,996) (2,169) (171) (1,405) (302)
Other income (expense)................... 1,094 (1,020) (33) (298) 53 356 357
--------- --------- --------- ------------- ------------- ----------- ---------
Income before income taxes............... 15,242 16,214 18,226 20,674 1,271 18,865 4,440
Income taxes............................. 5,962 5,713 6,737 7,746 736 9,218 2,214
--------- --------- --------- ------------- ------------- ----------- ---------
Net income............................... $ 9,280 $ 10,501 $ 11,489 $ 12,928 $ 535 $ 9,647 $ 2,226
--------- --------- --------- ------------- ------------- ----------- ---------
--------- --------- --------- ------------- ------------- ----------- ---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities............................. $ 22,510 $ 29,917 $ 34,589 $ 21,213 $ 5,588 $ 38,291 $ 11,025
Net cash provided (used) by investing
activities............................. (21,151) (19,587) (20,611) (13,554) (3,279) (26,664) 1,947
Net cash used by financing activities.... (1,659) (10,578) (12,947) (8,209) (2,563) (6,770) (11,587)
Defined EBITDA........................... 30,790 32,861 35,570 38,666 3,908 50,729 11,951
Defined EBITDA margin.................... 44.4% 43.8% 46.4% 49.2% 41.4% 45.1% 46.3%
Capital expenditures..................... $ 21,001 $ 19,437 $ 20,465 $ 14,575 $ 1,825 $ 26,799 $ 2,321
Ratio of earnings to fixed charges....... 4.5x 4.3x 4.8x 5.5x 3.2x 4.5x 2.5x
OTHER DATA (END OF PERIOD):
Access lines in service.................. 73,563 77,660 82,969 -- 124,869 131,858 128,023
Cellular subscribers..................... 3,058 3,950 5,573 -- 2,096 2,945 2,546
Cellular penetration..................... 2.1% 2.7% 3.8% -- 3.7% 5.2% 4.6%
BALANCE SHEET DATA (END OF PERIOD)
Total assets............................. $ 157,536 $ 161,323 $ 162,834 -- $ 459,175 $ 472,660 $ 466,301
Long-term debt including current
portion................................ $ 43,089 43,616 44,294 -- 42,950 43,408 42,683
Stockholders' equity..................... 82,317 90,841 92,137 -- 391,314 400,962 395,359
1999
---------
OPERATING DATA:
Operating revenue
Local telephone........................ $ 30,815
Cellular............................... 546
---------
Total operating revenue............ 31,361
Operating expenses
Local telephone........................ 17,270
Cellular............................... 396
Depreciation and amortization.......... 7,785
---------
Total operating expenses........... 25,451
---------
Operating income......................... 5,910
Interest expense, net.................... (358)
Other income (expense)................... 80
---------
Income before income taxes............... 5,632
Income taxes............................. 2,709
---------
Net income............................... $ 2,923
---------
---------
OTHER FINANCIAL DATA:
Net cash provided by operating
activities............................. $ 14,103
Net cash provided (used) by investing
activities............................. (2,339)
Net cash used by financing activities.... (6,753)
Defined EBITDA........................... 13,775
Defined EBITDA margin.................... 49.6%
Capital expenditures..................... $ 2,200
Ratio of earnings to fixed charges....... 5.0x
OTHER DATA (END OF PERIOD):
Access lines in service.................. 134,276
Cellular subscribers..................... 3,417
Cellular penetration..................... 5.2%
BALANCE SHEET DATA (END OF PERIOD)
Total assets............................. $ 473,669
Long-term debt including current
portion................................ 43,094
Stockholders' equity..................... 403,885
|
The following table sets forth selected historical financial data of ATU. You should keep the following points in mind as you read the table.
- We derived the selected historical financial data for each of the three years in the period ended December 31, 1998 and as of December 31, 1997 and 1998 from the audited financial statements and the related notes of ATU included in this prospectus.
- We derived the selected historical financial data for each of the two years in the period ended December 31, 1995 and as of December 1994, 1995 and 1996 from the audited financial statements of ATU which are not included in this prospectus.
- We derived the summary financial data for each of the three month periods ended March 31, 1998 and 1999 and as of March 31, 1998 and 1999 from the unaudited financial statements of ATU which are included in this prospectus and which, in the opinion of management, include all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information they contain.
- "Other income (expense)" includes the net operating results of ATU's equipment sales and rental, and payphone business and equity in earnings (losses) from minority investments.
- During the periods presented, ATU was a public utility of the Municipality of Anchorage and was exempt from federal and state income taxes.
- Net cash data includes information from ATU financial statements prepared in accordance with governmental accounting principles.
- "EBITDA" excludes equity in earnings (loss) of minority investments of $(46,158), $158,000 and $(2,945,000) for the years ended December 31, 1996, 1997 and 1998 and $(250,000) and $(509,000) for the three months ended March 31, 1998 and 1999.
The selected historical financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements of ATU, and the related notes, included in this prospectus.
ATU
---------------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenue
Local telephone.................................... $ 109,371 $ 110,011 $ 113,415 $ 116,555 $ 121,057 $ 29,735 $ 30,364
Cellular........................................... 8,540 12,670 16,897 21,845 29,225 5,879 6,710
Long distance...................................... -- -- 2 1,541 6,815 1,144 2,683
--------- --------- --------- --------- --------- --------- ---------
Total operating revenues....................... 117,911 122,681 130,314 139,941 157,097 36,758 39,757
Operating expenses
Local telephone.................................... 71,564 73,024 75,980 74,994 74,240 18,231 18,844
Cellular........................................... 6,473 9,727 12,379 14,455 19,961 4,048 4,740
Long distance...................................... -- -- 543 4,644 10,395 1,898 3,243
Depreciation and amortization...................... 18,936 19,258 20,496 26,839 29,608 7,099 7,434
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses....................... 96,970 102,009 109,398 120,932 134,204 31,276 34,261
--------- --------- --------- --------- --------- --------- ---------
Operating income..................................... 20,941 20,672 20,916 19,009 22,893 5,482 5,496
Interest expense, net................................ (7,565) (6,706) (6,840) (6,768) (6,427) (1,840) (1,585)
Other income (expense)............................... (328) (322) (219) (123) (2,896) (183) (423)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........................... 13,048 13,644 13,857 12,118 13,570 3,459 3,488
Income taxes......................................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................................... $ 13,048 $ 13,644 $ 13,857 $ 12,118 $ 13,570 $ 3,459 $ 3,488
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
Net cash provided by operating activities............ $ 42,382 $ 43,412 $ 42,120 $ 46,641 $ 53,207 $ 8,394 $ 10,735
Net cash provided (used) by investing activities..... 13,577 1,057 (787) (3,665) (5,659) (8,044) (1,568)
Net cash provided (used) by financing activities..... (57,169) (53,518) (30,095) (46,916) (33,580) 16,631 (12,150)
Defined EBITDA....................................... 39,549 39,608 41,239 45,567 52,550 12,648 13,016
Defined EBITDA margin................................ 37.5% 36.1% 35.6% 36.4% 37.1% 38.5% 35.6%
Capital expenditures................................. $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
Ratio of earnings to fixed charges................... 1.5x 1.4x 1.4x 1.4x 1.5x 1.7x 1.4x
OTHER DATA (end of period):
Access lines in service.............................. 144,869 147,934 154,752 158,486 168,536 164,569 170,343
Cellular subscribers................................. 13,684 24,855 37,651 53,035 63,627 54,436 63,779
Cellular penetration................................. 4.7% 8.4% 12.6% 13.3% 15.8% 13.7% 15.8%
BALANCE SHEET DATA (END OF PERIOD):
Total assets......................................... $ 288,857 $ 289,903 $ 308,810 $ 323,124 $ 350,245 $ 351,190 $ 346,696
Long-term debt including current portion............. 145,775 123,009 146,412 151,945 172,521 180,161 167,618
Fund equity.......................................... 118,695 126,839 132,596 136,414 141,884 139,873 145,372
|
The following unaudited pro forma combined financial and operating data are based on the financial statements of Century's Alaska properties and ATU, as adjusted for the estimated effects of:
- the acquisition of Century's Alaska properties;
- the acquisition of ATU;
- the purchase of fiber capacity for $19.5 million; and
- the financings necessary to complete these transactions,
as if they had occurred on January 1, 1998 for the Statement of Operations. The unaudited pro forma combined financial and operating data are not necessarily indicative of what our financial position or results of operations would actually have been had these transactions been completed on the dates indicated and do not project our results of operations for any future date.
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
CENTURY'S
ALASKA ACQUISITION PRO FORMA
PROPERTIES ATU ADJUSTMENTS COMBINED
---------------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
Operating revenue
Local telephone.......................................... $ 121,933 $ 121,057 $ -- $ 242,990
Cellular................................................. 2,576 29,225 -- 31,801
Long distance............................................ -- 6,815 -- 6,815
-------- --------- ----------- -----------
Total operating revenue.............................. 124,509 157,097 -- 281,606
Operating expenses
Local telephone.......................................... 72,008 74,240 1,033(c) 147,281
Cellular................................................. 2,128 19,961 -- 22,089
Long distance............................................ -- 10,395 -- 10,395
Depreciation and amortization............................ 30,459 29,608 1,154(a) 61,221
-------- --------- ----------- -----------
Total operating expenses............................. 104,595 134,204 2,187 240,986
-------- --------- ----------- -----------
Operating income........................................... 19,914 22,893 (2,187) 40,620
Interest expense, net...................................... (1,405) (6,427) (49,265)(b) (57,097)
Equity in earnings (loss) of subsidiaries.................. -- (2,945) -- (2,945)
Other income (expense)..................................... 356 49 -- 405
-------- --------- ----------- -----------
Income (loss) before income taxes........................ 18,865 13,570 (51,452) (19,017)
Income tax expense (benefit)............................... 9,218 -- (9,218)(d) --
-------- --------- ----------- -----------
Net income (loss).......................................... $ 9,647 $ 13,570 $ (42,234) $ (19,017)
-------- --------- ----------- -----------
-------- --------- ----------- -----------
|
JANUARY 1, 1999 TO SIX MONTHS
SIX MONTHS MAY 14, 1999 (ACQUISITION) ENDED
ENDED ---------------------------- JUNE 30, 1999
JUNE 30, 1999 CENTURY'S ACQUISITION PRO FORMA
ALEC HOLDINGS ALASKA PROPERTIES ATU ADJUSTMENTS COMBINED
--------------- ----------------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
Operating Revenue
Local telephone....................... $ 32,375 $ 45,538 $ 46,380 $ -- $ 124,293
Cellular.............................. 4,568 931 10,277 -- 15,776
Long distance......................... 1,387 -- 3,780 -- 5,167
------- ------- --------- ----------- -------------
Total operating revenue........... 38,330 46,469 60,437 -- 145,236
Operating expenses
Local telephone....................... 23,249 27,305 29,120 378(c) 80,052
Cellular.............................. 3,039 957 7,677 -- 11,673
Long distance......................... 1,575 -- 4,841 -- 6,416
Depreciation and amortization......... 8,093 8,912 11,655 258(a) 28,918
------- ------- --------- ----------- -------------
Total operating expenses.......... 35,956 37,174 53,293 636 127,059
Operating income........................ 2,374 9,295 7,144 (636) 18,177
Interest expense, net................... (7,624) (700) (2,439) (18,272)(b) (29,035)
Equity in earnings (loss) of
subsidiaries.......................... -- -- (1,282) -- (1,282)
Other income............................ 125 921 -- -- 1,046
Other expense........................... (621) -- 76 -- (545)
------- ------- --------- ----------- -------------
Income (loss) before taxes............ (5,746) 9,516 3,499 (18,908) (11,639)
Income tax expense (benefit)............ -- 3,944 -- (3,944)(d) --
------- ------- --------- ----------- -------------
Net income (loss)....................... $ (5,746) $ 5,572 $ 3,499 $ (14,964) $ (11,639)
------- ------- --------- ----------- -------------
------- ------- --------- ----------- -------------
|
(a) Represents the increase in amortization expense as a result of the increase in goodwill due to the application of purchase accounting and the $19,500,000 purchase of fiber capacity. Goodwill is amortized over 40 years, and the fiber capacity is amortized over 20 years.
(b) Represents the net adjustment to interest expense as a result of the borrowings under the revolving credit facility, the term loan facilities, the Alaska Communications Systems Holdings senior subordinated notes and the exchange debentures, calculated as follows (dollars in thousands):
FOR THE PERIOD
JANUARY 1,
1999
YEAR ENDED TO MAY 14,
DECEMBER 31, 1998 1999
----------------- --------------
Revolving credit facility(1)........................................ $ 523 $ 196
Term Loan A Facility(2)............................................. 11,625 4,359
Term Loan B Facility(3)............................................. 12,000 4,500
Term Loan C Facility(4)............................................. 11,138 4,177
9 3/8% Senior subordinated notes due 2009(5)........................ 14,063 5,274
13% Senior discount debentures due 2011(6).......................... 3,250 1,219
Interest on long term obligations assumed(7)........................ 600 225
------- -------
Pro forma cash interest expense(8).................................. 53,198 19,950
Amortization of deferred financing costs(9)......................... 3,750 1,406
Amortization of OID on discount debentures.......................... 148 55
------- -------
Pro forma interest expense.......................................... 57,097 21,411
Historical interest expense, net.................................... (7,832) (3,139)
------- -------
Total......................................................... $ 49,265 $ 18,272
------- -------
------- -------
|
(1) Represents interest on the $6.7 million that was drawn under the revolving credit facility of Alaska Communications Systems Holdings on the closing date using an assumed interest rate of 7.75%.
(2) Represents interest on the $150.0 million Term Loan A Facility of Alaska Communications Systems Holdings using an assumed interest rate of 7.75%.
(3) Represents interest on the $150.0 million Term Loan B Facility of Alaska Communications Systems Holdings using an assumed interest rate of 8.00%.
(4) Represents interest on the $135.0 million Term Loan C Facility of Alaska Communications Systems Holdings using an assumed interest rate of 8.25%.
(5) Represents interest on the $150.0 million senior subordinated notes of Alaska Communications Systems Holdings using an interest rate of 9.375%.
(6) Represents interest on the $25.0 million exchange debentures using an interest rate of 13.0%.
(7) Represents interest on $7.5 million of long-term obligations assumed by us at an interest rate of 8.00%.
(8) A 1/8% change in interest rates for the variable rate debt above would change interest expense by $552,000 for the year ended December 31, 1998 and by $207,000 for the six months ended June 30, 1999.
(9) Deferred financing costs are amortized over the term of the related debt (an average life of eight years for all borrowings).
(c) Represents the estimated annual management fee to be paid to Fox Paine & Company prorated for six months. The Fox Paine & Company management fee is based on 1% of Defined EBITDA as calculated without regard to the fee. Defined EBITDA is net income before interest expense, interest income, income taxes, depreciation and amortization and equity in earnings (loss) of minority investments
(d) Represents the elimination of historical tax expense, as on a pro forma basis we would have been in a net loss position. No tax benefit for the net loss is reflected in the Unaudited Pro Forma Combined Statement of Operations, as we are uncertain when profitable operations will be achieved.
OVERVIEW
We were formed in 1998 to acquire telecommunications properties in Alaska. On August 14, 1998, we entered into an agreement to acquire Century's Alaska properties. Century's Alaska properties are the incumbent provider of local telephone services to over 131,000 access lines in Juneau, Fairbanks and more than 70 rural communities in Alaska. Century's Alaska properties also provide cellular services and internet access services. Beginning in August 1998, members of management provided advisory and management consulting services to Century's Alaska properties relating to their day-to-day business operations under a consulting agreement between Century and LEC Consulting Corporation, a company formed by members of management.
On October 20, 1998, we entered into an agreement to acquire substantially all of the assets and liabilities of ATU from the Municipality of Anchorage. ATU is the incumbent provider of local telephone services to over 168,000 access lines in the Municipality of Anchorage and surrounding communities. ATU also provides cellular and long distance services. In addition, ATU holds minority interests in companies that deliver wireless cable television, internet access and wholesale long distance. Prior to May 1999, ATU also held a minority interest in a provider of home security services.
We completed the acquisitions of PTI Alaska and ATU on May 14, 1999. In connection with these acquisitions, we:
- received equity contributions from Fox Paine Capital Fund, L.P., members of management and other investors in the amount of $121.2 million and
- issued $46.9 million in principal amount of the old debentures and warrants for aggregate gross proceeds of $25.0 million.
All $146.2 million of the proceeds from these financings, the fees and expenses of which were borne by Alaska Communications Systems Holdings, were contributed to Alaska Communications Systems Holdings as common equity.
The table below outlines the sources and uses of funds at Alaska Communications Systems Holdings for the acquisitions and the related expenses. You should keep the following points in mind as you read the table.
- The revolving credit facility allows for total borrowings of up to $75.0 million, of which $66.3 million remains available. See "Description of Other Indebtedness--The Senior Credit Facility."
- The term loan facilities are comprised of $150.0 million of term loan A facility, $150.0 million of term loan B facility and $135.0 million of term loan C facility.
- The purchase of Century's Alaska properties includes the repayment of existing indebtedness.
- Working capital was used to fund in part the purchase of $19.5 million of fiber capacity.
AMOUNT
-------------------
(DOLLARS IN
MILLIONS)
SOURCES:
Revolving credit facility........................................................... $ 6.7
Term loan facilities................................................................ 435.0
9 3/8% Senior subordinated notes due 2009........................................... 150.0
Equity contributions................................................................ 146.2
------
Total sources..................................................................... $ 737.9
------
------
USES:
Purchase of Century's Alaska properties............................................. $ 411.8
Purchase of ATU..................................................................... 265.1
Working capital..................................................................... 12.6
Transaction fees and expenses....................................................... 48.4
------
Total uses........................................................................ $ 737.9
------
------
|
Prior to the consummation of the acquisitions of Century's Alaska properties and ATU, we had no operations. Accordingly, the following discussion should be read in conjunction with our consolidated financial statements, the combined financial statements of Century's Alaska properties and the consolidated financial statements of ATU, and the related notes, included in this prospectus.
REVENUES. Century's Alaska properties generate revenue through:
- the provision of local telephone services, including:
- basic local service to customers within its service areas,
- network access services to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls,
- enhanced services,
- ancillary services, such as billing and collection, and
- universal service payments; and
- the provision of wireless services.
Century's Alaska properties generate additional revenue through the provision of internet access and miscellaneous equipment sales, which are recorded net of expenses as "Other income (expense)."
ATU generates revenue through:
- the provision of local telephone services, including
- basic local service to customers within its service areas,
- network access services to interexchange carriers, for origination and termination of interstate and intrastate long distance phone calls,
- enhanced services and
- ancillary services, such as billing and collection;
- the provision of wireless services; and
- the provision of long distance services.
In addition, ATU recognizes its proportionate share of the net income or loss of its minority-owned investments.
Changes in revenue are largely attributable to changes in the number of access lines, local service rates and minutes of use. Other factors can also impact revenue, such as:
- intrastate and interstate revenue settlement methodologies,
- whether an access line is used by a business or residential subscriber,
- calling patterns (intrastate and interstate),
- customers' selection of various local rate plan options,
- selection of enhanced calling services or other packaged products (such as cellular and internet) and
- other subscriber usage characteristics.
Local exchange carriers have two basic tiers of customers:
- end users located in the local exchange carrier's local exchanges that pay for local telephone service and
- the interexchange carriers that pay the local exchange carrier for access to customers located within that local exchange carrier's local service area. Local exchange carriers provide access service to numerous interexchange carriers and also bill and collect long distance charges from interexchange carrier customers on behalf of the interexchange carrier. The amount of access charge revenue associated with a particular interexchange carrier varies depending upon long distance calling patterns and the relative market share of each long distance carrier.
Our local service rates for end users are authorized by the RCA. Authorized rates of return are set by the FCC and the RCA for interstate and intrastate access charges, respectively, and may change from time to time.
The following unaudited table summarizes our combined operations for the six month periods ended June 30, 1999 and June 30, 1998. For the six months ended June 30, 1999, the summary information represents the combined historical results of Century's Alaska properties and ATU from January 1, 1999 through acquisition on May 14, 1999 and our consolidated operating results for the period from May 15, 1999 to June 30, 1999. For the six months ended June 30, 1998, the summary
SIX MONTHS ENDED
JUNE 30
----------------------
1998 1999
---------- ----------
OPERATING REVENUES
Local Telephone......................................................................... $ 117,429 $ 124,319
Cellular................................................................................ 14,122 15,776
Long Distance........................................................................... 2,487 5,141
---------- ----------
Total operating revenues............................................................ 134,038 145,236
OPERATING EXPENSES
Cost of sales and operating expenses--local............................................. 70,944 79,674
Cost of sales and operating expenses--cellular.......................................... 9,782 11,432
Cost of sales and operating expenses--long distance..................................... 4,410 6,416
Depreciation and amortization........................................................... 26,575 28,901
---------- ----------
Total operating expenses............................................................ 111,711 126,423
---------- ----------
OPERATING INCOME.......................................................................... 22,327 18,813
Interest expense, net................................................................... (4,267) (10,763)
Other income (expense).................................................................. (667) (781)
---------- ----------
INCOME BEFORE TAXES....................................................................... 17,393 7,269
Income Taxes............................................................................ 4,304 3,944
---------- ----------
NET INCOME................................................................................ $ 13,089 $ 3,325
---------- ----------
DEFINED EBITDA............................................................................ $ 48,439 $ 48,215
---------- ----------
|
Combined operating revenues increased 8.4% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. Local telephone, cellular and long distance revenues all increased as compared to the prior six month period. The revenue increases were primarily due to increased traffic as follows:
- 9.7% increase in access lines to 320,096 from 291,844,
- 104.2% increase in long distance minutes of use mitigated somewhat by a
7.7% decrease in revenue dollars per minute and
- 15.2% increase in cellular subscribers to 69,581 from 60,425.
Operating expense increased 13.2% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. Operating expenses increased to 87.0% of revenues for the six months ended June 30, 1999 as compared to 83.3% of revenues for the six months ended June 30, 1998. Adjusted for one-time and transaction related costs of approximately $6.6 million and reducing revenues by $1.6 million for non-recurring items related to a prior period, operating expenses would be 83.4% of revenues for the current six month period.
LOCAL TELEPHONE cost of sales and operating expenses increased $8.7 million, or 12.3%. The one-time costs discussed above contributed to the increase. Sales and customer service expense, two
LONG DISTANCE cost of sales and operating expenses increased in dollars but decreased as a percentage of sales as long distance operations benefited from economies of scale, particularly in general and administrative expenses.
CELLULAR cost of sales and operating expenses increased 16.9% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998 primarily due to the increase costs of supporting a larger customer base.
DEPRECIATION AND AMORTIZATION expense increased 8.7% due to increases in plant in service and additional amortization of goodwill from date of acquisition to June 30, 1999.
Interest expense, net increased 152.2% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998 due to the increase in acquisition related long-term debt.
Other income expense for the six months ended June 30, 1999 consists primarily of non-recurring income and expenses ancillary to telephone operations and losses in minority interests. Other income is approximately $1.2 million and includes approximately $0.5 million of one-time revenues and $0.7 million of other ancillary revenues. Other expense is approximately $0.7 million and consists primarily of miscellaneous non-recurring expense items. The other component of other expense is losses in minority interests of $1.3 million. Other income (expense) decreased by 28.3% for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. A significant factor was increased losses in minority interests.
The decrease in net income is primarily a result of the factors discussed above and, in particular, the increase in operating expense as a percentage of sales and the increase in interest expense. Defined EBITDA is not driven by the increase in interest expense. Defined EBITDA includes the net operating results of equipment sales and rental, payphone, internet businesses and non-recurring income and expense items which are included below operating income in the line "Other income (expense), net." Defined EBITDA decreased approximately $0.2 million. As the Company integrates the acquisitions, management anticipates strengthening of earnings and Defined EBITDA.
CENTURY'S ALASKA PROPERTIES
Century acquired the Alaska properties on December 1, 1997 as part of its acquisition of Pacific Telecom, Inc. from PacifiCorp Holdings, Inc. On October 6, 1997, prior to their acquisition by Century, Century's Alaska properties acquired the assets of the City of Fairbanks Telephone Operation. On December 31, 1997, Century's Alaska properties sold their Alaska rural statistical area, or RSA, #1 B-side cellular property in Fairbanks to ATU. The operating results of this divested property are included in the historical operating results of Century's Alaska properties.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
Local service............................................. $ 21,740 $ 26,937 $ 37,255 $ 8,961 $ 9,576
Network access............................................ 45,056 50,298 64,321 14,292 15,305
Other..................................................... 9,154 12,350 20,357 4,714 5,934
--------- --------- ---------- --------- ---------
Local telephone........................................... 75,950 89,585 121,933 27,967 30,815
Cellular.................................................. 4,823 5,301 2,576 408 546
--------- --------- ---------- --------- ---------
Total..................................................... $ 80,773 $ 94,886 $ 124,509 $ 28,375 $ 31,361
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
|
Century's Alaska properties' operating expenses are categorized as: cost of sales and operating expenses--telephone; cost of sales and operating expenses--wireless; and depreciation and amortization. Cost of sales and operating expenses--telephone are those operating expenses incurred by Century's Alaska properties in connection with their local telephone business, including the operation of their central offices and outside plant facilities and related operations, customer service, marketing and other general and administrative expenses and allocated corporate expenses. Cost of sales and operating expenses--wireless are those operating expenses incurred by Century's Alaska properties in connection with the operation of their wireless facilities and transmission of wireless services, customer service, marketing and other general and administrative expenses and allocated corporate expenses.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998.
Combined operating revenues increased 10.5% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. Local service, network access and cellular revenues all increased as compared to the prior three month period.
Local telephone revenues increased 10.2% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. The increase in local service revenues paralleled a 4.9% growth in access lines from the previous period. Access revenues increased $1.0 million, or 7.1%, as compared to the prior three month period.
Cellular revenues increased 33.8% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998, as cellular customers increased 34.3% during that period.
Cost of sales and operating expenses--telephone increased marginally for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998.
Cost of sales and operating expenses--cellular increased 20.0% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. This increase is due to the additional cost required to support additional cellular customers.
The 8.0% increase in depreciation and amortization for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 was due to higher plant in service balances and amortization of goodwill associated with purchase accounting.
Interest expense, net increased to $358,000 for the three months ended March 31, 1999 from $302,000 for the three months ended March 31, 1998.
Other income (expense) is related primarily to non-recurring income and expenses ancillary to telephone operations. For the three months ended March 31, 1999, other income (expense) decreased 77.6% as compared to the three months ended March 31, 1998. The decrease was primarily due to recognition of non-recurring expenses in the current period.
The provision for income taxes was $2.7 million for the three months ended March 31, 1999 as compared to $2.2 million for the three months ended March 31, 1998 due to higher taxable income in the more recent three month period.
Increases in Net Income and Defined EBITDA are a result of the factors described above, and in particular, the increase in our customer base as represented by increased access lines and increased cellular customers. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses which are included below operating income in the line "Other income (expense)."
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
The financial statements of Century's Alaska properties reflect the combined results of Century's Alaska properties, including Telephone Utilities of Alaska, Inc., which operates in Juneau, Telephone Utilities of the Northland, Inc., which operates in numerous rural communities, and the Alaska RSA #3 cellular property for the years ended December 31, 1997 and 1998. Additionally, the results of the City of Fairbanks Telephone Operation are reflected from the date of acquisition, October 6, 1997. The Alaska RSA #1 B-side cellular property was divested on December 31, 1997 to satisfy FCC cross-
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Revenues............................................................. $ 2,681 $ 3,100
Operating expenses................................................... 1,889 1,643
Depreciation......................................................... 457 424
--------- ---------
Operating income..................................................... $ 335 $ 1,033
--------- ---------
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Combined operating revenues increased 31.2% to $124.5 million for the year ended December 31, 1998 as compared to $94.9 million for the year ended December 31, 1997. Local telephone operating revenues increased 36.0% to $121.9 million for the year ended December 31, 1998 as compared to $89.6 million for the year ended December 31, 1997. Cellular revenues decreased 51.4% to $2.6 million for the year ended December 31, 1998 as compared to $5.3 million for the year ended December 31, 1997. Ownership of the City of Fairbanks Telephone Operation for a full year in 1998 versus a partial year in 1997 accounted for $21.0 million of the total $29.6 million increase in combined operating revenues.
Local telephone revenues increased 36.0% to $121.9 million for the year ended December 31, 1998 as compared to $89.6 million for the year ended December 31, 1997. Of this increase, $21.0 million was due to the full year of ownership of the City of Fairbanks Telephone Operation in 1998 versus a partial year in 1997, $4.2 million was due to higher access revenues at Telephone Utilities of Alaska and Telephone Utilities of the Northland, $1.5 million was due to higher local service revenues at Telephone Utilities of Alaska and Telephone Utilities of the Northland, and $0.4 million was due to higher other revenues. The increase in local service revenues was due to a 5.6% growth in access lines from December 31, 1997 to December 31, 1998. Growth in access revenues was primarily the result of a higher revenue requirement due to higher expenses for the year ended December 31, 1998 as compared to the year ended December 31, 1997.
Cellular revenues decreased 51.4% to $2.6 million for the year ended December 31, 1998 as compared to $5.3 million for the year ended December 31, 1997. Improved results of the Alaska RSA #3 property increased revenues $0.4 million for the year ended December 31, 1998 as compared to the year ended December 31, 1997. The divestiture of the Alaska RSA #1 B-side cellular property decreased cellular revenue by $3.1 million for the year ended December 31, 1998 as compared to the year ended December 31, 1997.
Cost of sales and operating expenses--telephone increased 47.5% to $72.0 million for the year ended December 31, 1998 as compared to $48.8 million for the year ended December 31, 1997. Ownership of the City of Fairbanks Telephone Operation for the full year 1998 versus a partial year in 1997 accounted for $15.0 million of the total increase in cost of sales and operating expenses-- telephone. The remaining increase was due primarily to higher expenses at Telephone Utilities of
Cost of sales and operating expenses--cellular decreased by 34.1% to $2.1 million for the year ended December 31, 1998 as compared to $3.2 million for the year ended December 31, 1997. In addition, $0.5 million of higher cost of sales and operating expense--cellular was due to increased costs necessary to support the increased number of customers for the Alaska RSA #3 cellular property. The divestiture of the Alaska RSA #1 B-side cellular property decreased expenses by $1.6 million.
Depreciation and amortization increased $12.2 million to $30.5 million for the year ended December 31, 1998 as compared to $18.3 million for the year ended December 31, 1997. The increase in depreciation and amortization expense was due to higher plant in service balances, amortization of goodwill associated with purchase accounting, higher authorized depreciation rates effective January 1, 1998, as approved by the APUC, and a full year of ownership of the City of Fairbanks Telephone Operation.
Interest expense, net decreased 40.0% to $1.4 million for the year ended December 31, 1998 as compared to $2.3 million for the year ended December 31, 1997. The decrease was due to $4.9 million in higher cash and cash equivalents and $11.5 million higher affiliated receivable balances at December 31, 1998 as compared to December 31, 1997.
Other income (expense) is related primarily to non-recurring income and expenses ancillary to telephone operations. For the year ended December 31, 1998 Other income (expense) was $356,000 as compared to $(245,000) for the year ended December 31, 1997.
Income taxes increased 8.7% to $9.2 million for the year ended December 31, 1998 as compared to $8.5 million for the year ended December 31, 1997. Higher income taxes were due to higher taxable income in 1998 as compared to 1997.
As a result of the factors described above, net income decreased $3.8 million to $9.6 million for the year ended December 31, 1998 as compared to $13.4 million for the year ended December 31, 1997.
As a result of the factors described above, Defined EBITDA increased by $8.1 million to $50.7 million for the year ended December 31, 1998 as compared to $42.6 million for the year ended December 31, 1997. In particular, an increase in local telephone customers as represented by an increase in access lines more than offset the effects of a decline in cellular customers. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses.
Combined operating revenues increased 17.5% to $94.9 million for the year ended December 31, 1997 as compared to $80.8 million for the year ended December 31, 1996. Local telephone operating revenues increased 18.0% to $89.6 million for the year ended December 31, 1997 as compared to $76.0 million for the year ended December 31, 1996. Cellular revenues increased 9.9% to $5.3 million for the year ended December 31, 1997 as compared to $4.8 million for the year ended December 31, 1996. Ownership of the City of Fairbanks Telephone Operation from October 6, 1997 through December 31, 1997 accounted for $7.8 million of the total $14.1 million increase in combined operating revenues.
Local telephone revenues increased 18.0% to $89.6 million for the year ended December 31, 1997 as compared to $76.0 million for the year ended December 31, 1996. Of this increase, $7.8 million was due to partial year ownership of the City of Fairbanks Telephone Operation in 1997, $1.2 million was due to higher access revenues at Telephone Utilities of Alaska and Telephone Utilities of the Northland, and $2.0 million was due to higher local service and other revenues at Telephone Utilities of Alaska and Telephone Utilities of the Northland. The increase in local service revenues was due to a 6.0% growth in access lines and higher enhanced services revenue (in each case without giving effect to the City of Fairbanks Telephone Operation acquisition). Growth in access revenues was primarily the result of a higher revenue requirement due to higher expenses for the year ended December 31, 1997 as compared to the prior year.
Cellular revenues increased 9.9% to $5.3 million for the year ended December 31, 1997 as compared to $4.8 million for the year ended December 31, 1996. Improved results were primarily due to an increase in subscribers from December 31, 1996 to December 31, 1997.
Cost of sales and operating expenses--telephone increased 16.7% to $48.8 million for the year ended December 31, 1997 as compared to $41.8 million for the year ended December 31, 1996. Ownership of the City of Fairbanks Telephone Operation for part of the year in 1997 accounted for $4.4 million of the total increase. The remaining increase is due primarily to higher expenses for Telephone Utilities of Alaska and Telephone Utilities of the Northland local telephone operations, attributable to increased costs necessary to support growth in access lines.
Cost of sales and operating expenses--cellular decreased 4.5% to $3.2 million for the year ended December 31, 1997 as compared to $3.4 million for the year ended December 31, 1996.
Depreciation and amortization increased 19.2% to $18.3 million for the year ended December 31, 1997 as compared to $15.3 million for the year ended December 31, 1996. Ownership of the City of Fairbanks Telephone Operation for part of the year in 1997 resulted in $2.1 million of the total increase. The remaining portion of the total increase was due to higher plant in service balances in 1997 as compared to 1996.
Interest expense, net increased 17.2% to $2.3 million for the year ended December 31, 1997 as compared to $2.0 million for the year ended December 31, 1996.
Other income (expense) is related primarily to non-recurring income and expenses ancillary to telephone operations. For the year ended December 31, 1996, this activity resulted in other income (expense) of $0.0 million as compared to $(0.2) million for the year ended December 31, 1997. This increase was due principally to increased internet revenues and increased payphone, equipment sales and rental activity.
Income taxes increased 25.9% to $8.5 million for the year ended December 31, 1997 as compared to $6.7 million for the year ended December 31, 1996. The higher income taxes were due to higher taxable income in 1997 as compared to 1996.
As a result of the factors described above, net income increased $1.9 million to $13.4 million for the year ended December 31, 1997 as compared to $11.5 million for the year ended December 31, 1996.
As a result of the factors described above, Defined EBITDA increased $7.0 million to $42.6 million for the year ended December 31, 1998 as compared to $35.6 million for the year ended December 31, 1996. In particular, the local telephone and cellular customer bases increased. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses.
ATU
The following table summarizes each component of ATU's revenue sources for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (dollars in thousands):
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
Local service.......................................... $ 49,458 $ 52,007 $ 50,863 $ 12,913 $ 12,244
Network access......................................... 34,800 34,369 34,740 8,035 10,686
Other.................................................. 29,157 30,179 35,454 8,787 7,434
---------- ---------- ---------- --------- ---------
Local telephone.................................. 113,415 116,555 121,057 29,735 30,364
Cellular............................................... 16,897 21,845 29,225 5,879 6,710
Long distance.......................................... 2 1,541 6,815 1,144 2,683
---------- ---------- ---------- --------- ---------
Total.................................................. $ 130,314 $ 139,941 $ 157,097 $ 36,758 $ 39,757
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---------- ---------- ---------- --------- ---------
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ATU's operating expenses are categorized as: cost of sales and operating expenses--local telephone; cost of sales and operating expenses--cellular; cost of sales and operating expenses--long
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
Operating revenues increased 8.2% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. ATU reported revenue growth in all three service categories: local telephone, cellular and long distance.
Local telephone revenues, which consist of local service, network access charges and other revenues, increased 2.1% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. Comparing the same periods, local service revenues decreased 5.2% as a result of a 3.6% decrease in retail access lines. Local service revenues include revenues for ATU's retail local telephone service to business and residential customers and wholesale customers that resell ATU's local telephone service. The decrease in retail access lines was primarily due to the introduction of competition in ATU's service area.
Network access revenues increased 33.0% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998, due primarily to prior period revenues which had been reserved in connection with various regulatory matters that have been resolved.
Other revenues decreased $1.4 million, or 15.4%, for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998.
Cellular revenues increased 14.1% for the three months ended March 31, 1999 as compared to the three months March 31, 1998. The number of subscribers increased from 54,436 at March 31, 1998 to 63,779 at March 31, 1999.
Long distance revenues increased 134.5% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 principally due to a 161.1% growth in minutes of use.
Cost of sales and operating expenses--telephone increased 3.4% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 due to a number of factors including increased labor and consulting related to new information systems, increased customer service expense and an increase in sales and marketing expense as a response to the opening of the local market to competition.
Cost of sales and operating expenses--cellular increased 17.1% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 primarily due to the increase costs of supporting a larger customer base.
Cost of sales and operating expenses--long distance increased 70.9% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. Expenses rose at a lower rate than revenues due to economies of scale. Since ATU is not a facilities-based carrier, a primary component of long distance cost of sales is the semi-fixed expense of leased lines. The number of leased lines is fixed over a range of capacity. In addition, selling, general and administrative expense, as a percentage of revenues, was significantly lower for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998.
Depreciation and amortization expense increased 4.7% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 primarily due to increases in plant in service balances and goodwill amortization.
Interest expense, net decreased 13.9% for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 due to the decrease in outstanding long-term debt.
Other income (expense) includes equity in earnings (loss) of minority interests and other income and expenses ancillary to telephone operations. Other income (expense) changed only marginally between the two three month periods.
The 0.8% increase in net income and the 2.9% increase in Defined EBITDA result from the factors described above. In particular, the increase in the customer base for cellular and long distance services and the increase in revenues from the resale of unbundled network elements more than offset the competition-driven decrease in local telephone retail customers. Because ATU was a public utility of the Municipality of Anchorage, it was exempt from U.S. federal and state income taxes. Because earnings and losses from equity investments do not directly affect the operating cash requirements of ATU, these amounts have been excluded from the Defined EBITDA calculation. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses which are included below operating income in the line "Other income (expense)."
Operating revenues increased 12.3% to $157.1 million for the year ended December 31, 1998 as compared to $139.9 million for the year ended December 31, 1997. ATU reported revenue growth in all three service categories: local telephone, cellular and long distance.
Local telephone revenues, which consist of local service, network access charges and other revenues, increased 3.9% to $121.1 million for the year ended December 31, 1998 as compared to $116.6 million for the year ended December 31, 1997. Local service revenues decreased 2.2% to $50.9 million for the year ended December 31, 1998 as compared to $52.0 million for the year ended December 31, 1997 as a result of a decrease in retail access lines. Local service revenues include revenues for ATU's retail local telephone service to business and residential customers and wholesale customers that resell ATU's local telephone service. Although the total number of access lines increased from 158,486 at December 31, 1997 to 168,536 at December 31, 1998, retail access lines decreased 14,492 from 150,720 at December 31, 1997 to 136,228 at December 31, 1998, principally as a result of the introduction of competition in ATU's service area. The number of access lines made available to competitors increased from 7,766 at December 31, 1997 to 32,308 at December 31, 1998. This decrease in retail access lines resulted in a decrease in local service revenues.
Network access revenues increased 1.1% to $34.7 million for the year ended December 31, 1998 as compared to $34.4 million for the year ended December 31, 1997. Market share losses relating to increased sales by competitors reduced network access revenues by $1.9 million in 1998. We expect this competition to continue. This decrease was partially offset by $2.4 million in higher intrastate network access revenues from the settlement of a prior year access charge dispute.
Other revenues increased 17.5% to $35.5 million for the year ended December 31, 1998 as compared to $30.2 million for the year ended December 31, 1997. This increase was primarily attributable to higher revenues from unbundled network element interconnection and directory advertising. Revenues from monthly charges paid by competing carriers for unbundled network element interconnection are accounted for as other revenue.
Cellular revenues increased 33.8% to $29.2 million for the year ended December 31, 1998 as compared to $21.8 million for the year ended December 31, 1997. The increase was due to an increase in the number of cellular subscribers in Anchorage and Alaska RSA #2, as well as the acquisition of the Alaska RSA #1 B-side cellular property on January 1, 1998. The number of subscribers increased from 47,538 (excluding the Alaska RSA #1 B-side property) at December 31, 1997 to 63,627 at December 31, 1998. The Fairbanks property increased from 5,497 subscribers at January 1, 1998 to 9,064 at December 31, 1998. Average revenue per customer per month remained stable at $42 per customer per month.
Long distance revenues increased 342.2% to $6.8 million for the year ended December 31, 1998 as compared to $1.5 million for the year ended December 31, 1997 principally due to customer growth. The number of customers increased to 25,670 customers at December 31, 1998 from approximately 10,600 customers at December 31, 1997.
Cost of sales and operating expenses--telephone decreased marginally to $74.2 million for the year ended December 31, 1998 as compared to $75.0 million for the year ended December 31, 1997. Product sales and advertising expenses increased $2.4 million in 1998 due to increased advertising campaigns resulting from heightened competition in the local telephone market in 1998. These higher expenses were offset by $3.5 million of lower expenses, primarily due to lower labor expenses associated with reduced full-time local telephone employee levels in 1998 as compared to 1997.
Cost of sales and operating expenses--cellular increased 38.1% to $20.0 million for the year ended December 31, 1998 as compared to $14.5 million for the year ended December 31, 1997. An increase in customers from 47,538 at December 31, 1997 to 63,627 at December 31, 1998 resulted in increases in sales and marketing, general and administrative and other operating expenses. Of the $5.5 million increase in cost of sales and operating expenses--cellular, $2.1 million was due to the operation of the newly acquired Alaska RSA #1 B-side cellular property for a full year in 1998.
Cost of sales and operating expenses--long distance increased 123.8% to $10.4 million for the year ended December 31, 1998 as compared to $4.6 million for the year ended December 31, 1997. Higher expenses were due to increased dedicated facilities leases, access payments, advertising and administrative expenses to support greater long distance traffic volumes. Traffic volumes increased due to increases in the total number of long distance customers. As a result, ATU's long distance operations incurred losses of $3.7 million in 1998 and $3.2 million in 1997.
Depreciation and amortization expense increased 10.3% to $29.6 million for the year ended December 31, 1998 as compared to $26.8 million for the year ended December 31, 1997. Increases in plant in service balances and goodwill amortization accounted for the increase. Higher depreciation and amortization expense of $1.5 million in the local telephone operations and $1.3 million in the cellular and long distance operations was incurred in 1998.
Interest expense, net decreased 5.0% to $6.4 million for the year ended December 31, 1998 as compared to $6.8 million for the year ended December 31, 1997. Interest expense increased by $1.1 million as a result of higher outstanding long-term obligations associated with a bond issuance in 1998. Increases in interest income from higher cash balances served to offset higher interest expense. Reversal of previously accrued interest expense for revenue that had been reserved in prior periods but recognized in 1998 reduced interest expense for the year ended December 31, 1998 by $0.4 million.
Other income (expense) includes equity in earnings (loss) of minority interests and other income and expenses ancillary to telephone operations. ATU recognized losses in its minority investments of $2.9 million for the year ended December 31, 1998 compared to earnings of $0.2 million for the year ended December 31, 1997. For the year ended December 31, 1998, ATU incurred $1.1 million in proportional losses from its minority investments, and wrote down $1.5 million and $0.4 million of its investments in Alaskan Choice Television, LLC, and Internet Alaska, Inc., respectively.
As a result of the factors described above, net income increased $1.5 million to $13.6 million for the year ended December 31, 1998 as compared to $12.1 million for the year ended December 31, 1997. Because ATU was a public utility of the Municipality of Anchorage, it was exempt from U.S. federal and state income taxes.
As a result of the factors described above, Defined EBITDA increased $7.0 million to $52.6 million for the year ended December 31, 1998 as compared to $45.6 million for the year ended December 31, 1997. In particular, the increase in the customer base for cellular and long distance services and the increase in revenues from the resale of unbundled network elements more than offset the competition-driven decrease in local telephone retail customers. Because earnings and losses from equity investments do not directly affect the operating cash requirements of ATU, these amounts have been excluded from the Defined EBITDA calculation. Defined EBITDA includes the net operating results of equipment sales and rental, payphone and internet businesses.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
Operating revenues increased 7.4% to $139.9 million for the year ended December 31, 1997 as compared to $130.3 million for the year ended December 31, 1996. ATU reported revenue growth in all three service categories: local telephone, cellular and long distance.
Local telephone revenues increased 2.8% to $116.6 for the year ended December 31, 1997 as compared to $113.4 million for the year ended December 31, 1996. Local service revenues increased 5.2% to $52.0 million for the year ended December 31, 1997 as compared to $49.5 million for the year ended December 31, 1996. The increase in local service revenues was primarily due to a 2.4% increase in access lines and increases in penetration of enhanced services, such as caller ID and call forwarding. Access revenues declined $0.4 million for the year ended December 31, 1997 due to lower intrastate access revenues. Other revenues increased 3.4% to $30.2 million for the year ended December 31, 1997 as compared to $29.2 million for the year ended December 31, 1996, principally as a result of the commencement of unbundled network element interconnection, resulting in the sale by ATU of unbundled network elements to a competitor, and directory advertising revenues.
Cellular revenues increased 29.3% to $21.8 million for the year ended December 31, 1997 as compared to $16.9 million for the year ended December 31, 1996. The increase was principally attributable to a 26.3% increase in the number of subscribers, from 37,651 at December 31, 1996 to 47,538 at December 31, 1997 (excluding the Alaska RSA #1 B-Side cellular property which was acquired on January 1, 1998).
Long distance revenues increased to $1.5 million for the year ended December 31, 1997 as compared to $2,000 for the year ended December 31, 1996. The increase was attributable to the commencement of the long distance business in the fall of 1996.
Cost of sales and operating expenses--telephone decreased 1.3% to $75.0 million for the year ended December 31, 1997 as compared to $76.0 million for the year ended December 31, 1996. The decrease is primarily attributable to lower labor expense from a reduction in the number of employees and lower expenses from regulatory consulting services.
Cost of sales and operating expenses--cellular increased 16.8% to $14.5 million for the year ended December 31, 1997 as compared to $12.4 million for the year ended December 31, 1996. The increase is attributable to increases in the number of employees to support growth in the customer base and increased advertising expenses.
Cost of sales and operating expenses--long distance increased $4.1 million to $4.6 million for the year ended December 31, 1997 as compared to $0.5 million for the year ended December 31, 1996. The increase was due to start-up expenses associated with commencing long distance operations, including higher switching, facilities lease and access expenses to support the larger base of customers.
Depreciation expense increased 30.9% to $26.8 million for the year ended December 31, 1997 as compared to $20.5 million for the year ended December 31, 1996. The higher depreciation expense was attributable to higher telephone plant in service, as well as higher depreciation rates authorized by the APUC that became effective January 1, 1997.
Interest expense, net remained relatively unchanged. Higher interest expense from higher outstanding long-term debt balances was offset by higher interest income associated with higher cash balances.
Other income (expense) includes minority investment earnings of $0.2 million for the year ended December 31, 1997, and other expense of $0.3 million for the year ended December 31, 1997 as compared to other expense of $0.2 million for the year ended December 31, 1996.
As a result of the factors described above, net income decreased $1.8 million to $12.1 million for the year ended December 31, 1997 as compared to $13.9 million for the year ended December 31, 1996. Because ATU was a public utility of the Municipality of Anchorage, it was exempt from federal and state income taxes.
As a result of the factors described above, Defined EBITDA increased $4.4 million to $45.6 million for the year ended December 31, 1997 as compared to $41.2 million for the year ended December 31, 1996. In particular, our customer base grew in local, cellular and long distance services. Because earnings and losses from equity investments do not directly affect the operating cash
YEAR 2000
Some of our older computer programs identify years with two digits instead of four. This may cause problems because these programs may recognize the year 2000 as the year 1900. These problems could result in a system failure or miscalculations disrupting operations, including a temporary inability to process transactions, send invoices or engage in similar, normal business activities. In addition, we face the risk that suppliers of products, services and systems purchased by us do not have business systems or products that comply with the year 2000 requirements.
While we believe that the conversions or installations of replacement systems will proceed smoothly, we cannot assure you that there will not be interruptions or failures in our systems or in the systems of our suppliers. The telecommunications industry is highly susceptible to the year 2000 issue. Should the year 2000 issue cause problems across our infrastructure, service could be interrupted. These events, if they occur, could materially adversely affect our financial condition and results of operations.
In order to understand our vulnerability to the year 2000 issue, we conducted a complete systems assessment of our year 2000 compliance during the process of evaluating the acquisitions of Century's Alaska properties and ATU. Many of our systems have been represented by the respective vendors of these systems to be year 2000 compliant and both Century's Alaska properties and ATU have initiatives in progress that we believe will address all outstanding year 2000 issues.
As of January 1, 1999, ATU completed its installation of an integrated financial and accounting system. On March 12, 1999, ATU completed its installation of Saville, a state-of-the-art customer care and billing system. MACtel and ATU Long Distance will continue to operate their existing financial management and billing systems. For carrier access billing, ATU will transition to Century's Alaska properties' existing systems. Each of the foregoing systems has been represented by the vendor to be year 2000 compliant.
We have recently converted Century's Alaska properties customer care and billing systems to ATU's Saville platform. Century's Alaska properties recently completed their installation of Platinum, an integrated financial and accounting application. Facilities management and repair support systems for Century's Alaska properties are scheduled to be transitioned in October 1999 to ATU platforms, which have been represented by the vendors as year 2000 compliant.
Since January 1, 1997, ATU has spent approximately $22.8 million to upgrade and maintain its information technology systems. While each of these upgrades related to systems that, based on representations by the vendors, we believe are year 2000 compliant, the expenditures for upgrading these systems also included costs of replacing otherwise obsolete systems. We expect to spend an additional $4.3 million to make our information technology systems year 2000 compliant by the end of October 1999.
Century's Alaska properties' cellular systems are supported by Novatel and Northern Telecom switching and cell site equipment. The Novatel switches, which serve southeast Alaska, are not currently year 2000 compliant, but these systems are in the process of being replaced by year 2000 compliant systems, with completion expected by October 1999 at a cost of approximately $4.0 million.
Given the progress made to date, we do not anticipate delays in finalizing and implementing year 2000 readiness solutions by the end of October 1999. We cannot accurately estimate the uncertainty of completing our year 2000 readiness plan, particularly as it relates to any failure by third parties that have material relationships with us and fail to achieve their own year 2000 readiness. We have in the
We believe that the following several situations make up our most reasonably likely worst case scenario:
FAILURE OF ELECTRICAL POWER SUPPLIES. Although most of our major switching and information systems have emergency standby power supplies, in the event of long-term power disruption we may be required to shut down our switching and computer equipment. We believe the larger electrical utilities that provide service to us are pursuing year 2000 readiness strategies. However, electric utilities serving smaller rural communities may be particularly exposed to year 2000 readiness issues.
DISRUPTION OF SWITCHING AND INFORMATION TECHNOLOGY INFRASTRUCTURE. The most significant risks related to our switching and information technology systems are
- the inability of our customers to make and receive calls,
- the inability of our cell sites, switching centers and other interfaces to process and record call details of local telephone, long distance and cellular traffic accurately and
- the inability of our billing systems to report and bill customers for phone usage accurately.
We believe that we have adequately addressed each of these risks in our year 2000 readiness plan.
INABILITY OF LARGE CUSTOMERS TO PAY INVOICES. Our largest customers are interexchange carriers that are both customers and competitors in some of our markets. If interexchange carriers experience year 2000 readiness problems, we may experience delays in collection of outstanding receivables and a decrease in the cash available to fulfill our obligations.
We are developing contingency plans for potential year 2000 disruptions. We are closely monitoring our year 2000 readiness plan and have developed preliminary contingency plans for the most critical aspects of our year 2000 readiness plan. Details of these plans will be further developed and will depend on our final assessment of the relevant situation and potential alternative strategies.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from the sale of stock, debt financing and operations. The six months ended June 30, 1999 include operations from acquired telephone operations for the period from May 15, 1999 to June 30, 1999. On this basis, our cash flows from operating activities were approximately $13.0 million, primarily as a result of a decrease in accounts receivable and the add-back of depreciation as a non-cash component of the net loss. Significant cashflows from the issuance of debt and stock were used for the acquisitions of Century's Alaska properties and ATU and, to a lesser extent, for capital expenditures. At June 30, 1999, we had approximately $6.0 million in working capital, including approximately $4.0 million in cash and cash equivalents.
We currently have commitments for capital expenditures totaling approximately $30 million and anticipate spending approximately $60 million, including the $30 million already committed, during the next 12 months. We expect a significant portion of this spending to be directed at expanding and upgrading our telecommunications infrastructure and computer systems.
We believe that internally generated cash flows will be adequate to satisfy our capital requirements for the next twelve months. Incremental borrowings on our line of credit are available should any shortfalls occur due to the timing of inflows and outflows.
Management believes additional debt availability and internally generated cash flow from operations will be adequate to meet our anticipated capital and liquidity requirements. Other than debt service, our future liquidity demands relate to capital expenditures and working capital.
The local telephone business is a regulated business that requires the timely maintenance of plant and infrastructure. Our local network is of high quality and is technically advanced and will have relatively predictable annual capital needs. Our historical capital expenditures have been significant. The construction and geographic expansion of our cellular network required a substantial amount of capital. We are in the process of completing a digital upgrade of our cellular network and expect to finish this upgrade during the last six months of 1999, spending approximately $7.0 million. The implementation of our long distance strategy is capital intensive. We recently purchased fiber capacity for $19.5 million. This purchase will enable us to use our own leased facilities in developing our business. If we successfully implement our long distance strategy and grow our long distance business, we will be required to make substantial purchases of additional fiber capacity. In addition to the purchase of fiber capacity, we anticipate total capital expenditures in 1999 of approximately $58.0 million, of which approximately $48.0 million will be for our local exchange business and approximately $10.0 million will be for our cellular business. We do not expect our capital expenditure requirements to increase materially in the foreseeable future for our local exchange or cellular businesses.
Our capital requirements may change, however, due to, among other things:
- the availability of additional fiber capacity,
- our decision to pursue specific acquisition opportunities,
- changes in technology, or
- the effects of competition.
Any of these changes could require additional financing that might not be available or, if available, might not be on terms favorable to us. Our ability to satisfy our capital requirements will be dependent upon our future financial performance, which is, in turn, subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
EFFECT OF NEW ACCOUNTING STANDARDS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. SFAS No. 133 establishes standards for the recognition and measurement of derivatives and hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. We are currently analyzing the impact SFAS No. 133 will have on our financial statements.
RECENT DEVELOPMENTS
On July 6, 1999, we issued 1,624,907 shares of our common stock to Cook Inlet Region, Inc. for $10 million in cash, all of which was subsequently contributed to Alaska Communications Systems Holdings as additional equity capital. In connection with Cook Inlet's investment, it became a party to our stockholders' agreement described under the caption "Ownership of Capital Stock--Stockholders' Agreement."
OUTLOOK
We expect the current demand for telecommunications services in Alaska to continue to grow, particularly as data-related usage leads to increased access line demand and industry-wide demand for wireless services increases. We believe that we will be able to capitalize on this demand through our diverse service offerings and a focused sales and marketing approach.
There are currently a number of regulatory proceedings underway at the federal and state levels that could have a significant impact on our operations. The APUC held hearings the week of June 21, 1999 and on June 30, 1999 issued orders revoking the rural exemptions applicable to Century's Alaska rural local exchange operating companies. We have sought reconsideration of the APUC rulings by the RCA, and we may also consider seeking judicial review of the APUC rulings. On September 1, 1999, we filed a petition with the RCA seeking suspension or modification of interconnection duties and other market structure reforms for Century's Alaska local exchange carriers in selected markets. We also requested the removal or reduction of regulatory limitations on these local exchange carriers. If reconsideration or appeal of the APUC's orders or suspension or modification of interconnection duties is unsuccessful, or if market structure reforms are not implemented or if they are implemented in a manner that is unfavorable to us, then we may be unable to provide local telephone service on a profitable basis to all our service areas. See "Regulation."
We believe there are numerous potential facilities-based competitors for each of our services in our service areas. During the last session, a bill was proposed in the Alaska state senate to open to competition many local telephone markets in which we operate. Specifically, the bill proposed to allow competitors to provide local telephone service in local telephone markets throughout Alaska that have at least 5,000 access lines, effectively depriving incumbent local exchange carriers in those markets of their rural exemptions. Competition resulting from this bill, if it had been enacted into law, could have materially adversely affected our profitability. We cannot predict at this time whether or to what extent proposals included in the bill will be offered again and enacted into law. However, with the exception of Anchorage, we do not expect facilities-based competition for our services to begin in the near future, either because of regulatory restrictions pertaining to negotiation or arbitration or because of the significant capital investment that would be required to initiate facilities-based competition. We believe that our existing competitors in Anchorage will continue to market their services aggressively and that we may be forced to react to special promotions or discounts in order to retain our customer base. If that is required, it may materially adversely affect our profitability.
The telecommunications industry is subject to continuous technological change. We expect that new technological developments in the future will generally serve to enhance our ability to provide service to our customers. However, these developments may also increase competition or require us to make significant capital investments to maintain our leadership position in Alaska.
OVERVIEW
In recent years, the telecommunications industry has undergone rapid change due to deregulation, construction of additional infrastructure and introduction of new technologies, all of which have resulted in increased competition and demand for telecommunications services. The Alaskan telecommunications industry is influenced by many of these factors, though Alaska's unique characteristics further enhance the need for telecommunications services. Alaska has widely dispersed population centers across a large geographic area and under-developed ground transportation infrastructure. As a result, Alaskan residents are particularly dependent on telecommunications to access resources and information.
Alaskan telecommunications operators use a variety of technologies, including traditional copper wire, fiber optic cable, digital microwave and satellite-based communications (particularly in remote communities) to provide telecommunications services, including local telephone, wireless, long distance services and internet access. Management estimates the telecommunications market in Alaska generated revenues of approximately $810 million in 1997, of which approximately $300 million was attributable to local telephone, $60 million to wireless, $430 million to long distance and $20 million to internet.
LOCAL TELEPHONE OVERVIEW
The U.S. local telephone industry is subject to significant regulation from both the FCC and state authorities. The U.S. local telephone industry is composed of a few large, well-known companies, including the regional Bell operating companies and GTE Corporation, and numerous small, independent telephone companies. Large incumbent local exchange carriers generate the vast majority of the estimated $100 billion in annual local exchange revenues and own a majority of the access lines. A majority of the small, independent telephone companies operate in sparsely populated rural areas with limited competition due to the unfavorable economics of constructing and operating a competing network in those areas.
Local telephone services traditionally offered by local telephone companies include:
- basic local service to customers within a local exchange carrier's service area,
- network access services to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls,
- enhanced services, such as call waiting, call forwarding, caller ID and voice mail and
- other services, such as billing and collection, directory publishing, directory assistance and Centrex, a switch-based service offering for business customers.
Rural local exchange carriers typically receive the majority of their revenues from access charges, as opposed to the regional Bell operating companies, which receive a greater share of revenues from basic local services.
The characteristics of a rural local exchange carrier's service areas result in higher costs for the local exchange carrier because of the additional costs of providing the infrastructure to rural customers and the lack of economies of scale available in more densely populated areas. To ensure that affordable universal telephone service is available in remote areas, rural local exchange carriers typically benefit from various support mechanisms. The largest support mechanism for rural local exchange carriers are universal service payments. See "Regulation."
The population of Alaska was approximately 614,020 at June 30, 1998, having grown at a compound annual rate of approximately 1.3% over the past ten years. While the majority of the population is concentrated in the city of Anchorage and surrounding areas, population growth in recent years has been broadly distributed throughout the state. The U.S. Census Bureau projects that through 2005 the population of Alaska will grow at a compound annual rate of 1.9%, as compared to a 0.8% compound annual rate projected for the U.S. as a whole.
Alaska has the highest median household income in the U.S. According to the U.S. Census Bureau, Alaska's average median household income during the period from 1995 to 1997 was $50,829, approximately 40% greater than the overall U.S. median household income. In addition, Alaskans benefit from the absence of state personal income taxes.
Alaska's economic activity centers around three urban areas: Anchorage, Juneau, and Fairbanks. Historically, the state's economy has depended significantly on natural resource industries in general and the petroleum industry in particular. In 1996, the most recent year for which the gross state product was calculated, the petroleum industry represented approximately 36.3% of the $25.9 billion gross state product. In 1998 most of the employment growth in Alaska was attributable to the services sector, and in particular, health care, hotels and social services.
OUR COMPANY
We are the leading diversified, full-service telecommunications provider in Alaska offering local telephone, wireless, long distance and internet services to business and residential customers throughout the state. We have over $875 million invested in our network, a state-of-the-art telecommunications infrastructure that includes over 485 miles of fiber optic cable and 176 switching facilities.
LOCAL TELEPHONE. With over 300,000 access lines, we are the 16th largest local exchange carrier in the U.S. and the leading local exchange carrier in Alaska. We provide service to 75% of the Alaskan population and to all of the state's major population centers, including Anchorage, Juneau and Fairbanks. There are no regional Bell operating companies in Alaska.
WIRELESS. We are the largest and only statewide provider of wireless services in Alaska, currently serving over 66,000 subscribers. Our service areas cover all major population centers and highway corridors.
LONG DISTANCE AND INTERNET. We provide long distance services to approximately 26,000 customers, primarily in Anchorage, and internet access services to approximately 16,000 customers throughout the state.
Century's Alaska properties and ATU have achieved strong operating results through stable internal growth and strategic acquisitions. For the year ended December 31, 1998, we would have had consolidated pro forma revenues of $282 million, operating income of $41 million, a net loss of $19 million and EBITDA of $102 million.
We believe that the outlook for continued growth in our local telephone business is favorable due to the fundamentals of the local exchange business, including:
- continued demand for core telephone services and enhanced service offerings, such as voice mail and call waiting,
- access line growth due to higher consumer bandwidth needs for internet, data and video usage and
- improving regulatory environments.
We also intend to leverage our strength in our core local telephone business to grow our wireless, long distance and internet businesses.
COMPANY BACKGROUND
We were formed in 1998 by Fox Paine & Company and members of management to acquire Century's Alaska properties and ATU.
CENTURY'S ALASKA PROPERTIES. Century's Alaska properties are the incumbent provider of local telephone services to over 131,000 access lines in Juneau, Fairbanks and more than 70 rural communities in Alaska. Century's Alaska properties also provide cellular service to approximately 3,000 subscribers, primarily in Juneau, and owns 10 megahertz personal communications services, or PCS, licenses covering Anchorage, Juneau and Fairbanks. In addition, Century's Alaska properties provide internet services to approximately 16,000 customers statewide.
ATU. ATU is the largest local exchange carrier in Alaska and is the incumbent provider of local telephone services to over 168,000 access lines, primarily in Anchorage. ATU also provides cellular service to over 63,000 subscribers primarily in Anchorage and Fairbanks under the MACtel brand name. MACtel is the leading cellular provider in Alaska and has achieved a penetration rate of
STRATEGY
The principal elements of our business strategy include:
CAPITALIZE ON GROWTH OPPORTUNITIES. We intend to capitalize on growth opportunities by expanding our offerings of enhanced services, wireless services, long distance services, data services and internet access services and by marketing these services under a common branding strategy. We believe that our statewide presence and history of providing quality service will allow us to achieve greater brand awareness and service penetration than our competitors.
- ACCESS LINE GROWTH. We intend to focus our sales and marketing efforts to capitalize on continued growth in access line demand. We also intend to stimulate additional demand for access lines through the provision of advanced high-speed data services, such as digital subscriber lines and integrated services digital networks in our major markets.
- ENHANCED SERVICES. We intend to market enhanced services, such as call waiting, caller ID and voice mail. Customer penetration of enhanced services (the number of enhanced services divided by the number of access lines) in our service areas is approximately 82%, while other local exchange carriers in the U.S. have achieved penetration levels of 100% to 120%, on average. Increasing penetration rates will improve revenue per customer that, due to the fixed cost nature of the local exchange business, are expected to result in increasing EBITDA.
- WIRELESS SERVICES. As the only statewide cellular service provider in Alaska, we believe our cellular operations represent a significant growth opportunity. Our cellular operations currently penetrate only 8% of the population in our Fairbanks and southeast Alaska service areas, compared with MACtel's 18% penetration rate in Anchorage. We also plan to complete the digital conversion of our entire cellular network by the end of 1999. After this conversion, we will be able to offer our customers enhanced digital cellular services and features. We believe that the market for wireless services will continue to grow with the growth in the wireless industry as a whole.
- LONG DISTANCE SERVICES. As the incumbent local exchange carrier in our service areas, we are well positioned to offer long distance services to our existing customers. Management intends to leverage the long distance experience it gained while operating the largest long distance provider in Alaska, to improve the long distance operations at ATU and to expand ATU's long distance business in the service areas of Century's Alaska properties. In connection with the settlement of a number of outstanding disputes we recently purchased fiber capacity between Alaska's major population centers and between Alaska and the contiguous 48 states of the U.S. This capacity will allow us both to improve the quality of our service offerings and realize future operating cost efficiencies.
IMPROVE OPERATING EFFICIENCIES. We intend to use our operating, regulatory, marketing and management expertise to improve operations and profitability. There are several redundancies between the operations of Century's Alaska properties and those of ATU. These redundancies include material management, purchasing, network planning/engineering and customer care centers that we intend to consolidate to enhance operating efficiencies. We also intend to support the general and administrative requirements of Century's Alaska properties and ATU on a common basis.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS. We will pursue selective regional acquisitions in Alaska and the western U.S. as opportunities arise, subject to regulatory approval. During the last five years, the regional Bell operating companies and GTE Corporation have made significant divestitures and
PRODUCTS, SERVICES AND REVENUE SOURCES
We offer a broad portfolio of telecommunications services to residential and business customers in our markets. Our service offerings are locally managed to better serve the needs of each community. We believe that, as the communications marketplace continues to converge, the ability to offer an integrated package of communications products will provide a distinct competitive advantage, as well as increase customer loyalty, thereby decreasing customer turnover. We intend to complement our local telephone services by actively marketing our wireless, long distance and internet service offerings.
The following table sets forth the components of our revenues on a pro forma basis for the year ended December 31, 1998:
REVENUE SOURCE PERCENT
------------------------------------------------------------------------------------ AMOUNT -----------
-------------------
(DOLLARS IN
MILLIONS)
Local telephone services
Basic local service............................................................... $ 78.6 27.9%
Enhanced services................................................................. 9.5 3.4
Network access...................................................................... 85.6 30.4
Cellular............................................................................ 31.8 11.3
Long distance....................................................................... 6.8 2.4
Universal service................................................................... 13.5 4.8
Other............................................................................... 55.8 19.8
------ ---
Total........................................................................... $ 281.6 100%
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BASIC LOCAL SERVICE. Basic local service enables customers to originate and receive telephone calls within a defined "exchange" area. We provide basic local services to residential and business customers, generally for a fixed monthly charge. The maximum amount that we can charge a customer for basic local services is determined by rate proceedings involving the appropriate state regulatory authorities. We charge business customers higher rates to recover a portion of the costs of providing local service to residential customers. On average, U.S. business rates for basic local services have been over two times the rates of residential customers. Basic local service also includes non-recurring charges to customers for the installation of new products and services.
At December 31, 1998, approximately 60% of our retail access lines served residential customers, while 40% served business customers. Currently, our monthly charges for basic local service for residential customers range from $9.42 to $16.30 in the service areas of Century's Alaska properties and are $9.70 in ATU's service area, as compared to the national average of $15.99. Monthly charges for business customers range from $17.65 to $26.05 in the service areas of Century's Alaska properties and are $25.75 in ATU's service areas, as compared to the national average of $34.55.
AS OF DECEMBER 31,
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1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
Access lines
Century's Alaska properties ..................... 73,563 77,660 82,969 124,869 131,858
ATU.............................................. 144,869 147,934 154,752 158,486 168,536
% Growth
Century's Alaska properties ..................... -- 5.6% 6.8% 50.5% 5.6%
ATU.............................................. -- 2.1% 4.6% 2.4% 6.3%
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Future growth in access lines is expected to be derived from:
- increases in line demand from data-related usage by existing business customers,
- increased additional line demand from internet usage by residential customers and
- population growth in our service areas.
ENHANCED SERVICES. Enhanced services consist of services such as call waiting, call forwarding, call return, continuous redial, caller ID and voice mail. These services are generally billed on a monthly basis together with the customers' bill for basic local services. Customer penetration of enhanced services, or the number of enhanced services divided by the number of access lines, in our service areas is currently 82%, while other rural local exchange carriers in the U.S. have achieved penetration levels of 100% to 120%, on average.
Network access services include long distance, or toll, calls that typically involve more than one company in the provision of telephone service. We bill access charges to each interexchange carrier for the use of our facilities to access the customer, as described below. Since toll calls are generally billed to the customer originating the call, a mechanism is required to compensate each company providing services relating to the call. Rural local exchange carriers typically are allowed to charge higher access rates to interexchange carriers than urban local exchange carriers as an implicit means of recovering a portion of the costs of providing telephone service to rural service areas.
INTRASTATE ACCESS CHARGES. We generate intrastate access revenue when an intrastate long distance call which involves an interexchange carrier is originated by a customer within the same state but in another local calling area. The interexchange carrier pays us an intrastate access payment for either terminating or originating the call. We record the details of the call through our carrier access billing system and receive the access payment from the interexchange carrier. When one of our customers originates the call, we typically provide billing and collection for the interexchange carrier through a billing and collection agreement. The access charge for our intrastate service is regulated and approved by the RCA.
INTERSTATE ACCESS CHARGES. We generate interstate access revenue when an interstate long distance call is originated by a customer calling from a local calling area in one state to a local calling area in another state. We bill interstate access charges in the same manner as we bill intrastate access charges; however, the interstate access charge is regulated and approved by the FCC rather than by the RCA.
Our cellular businesses currently are managed separately from our local exchange carrier business and are subject to a different regulatory framework and cost structure. Management intends to integrate the cellular operations of Century's Alaska properties with those of MACtel. The primary sources of wireless revenue include subscriber access charges, airtime usage, toll charges, connection fees, roaming revenues, as well as enhanced features, such as voice mail. A subscriber may purchase services separately or may purchase rate plans that package these services in different ways to fit different calling patterns. We currently provide digital service in Anchorage and Fairbanks and expect to be fully digital in our other service areas by the end of 1999. Upon conversion to digital service, we will be able to offer advanced digital services and features, such as text messaging.
As illustrated in the table below, both Century's Alaska properties and MACtel have experienced growth in the number of cellular subscribers served and the total population over the past five years:
AS OF DECEMBER 31,
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1994 1995 1996 1997 1998(A)
--------- --------- --------- --------- ---------
Total populations
Century's Alaska properties ............................. 53,484 54,286 55,101 55,927 56,766
MACtel................................................... 289,813 294,160 298,573 397,434 403,396
Ending subscribers
Century's Alaska properties ............................. 1,194 1,300 1,678 2,096 2,945
MACtel................................................... 13,684 24,855 37,651 53,035 63,627
Ending penetration
Century's Alaska properties ............................. 2.2% 2.4% 3.1% 3.7% 5.2%
MACtel................................................... 4.7% 8.4% 12.6% 13.3% 15.8%
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(a) MACtel acquired the Alaska RSA #1 B-Side cellular property from PTI Alaska on January 5, 1998, which covered a population of 94,383 and had 5,497 subscribers on the date of acquisition. The chart includes the RSA #1 B-Side cellular property for MACtel as of December 31, 1997. The RSA #1 B-Side cellular property has been excluded from the data for PTI Alaska presented in the table.
Although MACtel has achieved cellular penetration rates of 18% and 19% in Anchorage and Kenai, respectively, penetration rates in our other service areas are significantly lower. Management believes there are opportunities to improve the penetration rates of our cellular operations in Fairbanks and Juneau. Management also believes that the market for wireless services will continue to grow with the growth in the wireless industry as a whole.
We also own 10 megahertz E Block PCS licenses covering Anchorage, Juneau and Fairbanks, which were purchased by Century's Alaska properties in 1997. We have not built out these licenses and do not plan to do so in the near future. Management is analyzing technical alternatives for using this spectrum to enhance our service offerings in our overall business.
We began offering long distance services on a resale basis in October 1997, primarily in Anchorage. We currently have approximately 26,000 long distance customers and less than a 2.5% market share, based on revenues. We intend to expand our long distance operations into the service areas of Century's Alaska properties during 1999. Before August 1998, Century's Alaska properties were precluded from entering the long distance business by a non-competition agreement with AT&T Alascom, Inc. which was signed when Pacific Telecom sold Alascom, Inc. to AT&T in 1995. To date, our long distance operations have generated operating losses.
Recently, we and GCI, Inc. entered into a settlement agreement under which we agreed to enter into a number of new business arrangements and to settle a number of outstanding disputes, including
We are subject to numerous conditions imposed by the RCA and, to a lesser degree, by the FCC on the manner in which we conduct our long distance operations. The restrictions are intended to prohibit cross-subsidization from the regulated local exchange carrier to the unregulated long distance affiliate and discrimination against other long distance providers in favor of a local exchange carrier's long distance affiliate. Specifically, our long distance affiliates are
- required to hold all books and records, management, employees and administrative services separate, except that services may be provided among affiliates through arms-length affiliated interest agreements;
- prohibited from jointly marketing or bundling local and long distance services until competition develops in the local market and
- prevented from joint ownership of telephone transmission or switching facilities with the local exchange carrier and from using the local exchange carrier's assets as collateral for its own indebtedness.
As a result of the introduction of competition in ATU's local service areas, the APUC lifted the restriction on bundling on local and long distance services in ATU's service areas in 1998.
Universal Service revenue supplements the amount of local service revenue we receive to ensure that basic local service rates for customers in high cost rural areas are not significantly higher than rates charged in lower cost urban and suburban areas. The federal Universal Service Fund is funded by monthly customer fees charged to interexchange carriers, local exchange carriers and other telecommunications providers and distributed to us on a monthly basis based upon our costs for providing local service. See "Regulation."
We seek to capitalize on our local presence and network infrastructure by offering additional services to customers, such as directory services and billing and collection services for interexchange carriers.
We provide internet access services to approximately 16,000 customers under the PTINet( SM) brand name. For the year ended December 31, 1998, Century's Alaska properties generated $5.1 million in internet access revenues. In order to offer internet access, we provide local dial-up telephone numbers for our customers. These local dial-up numbers allow customers access, through a modem connection on their computer, to a series of computer servers we own and maintain. These servers allow customers to access their e-mail accounts and to be routed to local access points that connect customers to the internet. We charge customers either a flat rate for unlimited internet usage or a usage-sensitive rate, which, in either case, is billed in conjunction with the local telephone bill. Internet revenues are recorded, net of expenses, in our income statement under "Other income (expense)."
NETWORK FACILITIES
As of December 31, 1998, we owned 74 exchanges serving over 300,000 access lines. All of our exchanges are served by digital switches, provided predominately by Northern Telecom. Our switches are linked through a combination of extensive aerial, underground and buried cable, including 485 miles of fiber optic cable, as well as digital microwave and satellite links. We have 100% single-party services (one customer per access line), and believe all switches have the latest generic software upgrades available, allowing for the full range of enhanced customer features.
We have integrated numerous network elements to offer a variety of services and applications that meet the increasingly sophisticated needs of customers. These elements include Signal System 7 signaling networks, voice messaging platforms, digital switching and, in some communities, integrated service digital network access. As the telecommunications industry experiences significant changes in technology, customer demand and competitive pressures, we intend to introduce additional enhancements, such as information delivery that improves the delivery speeds of data, video and voice traffic, known as ATM, and the efficient switching of variable-length data packets, known as Frame Relay.
Network operations and monitoring will be provided for Century's Alaska properties and ATU by ATU's network operating control center located in Anchorage. The network operating control center has technicians staffed or on-call seven days a week, 24 hours a day. Automated alarm systems are in place should problems arise with the network after normal business hours. In addition, we have the right to use Century's network operating control center until August 31, 1999 under a transition services agreement. We also have customer care facilities in Anchorage and Fairbanks with extensive business hours to efficiently handle customer inquiries and orders for service.
Our cellular operations consist of eight switching centers and 77 cell sites covering all major population centers and highway corridors in Alaska. We plan to complete the conversion of all of our switching and cell site equipment to digital service by the end of 1999. Our switching and cell site infrastructure is linked by digital microwave and fiber. MACtel also has a network operating control center and customer care center, located in Anchorage.
COMPETITION
Incumbent local exchange carriers may be subject to any of three types of competition:
- facilities-based competition from providers with their own local service network;
- competition from unbundled network element interconnection--i.e., providers who lease unbundled network elements from the incumbent local exchange carrier.
The geographic characteristics of rural areas make the entrance of most facilities-based competitors uneconomical because of the significant capital investment required and the limited market size. Thus, competition is likely to come from resale interconnection or unbundled network element interconnection.
In September 1997, GCI and AT&T Alascom, two long distance carriers in Alaska, began providing competitive local telephone services in Anchorage. GCI competes principally through unbundled network element interconnection with ATU's facilities, while AT&T Alascom competes exclusively by reselling ATU's services. Competition is based upon price and pricing plans, types of services offered, customer service, billing services, quality and reliability. GCI has focused principally on advertising discount plans for bundled services. AT&T Alascom's strategy has been to sell ATU's service as part of a package of local and long distance services. As a result, ATU lost approximately 19% of its retail access lines in Anchorage to these competitors during the first ten months of competition, approximately 61% of which resulted from unbundled network element interconnection by GCI. The majority of this loss was among price-sensitive residential customers who have lower average monthly bills than ATU's business customers. Since June 1998, the rate of this loss has slowed. We expect GCI and AT&T Alascom to continue to compete for local telephone business.
As "rural telephone companies" under the Telecommunications Act, Century's Alaska local telephone operating subsidiaries had been granted rural exemptions from the obligation to lease their facilities to competitive local exchange carrier seeking to interconnect with our network. Thus, we do not currently face competition for local telephone services in the service areas of Century's Alaska properties, although Century's Alaska properties voluntarily offered competitors the opportunity to begin resale service at wholesale rates in 1997.
Despite these rural exemptions, in the fall of 1997, Century's Alaska properties received a request from GCI for unbundled network element interconnection. Following failed negotiations between Century's Alaska properties and GCI, the APUC conducted a hearing in which it affirmed Century's Alaska properties' rural exemptions. This ruling was appealed and was remanded to the APUC for further proceedings. The APUC terminated the rural exemptions on June 30, 1999 and ordered the start of a nine-month cycle of negotiation or arbitration as provided for in the Telecommunications Act. We expect that we may eventually be required to allow unbundled network element interconnection in some of the service areas of Century's Alaska properties but believes that our services offerings and customer relationships and management's expertise in the local telephone business will provide us a competitive advantage over new local exchange carriers. In addition, we believe that the lifting of the rural exemptions provides the RCA the opportunity to implement market structure reforms that would mitigate the financial impact caused by competition, although we cannot assure you that the RCA will take any actions that would so benefit us.
We expect increasing competition from providers of various services that provide users the means to bypass its network. Long distance companies may construct, modify or lease facilities to transmit traffic directly from a user to a long distance company. Cable television companies, in particular, may be able to modify their networks to partially or completely bypass our local network.
In addition, while cellular telephone services have historically complemented traditional local exchange services, we anticipate that existing and emerging wireless technologies may increasingly compete with local exchange carrier services. Technological developments in cellular telephone features,
The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of improvements in the capacity and quality of digital technology, shorter cycles for new products and enhancements and changes in consumer preferences and expectations. We believe that the demand for wireless telecommunications services is likely to increase significantly as equipment costs and service rates continue to decline and equipment becomes more convenient and functional. We currently compete with one other cellular provider in each of its wireless service areas, including AT&T Wireless Services, Century and Mercury Communications. Competition is based on price, quality and network coverage. In addition, there are six PCS licensees in each of our wireless service areas. We hold licenses covering Anchorage, Fairbanks and Juneau. One of the PCS licensees began providing digital PCS service in Anchorage in October 1998. Another PCS licensee has recently indicated it will commence trials of its technology. We believe that the unique and vast terrain and the high cost of PCS system build-out makes entrance into markets outside Anchorage unlikely.
The long distance telecommunications market is highly competitive. Competition in the long distance business is based on price, customer service, billing services and quality. We currently offer long distance in ATU's service areas, and intend, subject to regulatory restrictions, to expand ATU's long distance operations into the service areas of Century's Alaska properties. AT&T Alascom and GCI are currently the two major long distance providers in Alaska, including in our service areas.
Our long distance operations are subject to regulatory restrictions.
The market for internet access services is highly competitive. There are few significant barriers to entry, and we expect that competition will intensify in the future. We currently compete with a number of established on line services companies, interexchange carriers and cable companies. We believe that our ability to compete successfully will depend upon a number of factors, including the reliability and security of our network infrastructure, the ease of access to the internet and the pricing policies of our competitors.
CUSTOMERS
We have two basic types of customers for our local services:
- business and residential customers located in their local service areas that pay for local phone service and
- interexchange carriers that pay us for access to long distance calling customers located within our local service areas.
In general, the majority of our local customers are residential, rather than business, customers, as is typical for rural telephone companies. In addition, no single local customer of ours represented more than 5% of our total 1998 pro forma revenue, excluding access customers.
SALES AND MARKETING
Century's Alaska properties and ATU have historically conducted their sales and marketing operations for each of their respective products on a stand-alone basis. At Century's Alaska properties,
Our sales and marketing strategy, subject to regulatory restrictions, is to:
- market aggressively current and future service offerings, including packaged service offerings,
- centralize sales and marketing functions and
- enhance direct sales efforts.
We also believe that we can leverage our position as an integrated provider of multiple telecommunications services with attractive positions in local access and cellular services. By pursuing a marketing strategy that takes advantage of these characteristics, we believe we can increase penetration of new product offerings, maintain customer retention rates, increase our share of our customers' overall telecommunications expenditures and achieve continued revenue and operating cash flow growth.
While Century's Alaska properties and ATU have, to a limited extent, packaged local telephone services into attractively-priced service offerings and packaged these local telephone services with wireless, long distance and internet services, neither Century's Alaska properties nor ATU has focused on these types of offerings. Packaged offerings allow customers to enjoy pricing for a number of services at a substantial discount to A LA CARTE pricing of individual services. Subject to regulatory limitations, we intend to expand this strategy, which we expect will increase the average revenue per customer and result in a more loyal and satisfied customer base.
We intend to establish a sales and marketing division where marketing strategies will be centralized and sales functions will be based locally. To enhance our direct selling efforts, we intend to establish additional customer and retail service centers in its larger service areas, such as Juneau and Kenai/ Soldotna, and to enhance call center operations through a combination of technology investments and training and incentive compensation programs for call center employees. In addition, we intend to begin marketing Century's Alaska properties' cellular operations under the MACtel brand name. We will continue to review our branding strategy and believe that further rationalization of our brand names may be appropriate.
SUPPLIERS
We believe we have strong, long-term relationships with our numerous communications vendors. Our primary switching vendor is Northern Telecom, a leading provider of advanced switching systems to rural service providers. While we recognize that the separation of Century's Alaska properties from the rest of Century's properties might result in higher unit costs for Century's Alaska properties, we expect that the combination of Century's Alaska properties and ATU and the presence of vendor competition will deter any significant unit increases and may result in unit cost reductions in the longer term. We also enjoy positive relationships with a variety of vendors for outside plant facilities and other elements of our network.
EMPLOYEES
We consider employee relations to be good. As of June 18, 1999, we employed a total of 1,107 full-time employees, 750 of whom were represented by unions. In addition, we employ approximately 32 part-time employees in various support positions throughout the organization.
MINORITY INTERESTS
We own minority interests in the entities described below:
- a 47% equity interest in Alaska Network Systems, Inc., which provides wholesale intrastate and interstate long distance services;
- a 30% share of Internet Alaska, which serves approximately 30,000 customers, primarily in Anchorage and Fairbanks; and
- a 33% interest in Alaskan Choice Television, a wireless cable television provider whose business plan requires significant additional capital. While we are not obligated to make an additional investment in Alaskan Choice Television, we are currently considering a number of alternatives which address our proportionate interest.
For the year ended December 31, 1998, ATU incurred $1.1 million in proportional losses from its minority investments and wrote down $1.5 million and $0.4 million of its investments in Alaskan Choice Television and Internet Alaska. See Note 7 to the consolidated financial statements of ATU included herein.
ENVIRONMENTAL REGULATIONS
Our operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner or operator of property and a generator of hazardous wastes, we could be subject to environmental laws that impose liability for the entire cost of cleanup at contaminated sites, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe, however, that our operations are in substantial compliance with applicable environmental laws and regulations.
Many of our properties formerly contained, or currently contain, underground and aboveground storage tanks used for the storage of fuel or wastes. Some of these tanks have leaked. We believe that known contamination caused by these leaks has been, or is being, investigated or remediated. We cannot be sure, however, that we have discovered all contamination or that the regulatory authorities will not request additional remediation at sites that have previously undergone remediation.
Our cellular operations are also subject to regulations and guidelines that impose a variety of operational requirements relating to radio frequency emissions. The potential connection between radio frequency emissions and negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community in recent years. To date, the results of these studies have been inconclusive. Although we have not been named in any lawsuits alleging damages from radio frequency emissions, it is possible we could be sued in the future, particularly if scientific studies conclusively determine that radio frequency emissions are harmful.
LOCAL TELEPHONE. Our primary properties consist of 168 switching facilities serving 74 exchanges. We own most of our administrative and maintenance facilities, central office and remote switching platforms and transport and distribution network facilities. We lease our corporate headquarters located in Anchorage.
Our transport and distribution network facilities include a fiber optic backbone and copper wire distribution facilities that connect customers to remote switch locations or to the central office and to points of presence or interconnection with interexchange carriers. These facilities are located on land pursuant to permits, easements or other agreements.
WIRELESS. We have 77 cell sites that cover all major population centers and highway corridors throughout Alaska. Most of these sites are leased.
LEGAL PROCEEDINGS
We currently, and from time to time, are involved in litigation and regulatory proceedings incidental to the conduct of our business. None of Century's Alaska properties nor ATU is a party to any lawsuit or proceeding that, in the opinion of management, is likely to have a material adverse effect on us.
OVERVIEW
Our operations are subject to the separate but concurrent jurisdictional control of both the federal government and the State of Alaska. Century's Alaska local telephone operating subsidiaries, Telephone Utilities of the Northland, Telephone Utilities of Alaska and PTI Communications, which was formerly the City of Fairbanks Telephone Operation, and ATU are each "telecommunications carriers" and "local exchange carriers" under the Communications Act of 1934, which was amended by the Telecommunications Act. As a result, the FCC exercises jurisdiction over all of our interstate and wireless communications activities. Century's Alaska local telephone operating companies and ATU are also "public utilities" within the meaning of the Alaska statutes and are, therefore, governed by the applicable rules and regulations of the RCA.
FEDERAL REGULATION
Under the federal regulatory scheme, incumbent local exchange carriers are required to comply with the Communications Act and the applicable rules and regulations. In substantially overhauling the Communications Act, the Telecommunications Act was intended to, among other things, eliminate unproductive regulatory burdens and promote competition. Despite this, telecommunications carriers are still subject to extensive ongoing regulatory requirements. For instance, FCC-regulated entities are required to obtain operating authorizations prior to providing international, interstate and wireless communications services. The FCC also regulates transfers of control and assignments of these operating authorizations. The FCC requires carriers providing access services to file tariffs with the FCC reflecting the rates, terms and conditions of those services. These tariffs are subject to review and potential objection by the FCC or third parties.
STATE REGULATION
Telecommunications companies subject to the RCA's jurisdiction are required to obtain certificates of public convenience and necessity prior to operating as a public utility in Alaska. The RCA is responsible for approving new issuances and any transfers of these operating certificates. In addition, the RCA is responsible for implementing a portion of the competitive requirements of the Telecommunications Act, as well as for regulating intrastate access and local service rates and services of local telephone companies. After passage of the Telecommunications Act, the APUC adopted a plan to address competition issues across Alaska. The APUC established multiple dockets to investigate different competition-related issues, including revising local and long distance market structures, reforming its intrastate access charge system and establishing a state universal service fund.
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, we are afforded the opportunity to set maximum rates at a level that allows us the opportunity to recover the reasonable costs we incur in the provision of regulated telecommunications services and to earn a reasonable rate of return on the investment required to provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services and enhanced service offerings,
- access charges to interexchange carriers for originating and terminating interstate and intrastate interexchange calls,
- interconnection charges or other rates to competing carriers interconnecting with our networks or reselling our services, and
Rates for regulated services, and the amount of high-cost support, are set by the FCC with respect to interstate services and by the APUC with respect to intrastate services.
In conjunction with the recovery of costs and establishment of rates, a local exchange carrier must first determine its aggregate costs and then allocate those costs between regulated and nonregulated services.
After identifying the regulated costs of providing local telephone service, a local exchange carrier must allocate those costs among its various local exchange and interstate and intrastate interexchange services and between state and federal jurisdictions. This process is complicated by the difficulty of allocating specific pieces of plant and equipment to a particular service because a local exchange carrier's plant and equipment are utilized for different services, such as local telephone and interstate and intrastate access. This process is referred to as "separations" and is governed primarily by the FCC's rules and regulations. The underlying legal purpose of separations rules is to define how a carrier's expenses are allocated and recovered from federal and state jurisdictions. The FCC is considering whether to modify or eliminate the current separations process. This decision could indirectly increase or reduce earnings of carriers subject to separations rules.
The deployment of the local telephone network from the switching facility to the customer is known as the "local loop" and is one of the most significant costs incurred by a local exchange carrier in providing telephone service. The FCC has established a rate structure that provides for the recovery of a portion of the cost of the local loop allocated to that interstate jurisdiction directly from the end user customer through the assessment of a subscriber line charge. The remaining portion of the local loop costs are recovered from interstate access charges to an interexchange carrier.
As a result of the market and geographic conditions in rural areas, the costs of providing local loop and switching services are often higher than in urban areas. In the absence of an accommodation in the FCC rules to address this fact, a substantial portion of the costs of smaller local exchange carriers would remain unrecovered, leaving them little alternative other than to charge high rates for intrastate services. Accordingly, the FCC provides for additional interstate recovery by eligible telecommunications carriers through the federal Universal Service Fund. The federal Universal Service Fund is available to carriers whose local loop costs are significantly above the national average as calculated pursuant to FCC rules.
Interstate access rates are developed on the basis of a local exchange carrier's measurement of its interstate costs for the provision of access service to interexchange carriers divided by its projected demand for each service. The resulting rates are published in a company's interstate access tariff and filed with the FCC, at which time they are subject to challenge by third parties and to review by the FCC.
The FCC recognized that this rate making and tariff filing process may be administratively burdensome for small local exchange carriers. Accordingly, the FCC established the National Exchange Carriers Association, which is commonly referred to as NECA, in 1983 to, among other things, develop common interstate access service rates, terms and conditions. NECA develops interstate access rates on the basis of data that are provided individually by participating local exchange carriers and blended to yield average rates. These rates are intended to generate revenue equal to the aggregate costs plus a
Individual participating local exchange carriers are likely to have costs of providing service that are either higher or lower than the revenues generated by applying the overall NECA tariff rate. To rectify this result, the revenues generated by applying the NECA rates are pooled from all of the participating companies and redistributed on the basis of each individual company's costs. The result of this process not only eliminates the burden of individual tariff filing, but also produces a system in which small companies can share and spread risk. For example, if a smaller local exchange carrier filed its own tariff and subsequently suffered the loss of major customers that utilize interstate access service, the local exchange carrier could suffer significant under-recovery of its costs. In the NECA pool environment, the impact of this loss is reduced because it is spread over all of the pool participants.
NECA operates separate pools for traffic sensitive costs, which are primarily switching costs, and non-traffic sensitive costs, which are primarily loop costs. Companies are also free to develop and administer their own interstate access charges.
The FCC has initiated a proceeding to review its rates and policies governing interstate exchange access and the rate of return applicable to incumbent local exchange carriers. Because most rural local exchange carriers are subject to rate-of-return regulation, the outcome of this proceeding will directly affect the earning prospects for rural and small local exchange carriers. The outcome of this proceeding, and its ultimate impact on us, cannot be predicted at this time.
INTRASTATE END USER RATES. The levels of rates charged to end users for the provision of basic local service are generally subject to rate-of-return regulation administered by the RCA. Local rates are typically set at a level that will allow recovery of embedded costs for local service divided by the number of services and customers. Recognized costs include an allowance for a rate of return on investment in plant used to provide local service. Rate cases are typically infrequent, carrier-initiated and require the carrier to meet substantial burdens of proof. The last APUC-authorized rates of return were 12.55% and 11.70% for Telephone Utilities of Alaska and Telephone Utilities of the Northland, respectively. These rates were ordered in 1989. PTI Communications was previously not regulated by the APUC and instead was regulated by the City of Fairbanks Public Utilities Board. As a condition of the acquisition of the City of Fairbanks Telephone Operation by Century's Alaska properties, the APUC required that a general rate proceeding be initiated for PTI Communications by June of 1999. This proceeding has been delayed and combined with a company-wide earnings review to be filed with the APUC by June 30, 2001. ATU's last authorized rate of return was 9.79% for retail local exchange and 10.85% for intrastate access, ordered in 1991.
The APUC adopted regulations to govern competition in the local exchange marketplace. The transitional regulations provide for, among other things:
- initial classification of all incumbent local exchange carriers, including Century's Alaska properties and ATU, as dominant carriers,
- symmetrical requirements that all carriers, both dominant and nondominant, offer all retail services for resale at wholesale rates, and
- substantial dominant carrier pricing flexibility in competitive areas, under which carriers may reduce retail rates, offer new or repackaged services and implement special contracts for retail service upon 30 days' notice to the APUC. Only rate increases affecting existing services are subject to full cost support showings for local exchange carriers in areas with local competition.
INTRASTATE ACCESS RATES. In the past, the APUC has required all local companies in Alaska to pool their access costs and has set an annual statewide average price for access service. Each local exchange carriers charges interexchange carrier's fees for originating or terminating long distance calls on its
With the passage of the Telecommunications Act and increased competition in the local exchange market, the APUC began a process of reforming intrastate access charges.
Under recent revisions to the Alaska access system, local exchange carriers not yet subject to local competition continue to participate in the Alaska Exchange Carriers Association pool. Participants in this pool recover their costs based on the embedded cost of services most recently authorized by the APUC. These revisions also allow local exchange carriers to exit the pool in the event of competitive entry. These local exchange carriers have the right to propose that their access charges be based on market rates.
An additional consequence of this access reform is the continued removal of subsidies implicit in access pricing. For instance, the APUC recently abolished the "weighting system" for the non-traffic-sensitive rate element that had loaded extra costs on access charges for lower cost urban exchanges to support rural exchanges. At the same time, the APUC proposed to support a portion of high switching costs separately through a state universal service fund.
The Alaska Universal Service Fund serves as a complement to the federal Universal Service Fund. Currently, the Alaska Universal Service Fund only subsidizes a portion of higher cost carriers' switching costs, and the costs of lifeline service--supporting rates of low income customers. The APUC indicated that it may have considered expanding the Alaska Universal Service Fund's coverage in the future, such as to support the costs of public interest pay telephones. The RCA is examining whether existing support paid to carriers for switching costs is reasonable or should be changed, eliminated or reduced. Further litigation has been initiated in state court to determine the lawfulness of the Alaska Universal Service Fund as currently established.
THE TELECOMMUNICATIONS ACT
Among other things, the Telecommunications Act was enacted to enhance competition without jeopardizing the availability of nationwide universal service at affordable rates. These two objectives have resulted in a complex set of rules intended to promote competitive entry in the provision of local telephone services, except where entry would make the provision of universal service prohibitively expensive.
The Telecommunications Act made competitive entry into the local telephone business more attractive to other carriers by removing barriers to competition. In order to promote competition, the Telecommunications Act established new interconnection rules generally requiring local exchange carriers to allow competing carriers to interconnect with their local networks. Congress recognized, however, that when the desire to promote competition conflicted with the ability of existing carriers to provide universal service to higher cost customers, local exchange carriers classified as "Rural Telephone Companies" should be exempted from interconnection requirements until the appropriate conditions for competitive entry exist.
Under the Telecommunications Act, all local exchange carriers, including both incumbent local exchange carriers and new competitive carriers, are required to:
- offer reasonable and nondiscriminatory resale of their telecommunications services;
- ensure that customers can keep their telephone numbers when changing carriers;
- ensure access to telephone poles, ducts, conduits and rights of way; and
- compensate competitors for the costs of terminating traffic.
The Telecommunications Act also requires incumbent local exchange carriers to:
- interconnect their facilities and equipment with any requesting telecommunications carrier at any technically feasible point;
- unbundle and provide nondiscriminatory access to unbundled network elements, such as local loops, switches and transport facilities, at nondiscriminatory rates and on nondiscriminatory terms and conditions;
- offer resale interconnection at wholesale rates;
- provide reasonable notice of changes in the information necessary for transmission and routing of services over the incumbent local exchange carriers' facilities or in the information necessary for interoperability; and
- provide for the physical collocation of equipment necessary for interconnection or access to unbundled network elements at the premises of the incumbent local exchange carrier, at rates, terms and conditions that are just, reasonable and nondiscriminatory.
In order to implement interconnection requirements, local exchange carriers generally enter into negotiated interconnection arrangements with competing carriers. Local exchange carriers may also offer interconnection tariffs, available to all competitors.
Competitors are required to compensate a local exchange carrier for the cost of providing interconnection services. In the case of resale interconnection, the rules provide that the rates charged should be on a wholesale basis and reflect the current retail rates of the local exchange carrier, excluding the portion of costs avoided by the local exchange carrier. In the case of unbundled network elements interconnection, rates are based on costing methodologies that employ a forward-looking pricing methodology known as total element long run incremental cost. The Telecommunications Act specifies that resale and unbundled network elements rates are to be negotiated among the parties, or, if the parties fail to reach an agreement, arbitrated by the relevant state regulatory authority. Once the parties have come to agreement, the proposed rates are subject to final approval by the state regulatory commission.
In January of 1997, ATU entered into an interconnection agreement with GCI, which provides for resale and unbundled network elements interconnection, and with AT&T Alascom, which provides for resale interconnection.
Century's Alaska local operating utilities, Telephone Utilities of Alaska, Telephone Utilities of the Northland and PTI Communications, are defined as "rural telephone companies" under the Telecommunications Act. As rural telephone companies, they were granted rural exemptions from the requirements relating to both resale interconnection and unbundled network element interconnection. The rural exemptions were to continue until the APUC determined that interconnection was technically feasible, not unduly economically burdensome and consistent with the Telecommunications Act's universal service provisions, or until Alaska's state legislature acted to remove the rural exemptions directly.
On June 30, 1999, the APUC ordered the rural exemptions of Telephone Utilities of the Northland, Telephone Utilities of Alaska and PTI Communications terminated in order to increase
Separately, on September 1, 1999, we filed a petition with the RCA seeking suspension or modification of interconnection duties and addressing market structure reforms for the Fairbanks and Juneau-Douglas markets. In that petition, Telephone Utilities of Alaska, Telephone Utilities of the Northland,with respect to North Pole, Alaska only, and PTI Communications proposed tariffed terms and conditions, including pricing, for resale of their services at wholesale discounts and for the interconnection of their facilities and those of competitive local exchange carriers in the Fairbanks and Juneau-Douglas markets, effective January 1, 2000. Further, as part of that proposal, we also requested that the RCA permit these local operating utilities to operate subject to competitive regulation and that the RCA remove or reduce other regulatory limitations now imposed on these local operating utilities, effective January 1, 2001. We believe the RCA must act on this petition within the next 180 days, but the RCA retains the power to grant, deny or modify the petition, in whole or in part, and we cannot predict whether and to what extent the petition will be approved. Grant of the petition would provide increased operating and marketing flexibility that we believe over time could partially or substantially offset the potential for adverse effect caused by termination of the rural exemptions.
In April 1999, a bill was proposed in the Alaska state senate to open to competition many local telephone markets in which we operate. Specifically, the bill proposed to allow competitors to provide local telephone service in local telephone markets throughout Alaska that have at least 5,000 access lines, effectively depriving incumbent local exchange carriers in those markets of their rural exemptions. Competition resulting from this bill, if it had been enacted into law, could have materially adversely affected our profitability. We cannot predict at this time whether or to what extent proposals included in the bill will be offered again and enacted into law. To the extent the markets of Century's Alaska rural local exchange carriers are opened to competition by the APUC's termination of their rural exemptions, we do not believe that the marginal effect of passage of the proposed bill on our business would be material.
For the first three months of 1999, Century's Alaska local exchange carriers benefiting from rural exemptions accounted for 42.3% of our revenues and 52.3% of our operating income. Loss of the rural exemptions, absent compensating measures, such as rate increases, or market structure reforms, such as the replacement of implicit subsidies by explicit support mechanisms, or rate deaveraging, could adversely affect our ability to meet our financial obligations.
While the Telecommunications Act promoted Congress' policy of ensuring that affordable service is provided to consumers universally in rural, high-cost areas of the country, the Telecommunications Act altered the framework for providing universal service by:
- requiring the FCC to make implicit subsidies explicit;
- expanding the types of communications carriers required to pay universal service support; and
- allowing competitive local exchange carriers to be eligible for funding.
These and other provisions were intended to make provision of universal service support compatible with a competitive market.
In May 1997, the FCC implemented new rules for interstate universal service support. The new rules provide for separate federal Universal Service Fund programs for rural and non-rural telephone companies. The new rules for non-rural companies base support upon "forward-looking costs" derived from cost proxy models. It is uncertain whether the forward-looking cost model will fully compensate local exchange carriers for the cost of providing local service in high-cost areas. The FCC set the implementation date for the new system at January 1, 1999, which has now been postponed to January 1, 2000 for non-rural telephone companies. The FCC has established a Rural Task Force, which will investigate how to adapt the proxy cost models approved for larger carriers for rural telephone companies. The FCC has indicated that it will not implement a new system for application to rural telephone companies for an additional three years after the first step implementation, or at least until January 1, 2001. In the interim, support mechanisms for rural carriers remain unchanged. The FCC revised its rules for non-rural carriers in May 1999 and sought comment on aspects of its revised plan.
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions of the individuals who currently serve as our executive officers and directors. Subject to our obligations under the employment agreements described under the caption "--New Employment Arrangements," our directors and officers are elected at the annual meeting of our shareholders and will serve until they resign or are removed or until their successors are elected and qualified.
NAME POSITION AGE
----------------------------------- ---------------------------------------------------------------------- ---------
Charles E. Robinson Chairman, President and Chief Executive Officer 65
Wesley E. Carson Executive Vice President and Assistant Secretary 49
Michael E. Holmstrom Senior Vice President and Chief Financial Officer 56
Benjamin L. Jarvis Senior Vice President of LEC Operations 62
F. Scott Davis President and CEO of MACtel 63
Michael E. Bowman Vice President, Engineering 43
Mark A. Foster President of ATU Long Distance; Vice President, Products and Services 38
Strategy
John Ayers Senior Vice President of Marketing and Sales 56
Donn T. Wonnell Executive Vice President, General Counsel and Secretary 52
Kenneth Laing Vice President, Operations 57
Michael L. Schuh Vice President of Information Technology and Chief Information Officer 40
Dean A. Ryland Vice President, Finance and Accounting, Controller and Assistant 48
Treasurer
Thomas R. Meade Vice President, Revenue Requirements 48
Kevin P. Hemenway Vice President and Treasurer 39
Priscilla B. Andres Vice President, Human Resources 49
W. Dexter Paine, III Director 38
Saul A. Fox Director 45
J. Russell Triedman Director 29
Carl H. Marrs Director 50
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See "Ownership of Capital Stock--Stockholders' Agreement" for information regarding election and terms of our directors and other related arrangements.
CHARLES E. ROBINSON
Mr. Robinson, our Chairman, President and Chief Executive Officer since May 1999, has over four decades of experience in the telecommunications industry. Mr. Robinson was instrumental in creating Alaska's long distance communications systems, including the White Alice Communications System, beginning in the late 1950's. Between 1979 to 1982, Mr. Robinson served as President of Alascom, the state's primary long distance carrier at the time. Under his guidance, Alascom developed the first statewide long distance service network in Alaska, connecting with more than 27 independent local companies. Mr. Robinson served as President and Chief Operating Officer of Pacific Telecom from 1981 until its sale to Century in 1997 and was appointed Chairman and Chief Executive Officer in 1989. Mr. Robinson has been a member of the National Security Telecommunications Advisory Committee for the last 18 years, having been appointed by President Reagan. Mr. Robinson also served on the Board of Directors of the United States Telephone Association from 1993 to 1995.
WESLEY E. CARSON
Mr. Carson, our Executive Vice President and Assistant Secretary since July 1998, has over 19 years of telecommunications experience. Mr. Carson began his career in telecommunications in 1980
MICHAEL E. HOLMSTROM
Mr. Holmstrom, our Senior Vice President and Chief Financial Officer since January 1999, will be responsible for our financial, accounting, tax and business development functions. Mr. Holmstrom's career in telecommunications spans 35 years. Since 1990 he has consulted, served as Chief Operating Officer for Spectrum Network Systems, Ltd. in Sydney, Australia, and as Chief Financial Officer for Atlantic Tele-Network in the U.S. Virgin Islands. From 1983 through 1989 he was Vice President of Unregulated Operations, Chief Financial Officer and then President of CP National Corporation, a telecommunications provider that merged with Alltel Corporation in December 1988. Mr. Holmstrom was Vice President of Finance at Alascom from 1976 through 1980, and Vice President of Financial and Business Planning at Pacific Telecom, Alascom's parent corporation, from 1980 to 1981. Mr. Holmstrom has a B.S. in Business Administration from Gannon University. He was Executive-in-Residence professor of business strategy at Texas A&M University for the academic year 1981 to 1982.
BENJAMIN L. JARVIS
Mr. Jarvis, our Senior Vice President of LEC Operations since November 1998, has over 35 years of experience in the telecommunications industry. Mr. Jarvis served Pacific Telecom in operations management from 1966 to 1982. From 1982 to 1998, Mr. Jarvis held various leadership positions with Harris Corporation, Bay Area Teleport and Harbor Bay Telecommunications, American Satellite Inc., U.S. Intelco Networks Inc. and two competitive local exchange carriers operating in emerging markets.
F. SCOTT DAVIS
Mr. Davis is responsible for our statewide cellular operations as President and Chief Executive Officer of MACtel, which position he has held since August 1995. Mr. Davis has been with MACtel since 1990, previously serving as Sales and Marketing Manager, and then General Manager. Mr. Davis has more than 30 years of experience in the wireless industry beginning in 1966 at Airsignal International, Inc., where he advanced to the position of Executive Vice President before he left in 1982. From 1982 to 1987 he served as Senior Vice President and General Manager for McCaw Communications Companies, Inc., with responsibility for Alaska and Hawaii. Mr. Davis worked in Alaska as a communications broker and consultant from 1987 to 1990. Mr. Davis holds a B.B.A. degree from Washburn University.
MICHAEL E. BOWMAN
Mr. Bowman was appointed Vice President of Engineering with responsibility for ATU's operations and managing statewide central office engineering and network administration in September 1999. Prior to joining us, Mr. Bowman had been with ATU since 1975, rising to become Chief Operations Officer. Mr. Bowman has also held positions of significant leadership within the International Brotherhood of Electrical Workers.
MARK A. FOSTER
Mr. Foster is President of ATU Long Distance and Vice President, Products and Services Strategy, positions he has held since June 1999. Mr. Foster has over 15 years experience in the utility industry,
JOHN AYERS
Mr. Ayers is Senior Vice President of Marketing and Sales, a position he has held since May 1999. Mr. Ayers has more than 20 years of experience in the telecommunications industry. As President and co-founder of e.Net, Ltd. in 1996, Mr. Ayers served as a consultant to a variety of established and start-up businesses. From February 1987 through August 1995, Mr. Ayers held various leadership positions with Pacific Telecom and its subsidiaries, including Executive Vice President of Pacific Telecom Services Company, with responsibility for strategic planning, marketing and business development, and Executive Vice President and General Manager of Alascom, Inc., Alaska's largest interexchange carrier. Mr. Ayers holds a bachelor's degree in management from Golden Gate University.
DONN T. WONNELL
Mr. Wonnell is Executive Vice President, General Counsel and Secretary, a position he has held since June 1999. Mr. Wonnell has worked in the telecommunications industry for more than 20 years. Mr. Wonnell served as Vice President for legal, regulatory, and legislative affairs of Pacific Telecom until the merger of Pacific Telecom into Century at the end of 1997. Prior to joining Pacific Telecom, Mr. Wonnell served as President of the Telecommunications and Energy Division of California Pacific Utilities in San Francisco, and, earlier, as Vice President and General Counsel of RCA Alaska Communications in Anchorage. Mr. Wonnell holds a B.A. from the College of William & Mary and a J.D. from the University of Pennsylvania School of Law. Mr. Wonnell has been admitted to practice before the bars of Alaska, California, Pennsylvania, and the District of Columbia.
KENNETH LAING
Mr. Laing was appointed Vice President of Operations with statewide responsibility for customer service and outside plant engineering, as well as direction of operations for the PTI Communications properties, in September 1999. Mr. Laing's telecommunications experience includes more than 30 years serving in various Senior management capacities in local exchange telephone and long distance companies. Mr. Laing began his telecommunications career in 1968 as a technician for RCA, building the Alaskan telecommunications network that preceded Alascom. Mr. Laing subsequently served in various leadership positions within Alascom, including Vice President of Administration and Vice President of Local Exchange Operations for Pacific Telecom's Montana and Washington divisions. Mr. Laing was an executive of LEC Consulting Corporation before our acquisition of Century's Alaska properties and ATU. Mr. Laing, a veteran of the U.S. Air Force, attended the University of Washington and Northeastern University.
MICHAEL L. SCHUH
Mr. Schuh, our Vice President of Information Technology and Chief Information Officer since November 1998, has more than 22 years of information technology experience, with 17 of those years devoted to telecommunications. Mr. Schuh worked for Pacific Telecom from 1986 to 1998, initially as an Information Services Manager and later as Senior Manager, LEC Operations, Customer Services and System Support. Prior to joining Pacific Telecom, Mr. Schuh held various positions in the computer operations department of the Municipality of Anchorage and Alascom from 1979 through 1986.
DEAN A. RYLAND
Mr. Ryland, our Vice President, Finance and Accounting, Controller and Assistant Treasurer since September 1998, served as a senior accounting manager with Century from 1997 to 1998. Prior to this
THOMAS R. MEADE
Mr. Meade joined us in May 1999 as Vice President, Revenue Requirements. From 1996 through May of 1999, Mr. Meade was employed by TelAlaska, Inc. where he served as Vice President, Regulatory and Legislative Affairs. Prior to that time, he worked for ATU for 12 years, holding various positions in finance, revenue requirements, jurisdictional cost separations, and regulatory affairs. Mr. Meade started his telecommunications career with Alascom in 1977, where he held supervisory and managerial positions in finance and accounting. Mr. Meade has an MBA in finance from the University of Michigan and a BA from Cornell University.
KEVIN P. HEMENWAY
Mr. Hemenway joined us as Vice President and Treasurer in July 1999 with 10 years of prior experience in the telecommunications industry. Before joining us Mr. Hemenway served as the Chief Financial Officer and Treasurer of Atlantic Tele-Network, Inc. based in the U.S. Virgin Islands. From January 1990 to October 1998, as an independent consultant, Mr. Hemenway performed extensive financial, accounting, management and rate making consulting services for the telecommunications industry, principally for Atlantic Tele-Network, Inc. and its subsidiaries. From 1986 through 1989, Mr. Hemenway was employed by Deloitte and Touche, LLP as a C.P.A. and manager, performing both audit and consulting services. From 1983 to 1986, Mr. Hemenway was employed by Grant Thornton as a C.P.A. and senior staff accountant. Mr. Hemenway graduated from Creighton University in 1982 with a B.S.B.A., majoring in accounting, and is a non-practicing CPA certificate holder registered in the State of Nebraska.
PRISCILLA B. ANDRES
Ms. Andres has served as our Vice President of Human Resources since September 1998. Prior to joining us, she was Senior Manager of Corporate Compensation, Benefits and HRIS for a high technology capital equipment manufacturing company in Portland, Oregon. Ms. Andres was employed during the previous 11 years by Pacific Telecom and its parent company, PacifiCorp, in increasingly responsible human resources positions in the area of compensation, benefits, employee relations, employee services, employment, labor relations and health services. Ms. Andres has a bachelor's degree from the University of Portland.
W. DEXTER PAINE, III
Mr. Paine, a director since July 1998, has been President and Co-founder of Fox Paine & Company since its inception in 1997. From 1994 until founding Fox Paine, Mr. Paine served as a senior partner of Kohlberg & Company, where he was responsible for establishing and leading the firm's west coast office. Prior to joining Kohlberg & Company, Mr. Paine served as a general partner at Robertson Stephens & Company. In his more than 11 years in leveraged investing, Mr. Paine has focused on the supermarket, healthcare, telecommunications and automotive industries. Mr. Paine has a B.A. in economics from Williams College.
SAUL A. FOX
Mr. Fox, a director since May 1999, has been Chief Executive Officer and Co-founder of Fox Paine & Company since its inception in 1997. From 1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis & Roberts & Co., where he became one of KKR's most senior general partners prior to his retirement from KKR in 1996. In his more than 13 years at KKR, Mr. Fox was involved in
J. RUSSELL TRIEDMAN
Mr. Triedman, a director since June 1999, has been a Vice President of Fox Paine & Company since 1998. Upon completion of law school in 1996, Mr. Triedman worked at Cravath, Swaine & Moore. While at Cravath, Mr. Triedman worked in mergers and acquisitions and high yield finance. Prior to attending law school, Mr. Triedman worked as a financial analyst at Brown Brothers Harriman & Co. in the private equity group, where he facilitated three private equity investments totaling $95 million. Mr. Triedman is a graduate of Brown University with a B.S. in Applied Mathematics and Economics and holds a J.D. from the University of Chicago Law School.
CARL H. MARRS
Mr. Marrs, a director since July 1999, is President and Chief Executive Officer of Cook Inlet. Mr. Marrs has been with Cook Inlet for approximately 25 years. During that period Mr. Marrs has been employed in a series of management positions, culminating in his appointment as President in 1986. Mr. Marrs is a native of Alaska. Mr. Marrs attended the Stanford University School of Business for Executives in 1983 and the Amos Tuck School of Business at Dartmouth College in 1986.
COMPENSATION OF DIRECTORS
We currently do not compensate our directors other than for expense reimbursement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee. All arrangements regarding executive compensation before completion of the acquisitions of Century's Alaska properties and ATU were conducted between members of Fox Paine & Company and our executive officers.
NEW EMPLOYMENT ARRANGEMENTS
Before completion of the acquisitions of Century's Alaska properties and ATU, we entered into new employment arrangements with some of our employees relating to their employment with us and Alaska Communications Systems Holdings, their ownership of our common stock and the granting of options to purchase shares of our common stock following the completion of these acquisitions, as more fully described below.
EMPLOYMENT AGREEMENT WITH CHARLES E. ROBINSON. Under the employment agreement among us, Alaska Communications Systems Holdings and Charles E. Robinson, dated as of March 12, 1999, Mr. Robinson serves as the Chairman of the Board, Chief Executive Officer and President of us and Alaska Communications Systems Holdings for a three-year period, which term will be extended automatically for successive additional one-year periods unless either our board of directors gives Mr. Robinson, or Mr. Robinson gives our board of directors, no less than 90 days written notice of the intention not to extend the term. Mr. Robinson will receive during the initial term of his employment agreement an annual base salary of $500,000 that may be increased at the beginning of each year following the first year of employment. Mr. Robinson will be eligible for an annual bonus for each calendar year based on our attainment of mutually determined business targets. Mr. Robinson will receive an annual bonus equal to 100% of his annual base salary, as then in effect, if we attain these mutually determined business targets, with appropriate adjustments to the extent we exceed or fail to reach these targets. In no event will Mr. Robinson's annual bonus be less than $200,000. Mr. Robinson's employment agreement also provides for other customary benefits including fringe benefit plans, paid vacation, life and disability insurance plans and expense reimbursement.
- Mr. Robinson's annual base salary, as then in effect plus
- Mr. Robinson's most recent annual bonus, as well as reimbursement for the cost of continuing health insurance coverage under COBRA for twelve months.
In addition, notwithstanding any provisions to the contrary in any option plan or agreement under which Mr. Robinson has received options, upon the termination of Mr. Robinson's employment, the number of then-unvested options will vest as are necessary to vest at least one-third of all options received by Mr. Robinson. In addition, in the event we decide at any time not to extend the term of his employment agreement, we will pay Mr. Robinson the sum of:
- Mr. Robinson's annual base salary, as then in effect, plus
- Mr. Robinson's most recent annual bonus plus
- reimbursement for the cost of continuing health insurance coverage under COBRA for twelve months.
As used in the Robinson employment agreement:
- "Good reason" means:
- the assignment of Mr. Robinson by us to any duties materially inconsistent with, or a material diminution of, his position, including duties, title, offices, or responsibilities; or
- the transfer, without Mr. Robinson's concurrence, of Mr. Robinson's principal place of employment to a geographic location more than 100 miles from both his current personal residence and from the location of his current principal place of employment;
- "Cause" means:
- the willful failure to comply with lawful directions of our board of directors after written notice;
- fraud, misappropriation or embezzlement; or
- a material breach of the Robinson employment agreement (other than due to physical or mental illness) that is not cured within 30 days after receipt of written notice from our board of directors of a specific failure to perform his duties; and
- "Change in control" means:
- the acquisition by any person or group as that term is used in Regulation 13D under the Exchange Act, other than Fox Paine & Company or any of its affiliates, of beneficial ownership of a majority of ours or Alaska Communications Systems Holdings' outstanding voting securities; or
- any sale, lease, exchange or other transfer in one transaction or a series of transactions, other than a transfer to an entity which is majority controlled by Fox Paine & Company or any affiliate thereof or an entity with substantially the same equity holders as immediately prior to the transfer, of all or substantially all of the assets of us or Alaska Communications Systems Holdings or its operating subsidiaries taken together, or any plan for the liquidation or dissolution.
The Robinson employment agreement also provides that during his employment and during the 12-month period following any termination of his employment, Mr. Robinson shall not directly or indirectly own, make equity or debt investments in, manage, control, participate in, consult with, advise,
- any enterprise engaged in the provision of local exchange or wireless telecommunications services in any state in which:
- we, our affiliates or subsidiaries or
- any entity that is a party to an acquisition agreement with us, our affiliates or subsidiaries
is engaged in the provision of local exchange or wireless telecommunications services, or
- any enterprise that is the subject of a potential transaction made known to us, our affiliates or subsidiaries, or Mr. Robinson during or at any time prior to the termination of the Robinson employment agreement, that is engaged in the provision of local exchange or wireless telecommunications services.
However, Mr. Robinson may be a passive owner of not more than one percent of any publicly traded class of capital stock of any entity engaged in the provision of local exchange or wireless telecommunications services. The Robinson employment agreement also provides for other restrictions during Mr. Robinson's employment and during the 12-month period following any termination of his employment in connection with:
- inducing or attempting to induce any employee of us or our affiliates or subsidiaries to terminate, or otherwise interfering with, the relationship between us or our affiliates or subsidiaries and any of our employees, and
- soliciting or attempting to solicit business from any customer or supplier of us or our affiliates or subsidiaries.
EMPLOYMENT AGREEMENT WITH WESLEY E. CARSON. Under the employment agreement, dated March 12, 1999, by and among us, Alaska Communications Systems Holdings and Wesley E. Carson, Mr. Carson serves as Executive Vice President of us and Alaska Communications Systems Holdings for a two-year initial term at an annual base salary of $200,000. Mr. Carson's employment agreement contains provisions for additional terms, salary increases during any additional term, annual bonus, severance, other benefits, definitions of "good reason," "cause" and "change in control" and provisions for non-competition and non-solicitation similar to those in Mr. Robinson's employment agreement, except that:
- Mr. Carson does not have a guaranteed minimum annual bonus and Mr. Carson will receive no annual bonus if termination occurs prior to December 31, 1999; and
- Mr. Carson's employment agreement does not provide any additional rights with respect to vesting of then-unvested options upon termination.
EMPLOYMENT AGREEMENT WITH MICHAEL E. HOLMSTROM. Under the employment agreement, dated April 19, 1999, by and among us and Alaska Communications Systems Holdings and Michael E. Holmstrom, Mr. Holmstrom serves as Executive Vice President of us and Alaska Communications Systems Holdings for a two-year initial term at an annual base salary of $200,000. Mr. Holmstrom's employment agreement contains provisions for additional terms, salary increases during any additional term, annual bonus, severance, other benefits, definitions of "good reason," "cause" and "change in control" and provisions for non-competition and non-solicitation similar to those in Mr. Robinson's employment agreement, except that:
- Mr. Holmstrom does not have a guaranteed minimum annual bonus and Mr.
Holmstrom will receive no annual bonus if termination occurs prior to
December 31, 1999; and
- Mr. Holmstrom's employment agreement does not provide any additional rights with respect to vesting of then-unvested options upon termination.
Mr. Holmstrom's employment agreement also obliges us to pay relocation-related costs of Mr. Holmstrom.
ALEC HOLDINGS, INC. 1999 STOCK INCENTIVE PLAN
In connection with the completion of the acquisitions of Century's Alaska properties and ATU, we adopted the ALEC Holdings, Inc. 1999 Stock Incentive Plan under which we may grant incentive awards in the form of options to purchase shares of our common stock, restricted shares of our common stock and stock appreciation rights to participants, which include non-employee directors, officers, employees and consultants of us and our affiliates. The total number of shares of our common stock initially reserved and available for grant under the stock incentive plan is 3,410,486 shares. A committee of our board of directors, or our board of directors itself in the absence of a committee, is authorized to make grants and various other decisions under the stock incentive plan. Unless otherwise determined by the committee, any participant granted an award under the stock incentive plan must become a party to, and agree to be bound by, the stockholders' agreement.
Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights. Stock options are generally nontransferable and, unless otherwise determined by the committee, have a term of ten years. Upon a participant's death or when the participant's employment with us or the applicable affiliate of us is terminated for any reason, the participant's then-unvested stock options are forfeited and the participant or his or her legal representative may, within three months if termination of employment is for any reason other than death, or one year in the case of the participant's death, exercise any previously vested stock options. Stock appreciation rights may be granted in conjunction with all or part of any stock option award and are generally exercisable only in connection with the exercise of the related stock option. Upon termination or exercise of the related stock option, stock appreciation rights terminate and are no longer exercisable. Stock appreciation rights are transferable only with the related stock options. Unless otherwise provided in the related award agreement or, if applicable, the stockholders' agreement, immediately prior to the change of control transactions described in the stock incentive plan, all outstanding stock options and stock appreciation rights will become fully exercisable and vested, and any restrictions and deferral limitations applicable to any restricted stock awards will lapse. The committee may also grant to any participant, on terms and conditions determined by the committee, the right to receive cash payments to be paid at that time as an award results in compensation income to the participant in order to assist the participant in paying the resulting taxes.
The stock incentive plan will terminate on May 14, 2009. However, awards outstanding at that time will not be affected or impaired by the stock incentive plan's termination. Our board of directors and the committee have authority to amend the stock incentive plan and awards granted thereunder.
The following table sets forth information regarding the beneficial ownership of our common stock, par value $0.01 per share, by:
- each person known by us to own beneficially more than 5% of our common stock;
- each director and each named executive officer of us; and
- all of our executive officers and directors, as a group.
Except as otherwise indicated in the footnotes below, each beneficial owner has the sole power to vote and to dispose of all shares held by that holder. You should keep the following points in mind as you read the table.
- The amounts and percentage of our common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or to direct the voting of the security, or "investment power," which includes the power to dispose of or to direct the disposition of the security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest. The percentage of our common stock outstanding is based on the 21,774,027 shares of our common stock outstanding as of the date of this prospectus, without taking into account any options or convertible interests.
- We have computed percentages of shares outstanding with respect to the currently outstanding shares of our common stock, as the case may be, held by the holder, without taking into account any options or warrants.
- Fox Paine Capital, LLC is General Partner or Manager of Fox Paine Capital Fund, FPC Investors, L.P., ALEC Coinvestment Fund I, LLC, ALEC Coinvestment Fund II, LLC, ALEC Coinvestment Fund III, LLC, ALEC Coinvestment Fund IV, LLC, ALEC Coinvestment Fund V, LLC and ALEC Coinvestment Fund VI, LLC and possesses voting and investment power over all shares held by each of these entities. Fox Paine Capital is not the record owner of any shares of our common stock. Messrs. Fox and Paine are the Members of Fox Paine Capital and share voting power of Fox Paine Capital. Mr. Triedman is a Vice President of Fox Paine & Company. Each of Messrs. Paine and Fox are limited partners of FPC Investors. None of the shares shown as beneficially owned by any of Messrs. Fox, Paine or Triedman are owned of record by these individuals. The address of Fox Paine Capital, Fox Paine Capital Fund, FPC Investors, and Messrs. Paine, Fox and Triedman is c/o Fox Paine & Company, LLC, 950 Tower Lane, Suite 1950, Foster City, CA 94404.
- Cook Inlet Region, Inc. is record owner of 1,624,907 shares of our common stock. The address of Cook Inlet is 2525 C Street, P.O. Box 93330, Anchorage, Alaska 99509-3330. Mr. Marrs is President and Chief Executive Officer of Cook Inlet.
- Mr. Robinson is record owner of 241,788 shares of our common stock. The address of Mr. Robinson is c/o ALEC Holdings, Inc., 510 L. Street, Suite 500, Anchorage, Alaska 99501. Of these shares, 172,729 represent stock grants. See "Insider Relationships and Related Party Transactions."
- Mr. Holmstrom is record owner of 16,249 shares of our common stock. See "Insider Relationships and Related Party Transactions." The address of Mr. Holmstrom is c/o ALEC Holdings, Inc., 510 L. Street, Suite 500, Anchorage, Alaska 99501.
- Mr. Wonnell is the record owner of 66,249 shares of our common stock. Of these shares, 50,000 represent stock grants. See "Insider Relationships and Related Party Transactions." The address of Mr. Wonnell is c/o ALEC Holdings, Inc., 510 L. Street, Anchorage, Alaska 99501.
SHARES OF
HOLDINGS COMMON
STOCK PERCENT OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED OUTSTANDING
--------------------------------------------------------------------------- -------------------- -----------------
Fox Paine Capital.......................................................... 19,498,879 89.6%
Fox Paine Capital Fund..................................................... 16,251,658 74.6%
FPC Investors.............................................................. 241,144 1.1%
W. Dexter Paine, III....................................................... 19,498,879 89.6%
Saul A. Fox................................................................ 19,498,879 89.6%
J. Russell Triedman........................................................ 241,144 1.1%
Cook Inlet Region, Inc..................................................... 1,624,907 7.5%
Carl H. Marrs.............................................................. 1,624,907 7.5%
Charles E. Robinson........................................................ 241,788 1.1%
Wesley E. Carson........................................................... 129,341 *
Michael E. Holmstrom....................................................... 16,249 *
Donn T. Wonnell............................................................ 66,249 *
All directors and executive officers as a group (7 persons)................ 21,634,285 99.4%
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(*) Indicates less than 1% of outstanding shares.
STOCKHOLDERS' AGREEMENT
On May 14, 1999, we entered into a stockholders' agreement with Fox Paine Capital Fund, fund investors affiliated with Fox Paine Capital Fund, and non-fund investors, including co-investors and some of our employees listed as parties thereto. The following is a summary of the principal terms of the stockholders' agreement and is subject to and qualified in its entirety by reference to the stockholders' agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part and is incorporated by reference herein.
The stockholders' agreement provides, among other things for:
- the right of the non-fund investors to participate in, and the right of Fox Paine Capital Fund to require the non-fund investors to participate in, sales of our common stock by Fox Paine Capital Fund;
- prior to an initial public offering of our stock, our rights to purchase, and the rights of the non-fund investors to require us to purchase, except in the case of termination of employment of the non-fund investors, all, but not less than all, of the shares of our common stock owned by a non-fund investor upon the termination of employment or death of the non-fund investor, at prices determined in accordance with the stockholders' agreement; and
- additional restrictions on the rights of the non-fund investors to transfer shares of our common stock.
The stockholders' agreement will terminate:
- with respect to the rights and obligations of and restrictions on the fund investors and the non-fund investors in connection with restrictions on the transfer of shares of our common stock, when Fox Paine Capital Fund and its affiliates no longer hold at least 20% of the outstanding shares of our common stock, on a fully diluted basis; however, that the stockholders' agreement will terminate in that respect in any event if we enter into transactions resulting in Fox Paine Capital Fund, the fund investors, the non-fund investors, and each of their respective permitted transferees, owning less than a majority of the outstanding voting power of the entity surviving those transactions; and
- with respect to the registration of our common stock in offerings on the earlier of:
- the date on which there are no longer any registrable securities outstanding (as determined under the stockholders' agreement) and
- the 20(th) anniversary of the stockholders' agreement.
In connection with the completion of the acquisitions of Century's Alaska properties and ATU, members of management were given grants of our common stock. In connection with the stock grants, we loaned two members of management and one former member of management approximately 40% of the fair market value of the grants on May 14, 1999 on a nonrecourse basis. The proceeds of these loans, which are secured by the shares of our common stock owned by the individual borrowers, are to be used by those two individuals to pay taxes on the income deemed received in connection with the grants.
In connection with the execution of the purchase agreement relating to Century's Alaska properties, Century entered into a consulting agreement, dated August 14, 1998, with LEC Consulting Corporation, a corporation owned and operated by members of management. Pursuant to the consulting agreement, LEC Consulting provided management and advisory services to Century's Alaska properties with respect to their day-to-day business operations. Under the terms of the consulting agreement, Century paid LEC Consulting $175,000 per month for these services. In addition to the services required under the consulting agreement, LEC Consulting employees were responsible for managing the transition process for us and for creating the infrastructure necessary to begin operations as of May 14, 1999. In addition, Fox Paine & Company loaned to LEC Consulting approximately $3.4 million beginning in August 1998 for funding of start-up expenses, which amount was repaid out of funds provided by us on May 14, 1999 as part of the fees and expenses related to the acquisitions. LEC Consulting was merged into Alaska Communications Systems Holdings on May 10, 1999.
Pursuant to a consulting agreement between Century and Mr. Robinson, Mr. Robinson will continue to provide consulting services to Century with respect to its operations in the lower 48 contiguous states. These services will not interfere with Mr. Robinson's fulfillment of his duties and responsibilities to us. However, we have agreed that Mr. Robinson will not participate in making any decisions relating to acquisitions by us in the lower 48 contiguous states during the term of his consulting agreement and for two years thereafter. This consulting agreement is expected to expire on or before November 2000.
Fox Paine & Company received advisory fees upon consummation of each of the acquisitions. In addition, Fox Paine & Company will receive an annual management fee.
In connection with the consummation of the acquisitions of Century's Alaska properties and ATU and the private offering of the old debentures, we issued warrants to purchase shares of our common stock, representing 3.40% of our fully diluted ownership, to the initial purchasers in the private offering of the old debentures. The warrants are exercisable for $0.01 per share and expire on May 14, 2011. The proceeds received from the issuance of the old debentures and the warrants, together with the proceeds to us of the equity contributions, were contributed to Alaska Communications Systems Holdings as common equity.
THE SENIOR CREDIT FACILITY
Alaska Communications Systems Holdings, together with us, entered into a credit agreement with The Chase Manhattan Bank, as administrative agent and collateral agent, Credit Suisse First Boston Corporation, as documentation agent, and Canadian Imperial Bank of Commerce, as syndication agent, and the lenders named therein that provides the Alaska Communications Systems Holdings' senior credit facility consisting of term loans of up to $460.0 million and a revolving credit facility of $75.0 million. Chase Securities Inc. acts as advisor and arranger in connection with the senior credit facility. The following is a summary description of the material terms of the senior credit facility and is subject to and qualified in its entirety by reference to the credit agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part and is incorporated by reference herein.
STRUCTURE. Loans under the credit agreement consist of:
- a term loan A facility in the amount of $150.0 million;
- a term loan B facility in the amount of $150.0 million;
- a term loan C facility in the amount of $160.0 million; and
- a revolving credit facility in the amount of $75.0 million which is available, in part, for up to $25.0 million in letters of credit and up to $10.0 million in the form of swingline loans.
The term loan facilities and the revolving credit facility constitute the senior credit facility. Alaska Communications Systems Holdings used the term loan facilities and a portion of the revolving credit facility to provide a portion of the funds necessary to complete the acquisitions of Century's Alaska properties and ATU and to repay existing indebtedness of Century's Alaska properties. Alaska Communications Systems Holdings will use the remainder of the revolving credit facility for general corporate purposes.
SECURITY; GUARANTEES. Alaska Communications Systems Holdings' obligations under the senior credit facility are unconditionally and irrevocably guaranteed, jointly and severally, by us and by each of Alaska Communications Systems Holdings' existing and subsequently acquired or organized domestic or, in limited circumstances, foreign subsidiaries. In addition, the senior credit facility and the guarantees thereunder are secured by collateral that includes substantially all of Alaska Communications Systems Holdings' assets and all of the assets of Alaska Communications Systems Holdings' subsidiaries, including:
- a first priority pledge:
- by us of all of Alaska Communications Systems Holdings' capital stock and
- to the extent not prohibited by law or any existing contract, by Alaska Communications Systems Holdings of the capital stock of companies in which Alaska Communications Systems Holdings holds a minority stake, plus of all the capital stock Alaska Communications Systems Holdings, or any of its domestic subsidiaries or, under limited circumstances, any of Alaska Communications Systems Holdings' foreign subsidiaries, held in any existing and subsequently acquired or organized subsidiary, which pledge, in the case of any foreign subsidiary will, except under limited circumstances, be limited to 65% of the capital stock of the foreign subsidiary, and
- a perfected first priority security interest in, and mortgage on, substantially all of Alaska Communications Systems Holdings' tangible and intangible assets and substantially all of the tangible and intangible assets of the guarantors, including accounts receivable, documents,
AVAILABILITY. The availability of the senior credit facility is subject to various conditions precedent typical of bank loans including, among other things, the absence of any material adverse change in Alaska Communications Systems Holdings' business. The full amount of the term loan facilities was required to be drawn in a single drawing on May 14, 1999. Amounts repaid or prepaid under the term loan facilities may not be reborrowed. Amounts repaid under the revolving credit facility are available for reborrowing on a revolving basis, subject to the terms of the revolving credit facility. As a result of issuance of $150.0 million in Alaska Communications Systems Holdings senior subordinated notes, the term loan C facility was reduced to $135.0 million on May 14, 1999.
- The term loan A facility is repayable in annual principal payments of one percent of principal over five years, commencing on May 14, 2002, with the balance of the term loan A facility payable at maturity. The final maturity of the term loan A facility is November 14, 2006. The term loan A facility bears interest at a rate PER ANNUM equal (at Alaska Communications Systems Holdings' option) to: (1) an adjusted London interbank offered rate, or LIBOR, plus 2.75% or (2) a rate equal to the greater of the administrative agent's prime rate, a certificate of deposit rate plus 1% and the federal funds effective rate plus 2.25%, in each case subject to reduction based on Alaska Communications Systems Holdings' financial performance.
- The term loan B facility is repayable in annual principal payments of one percent of principal over six years, commencing on May 14, 2002, with the balance of term loan B facility payable at maturity. The final maturity of the term loan B facility is November 14, 2007. The term loan B facility bears interest at an annual rate equal (at Alaska Communications Systems Holdings' option) to: (1) an adjusted LIBOR plus 3.00% or (2) the federal funds effective rate plus 2.50%.
- The term loan C facility is repayable in annual principal payments of one percent of principal over six years, commencing on May 14, 2002, with the balance of term loan C facility payable at maturity. The final maturity of the term loan C facility is May 14, 2008. The term loan C facility bears interest at an annual rate equal (at Alaska Communications Systems Holdings' option) to: (1) an adjusted LIBOR plus 3.25% or (2) the federal funds effective rate plus 2.75%.
- The revolving credit facility is a seven-year facility and outstanding
balances thereunder will bear interest at an annual rate equal (at Alaska
Communications Systems Holdings' option) to: (1) an adjusted LIBOR plus
2.75% or (2) the federal funds effective rate plus 2.25%, in each case
subject to reduction based on Alaska Communications Systems Holdings'
financial performance. Amounts under the senior credit facility not paid
when due bear interest at a default rate equal to 2.0% above the
otherwise applicable rate.
PREPAYMENTS. The senior credit facility permits Alaska Communications Systems Holdings to prepay loans and to permanently reduce revolving credit commitments, in whole or in part, at any time. In addition, Alaska Communications Systems Holdings is required to make mandatory prepayments of the term loan facilities, subject to limited exceptions, in amounts equal to the excess, if any, of:
- 50% of excess cash flow for each fiscal year, as specified in the credit agreement, over
- the aggregate principal amount of the term loan facilities prepaid during the fiscal year.
Alaska Communications Systems Holdings is also required to make mandatory prepayments of term loan facilities, subject to limited exceptions, with the net cash proceeds of dispositions of assets or
FEES. Alaska Communications Systems Holdings is required to pay the lenders, on a quarterly basis, a commitment fee equal to 1/2 of 1% annually on the undrawn portion of the unused commitments, subject to reductions based upon Alaska Communications Systems Holdings' financial performance. Alaska Communications Systems Holdings is also required to pay:
- on a quarterly basis, a commission on the face amount of all outstanding letters of credit equal to the applicable margin then in effect for adjusted LIBOR loans under the revolving credit facility,
- on a quarterly basis, a fronting fee in the amount of 0.25% annually on each letter of credit to the issuing bank,
- standard fees of the issuing bank with respect to issuance, amendment, renewal or extension of any letters of credit and
- fees payable to the administrative agent.
COVENANTS, EVENTS OF DEFAULT. The credit agreement contains customary covenants that, among other things, restrict our ability, the ability of Alaska Communications Systems Holdings and the ability of Alaska Communications Systems Holdings' subsidiaries to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness or amend other debt instruments, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change Alaska Communications Systems Holdings' business, make capital expenditures or engage in transactions with affiliates. In addition, under the senior credit facility, Alaska Communications Systems Holdings is required to comply with specified financial ratios, including minimum interest coverage ratios and maximum leverage ratios.
The credit agreement also contains provisions that prohibit any modification of the indenture relating to the senior subordinated notes of Alaska Communications Systems Holdings as well as customary representations and warranties, affirmative covenants and events of default, including cross default, material judgments and change in control.
THE ACS SENIOR SUBORDINATED NOTES
On May 14, 1999, Alaska Communications Systems Holdings issued $150.0 million in aggregate principal amount of senior subordinated notes due 2009, in a private transaction not subject to the registration requirements of the Securities Act. Cash interest is payable on the outstanding principal amount of the Alaska Communications Systems Holdings senior subordinated notes at the annual rate of 9 3/8% payable semiannually on May 15th and November 15th of each year, commencing November 15, 1999, subject to restrictions on dividends to Alaska Communications Systems Holdings contained in the Alaska Communications Systems Holdings senior credit facility.
The Alaska Communications Systems Holdings senior subordinated notes rank junior in right of payment to all current and future senior indebtedness of Alaska Communications Systems Holdings,
The Alaska Communications Systems Holdings senior subordinated notes are not redeemable until May 15, 2004. Thereafter, the Alaska Communications Systems Holdings senior subordinated notes will be redeemable at the option of Alaska Communications Systems Holdings with a premium that declines each year until 2007, when the Alaska Communications Systems Holdings senior subordinated notes will be redeemable in whole or in part at 100% of their principal amount plus accrued and unpaid interest. Upon a change of control as described in the indenture governing the Alaska Communications Systems Holdings senior subordinated notes, each holder will be able to require Alaska Communications Systems Holdings to offer to redeem the holder's Alaska Communications Systems Holdings senior subordinated notes at a price equal to 101% of principal amount, subject to restrictions contained in the Alaska Communications Systems Holdings senior credit facility. If Alaska Communications Systems Holdings consummates one or more offerings of Alaska Communications Systems Holdings capital stock on or before May 15, 2002, Alaska Communications Systems Holdings, at its option, will be able to use all or a portion of the sale proceeds to redeem up to 35% of the aggregate principal amount of the Alaska Communications Systems Holdings senior subordinated notes originally issued, at a price equal to their principal amount plus a premium equal to one year's interest at the stated interest rate.
The indenture relating to the Alaska Communications Systems Holdings senior subordinated notes contains various restrictive covenants that, among other things, limit:
- the incurrence of indebtedness by Alaska Communications Systems Holdings and its subsidiaries,
- the payment of restricted payments, as described in the indenture relating to the Alaska Communications Systems Holdings senior subordinated notes,
- the payment of dividends on stock and purchases of stock,
- the sale of assets or stock of Alaska Communications Systems Holdings' subsidiaries,
- transactions with affiliates,
- mergers, consolidations and sales of assets and
- the business activities in which Alaska Communications Systems Holdings and its subsidiaries may engage.
Each of these limitations, however, is subject to qualifications set forth fully in the indenture governing the Alaska Communications Systems Holdings senior subordinated notes, which has been filed as an exhibit to the registration statement of which this prospectus is a part and is incorporated by reference herein.
The indenture relating to the Alaska Communications Systems Holdings senior subordinated notes also contains events of default customary for obligations of this type, including:
- a default in the payment of interest on the Alaska Communications Systems Holdings senior subordinated notes when due and payable,
- the acceleration of debt of Alaska Communications Systems Holdings or any of its subsidiaries in an amount in excess of $5.0 million and
- the rendering of any judgment for the payment of money in excess of $5.0 million against Alaska Communications Systems Holdings, subject, in each case, to applicable grace periods.
We will issue the exchange debentures under the same indenture, dated as of May 14, 1999, between us and The Bank of New York, as trustee, under which the old debentures were issued. We will provide you with a copy of the indenture upon request. The indenture contains provisions that define your rights under the exchange debentures. In addition, the indenture governs our obligations under the exchange debentures. The terms of the exchange debentures include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act.
The following description is meant to be only a summary of the indenture. It does not restate the terms of the indenture in their entirety. We urge you to read carefully the indenture as it, and not this description, governs your rights as holders.
OVERVIEW OF THE EXCHANGE DEBENTURES
The exchange debentures:
- will be general unsecured obligations of us;
- will be senior in right of payment to all of our existing and future subordinated obligations; and
- will be effectively subordinated to all of our secured Indebtedness to the extent of the value of the assets securing that Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
We will initially issue exchange debentures in an aggregate principal amount of $46,928,435 with gross proceeds of $25 million. The exchange debentures will mature on May 15, 2011. We will issue the exchange debentures in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000.
The exchange debentures will not accrue interest prior to November 15, 2004. Each exchange debenture we issue will bear interest at a rate of 13% beginning on November 15, 2004, or from the most recent date to which interest has been paid or provided for. We will pay interest semiannually to holders of record at the close of business on the May 1 or November 1 immediately preceding the interest payment date on May 15 and November 15 of each year. We will pay interest on overdue principal at 1% annually in excess of such rate, and we will pay interest on overdue installments of interest at such higher rate to the extent lawful.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the exchange debentures at any office of ours or any agency designated by us which is located in the Borough of Manhattan, the City of New York. We have initially designated the corporate trust office of the trustee to act as our paying agent in such matters. The location of the corporate trust office is 101 Barclay Street, Floor 21W, New York, New York 10286. We reserve the right, however, to pay interest by check mailed directly to holders at their registered addresses.
Holders may exchange or transfer their exchange debentures at the location given in the preceding paragraph. No service charge will be made for any registration of transfer or exchange of exchange debentures. We may, however, require holders to pay any transfer tax or other similar governmental charge payable in connection with a transfer or exchange.
Except as set forth in the following paragraph, we may not redeem the exchange debentures at our option prior to May 15, 2004. After this date, we may redeem the exchange debentures in whole or in part, at the following redemption prices, which are expressed as percentages of principal amount, plus accrued and unpaid interest thereon, and additional amounts in respect thereof, if any, to the redemption date. This redemption is subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period commencing on May 15 of the years set forth below:
REDEMPTION
YEAR PRICE
------------------------------------------------------------------------------------- -----------
2004................................................................................. 106.500%
2005................................................................................. 105.200%
2006................................................................................. 103.900%
2007................................................................................. 102.600%
2008................................................................................. 101.300%
2009 and thereafter.................................................................. 100.000%
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Prior to May 15, 2002, we may, at our option, on one or more occasions, also redeem up to a maximum of 35% of the original aggregate principal amount of the exchange debentures with the net cash proceeds of one or more equity offerings by us, at a redemption price equal to 113% of the principal amount of the exchange debentures redeemed, plus accrued and unpaid interest on, and any additional amounts in respect of, the exchange debentures, to the redemption date. However after giving effect to any such redemption:
- at least 65% of the original aggregate principal amount of the exchange debentures must remain outstanding; and
- any such redemption must be made within 90 days of a related equity offering by us and otherwise in accordance with the procedures set forth in the indenture.
SELECTION
If we partially redeem exchange debentures, the trustee will select the exchange debentures to be redeemed on a ratable basis, by lot or by such other method as the trustee deems to be fair and appropriate. However, no exchange debenture of $1,000 in original principal amount or less will be redeemed in part. On and after the redemption date, interest will cease to accrue on exchange debentures or portions of exchange debentures called for redemption so long as we have deposited with the paying agent funds sufficient to pay the principal of, plus accrued and unpaid interest on, and additional amounts in respect of, the exchange debentures to be redeemed.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of Control"), each holder will have the right to require us to repurchase all or any part of such holder's exchange debentures at a purchase price in cash equal to 101% of the accreted value (or if after May 14, 2004, of the principal amount thereof plus accrued and unpaid interest thereon) and additional amounts in respect thereof, if any, to the date of repurchase; PROVIDED, HOWEVER, that notwithstanding the occurrence of a change of control, we shall not be obligated to repurchase the exchange debentures pursuant to this section in the
(1) prior to the first public offering of our common stock, the Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a majority in the aggregate of the total voting power of the voting stock of Alaska Communications Systems Holdings or us;
(2) (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in clause (1) above, except that for purposes of this clause (2) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the voting stock of Alaska Communications Systems Holdings or us and (b) the Permitted Holders beneficially own (as defined in clause (1) above), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the voting stock of Alaska Communications Systems Holdings or us than such other person and do not have the right or ability to elect or designate for election a majority of the board of directors of Alaska Communications Systems Holdings or us (for the purposes of this clause (2), such other person shall be deemed to beneficially own any voting stock of a specified entity held by a parent entity, if such other person is the beneficial owner (as defined in this clause (2)), directly or indirectly, of more than 35% of the voting power of the voting stock of such parent entity and the Permitted Holders beneficially own (as defined in clause (1) above), directly or indirectly, in the aggregate a lesser percentage of the voting power of the voting stock of such parent entity and do not have the right or ability to elect or designate for election a majority of the board of directors of such parent entity);
(3) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of us or Alaska Communications Systems Holdings (together with any new directors whose (a) election by such board of directors of Alaska Communications Systems Holdings or us or whose nomination for election by the shareholders of Alaska Communications Systems Holdings or us was approved by a majority vote of the directors of Alaska Communications Systems Holdings or us then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (b) who are designees of the Permitted Holders or were nominated by the Permitted Holders) cease to constitute a majority of the board of directors of us or Alaska Communications Systems Holdings then in office;
(4) the adoption of a plan relating to the liquidation or dissolution of Alaska Communications Systems Holdings or us;
(5) the merger or consolidation of Alaska Communications Systems Holdings or us with or into another person or the merger of another person with or into Alaska Communications Systems Holdings or us, or the sale of all or substantially all the assets of Alaska Communications Systems Holdings or us to another person, other than a person that is controlled by the Permitted Holders, and, in the case of any such merger or consolidation, the securities of Alaska Communications Systems Holdings or us that are outstanding immediately prior to such transaction and that represent 100% of the aggregate voting power of the voting stock of Alaska Communications Systems Holdings or us are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving person or transferee that represent immediately after such transaction, at least a majority of the aggregate voting power of the voting stock of the surviving person or transferee; or
If at the time of such Change of Control the terms of the Bank Indebtedness restrict or prohibit the repurchase of exchange debentures pursuant to this covenant, then prior to the mailing of the notice to holders provided for in the immediately succeeding paragraph but in any event within 30 days following any Change of Control, we shall:
(1) repay in full all Bank Indebtedness or, if doing so will allow the repurchase of exchange debentures, offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness of each lender who has accepted such offer; or
(2) obtain the requisite consent under the agreements governing the Bank Indebtedness to permit the repurchase of the exchange debentures as provided for in the immediately succeeding paragraph.
Within 30 days following any Change of Control, we shall mail a notice to each holder with a copy to the trustee (the "Change of Control Offer") stating that a Change of Control has occurred and that such holder has the right to require us to purchase such holder's exchange debentures.
We will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by us and purchases all exchange debentures validly tendered and not withdrawn under such Change of Control Offer.
RESTRICTIVE COVENANTS
The indenture will contain covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (1) Neither we nor any restricted subsidiary will incur any Indebtedness unless on the date of and after giving effect to such incurrence the Debt to EBITDA Ratio would be less than 7.25:1.
(2) Notwithstanding the foregoing paragraph (1), we and our restricted subsidiaries may incur the following Indebtedness:
(a) Bank Indebtedness in an aggregate principal amount not to exceed $585 million less the aggregate amount of all prepayments of principal applied to permanently reduce any such Indebtedness;
(b) Indebtedness of us owed to and held by any wholly owned restricted subsidiary or Indebtedness of a restricted subsidiary owed to and held by us or any wholly owned restricted subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer of any capital stock or any other event that results in any such wholly owned restricted subsidiary ceasing to be a wholly owned subsidiary or any subsequent transfer of any such Indebtedness, except to Alaska Communications Systems Holdings or a wholly owned restricted subsidiary, shall be deemed, in each case, to constitute the incurrence of such Indebtedness by the issuer thereof;
(c) Indebtedness (i) represented by the exchange debentures, (ii)
represented by the Alaska Communications Systems Holdings senior
subordinated notes and the guarantees, (iii) outstanding on the Closing
Date, other than the Indebtedness described in clauses (a) and (b) above,
(iv) consisting of Refinancing Indebtedness incurred in respect of any
Indebtedness described in this clause (c) or the foregoing paragraph (1)
or (v) consisting of guarantees of any Indebtedness permitted under
clauses (a) and (b) of this paragraph (2);
(e) Indebtedness in respect of performance bonds, bankers' acceptances, letters of credit and surety or appeal bonds provided by us and the restricted subsidiaries in the ordinary course of their business;
(f) Purchase Money Indebtedness and capitalized lease obligations in an aggregate principal amount not in excess of $20 million at any time outstanding;
(g) Hedging obligations of us directly related to Indebtedness permitted to be incurred by us pursuant to the indenture for the purpose of fixing or hedging interest rate risk or currency fluctuations;
(h) (i) Indebtedness of another person incurred and outstanding on or prior to the date on which such person consolidates with or merges with or into us or Alaska Communications Systems Holdings (other than Indebtedness incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such person consolidates with or merges with or into us or Alaska Communications Systems Holdings); PROVIDED, HOWEVER, that on the date that such transaction is consummated, we would have been able to incur $1.00 of additional Indebtedness pursuant to the foregoing paragraph (1) after giving effect to the incurrence of such Indebtedness pursuant to this clause (h) and (ii) Refinancing Indebtedness incurred by us or Alaska Communications Systems Holdings or a successor company in respect of Indebtedness incurred pursuant to subclause (i) of this clause (h); or
(i) Indebtedness, other than Indebtedness permitted to be incurred pursuant to the foregoing paragraph (1) or any other clause of this paragraph (2), in an aggregate principal amount on the date of incurrence that, when added to all other Indebtedness incurred pursuant to this clause (i) and then outstanding, shall not exceed $5 million.
(3) Notwithstanding the foregoing, we may not incur any Indebtedness pursuant to paragraph (2) above if the proceeds thereof are used, directly or indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any subordinated obligations, unless such Indebtedness will be subordinated to the exchange debentures to at least the same extent as such subordinated obligations. In addition, we may not incur any secured Indebtedness that is not Pari Passu Indebtedness unless effective provision is made to secure the exchange debentures equally and ratably with (or on a senior basis to, in the case of Indebtedness subordinated in right of payment to the exchange debentures) such secured Indebtedness for so long as such secured Indebtedness is secured by a lien.
(4) Notwithstanding any other provision of this covenant, the maximum amount of Indebtedness that we or any restricted subsidiary may incur pursuant to this covenant shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rates of currencies. For purposes of
(a) Indebtedness incurred pursuant to the Credit Agreement prior to or on the Closing Date shall be treated as incurred pursuant to clause (2)(a) above;
(b) Indebtedness permitted by this covenant need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this covenant permitting such Indebtedness; and
(c) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in this covenant, we, in our sole discretion, shall classify such Indebtedness and only be required to include the amount of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS. (1) Neither we nor any restricted subsidiary will directly or indirectly:
(a) declare or pay any dividend or make any distribution on or in respect of its capital stock or similar payment to the holders of its capital stock except dividends or distributions payable solely in its capital stock, other than Disqualified Stock, and except dividends or distributions payable to us or another restricted subsidiary (and, if such restricted subsidiary has shareholders other than us or other restricted subsidiaries, to its other shareholders on a pro rata basis);
(b) purchase, redeem, retire or otherwise acquire for value any capital stock of us or any restricted subsidiary held by persons other than us or another restricted subsidiary;
(c) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any subordinated obligations (other than the purchase, repurchase or other acquisition of subordinated obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case, due within one year of the date of acquisition); or
(d) make any Investment, other than a Permitted Investment, in any person
(any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment being herein referred to as a "Restricted Payment") if at the time we or such restricted subsidiary make such Restricted Payment:
(i) a Default will have occurred and be continuing, or would result therefrom;
(ii) we could not incur at least $1.00 of additional Indebtedness under paragraph (1) of the covenant described under the caption "--Limitation on Indebtedness"; or
(iii) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined conclusively in good faith by the board of directors) declared or made subsequent to the Closing Date would exceed the sum of, without duplication:
(A) (i) 100% of EBITDA accrued during the period, treated as one accounting period, from the beginning of the fiscal quarter immediately following the fiscal quarter during which the Closing Date occurs to the end of the most recent fiscal quarter for which financial statements are publicly available (or, in case such EBITDA will be a deficit, minus 100% of such deficit), minus
(B) the aggregate net cash proceeds received by us from the issue or sale of our capital stock, other than Disqualified Stock, subsequent to the Closing Date (other than (x) an issuance or sale to one of our subsidiaries, (y) an issuance or sale to an employee stock ownership plan or other trust established by us or any of our subsidiaries or (z) to the extent used in accordance with clause (2)(e)(ii) or (2)(f)(iii)(B)) below; plus
(C) the aggregate net cash proceeds received by us from the sale or other disposition, other than to us or a restricted subsidiary, of any Investments previously made by us or a restricted subsidiary and treated as a Restricted Payment; PROVIDED that the amount added pursuant to this clause (C) shall not exceed the amount treated as a Restricted Payment and not previously added pursuant to this paragraph (iii); plus
(D) the amount by which Indebtedness of us or our restricted subsidiaries is reduced on our balance sheet upon the conversion or exchange, other than by one of our subsidiaries, subsequent to the Closing Date of any Indebtedness of us or our restricted subsidiaries issued after the Closing Date that is convertible or exchangeable for capital stock, other than Disqualified Stock, of us (less the amount of any cash or the fair market value of other property distributed by us or any restricted subsidiary upon such conversion or exchange); plus
(E) the amount equal to the net reduction in Investments in unrestricted subsidiaries resulting from (i) payments of dividends, repayments of the principal of loans or advances or other transfers of assets to us or any restricted subsidiary from unrestricted subsidiaries or (ii) the redesignation of unrestricted subsidiaries as restricted subsidiaries (valued, in each case, as provided in the definition of "Investment") not to exceed, in the case of any unrestricted subsidiary, the amount of Investments previously made by us or any restricted subsidiary in such unrestricted subsidiary, which amount was included in the calculation of the amount of Restricted Payments; plus
(F) $5 million.
(2) The provisions of the foregoing paragraph (1) will not prohibit:
(a) any purchase, repurchase, retirement, defeasance or other acquisition or retirement for value of capital stock or subordinated obligations of us made by exchange for, or out of the proceeds of the substantially concurrent sale of, capital stock of us, other than Disqualified Stock and other than capital stock issued or sold to one of our subsidiaries or an employee stock ownership plan or other trust established by us or any of our subsidiaries; PROVIDED, HOWEVER, that:
(i) such Restricted Payment will be excluded in the calculation of the amount of Restricted Payments; and
(ii) the net cash proceeds from such sale applied in the manner set forth in this clause (a) will be excluded from the calculation of amounts under clause (B) of paragraph (iii) above;
(c) any purchase or redemption of subordinated obligations from Net Available Cash to the extent permitted by the covenant described under the caption "--Limitation on Sales of Assets and Subsidiary Stock"; PROVIDED, HOWEVER, that such purchase or redemption will be excluded in the calculation of the amount of Restricted Payments;
(d) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; PROVIDED, HOWEVER, that such dividend will be included in the calculation of the amount of Restricted Payments;
(e) the repurchase or other acquisition of shares of, or options to purchase shares of, common stock of us or any of our subsidiaries from employees, former employees, consultants, former consultants, directors or former directors of us or any of our subsidiaries (or permitted transferees of such employees, former employees, consultants, former consultants, directors or former directors), pursuant to the terms of agreements or plans or amendments thereto approved by the board of directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock; PROVIDED, HOWEVER, that the aggregate amount of such repurchases, together with any amounts or other distributions to us under the following paragraph (f)(iii), shall not exceed in any calendar year the sum of (i) $5 million plus (ii) the net cash proceeds received since the date of the indenture by us or received by us and contributed to us from the sale of capital stock to employees, consultants and directors of us; PROVIDED, FURTHER, HOWEVER, that such repurchases and other acquisitions of shares, or options to purchase shares of common stock shall be included in the calculation of the amount of Restricted Payments; and
Notwithstanding the foregoing, no cash dividends in excess of $10.0 million may be paid by us unless we shall have set aside in an escrow account an amount not less than the amount of accretion accrued from the original issue date of the exchange debentures.
(1) pay dividends or make any other distributions on its capital stock or pay any Indebtedness or other obligations owed to us or any of our restricted subsidiaries;
(2) make any loans or advances to us or any of our restricted subsidiaries; or
(3) transfer any of its property or assets to us or any of our restricted subsidiaries,
except:
(a) any encumbrance or restriction pursuant to applicable law or an agreement in effect at or entered into on the Closing Date;
(b) any encumbrance or restriction with respect to a restricted subsidiary pursuant to an agreement relating to any Indebtedness incurred by such restricted subsidiary prior to the date on which such restricted subsidiary was acquired by us (other than Indebtedness incurred as
(c) any encumbrance or restriction (x) pursuant to an agreement effecting a refinancing of Indebtedness incurred pursuant to an agreement referred to in clause (a) or (b) above or this clause (c) or (y) contained in any amendment to an agreement referred to in clause (a) or (b) above or this clause (c) or (z) pursuant to any other agreement regarding Indebtedness otherwise permitted by the covenant "Limitation on Indebtedness"; PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any such refinancing agreement or amendment are no less favorable to the noteholders than the encumbrances and restrictions contained in such predecessor agreements or, with respect to agreements entered into at or after the Closing Date, the most restrictive agreement in existence at or prior to the Closing Date;
(d) in the case of clause (3), any encumbrance or restriction:
(i) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract; or
(ii) contained in security agreements securing Indebtedness of a restricted subsidiary to the extent such encumbrance or restriction restricts the transfer of the property subject to such security agreements;
(e) with respect to a restricted subsidiary, any restriction imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the capital stock or assets of such restricted subsidiary pending the closing of such sale or disposition;
(f) any encumbrance or restriction relating to Purchase Money Indebtedness or capitalized lease obligations for property acquired in the ordinary course of business that imposes restrictions on the ability of us or a restricted subsidiary to sell, lease or transfer the acquired property to us or our restricted subsidiaries;
(g) restrictions on cash or other deposits imposed by customers under contracts entered into in the ordinary course of business;
(h) any encumbrance or restriction contained in joint venture agreements and other similar agreements entered into in the ordinary course of business and customary for such types of agreements; and
(i) any encumbrance or restriction pursuant to an agreement for Indebtedness under Section 2(e) and 2(g) of the covenant "Limitation on Indebtedness."
(a) we or such restricted subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value, as determined in good faith by the board of directors, of the shares and assets subject to such Asset Disposition;
(b) at least 75% of the consideration thereof received by us or such restricted subsidiary is in the form of cash; PROVIDED that the following shall be deemed to be cash for purposes of this clause (b): (i) the amount of any liabilities (as shown on our, or such restricted subsidiary's, most recent balance sheet or in the notes thereto) of us or any restricted subsidiary, other than liabilities that are by their terms subordinated to the exchange debentures, that are assumed by the transferee of any such assets, (ii) the amount of any securities received by us
(for purposes of this paragraph (b), all determinations of fair market value shall be made in good faith by the board of directors and evidenced by an officers' certificate delivered to the trustee); and
(c) from and after the date on which neither the Bank Indebtedness nor the Alaska Communications Systems Holdings senior subordinated notes (including any refinancings thereof) are outstanding, an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by us (or such restricted subsidiary, as the case may be):
(i) FIRST, to the extent we elect or are required by the terms of any Indebtedness to prepay, repay, redeem, purchase or otherwise acquire Indebtedness, other than any Disqualified Stock, of a wholly owned restricted subsidiary (in each case, other than Indebtedness owed to us or any of our affiliates and other than preferred stock) within 180 days of the later of the date of such Asset Disposition or the receipt of such Net Available Cash;
(ii) SECOND, to the extent of the balance of Net Available Cash after application in accordance with clause (i) above, to the extent we or such restricted subsidiary elect to, or enter into a binding agreement to, reinvest in Additional Assets (including by means of an Investment in Additional Assets by a restricted subsidiary with cash in an amount equal to the amount of Net Available Cash received by, or to be received by, us or another restricted subsidiary) within 180 days of the later of such Asset Disposition or the receipt of such Net Available Cash; and
(iii) THIRD, to the extent of the balance of such Net Available Cash after application in accordance with clauses (i) and (ii) above, to make an offer to purchase exchange debentures pursuant to and subject to the conditions set forth in paragraph (2) below; PROVIDED, HOWEVER, that, if we elect (or are required by the terms of any other Senior Subordinated Indebtedness), such offer may be made ratably to purchase the exchange debentures and other Pari Passu Indebtedness of us;
PROVIDED, HOWEVER, that, in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (i) or (iii) above, we or such restricted subsidiary will retire such Indebtedness and will cause the related loan commitment, if any, to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased.
Upon completion of any offer, the amount of Net Available Cash shall be reset at zero, and we shall be entitled to use any remaining proceeds for any corporate purposes to the extent permitted under the indenture. Notwithstanding the foregoing provisions of this covenant, we and the restricted subsidiaries will not be required to apply any Net Available Cash in accordance with this covenant except to the extent that the aggregate Net Available Cash from all Asset Dispositions that is not applied in accordance with this covenant exceeds $10 million.
(2) In the event of an Asset Disposition that requires the purchase of exchange debentures pursuant to clause (c)(iii) above, we will be required to offer to purchase exchange debentures tendered pursuant to an offer by us for the exchange debentures at a purchase price of 100% of their
(3) We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of exchange debentures pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, we will comply with the
applicable securities laws and regulations and will not be deemed to have
breached our obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (1) Neither we nor any restricted subsidiary will, directly or indirectly, enter into or conduct any transaction or series of related transactions with any affiliate of us (an "Affiliate Transaction") unless such Affiliate Transaction is on terms:
(a) that are no less favorable to us or such restricted subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arms'-length dealings with a person who is not such an affiliate;
(b) that, in the event such Affiliate Transaction involves an aggregate amount in excess of $5 million:
(i) are set forth in writing; and
(ii) have been approved by a majority of the members of the board of directors having no personal stake, other than as a holder of capital stock of us, or such restricted subsidiary, in such Affiliate Transaction; and
(c) that, in the event such Affiliate Transaction involves an amount in excess of $15 million, have been determined by a nationally recognized appraisal or investment banking firm to be fair, from a financial standpoint, to us and our restricted subsidiaries.
(2) The provisions of paragraph (1) above will not prohibit:
(a) any Restricted Payment permitted to be paid pursuant to the covenant described under the caption "--Limitation on Restricted Payments";
(b) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the board of directors;
(c) the grant of stock options or similar rights to employees and directors of us pursuant to plans approved by the board of directors;
(d) loans or advances to employees in the ordinary course of business in accordance with past practices of us, but in any event not to exceed $10 million in the aggregate outstanding at any one time;
(e) the payment of reasonable fees to directors of us and our subsidiaries who are not employees of us or our subsidiaries;
(g) customary indemnification and insurance arrangements in favor of officers, directors, employees and consultants of us or any of our restricted subsidiaries;
(h) payments by us or any of our restricted subsidiaries to Fox Paine & Company and its affiliates for any financial advisory, financing, underwriting or other placement services or in respect of other investment banking activities, including, without limitation, in connection with acquisitions or divestitures which payments are approved by a majority of the members of the board of directors referred to in clause (b)(ii) above in good faith;
(i) the existence of, or the performance by us or any of our restricted subsidiaries of the obligations under the terms of, any stockholders agreements, including any registration rights agreement or purchase agreement related thereto, to which it is a party as of the Closing Date, as such agreements, may be amended from time to time pursuant to the terms thereof; PROVIDED, HOWEVER, that the terms of any such amendment are no less favorable to the holders than the terms of any such agreements in effect as of the Closing Date; and
(j) the issuance of capital stock, other than Disqualified Stock, of us for cash to any Permitted Holder.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. We will not sell or otherwise dispose of any shares of capital stock of a restricted subsidiary, and will not permit any restricted subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any shares of its capital stock except:
(1) to us or a wholly owned restricted subsidiary;
(2) if, immediately after giving effect to such issuance, sale or other disposition, neither we nor any of our subsidiaries own any capital stock of such restricted subsidiary; or
(3) if, immediately after giving effect to such issuance or sale, such restricted subsidiary would no longer constitute a restricted subsidiary and any Investment in such person remaining after giving effect thereto would have been permitted to be made under the covenant described under the caption "--Limitation on Restricted Payments" if made on the date of such issuance, sale or other disposition.
The proceeds of any sale of such capital stock permitted hereby will be treated as Net Available Cash from an Asset Disposition and must be applied in accordance with the terms of the covenant described under the caption "--Limitation on Sales of Assets and Subsidiary Stock."
SEC REPORTS. We will file with the SEC and provide the trustee and exchange debentures and prospective exchange debentures upon request within 15 days after we file them with the SEC, copies of our annual report and the information, documents and other reports that are specified in Sections 13 and 15(d) of the Exchange Act. In addition, following an Equity Offering, we shall furnish to the trustee and exchange debentures, promptly upon their becoming available, copies of the annual report to shareholders and any other information provided by us to our public shareholders generally. We also will comply with the other provisions of Section 314(a) of the Trust Indenture Act.
LIMITATION ON LINES OF BUSINESS. Neither we nor any restricted subsidiary will engage in any business other than a Related Business.
We will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all our assets to, any person, unless:
(1) the successor company will be a U.S. corporation, and the successor company, if not us, will expressly assume, by a supplemental indenture, all of our obligations under the exchange debentures and the indenture;
(2) immediately after giving effect to such transaction, no Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, the successor company would be able to incur an additional $1.00 of Indebtedness under paragraph (1) of the covenant described under the caption "--Restrictive Covenants--Limitation on Indebtedness";
(4) We shall have delivered to the trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture, if any, comply with the indenture; and
(5) We shall have delivered to the trustee an opinion of counsel to the effect that the holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred.
Notwithstanding the foregoing clause (2) or (3), we may merge with an affiliate incorporated or formed solely for the purpose of reincorporating we in another jurisdiction.
The successor company will succeed to, and be substituted for, and may exercise every right and power of, us under the indenture. However, in the case of a conveyance, transfer or lease of all or substantially all its assets, we will not be released from the obligation to pay the principal of and interest on the exchange debentures.
DEFAULTS
Each of the following is an "Event of Default":
(1) a default in any payment of interest on any exchange debenture when due and payable, continued for 30 days;
(2) a default in the payment of principal of any exchange debenture when due and payable at its stated maturity, upon required redemption or repurchase, upon declaration or otherwise;
(3) our failure to comply with our obligations under the covenant described under the caption "--Merger and Consolidation";
(4) our failure to comply for 30 days after notice with any of our obligations under the covenants described under the captions "--Change of Control" or "--Restrictive Covenants" (in each case, other than a failure to purchase exchange debentures);
(5) our failure to comply for 60 days after notice with its other agreements contained in the exchange debentures or the indenture;
(6) our failure or that of any of our subsidiaries to pay any Indebtedness, other than Indebtedness owing to us or any of our subsidiaries, within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $5.0 million or its foreign currency equivalent (the "cross acceleration provision") and such failure continues for 10 days after receipt of the notice specified in the indenture;
(8) the rendering of any judgment or decree for the payment of money in excess of $5.0 million or its foreign currency equivalent against us or any of our subsidiaries, to the extent such judgment or decree is not covered by insurance or is in excess of insurance coverage, if such judgment or decree remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed (the "judgment default provision").
A default under clause (4), (5) or (6) above will not constitute an Event of Default until the trustee or the holders of at least 25% in principal amount of the outstanding exchange debentures notify us of the default and we do not cure such default within the time specified in clauses (4), (5) or (6) above after receipt of such notice.
If an Event of Default, other than an Event of Default under the bankruptcy provisions, occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the outstanding exchange debentures by notice to us may declare the principal of (if, prior to May 14, 2004, the accreted value) and accrued but unpaid interest on all the exchange debentures to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. If an Event of Default under the bankruptcy provisions occurs, the principal of and accrued and unpaid interest on all the exchange debentures (if, prior to May 14, 2004, the accreted value of all the exchange debentures) will become immediately due and payable. Under certain circumstances, the holders of a majority in principal amount of the outstanding exchange debentures may rescind any such acceleration with respect to the exchange debentures and its consequences.
Subject to the provisions of the indenture relating to the duties of the trustee, in case an Event of Default occurs and is continuing, the trustee will be under no obligation to exercise any of the rights or powers under the indenture at the request or direction of any of the holders, unless such holders have offered to the trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium, if any, or interest when due, no holder may pursue any remedy with respect to the indenture or the exchange debentures unless:
(1) such holder has previously given the trustee notice that an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding exchange debentures have requested the trustee in writing to pursue the remedy;
(3) such holders have offered the trustee reasonable security or indemnity against any loss, liability or expense;
(4) the trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding exchange debentures have not given the trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount of the outstanding exchange debentures will be given the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or of exercising any trust or power conferred on the trustee. The trustee, however, may refuse to follow any direction that conflicts with law or the indenture or that the trustee determines is unduly prejudicial to the rights of any other holder or that would involve the trustee in personal liability. Prior to taking any action under the indenture, the trustee will be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action.
If a Default occurs and is continuing and is known to the trustee, the trustee must mail to each holder notice of the Default within 90 days after it is known to a trust officer or written notice of it is
AMENDMENTS AND WAIVERS
Subject to certain exceptions, holders of a majority in principal amount of the exchange debentures then outstanding may amend the indenture and waive defaults. More significant amendments require the consent of each holder of an outstanding exchange debenture affected. Without the consent of each holder, no amendment may, among other things:
- reduce the amount of exchange debentures whose holders must consent to an amendment;
- reduce the rate of or extend the time for payment of interest or any additional amounts on any exchange debenture or change or have the effect of changing the definition of accreted value;
- reduce the accreted value or principal of or extend the stated maturity of any exchange debenture;
- reduce the premium payable upon the redemption of any exchange debenture or change the time at which any exchange debenture may be redeemed;
- make any exchange debenture payable in money other than that stated in the exchange debenture;
- impair the right of any holder to receive payment of principal of, and interest or any additional amounts on, such holder's exchange debentures on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's exchange debentures; or
- make any change in the amendment provisions which require each holder's consent or in the waiver provisions.
Less significant amendments can be done without the consent of any holder. Without the consent of any holder, we and trustee may amend the indenture to:
- cure any ambiguity, omission, defect or inconsistency;
- provide for the assumption by a successor corporation of the obligations of us under the indenture;
- provide for uncertificated exchange debentures in addition to or in place of certificated exchange debentures;
- secure the exchange debentures;
- add to the covenants of us for the benefit of the holders or to surrender any right or power conferred upon us;
- make any change that does not adversely affect the rights of any holder, subject to the provisions of the indenture; or
- comply with any requirement of the SEC in connection with the qualification of the indenture under the Trust Indenture Act.
TRANSFER AND EXCHANGE
A holder will be able to transfer or exchange exchange debentures. Upon any transfer or exchange, the registrar and the trustee may require a debentureholder, among other things, to furnish appropriate endorsements and transfer documents. We may require a debentureholder to pay any taxes required by law or permitted by the indenture. We will not be required to transfer or exchange any exchange debenture selected for redemption or to transfer or exchange any exchange debenture for a period of 15 days prior to a selection of exchange debentures to be redeemed. The exchange debentures will be issued in registered form, and the holder will be treated as the owner of such exchange debenture for all purposes.
DEFEASANCE
We may at any time terminate all our obligations under the exchange debentures and the indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and administrative obligations. In addition, we may at any time terminate:
(1) our obligations under the covenants described under "--Restrictive Covenants" or
(2) the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and the judgment default provision described under "--Defaults" and the limitations contained in clauses (3) and (4) under the first paragraph under "--Merger and Consolidation" ("covenant defeasance").
If we exercise our legal defeasance option or our covenant defeasance option, each guarantor will be released from all of its obligations with respect to its guarantee.
We may exercise our legal defeasance option notwithstanding our prior exercise of our covenant defeasance option. If we exercise our legal defeasance option, payment of the exchange debentures may not be accelerated because of an Event of Default with respect thereto. If we exercise our covenant defeasance option, payment of the exchange debentures may not be accelerated because of an Event of Default specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries) or (8) under "--Defaults" or because of our failure to comply with clause (3) or (4) under the first paragraph under "--Merger and Consolidation."
In order to exercise either defeasance option, we must irrevocably deposit in trust, the "defeasance trust", with the trustee money or U.S. government obligations for the payment of principal, premium if any, and interest on the exchange debentures to redemption or maturity, and must comply with certain other conditions, including delivery to the trustee of an opinion of counsel relating to tax matters affecting holders.
CONCERNING THE TRUSTEE
The Bank of New York is to be the trustee under the indenture and has been appointed by us as registrar and paying agent with regard to the exchange debentures.
GOVERNING LAW
The indenture and the exchange debentures will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby.
DEFINITIONS
"Additional Assets" means:
(1) any property or assets, other than Indebtedness and capital stock, to be used by us or a restricted subsidiary in a Related Business;
(3) capital stock constituting a minority interest in any person that at such time is a restricted subsidiary;
PROVIDED, HOWEVER, that any such restricted subsidiary described in clauses (2) or (3) above is primarily engaged in a Related Business.
"Asset Disposition" means any sale, lease, transfer or other disposition, or series of related sales, leases, transfers or dispositions, by us or any restricted subsidiary, including any disposition by means of a merger, consolidation, or similar transaction (each referred to for the purposes of this definition as a "disposition"), of:
(1) any shares of capital stock of a restricted subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a person other than us or a restricted subsidiary);
(2) all or substantially all the assets of any division or line of business of us or any restricted subsidiary; or
(3) any other assets of us or any restricted subsidiary outside of the ordinary course of business of us or such restricted subsidiary;
(other than, in the case of (1), (2) and (3) above:
(a) a disposition by a restricted subsidiary to us or by us or a restricted subsidiary to a wholly owned restricted subsidiary;
(b) for purposes of the provisions described under the caption "--Restrictive Covenants-- Limitation on Sales of Assets and Subsidiary Stock" only, a disposition subject to the covenant described under the caption "--Restrictive Covenants--Limitation on Restricted Payments";
(c) a disposition of assets with a fair market value of less than $100,000;
(d) a disposition of temporary cash investments or goods held for sale in the ordinary course of business or obsolete equipment or other obsolete assets in the course of business consistent with past practices of us;
(e) the disposition of all or substantially all of our assets of us in a manner permitted under the covenant described under the caption "--Merger and Consolidation" or any disposition that constitutes a Change of Control under the indenture; and
(f) the lease, assignment or sub-lease of any real or personal property in the ordinary course of business).
"Attributable Debt" in respect of a sale/leaseback transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the exchange debentures, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such sale/leaseback transaction, including any period for which such lease has been extended.
"Bank Indebtedness" means any and all amounts payable under or in respect of the Credit Agreement, the notes issued pursuant thereto, the guarantees thereof, the collateral documents relating thereto and any Refinancing Indebtedness with respect thereto, as amended from time to time, including principal, premium, if any, interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to Alaska Communications Systems Holdings
"Closing Date" means the date of the indenture.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of us and our Consolidated restricted subsidiaries which may properly be classified as current liabilities, including taxes accrued as estimated, on a Consolidated basis, after eliminating:
(1) all intercompany items between us and any restricted subsidiary; and
(2) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest expense of us and our Consolidated restricted subsidiaries, plus, to the extent incurred by us and our Consolidated restricted subsidiaries in such period but not included in such interest expense:
(1) interest expense attributable to capitalized lease obligations and the interest expense attributable to leases constituting part of a sale/leaseback transaction;
(2) amortization of debt discount and debt issuance costs;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges attributable to letters of credit and bankers' acceptance financing;
(6) interest accruing on any Indebtedness of any other person to the extent such Indebtedness is guaranteed by us or any restricted subsidiary;
(7) amortization of net costs associated with hedging obligations;
(8) dividends in respect of all Disqualified Stock of us and all preferred stock of any of our subsidiaries, to the extent held by persons other than us or a wholly owned restricted subsidiary;
(9) interest incurred in connection with investments in discontinued operations; and
(10) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any person, other than us, in connection with Indebtedness incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of us and our Consolidated subsidiaries for such period; PROVIDED, HOWEVER, that there shall not be included in such Consolidated Net Income:
(1) any net income of any person, other than us, if such person is not a restricted subsidiary, except that:
(a) subject to the limitations contained in clause (4) below, our equity in the net income of any such person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash or other assets actually distributed by such person during such period to us or a restricted subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a restricted subsidiary, to the limitations contained in clause (3) below); and
(2) any net income or loss of any person acquired by us or any of our subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition;
(3) any net income of any restricted subsidiary to the extent that the declaration or payment of dividends or similar distributions by such restricted subsidiary of its net income is not, at the date of determination, permitted without any prior governmental approval, which has not been obtained, or, directly or indirectly, by the operation of the terms of its charter, or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that restricted subsidiary or its stockholders, unless such restrictions with respect to the payment of dividends or similar distributions have been legally waived, except that the net loss of any such restricted subsidiary for such period shall be included in determining such Consolidated Net Income;
(4) any gain, but not loss, realized upon the sale or other disposition of any asset of us or our Consolidated subsidiaries, including pursuant to any sale/leaseback transaction, that is not sold or otherwise disposed of in the ordinary course of business and any gain, but not loss, realized upon the sale or other disposition of any capital stock of any person;
(5) any extraordinary or otherwise nonrecurring gain or loss; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purpose of the covenant described under the caption "--Restrictive Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from unrestricted subsidiaries to us or a restricted subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (1)(d)(iii)(E) thereof.
"Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a consolidated balance sheet of us and our Consolidated restricted subsidiaries, determined on a Consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of:
(1) minority interests in Consolidated subsidiaries held by persons other than us or a restricted subsidiary;
(2) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the board of directors;
(3) any revaluation or other write-up in book value of assets subsequent to the date of the indenture as a result of a change in the method of valuation in accordance with GAAP consistently applied;
(4) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items;
(5) treasury stock;
(6) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of capital stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and
"Consolidation" means the consolidation of the amounts of each of the restricted subsidiaries with those of us in accordance with GAAP consistently applied; PROVIDED, HOWEVER, that "Consolidation" will not include consolidation of the accounts of any unrestricted subsidiary, but the interest of us or any restricted subsidiary in an unrestricted subsidiary will be accounted for as an investment. The term "Consolidated" has a correlative meaning.
"Credit Agreement" means the credit agreement dated as of May 14, 1999 among us, Alaska Communications Systems Holdings, the financial institutions named therein, The Chase Manhattan Bank, as Administrative Agent, Canadian Imperial Bank of Commerce, as Syndication Agent and Credit Suisse First Boston, as Documentation Agent, as amended, waived or otherwise modified from time to time (except to the extent that any such amendment, waiver or other modification thereto would be prohibited by the terms of the indenture, unless otherwise agreed to by the holders of at least a majority in aggregate principal amount of exchange debentures at the time outstanding), including any such amendments or modifications, or any other credit agreement or credit agreements, that replace, refund or refinance any or a portion of the commitments or loans thereunder, up to a maximum principal amount not to exceed $585 million.
"Debt to EBITDA Ratio" as of any date of determination means the ratio of:
(1) Total Consolidated Indebtedness as of the date of determination to
(2) EBITDA for the period of the most recent four consecutive fiscal quarters ending at the end of the most recent fiscal quarter for which financial statements are publicly available; PROVIDED, HOWEVER, that:
(a) if we or any restricted subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case, other than Indebtedness incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Debt to EBITDA Ratio, EBITDA for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if we or such restricted subsidiary has not earned the interest income actually earned during such period in respect of cash or temporary cash investments used to repay, repurchase, defease or otherwise discharge such Indebtedness;
(b) if since the beginning of such period we or any restricted subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA, if positive, directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to the EBITDA, if negative, directly attributable thereto for such period;
(c) if since the beginning of such period, we or any restricted subsidiary shall have made an Investment in any person that is merged with or into us or any restricted subsidiary, or any person that becomes a restricted subsidiary, or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA for such period shall be calculated after giving pro forma effect thereto, including the incurrence of any Indebtedness, as if such Investment or acquisition occurred on the first day of such period; any such pro forma calculation may include adjustments appropriate to reflect, without duplication (x) any such acquisition to the extent such adjustments may be reflected in the preparation of pro forma financial information in accordance with the requirements of GAAP and Article XI of
(d) if since the beginning of such period, any person (that subsequently became a restricted subsidiary or was merged with or into us or any restricted subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (b) or (c) above if made by us or a restricted subsidiary during such period, EBITDA for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets and the amount of income or earnings relating thereto, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of us. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any interest rate agreement applicable to such Indebtedness if such interest rate agreement has a remaining term as at the date of determination in excess of 12 months).
"Default" means any event which is, or after notice or passage of time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any person, any capital stock that by its terms, or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable, or upon the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock; or
(3) is redeemable at the option of the holder thereof, in whole or in part;
in each case on or prior to the first anniversary of the stated maturity of the exchange debentures; PROVIDED, HOWEVER, that any capital stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such person to repurchase or redeem such capital stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the stated maturity of the exchange debentures shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such capital stock are not more favorable to the holders of such capital stock than the provisions of the covenants described under the captions "--Change of Control" and "--Restrictive Covenants--Limitation on Sale of Assets and Subsidiary Stock."
"EBITDA" for any period means the Consolidated Net Income for such period, plus the following to the extent deducted in calculating such Consolidated Net Income:
(1) income tax expense of us and our Consolidated restricted subsidiaries;
(3) depreciation expense of us and our Consolidated restricted subsidiaries;
(4) amortization expense of us and our Consolidated restricted subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period); and
(5) all other non-cash charges of us and our Consolidated restricted subsidiaries (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash expenditures in any future period, but that will not be expensed in such future periods),
in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a restricted subsidiary of us shall be added to Consolidated Net Income to compute EBITDA only to the extent, and in the same proportion, that the net income of such restricted subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to us by such restricted subsidiary without prior approval, that has not been obtained pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such restricted subsidiary or its stockholders.
"Equity Offering" means any public or private sale of capital stock, other than Disqualified Stock, of us, other than offerings of us of the type that can be registered on Form S-8.
"GAAP" means generally accepted accounting principles in the U.S. as in effect as of the Closing Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards Board;
(3) such other statements by such other entities as approved by a significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of financial statements, including pro forma financial statements, in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC.
All ratios and computations based on GAAP contained in the indenture shall be computed in conformity with GAAP.
"Indebtedness" means, with respect to any person on any date of determination, without duplication:
(1) the principal of and premium, if any, in respect of indebtedness of such person for borrowed money;
(2) the principal of and premium, if any, in respect of obligations of such person evidenced by bonds, debentures, notes or other similar instruments;
(3) all obligations of such person in respect of letters of credit or other similar instruments;
(4) all obligations of such person to pay the deferred and unpaid purchase price of property or services, except trade payables and contingent obligations to pay earn-outs, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services;
(6) the amount of all obligations of such person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any subsidiary of such person, any preferred stock (but excluding, in each case, any accrued dividends);
(7) all Indebtedness of other persons secured by a lien on any asset of such person, whether or not such Indebtedness is assumed by such person; PROVIDED, HOWEVER, that the amount of Indebtedness of such person shall be the lesser of:
(A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other persons;
(8) to the extent not otherwise included in this definition, hedging obligations of such person; and
(9) all obligations of the type referred to in clauses (1) through (8) above of other persons and all dividends of other persons for the payment of which, in either case, such person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any guarantee.
The amount of Indebtedness of any person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date.
"Investment" in any person means any, direct or indirect, advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extension of credit (including by way of guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of capital stock, Indebtedness or other similar instruments issued by such person. For purposes of the definition of the covenant described under the caption "--Restrictive Covenants--Limitation on Restricted Payments":
(1) "Investment" shall include the portion, proportionate to our equity interest in such Subsidiary, of the fair market value of the net assets of any of our subsidiaries at the time that such subsidiary is designated an unrestricted subsidiary; PROVIDED, HOWEVER, that, upon a redesignation of such subsidiary as a restricted subsidiary, we shall be deemed to continue to have a permanent "Investment" in an unrestricted subsidiary in an amount, if positive, equal to:
(a) our Investment in such subsidiary at the time of such redesignation less
(b) the portion, proportionate to our equity interest in such subsidiary, of the fair market value of the net assets of such subsidiary at the time of such redesignation; and
(2) any property transferred to or from an unrestricted subsidiary shall be valued at its fair market value at the time of such transfer, in each case, as determined in good faith by the board of directors.
"Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring person of Indebtedness or other obligations relating to the properties or
(1) all legal fees and expenses, title and recording tax expenses, commissions and other fees and expenses incurred, and all federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition;
(2) all payments, including any prepayment premiums or penalties, made on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority interest holders in subsidiaries or joint ventures as a result of such Asset Disposition; and
(4) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by us or any restricted subsidiary after such Asset Disposition.
"Pari Passu Indebtedness" of us means the exchange debentures, our guarantee of the Bank Indebtedness, and any other Indebtedness of us that specifically provides that such Indebtedness is to rank equally with the exchange debentures, in right of payment and is not subordinated by its terms in right of payment to any Indebtedness or other obligation of us which is not Pari Passu Indebtedness.
"Permitted Holders" means Fox Paine Capital Fund, L.P., and its affiliates, FPC Investors, L.P., ALEC Coinvestment Fund I, LLC, ALEC Coinvestment Fund II, LLC, ALEC Coinvestment Fund III, LLC, ALEC Coinvestment Fund IV, LLC, ALEC Coinvestment Fund V, LLC, members of management and any person acting in the capacity of an underwriter in connection with a public or private offering of our capital stock.
"Permitted Investment" means an Investment by us or any restricted subsidiary in:
(1) us, a restricted subsidiary or a person that will, upon the making of such Investment, become a restricted subsidiary; PROVIDED, HOWEVER, that the primary business of such restricted subsidiary is a Related Business;
(2) another person if as a result of such Investment such other person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, Alaska Communications Systems Holdings or a restricted subsidiary; PROVIDED, HOWEVER, that such person's primary business is a Related Business;
(3) temporary cash investments;
(4) receivables owing to us or any restricted subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms may include such concessionary trade terms as us or any such restricted subsidiary deems reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business;
(6) any loans or advances to employees made in the ordinary course of business consistent with past practices of us or such restricted subsidiary and not exceeding, when aggregated with amounts loaned or advanced under clause (2)(f)(iv) of "--Restrictive Covenants--Limitation on Restricted Payments," $5 million in the aggregate outstanding at any one time;
(8) any person to the extent such Investment represents the non-cash or deemed cash portion of the consideration received for an Asset Disposition that was made pursuant to and in compliance with the covenant described under the caption "--Restrictive Covenants-- Limitation on Sales of Assets and Subsidiary Stock";
(9) any Investment existing on the Closing Date;
(10) hedging obligations permitted under paragraph (2)(g) of the covenant described under the caption "--Restrictive Covenants--Limitation on Indebtedness";
(11) guarantees of Indebtedness permitted under the covenant described under the caption "--Restrictive Covenants--Limitation on Indebtedness";
(12) Investments which are made exclusively with our capital stock, other than Disqualified Stock; and
(13) additional Investments having an aggregate fair market value, taken together with all other Investments made pursuant to this clause (13) that are at the time outstanding, not to exceed $5 million at the time of such Investment, with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value.
"Permitted Joint Venture Interests" means equity interests representing at least 35% of the voting stock of a person engaged in a business in which we were engaged at the Closing Date or a Related Business.
"Purchase Money Indebtedness" means Indebtedness:
(1) consisting of the deferred purchase price of an asset, conditional sale obligations, obligations under any title retention agreement and other purchase money obligations, in each case where the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed; and
(2) incurred to finance the acquisition by us or a restricted subsidiary of such asset, including additions and improvements; PROVIDED, HOWEVER, that such Indebtedness is incurred within 180 days before or after the acquisition by us or such restricted subsidiary of such asset.
"Refinancing Indebtedness" means Indebtedness that is incurred to refund, refinance, replace, repay, redeem, retire, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) any Indebtedness of us or any restricted subsidiary existing on the Closing Date or incurred in compliance with the indenture; PROVIDED, HOWEVER, that:
(1) other than with respect to Bank Indebtedness or the Alaska Communications Systems Holdings senior subordinated notes, the Refinancing Indebtedness has a stated maturity no earlier than the stated maturity of the Indebtedness being refinanced;
(2) other than with respect to Bank Indebtedness or the Alaska Communications Systems Holdings senior subordinated notes, the Refinancing Indebtedness has an average life at the time such Refinancing Indebtedness is incurred that is equal to or greater than the average life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced; and
PROVIDED, FURTHER, HOWEVER, that Refinancing Indebtedness shall not include:
(a) Indebtedness of a restricted subsidiary that refinances Indebtedness of us; or
(b) Indebtedness of us or a restricted subsidiary that refinances Indebtedness of an unrestricted subsidiary.
"Related Business" means any business related, ancillary or complementary to the businesses of us and the restricted subsidiaries on the Closing Date.
"Significant Subsidiary" means any restricted subsidiary that would be a "Significant Subsidiary" of Holdings within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Telecommunications Assets" means (1) assets used or useful in the operating businesses of Alaska Communications Systems Holdings at the Closing Date or in a Related Business or (2) equity interests representing a majority of the voting stock of persons engaged in such businesses.
"Total Consolidated Indebtedness" means, as of any date of determination, an amount equal to the aggregate amount of all Indebtedness of us and our restricted subsidiaries, determined on a Consolidated basis, outstanding as of such date of determination, after giving effect to any incurrence of Indebtedness and the application of the proceeds therefrom giving rise to such determination.
We and the initial purchasers in the private offering of the old debentures entered into an exchange and registration rights agreement on May 14, 1999. Pursuant to the registration rights agreement, we agreed to:
- file with the SEC on or before July 28, 1999, or 75 days after issuance of the old debentures, a registration statement on Form S-1 or Form S-4, if the use of that form is then available, relating to a registered exchange offer for the exchange debentures under the Securities Act and
- use our reasonable best efforts to cause the exchange offer registration statement to be declared effective under the Securities Act on or before October 11, 1999, or 150 days after issuance of the old debentures.
As soon as practicable after the effectiveness of the exchange offer registration statement, we will offer to the holders of transfer restricted securities who are not prohibited by any law or policy of the SEC from participating in the exchange offer the opportunity to exchange their transfer restricted securities for exchange debentures. We will keep the exchange offer open for not less than 30 days, or longer, if required by applicable law, after the date on which notice of the exchange offer is mailed to the holders of the old debentures.
If:
- because of any change in law or applicable interpretations thereof by the staff of the SEC, we are not permitted to effect the exchange offer as contemplated by the registration rights agreement;
- any old debentures validly tendered pursuant to the exchange offer are not exchanged for exchange debentures on or before November 10, 1999, or 180 days after issuance of the old debentures;
- any initial purchaser so requests within 20 business days of completion of the exchange offer with respect to old debentures held by it that are not eligible to be exchanged for exchange debentures in the exchange offer;
- any applicable law or interpretations do not permit any holder of old debentures to participate in the exchange offer;
- any holder of old debentures that participates in the exchange offer that does not receive freely transferable exchange debentures in exchange for tendered old debentures so requests within 20 business days of completion of the exchange offer; or
- we so elect,
then we will file with the SEC a shelf registration statement to cover resales of transfer restricted securities by holders who provide requested information in connection with the shelf registration statement.
For purposes of this section, "transfer restricted securities" means each old debenture until:
- the date on which the old debenture has been exchanged for a freely transferable exchange debenture in the exchange offer;
- the date on which the old debenture has been effectively registered under the Securities Act and disposed of in accordance with the shelf registration statement; or
- the date on which the old debenture is distributed to the public pursuant
to Rule 144 under the Securities Act or is salable pursuant to Rule
144(k) under the Securities Act.
Any of the following is considered a registration default:
- if the applicable registration statement is not filed with the SEC on or before July 28, 1999;
- if the exchange offer registration statement or the shelf registration statement, as the case may be, is not declared effective on or before October 11, 1999, or, in the case of a shelf registration statement required to be filed in response to a change in law or applicable interpretations of the staff of the SEC, if later, within 60 days after publication of the change in the law or interpretation;
- if the exchange offer is not consummated on or before November 10, 1999; or
- if the shelf registration statement is filed and declared effective on or before October 11, 1999, or, in the case of a shelf registration statement required to be filed in response to a change in law or applicable interpretations of the staff of the SEC, if later, within 60 days after publication of the change in the law or interpretation; but shall thereafter cease to be effective at any time that we are obligated to maintain its effectiveness without being succeeded within 45 days by an additional registration statement filed and declared effective
If a registration default occurs, we will be obligated to pay liquidated damages to each holder of transfer restricted securities, during the period of one or more registration defaults, in an amount equal to $0.192 per week per $1,000 principal amount of the old debentures constituting transfer restricted securities held by the holder until the applicable registration statement is filed, the exchange offer registration statement is declared effective and the exchange offer is consummated or the shelf registration statement is declared effective or again becomes effective, as the case may be. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the old debentures on semi-annual payment dates that correspond to interest payment dates for the old debentures. Following the cure of all registration defaults, the accrual of liquidated damages will cease.
The registration rights agreement also provides that we:
- will make available for a period of 90 days after the completion of the exchange offer a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any resale of any exchange debentures and
- will pay all expenses incident to the exchange offer, including the expense of one counsel to the holders of the old debentures, and will jointly and severally indemnify holders of the old debentures, including any broker-dealer, against related liabilities, including liabilities under the Securities Act. A broker-dealer that delivers a prospectus to purchasers in connection with resales of the exchange debentures will be subject to the civil liability provisions under the Securities Act and will be bound by the provisions of the registration rights agreement, including those relating to indemnification rights and obligations.
Holders of the old debentures will be required to make the representations to us described under the caption "The Exchange Offer--Procedures for tendering" in order to participate in the exchange
- required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers;
- subject to the civil liability provisions under the Securities Act in connection with those sales; and
- bound by the provisions of the registration rights agreement that are applicable to that holder, including those relating to indemnification obligations.
As long as the old debentures are outstanding, we will continue to provide to holders of the old debentures and to prospective purchasers of the old debentures the information required by Rule 144A(d)(4) under the Securities Act.
This description of the registration rights agreement is a summary only and is qualified in its entirety by reference to all provisions of the registration rights agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part and is incorporated by reference herein.
The exchange debentures will initially be represented by one or more permanent global notes in definitive, fully registered book-entry form, without interest coupons that will be deposited with, or on behalf of, DTC and registered in the name of Cede and Co., as nominee of DTC, on behalf of the acquirors of exchange debentures for credit to the accounts of the acquirors or to other accounts as they may direct at DTC, or Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System, or Cedel Bank, societe anonyme.
The global notes may be transferred in whole and not in part, solely to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global notes may not be exchanged for exchange notes in physical, certificated form except in the limited circumstances described below.
All interests in the global notes, including those held through Euroclear or Cedel, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Cedel may also be subject to the procedures and requirements of those systems.
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and Cedel set forth below are provided as a matter of convenience. These operations and procedures are solely within the control of the settlement systems and are subject to change by them from time to time. We take no responsibility for these operations or procedures, and you are urged to contact the relevant system or its participants directly to discuss these matters.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of New York,
- a "banking organization" within the meaning of the New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and
- a "clearing agency" registered pursuant to Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and facilitates the clearance and settlement of securities transactions between participants through electronic book-entry changes to the accounts of its participants, eliminating the need for physical transfer and delivery of certificates. DTC's participants include securities brokers and dealers, including the initial purchasers in the private offering of the old debentures, banks and trust companies, clearing corporations and similar organizations. Indirect access to DTC's system is also available to indirect participants, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Investors who are not participants may beneficially own securities held by or on behalf of DTC only through participants or indirect participants.
We expect that pursuant to procedures established by DTC ownership of the exchange debentures will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC, with respect to the interests of participants, and the records of participants and the indirect participants, with respect to the interests of persons other than participants.
The laws of some jurisdictions may require that purchasers of securities take physical delivery of purchased securities in definitive form. Accordingly, the ability to transfer interests in the exchange notes represented by a global note to those persons may be limited. In addition, because DTC can act only on behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the ability of a person having an interest in exchange debentures represented by a global
So long as DTC or its nominee is the registered owner of a global note, DTC or its nominee will be considered the sole owner or holder of the exchange debentures represented by the global note for all purposes under the indenture. Except as provided below, owners of beneficial interests in a global note will not be entitled to have exchange debentures represented by that global note registered in their names, will not receive or be entitled to receive physical delivery of certificated exchange notes and will not be considered the owners or holders thereof under the indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the trustee. Accordingly, each holder owning a beneficial interest in a global note must rely on the procedures of DTC and, if the holder is not a participant or an indirect participant, on the procedures of the participant through which the holder owns its interest, to exercise any rights of a holder of exchange debentures under the indenture or the global note. We understand that, under existing industry practice, in the event that we request any action of holders of exchange debentures, or a holder that is an owner of a beneficial interest in a global note desires to take any action that DTC, as the holder of that global note, is entitled to take, DTC would authorize the participants to take that action and the participants would authorize holders owning through the participants to take that action or would otherwise act upon the instruction of the holders. Neither we nor the trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of exchange debentures by DTC, or for maintaining, supervising or reviewing any records of DTC relating to exchange debentures.
Payments with respect to the principal of, and premium, if any, liquidated damages, if any, and interest on, any exchange debentures represented by a global note registered in the name of DTC or its nominee on the applicable record date will be payable by the trustee to or at the direction of DTC or its nominee in its capacity as the registered holder of the global note representing the exchange debentures under the indenture. Under the terms of the indenture, we and the trustee may treat the persons in whose names the exchange debentures, including the global notes, are registered as the owners for the purpose of receiving payment thereon and for any and all other purposes whatsoever. Accordingly, neither we nor the trustee has or will have any responsibility or liability for the payment of these amounts to owners of beneficial interests in a global note, including principal, premium, if any, liquidated damages, if any, and interest. Payments by the participants and the indirect participants to the owners of beneficial interests in a global note will be governed by standing instructions and customary industry practice and will be the responsibility of the participants or the indirect participants and DTC.
DTC management is aware that some computer applications, systems, and the like for processing data that are dependent upon calendar dates, including dates before, on, and after January 1, 2000, may encounter year 2000 problems. DTC has informed its participants and other members of the financial community that it has developed and is implementing a program so that its systems, as they relate to the timely payment of distributions, including principal and income payments, to securityholders, book-entry deliveries, and settlement of trades within DTC, continue to function appropriately. This program includes a technical assessment and a remediation plan, each of which is complete. Additionally, DTC's plan includes a testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent upon other parties, including but not limited to issuers and their agents, as well as third party vendors from whom DTC licenses software and hardware, and third party vendors on whom DTC relies for information or the provision of services, including telecommunication and electrical utility service providers, among others.
- impress upon them the importance of their services being year 2000 compliant; and
- determine the extent of their efforts for year 2000 remediation and, as appropriate, testing of their services.
In addition, DTC is in the process of developing the contingency plans that it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been provided to the industry for informational purposes only and is not intended to serve as a representation, warranty, or contract modification of any kind.
Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. Transfers between participants in Euroclear or Cedel will be effected in the ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
exchange notes, cross-market transfers between the participants in DTC, on the
one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary. However, these
cross-market transactions will require delivery of instructions to Euroclear or
Cedel by the counterparty in the appropriate system in accordance with the rules
and procedures and within the established deadlines, Brussels time, of the
appropriate system. Euroclear or Cedel will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf by delivering or receiving
interests in the relevant global notes in DTC and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for
Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or Cedel participant purchasing an interest in a global note from a participant in DTC will be credited, and that crediting will be reported to the relevant Euroclear or Cedel participant, during the securities settlement processing day, which must be a business day for Euroclear and Cedel, immediately following the settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales of interest in a global note by or through a Euroclear or Cedel Participant to a participant in DTC will be received with value on the settlement date of DTC, but will be available in the relevant Euroclear or Cedel cash account only as of the business day for Euroclear or Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to facilitate transfers of interests in the global notes among participants in DTC, Euroclear and Cedel, they are under no obligation to perform or to continue to perform these procedures, and these procedures may be discontinued at any time. Neither we nor the trustee will have any responsibility for the performance by DTC, Euroclear or Cedel or their participants or indirect participants of their obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If:
- we notify the Trustee in writing that DTC is no longer willing or able to act as a depositary or DTC ceases to be registered as a clearing agency under the Exchange Act and a successor depositary is not appointed within 90 days of that notice or cessation;
- upon the occurrence of other events as provided in the indenture,
then, upon surrender by DTC of the global notes, certificated exchange notes will be issued to each person that DTC identifies as the beneficial owner of the exchange debentures represented by the global notes. Upon that issuance, the trustee is required to register the certificated exchange notes in the name of that person, or the nominee of any thereof, and cause the same to be delivered to that person.
Neither we nor the trustee shall be liable for any delay by DTC or any participant or indirect participant in identifying the beneficial owners of the related exchange debentures, and each beneficial owner of exchange debentures may conclusively rely on, and shall be protected in relying on, instructions from DTC for all purposes, including with respect to the registration and delivery, and the respective principal amounts, of the exchange debentures to be issued.
SCOPE OF DISCUSSION
This general discussion of certain U.S. federal income and estate tax consequences applies to you if you acquired old debentures at original issue for cash, exchange your old debentures for exchange debentures pursuant to the terms set forth in this prospectus and hold the exchange debentures as a "capital asset," generally, for investment, under Section 1221 of the Code. This summary, however, does not consider state, local or foreign tax laws. In addition, it does not include all of the rules which may affect the U.S. tax treatment of your investment in the exchange debentures. For example, special rules not discussed here may apply to you if you are:
- a broker-dealer, a dealer in securities, a trader in securities who elects to apply a mark-to-market method of accounting or a financial institution;
- an S corporation;
- an insurance company;
- a tax-exempt organization;
- subject to the alternative minimum tax provisions of the Code;
- holding the exchange debentures as part of a hedge, straddle, conversion transaction or other risk reduction or constructive sale transaction;
- a nonresident alien or foreign corporation subject to net-basis U.S.
federal income tax on income or gain derived from an exchange debenture
because such income or gain is effectively connected with the conduct of
a U.S. trade or business; or
- an expatriate of the U.S.
This discussion only represents our best attempt to describe certain federal income tax consequences that may apply to you based on current U.S. federal tax law. This discussion may in the end inaccurately describe the federal income tax consequences which are applicable to you because the law may change, possibly retroactively, and because the IRS or any court may disagree with this discussion.
THIS SUMMARY MAY NOT COVER YOUR PARTICULAR CIRCUMSTANCES BECAUSE IT DOES NOT CONSIDER FOREIGN, STATE OR LOCAL TAX RULES, DISREGARDS CERTAIN SPECIAL FEDERAL TAX RULES, AND DOES NOT DESCRIBE FUTURE CHANGES IN FEDERAL TAX RULES. PLEASE CONSULT YOUR TAX ADVISOR RATHER THAN RELYING ON THIS GENERAL DESCRIPTION.
THE EXCHANGE OFFER
The issuance of the exchange debentures to holders of the old debentures pursuant to the terms set forth in this prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss will be recognized by holders of the old debentures upon receipt of the exchange debentures, and ownership of the exchange debentures will be considered a continuation of ownership of the old debentures. For purposes of determining gain or loss upon the subsequent sale or exchange of the exchange debentures, a holder's basis in the exchange debentures should be the same as the holder's basis in the old debentures exchanged. A holder's holding period for the exchange debentures should include the holder's holding period for the old debentures exchanged. The issue price and other tax characteristics of the exchange debentures should be identical to the issue price and other tax characteristics of the old debentures exchanged.
U.S. HOLDERS
If you are a U.S. holder, as defined below, this section applies to you. Otherwise, the next section, "non-U.S. holders," applies to you.
- a citizen or resident of the U.S., including an alien individual who is a lawful permanent resident of the U.S. or meets the "substantial presence" test under Section 7701 (b) of the Code;
- a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or of any political subdivision of the U.S. (except that under the regulations to be published, certain partnerships created or organized under the foreign laws may be classified as a domestic partnership if such classification is more appropriate);
- an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
- a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a U.S. person.
TAXATION OF ORIGINAL ISSUE DISCOUNT. You must include original issue discount, or OID, on the exchange debentures as ordinary income as it accrues over the term of the exchange debentures under a constant yield methods' as described below, whether you use the accrual method or the cash method.
The exchange debentures will be treated as issued with OID equal to the excess of the stated redemption price at maturity of an exchange debenture over its issue price. The issue price of an exchange debenture should be identical to the issue price of an old debenture. The issue price of an old debenture is the first price at which a substantial portion of the old debentures were sold for money (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The stated redemption price at maturity of an exchange debenture is the total of all payments on the exchange debenture, including payments of stated interest.
The amount of OID includable in your income is the sum of the daily portions of OID with respect to the exchange debenture for each day during the taxable year or portion thereof in which you hold such exchange debenture. The daily portion is determined by allocating to each day in any "accrual period" a pro-rata portion of the OID that accrued in such period. The accrual period of an exchange debenture may be of any length and may vary in length over the term of an exchange debenture, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the first or last day of an accrual period. The amount of OID that accrues with respect to any accrual period is the product of the exchange debenture's adjusted issue price at the beginning of such accrual period and its yield to maturity, determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of such period. The adjusted issue price of an exchange debenture at the start of any accrual period is equal to its issue price increased by the accrued OID for each prior accrual period and reduced by any prior payments made on such exchange debenture. Payments of stated interest on an exchange debenture need not be included in income as they are received or accrued, because they are reflected in the calculation of OID.
HIGH YIELD DISCOUNT OBLIGATIONS. Sections 163(e) and 163(i) of the Code provide rules that affect the tax treatment of certain high-yield discount obligations. The exchange debentures constitute high-yield discount obligations because their yield-to-maturity exceeds by five percentage points or more the applicable federal rate for instruments with a similar maturity in effect for the calendar month in which the old debentures were issued. Because the exchange debentures are high-yield discount obligations, we may not deduct any OID that accrues with respect to the exchange debentures until we pay such amount in cash.
In addition, because the exchange debentures' yield-to-maturity exceeds the relevant applicable federal rate by more than six percentage points,
- a corporate holder may be entitled to treat the portion of the interest that is not deductible by us as a dividend, which may then qualify for the dividends-received deduction provided by Section 243 of the Code (subject to applicable conditions and limitations).
Corporate holders of exchange debentures should consult with their tax advisors as to the applicability of the dividends-received deduction.
SALE OR OTHER TAXABLE DISPOSITION OF THE EXCHANGE DEBENTURES. You must recognize taxable gain or loss on the sale, exchange, redemption, retirement or other taxable disposition of an exchange debenture. The amount of your gain or loss equals the difference between the fair market value of the cash or other property you receive for the exchange debenture, minus the amount attributable to accrued interest on the exchange debenture, minus your adjusted tax basis in the exchange debenture. Your initial tax basis should equal the price you paid for the old debenture. Your adjusted tax basis in an exchange debenture will equal the initial tax basis, increased by OID previously included in your gross income to the date of disposition with respect to the exchange debenture and the old debenture exchanged therefor and reduced by any payments on the exchange debenture or the old debenture exchanged therefor.
Your gain or loss will generally be a long-term capital gain or loss if your holding period for the exchange debenture is more than one year. Otherwise, it will be a short-term capital gain or loss. Payments attributable to accrued interest which you have not yet included in income will be taxed as ordinary interest income.
On or after May 15, 2004, we have the right to redeem the exchange debentures prior to their stated maturity date. In addition, we may, under certain circumstances, have the right to redeem up to 35% of the exchange debentures before May 15, 2002. If we experience a change of control, you will have the right to require us to repurchase your exchange debentures prior to their stated maturity date.
The presence of such options may affect the calculation of OID, among other things. The OID rules provide that, solely for purposes of the accrual of OID, an issuer of a debt instrument having an option to redeem the debt instrument prior to its stated maturity date will be presumed to exercise such option in the manner that minimizes the yield on the debt instrument. Conversely, a holder having an option to elect repayment of the debt instrument prior to its stated maturity date will be presumed to exercise such option in a manner that maximizes the yield on the debt instrument. If the exercise of such option or options to redeem the debt instrument prior to its stated maturity date or to elect repayment of the debt instrument prior to its stated maturity date actually occurs or does not occur, contrary to the presumption made under the OID rules, then, solely for purposes of the accrual of OID, the debt instrument is treated as reissued on the date of the change in circumstances for an amount equal to its adjusted issue price on that date.
BACKUP WITHHOLDING. You may be subject to a 31% backup withholding tax when you receive interest payments on an exchange debenture or proceeds upon the sale or other disposition of an exchange debenture. Certain holders (including, among others, corporations and certain tax-exempt organizations) are generally not subject to backup withholding. In addition, the 31% backup withholding tax will not apply, to you if you provide your taxpayer identification number in the prescribed manner unless:
- the IRS notifies us or our agent that the taxpayer identification number you provided is incorrect;
- you fail to certify under penalties of perjury that you are not subject to back up withholding.
If the 31% backup withholding tax does apply to you, you may use the amounts withheld as a refund or credit against your U.S. federal income tax liability as long as you provide certain information to the IRS.
NON-U.S. HOLDERS
DEFINITION OF NON-UNITED STATES HOLDER. A "non-U.S. holder" is any person who holds exchange debentures other than a U.S. holder. Please note that if you are subject to U.S. federal income tax on a net basis on income or gain with respect to an exchange debenture because such income or gain is effectively connected with the conduct of a U.S. trade or business, this disclosure does not cover the U.S. federal tax rules that apply to you.
PORTFOLIO INTEREST EXEMPTION. You will generally not have to pay U.S. federal income tax on interest, including OID, paid on the exchange debentures because of the "portfolio interest exemption" if either:
- you represent that you are not a U.S. person for U.S. federal income tax purposes and you provide your name and address to us or our paying agent on a properly executed IRS Form W-8 (or a suitable substitute form) signed under penalties of perjury; or
- a securities clearing organization, bank, or other financial institution that holds customers' securities in the ordinary course of its business holds the exchange debenture on your behalf, certifies to us or our agent under penalties of perjury that it has received IRS Form W-8 (or a suitable substitute form) from you or from another qualifying financial institution intermediary, and provides a copy to us or our agent.
You will not, however, qualify for the portfolio interest exemption described above if:
- you own, actually or constructively, 10% or more of the total combined voting power of all classes of our capital stock;
- you are a controlled foreign corporation with respect to which we are a "related person" within the meaning of Section 864(d)(4) of the Code;
- you are a bank receiving interest described in Section 881(c)(3)(A) of the Code;
WITHHOLDING TAX IF THE INTEREST IS NOT PORTFOLIO INTEREST. If you do not claim, or do not qualify for, the benefit of the portfolio interest exemption, you may be subject to a 30% withholding tax on interest payments made on the exchange debentures. However, you may be able to claim the benefit of a reduced withholding tax rate under an applicable income tax treaty. The required information for claiming treaty benefits is generally submitted, under current regulations, on Form 1001. Successor forms will require additional information, as discussed below under the heading "Non-U.S. Holders-- Backup Withholding and Information Reporting--New Withholding Regulations."
REPORTING. We may report annually to the IRS and to you the amount of interest paid to, and the tax withheld, if any, with respect to you.
SALE OR OTHER DISPOSITION OF EXCHANGE DEBENTURES. You will generally not be subject to U.S. federal income tax or withholding tax on gain recognized on a sale, exchange, redemption, retirement, or other disposition of an exchange debenture. You may, however, be subject to tax on such gain if you are an individual who was present in the U.S. for 183 days or more in the taxable year of the disposition, in
U.S. FEDERAL ESTATE TAXES. If you qualify for the portfolio interest exemption under the rules described above when you die, the exchange debentures will not be included in your estate for U.S. federal estate tax purposes.
PAYMENTS FROM U.S. OFFICE. If you receive payments of interest or principal directly from us or through a U.S. office of a custodian, nominee, agent or broker, there is a possibility that you will be subject to both backup withholding at a rate of 31% and information reporting.
With respect to interest payments made on the Note, however, backup withholding and information reporting will not apply if you certify, generally on a Form W-8 or a substitute form, that you are not a U.S. person in the manner described above under the heading "Non-U.S. Holders-- Interest."
Moreover, with respect to proceeds received on the sale, exchange, redemption, or other disposition of an exchange debenture, backup withholding or information reporting generally will not apply if you properly provide, generally on Form W-8 or a substitute form, a statement that you are an "exempt foreign person" for purposes of the broker reporting rules, and other required information. If you are not subject to U.S. federal income or withholding tax on the sale or other disposition of an exchange debenture, as described above under the heading "Non-U.S. Holders--Interest--Sale or Other Disposition of Exchange Debentures," you will generally qualify as an "exempt foreign person" for purposes of the broker reporting rules.
PAYMENTS FROM FOREIGN OFFICE. If payments of principal and interest are made to you outside the U.S. by or through a foreign office of your foreign custodian, nominee or other agent, or if you receive the proceeds of the sale of an exchange debenture through a foreign office of a "broker," as defined in the pertinent U.S. Treasury regulations, you will generally not be subject to backup withholding or information reporting. You will, however, be subject to backup withholding and information reporting if the foreign custodian, nominee, agent or broker has actual knowledge or, after December 31, 2000, reason to know, that the payee is a U.S. person. You will also be subject to information reporting, but not backup withholding, if the payment is made by a foreign office of a custodian, nominee, agent or broker that is a U.S. person or a controlled foreign corporation for U.S. federal income tax purposes, or that derives 50% or more of its gross income from the conduct of a U.S. trade or business for a specified three year period, unless the broker has in its records documentary evidence that you are a Non-U.S. Holder and certain other conditions are met.
REFUNDS. Any amounts withheld under the backup withholding rules may be refunded or credited against the non-U.S. holder's U.S. federal income tax liability, provided that the required information is furnished to the IRS.
NEW WITHHOLDING REGULATIONS. New regulations relating to withholding tax on income paid to foreign persons will generally be effective for payments made after December 31, 2000, subject to certain transition rules. The new withholding regulations modify and, in general, unify the way in which you establish your status as a non-U.S. "beneficial owner" eligible for withholding exemptions including the portfolio interest exemption, a reduced treaty rate or an exemption from backup withholding. For example, the new withholding regulations will require new forms, which you will generally have to provide earlier than you would have had to provide replacements for expiring existing forms.
The new withholding regulations clarify withholding agents' reliance standards. They also require additional certifications for claiming treaty benefits. The new withholding regulations also provide somewhat different procedures for foreign intermediaries and flow-through entities (such as foreign
When you purchased the old debentures, you were required to submit certification that complies with the currently effective temporary Treasury regulations in order to obtain an available exemption from or reduction in withholding tax. The new withholding regulations provide that certifications satisfying the requirements of the new withholding regulations will be deemed to satisfy the requirement of the temporary Treasury regulations now in effect. If you are a non-U.S. holder claiming benefit under an income tax treaty (and not relying on the portfolio interest exemption), you should be aware that you may be required to obtain a taxpayer identification number and to certify your eligibility under the applicable treaty's limitations on benefits article in order to comply with the new withholding regulations' certification requirements.
THE NEW WITHHOLDING REGULATIONS ARE COMPLEX AND THIS SUMMARY DOES NOT COMPLETELY DESCRIBE THEM. PLEASE CONSULT YOUR TAX ADVISOR TO DETERMINE HOW THE NEW WITHHOLDING REGULATIONS WILL AFFECT YOUR PARTICULAR CIRCUMSTANCES.
Each broker-dealer that receives exchange debentures for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange debentures. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange debentures received in exchange for old debentures where the old debentures were acquired as a result of market-making activities or other trading activities. We have agreed that, for at least 90 days after the exchange offer is completed, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any resale of exchange debentures.
We will not receive any proceeds from any sales of the exchange debentures by broker-dealers. Exchange debentures received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange debentures or a combination of methods of resale, at market prices prevailing at the time of resale, at prices related to those prevailing market prices or at negotiated prices. Any resale may be made directly to the purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from the broker-dealer and/or the purchasers of the exchange debentures. Any broker-dealer that resells the exchange debentures that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of the exchange debentures may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any resale of exchange debentures and any commissions or concessions received by any of those persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay the expenses incident to the exchange offer, other than commission or concessions of any brokers or dealers and the fees of any counsel or other advisors or experts retained by the holders of old debentures, and will indemnify the holders of the exchange debentures (including any broker-dealers) against related liabilities, including liabilities under the Securities Act.
We have filed with the SEC a registration statement on Form S-4 under the Securities Act for the registration of the exchange debentures offered in this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits and schedules to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us or the exchange debentures offered in this prospectus, you should refer to the registration statement, including the related exhibits and financial statement. With respect to each document filed with the SEC as an exhibit to the registration statement, you should refer to the exhibit for a more complete description of the matter involved, and each discussion in this prospectus of any document filed as an exhibit to the registration statement qualified in its entirety by reference to the relevant exhibit.
In connection with the exchange offer, we will become subject to the
information requirements of the Exchange Act, and, in accordance therewith, will
file reports and other information with the SEC. The registration statement and
the reports and other information we file can be inspected and copied at the
Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and the regional offices of the SEC located at 7 World Trade Center, New
York, New York 10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois
60661. Copies of these materials may be obtained from the Public Reference
Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at its public reference facilities in New York, New York and Chicago,
Illinois at prescribed rates. Information on the operation of the Public
Reference Room can be obtained by calling the SEC
We will send to each holder of exchange debentures copies of annual reports
and quarterly reports containing the information required to be filed under the
Exchange Act. So long as we are subject to the periodic reporting requirements
of the Exchange Act, we are required to furnish the information required to be
filed with the SEC to the trustee and the holders of the old debentures and the
exchange debentures. We have agreed that, even if we are not required under the
Exchange Act to furnish this information to the SEC, we will nonetheless
continue to furnish information that would be required to be furnished by us by
Section 13 of the Exchange Act to the trustee and the holders of the old
debentures or exchange debentures as if we were subject to these periodic
reporting requirements.
Our balance sheet as of March 31, 1999 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Alaska Communications Systems Holdings, Inc. as of December 31, 1998 and for the period from July 16, 1998, its date of inception, through December 31, 1998, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The combined financial statements of CenturyTel Alaska Properties, also known as Century's Alaska properties, as of December 31, 1998 and for the year then ended have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of CenturyTel Alaska Properties, also known as Century's Alaska properties, as December 31, 1997 and for the year ended December 31, 1996, eleven months ended November 30, 1997, and one month ended December 31, 1997 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The combined financial statements of Telephone Fund of Fairbanks Municipal Utilities Services as of October 6, 1997 and for the year ended December 31, 1996 and the period ended October 6, 1997 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The financial statements of the Municipality of Anchorage Telephone Utility Fund as of December 31, 1998, and for each of the years in the three-year period ended December 31, 1998, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The validity of the exchange debentures will be passed upon for us by Wachtell, Lipton, Rosen & Katz, New York, New York.
ALEC Holdings, Inc.
Independent Auditors' Report....................................................... F-3
Balance Sheet--March 31, 1999...................................................... F-4
Notes to Balance Sheet--March 31, 1999............................................. F-5
Consolidated Balance Sheet--June 30, 1999 (Unaudited).............................. F-6
Consolidated Statement of Operations--Six Months Ended June 30, 1999 (Unaudited)... F-7
Consolidated Statement of Stockholders' Equity--Six Months Ended June 30, 1999
(Unaudited)...................................................................... F-8
Consolidated Statement of Cash Flows--Six Months Ended June 30, 1999 (Unaudited)... F-9
Notes to Consolidated Financial Statements--Six Months Ended June 30, 1999
(Unaudited)...................................................................... F-10
Alaska Communications Systems Holdings, Inc.
Independent Auditors' Report....................................................... F-15
Consolidated Balance Sheets--December 31, 1998 and March 31, 1999 (Unaudited)...... F-16
Consolidated Statement of Cash Flows--Period from July 16, 1998 (Date of Inception)
through December 31, 1998 and Three Months Ended March 31, 1999 (Unaudited)...... F-17
Notes to Consolidated Financial Statements--Period from July 16, 1998 (Date of
Inception) through December 31, 1998 (Notes for the Three Months Ended March 31,
1999 Are Unaudited).............................................................. F-18
CenturyTel Alaska Properties
Independent Auditors' Reports...................................................... F-21
Combined Balance Sheets--December 31, 1997, December 31, 1998 and March 31, 1999... F-23
Combined Statements of Income and Retained Earnings--Year Ended December 31, 1996,
Eleven Months Ended November 30, 1997, One Month Ended December 31, 1997, Year
Ended December 31, 1998 and Three Months Ended March 31, 1998 and 1999........... F-24
Combined Statements of Cash Flows--Year Ended December 31, 1996, Eleven Months
Ended November 30, 1997, One Month Ended December 31, 1997, Year Ended December
31, 1998 and Three Months Ended March 31, 1998 and 1999.......................... F-25
Notes to Combined Financial Statements--Year Ended December 31, 1996, Eleven Months
Ended November 30, 1997, One Month Ended December 31, 1997, Year Ended
December 31, 1998 (Notes for Three Months Ended March 31, 1998 and 1999 Are
Unaudited)....................................................................... F-26
Telephone Fund of Fairbanks Municipal Utilities Services
Independent Auditors' Report....................................................... F-39
Combined Balance Sheet--October 6, 1997............................................ F-40
Combined Statements of Income and Fund Equity--Year Ended December 31, 1996 and
Period Ended October 6, 1997..................................................... F-41
Combined Statements of Cash Flows--Year Ended December 31, 1996 and Period Ended
October 6, 1997.................................................................. F-42
Notes to Combined Financial Statements--Year Ended December 31, 1996 and Period
Ended October 6, 1997............................................................ F-43
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Municipality of Anchorage Telephone Utility Fund
Independent Auditors' Report (Notes for Three Months Ended March 31, 1998 and 1999
Are Unaudited)................................................................... F-46
Balance Sheets--December 31, 1997, December 31, 1998 and March 31, 1999............ F-47
Statements of Revenues, Expenses, and Changes in Retained Earnings--Years Ended
December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and March
31, 1999......................................................................... F-48
Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998 and Three
Months Ended March 31, 1998 and March 31, 1999................................... F-49
Notes to Financial Statements--Years Ended December 31, 1996, 1997 and 1998........ F-50
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Board of Directors
ALEC Holdings, Inc.
Anchorage, Alaska
We have audited the balance sheet of ALEC Holdings, Inc. (the "Company") as of March 31, 1999. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of ALEC Holdings, Inc. as of March 31, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
June 28, 1999
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ 1
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares; outstanding, 100
shares........................................................................ $ 1
---------
---------
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1. THE COMPANY
ALEC Holdings, Inc. (the "Company") was incorporated in the State of Delaware in October 1998 to operate as a holding company to purchase telecommunications properties.
2. SUBSEQUENT ACQUISITIONS
At March 31, 1999, Alaska Communications Systems Holdings, Inc. ("ACS"), which became a wholly owned subsidiary of the Company in May 1999, had announced two purchase agreements that would allow ACS to enter the telecommunications industry. The first agreement involved the acquisition of Century Tel's Alaska holdings including Telephone Utilities of Alaska, Inc., Telephone Utilities of the Northland, Inc., PTI Communications of Alaska, Inc., Pacific Telecom of Alaska PCS, Inc. and Pacific Telecom Cellular of Alaska, Inc. The second agreement was with the Municipality of Anchorage to acquire all of its telecommunication investments.
On May 14, 1999, ACS Company purchased all the outstanding shares of PTI Alaska from CenturyTel of the Northwest, Inc. and CenturyTel Wireless, Inc., which are wholly owned subsidiaries of Century. PTI Alaska is the incumbent provider of local telephone services to over 131,000 access lines in Juneau, Fairbanks and more than 70 rural communities in Alaska. PTI Alaska also provides cellular services to approximately 3,000 subscribers and internet services to approximately 16,000 customers. The aggregate cash purchase paid by the Company was approximately $411.8 million.
On May 14, 1999, ACS also purchased certain of the assets and certain of the liabilities of the Anchorage Telephone Utility ("ATU") from the Municipality of Anchorage. ATU is the largest local exchange carrier in Alaska providing local services to over 168,000 access lines, primarily in Anchorage. ATU also provides cellular service to over 63,000 subscribers under the MACtel brand name and long distance service on a resale basis to approximately 26,000 customers. The aggregate cash purchase price paid by the Company was approximately $265.1 million.
ACS recorded transaction fees and expenses of approximately $48 million from these purchases. In addition, ACS will amortize approximately $267 of acquisition goodwill over 40 years.
JUNE 30,
1999
-----------
ASSETS
Current assets:
Cash and cash equivalents.......................................................................... $ 4,019
Accounts receivable--trade......................................................................... 47,493
Accounts receivable--affiliates.................................................................... --
Materials and supplies............................................................................. 5,759
Prepayments and other current...................................................................... 3,788
-----------
Total current assets............................................................................. 61,059
-----------
Investments.......................................................................................... 4,356
-----------
Property, plant and equipment:
Telecommunications................................................................................. 829,962
Less: Accumulated depreciation..................................................................... (432,095)
-----------
397,867
Construction work in progress...................................................................... 23,041
-----------
Net property, plant and equipment................................................................ 420,908
-----------
Intangible assets.................................................................................... 25,115
Goodwill............................................................................................. 243,980
Debt issuance cost................................................................................... 37,311
Deferred charges..................................................................................... 3,238
Other assets......................................................................................... 379
-----------
Total assets..................................................................................... $ 796,346
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................................. $ 4,248
Notes payable...................................................................................... 8,700
Accounts payable--trade............................................................................ 16,134
Accounts payable--affiliates....................................................................... 75
Income taxes payable............................................................................... (278)
Advance billings and customer deposits............................................................. 6,242
Dividend payable................................................................................... --
Accrued and other current liabilities.............................................................. 19,944
-----------
Total current liabilities........................................................................ 55,065
-----------
Long-term debt, net of current portion............................................................... 609,765
Deferred income taxes................................................................................ 2
Unamortized investment tax credits................................................................... 694
Other deferred credits and long-term liabilities..................................................... 8,601
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 shares authorized,
20,082,871 shares issued......................................................................... 201
Paid in capital in excess of par value............................................................. 128,482
Notes receivable from officers..................................................................... (718)
Retained earnings (deficit)........................................................................ (5,746)
-----------
Total stockholders' equity....................................................................... 122,219
-----------
Total liabilities and stockholders' equity......................................................... $ 796,346
-----------
-----------
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See notes to consolidated financial statements.
SIX MONTHS ENDED
JUNE 30, 1999
-----------------
Operating revenues:
Local telephone.............................................................................. $ 32,375
Cellular..................................................................................... 4,568
Long distance................................................................................ 1,387
-------
Total operating revenues................................................................. 38,330
-------
Operating expenses: Cost of sales and operating expenses
Local telephone.............................................................................. 23,249
Cellular..................................................................................... 3,039
Long Distance................................................................................ 1,575
Depreciation and amortization................................................................ 8,093
-------
Total operating expenses................................................................. 35,956
-------
Operating income............................................................................... 2,374
-------
Other income and expense:
Interest expense............................................................................. (7,852)
Interest during construction................................................................. 126
Interest income.............................................................................. 102
Other........................................................................................ (496)
-------
Total other income and expense........................................................... (8,120)
-------
Income (loss) before income taxes.............................................................. (5,746)
Income taxes................................................................................... --
-------
Net loss....................................................................................... $ (5,746)
-------
-------
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See notes to consolidated financial statements.
PAID IN
CAPITAL IN NOTES
IN EXCESS RECEIVABLE TOTAL
COMMON OF FROM RETAINED STOCKHOLDERS'
STOCK PAR VALUE OFFICERS EARNINGS EQUITY
----------- ----------- ---------- ----------- ------------
Balance, December 31, 1998........................... $ -- $ -- $ -- $ -- $ --
Issuance of 20,082,871 shares of common stock, $.01
par................................................ 201 123,393 -- -- 123,594
Discount on warrants issued in conjunction with
long-term debt..................................... -- 5,089 -- -- 5,089
Officers loans in conjunction with the issuance of
stock.............................................. -- -- (718) -- (718)
Net loss for the period December 31, 1998 to June 30,
1999............................................... -- -- -- (5,746) (5,746)
----- ----------- ---------- ----------- ------------
Balance, June 30, 1999............................... $ 201 $ 128,482 $ (718) $ (5,746) $ 122,219
----- ----------- ---------- ----------- ------------
----- ----------- ---------- ----------- ------------
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See notes to consolidated financial statements.
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
Cash Flows from Operating Activities:
Net loss......................................................................................... $ (5,746)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................. 8,093
Amortization of debt issuance costs............................................................ 589
Deferred income taxes.......................................................................... 41
Deferred credits............................................................................... (154)
Account receivable and other current assets.................................................... 8,237
Accounts payable and other current liabilities................................................. 1,910
Other.......................................................................................... (55)
-------------
Net cash provided by operating activities.................................................... 12,915
-------------
Cash Flows from Investing Activities:
Construction (excluding interest capitalized on equity funds).................................... (27,231)
Cost of acquisitions, net of cash received....................................................... (690,207)
Organizational costs............................................................................. (2,634)
-------------
Net cash used by investing................................................................... (720,072)
-------------
Cash Flows from Financing Activities:
Net change in short-term notes payable........................................................... 8,700
Proceeds from the issuance of long-term debt, net of discounts................................... 612,411
Payments on long-term debt....................................................................... --
Debt issuance costs.............................................................................. (37,900)
Dividends paid................................................................................... --
Issuance of common stock/warrants................................................................ 127,965
-------------
Net cash provided by financing activities.................................................... 711,176
-------------
Increase in cash................................................................................... 4,019
Cash at beginning of period........................................................................ --
-------------
Cash at end of period.............................................................................. $ 4,019
-------------
-------------
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See notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for ALEC Holdings, Inc. and Subsidiaries (the Company) represent the operating results of the following three legal entities (see Note 2, Acquisitions):
Alaska Communications Systems Holdings, Inc. (formerly ALEC Acquisition Corporation)
ALEC Acquisition Sub Corp., Inc. which acquired the stock of the PTI Alaska companies at the closing of the acquisitions.
Alaska Communications Systems, Inc. which acquired the stock of ATU Long Distance, ATU Communications, Inc. and MACtel Inc. at the closing of the acquisitions.
The Company wholly owns Alaska Communications Systems Holdings, Inc. which was organized in 1998 as the principal entity to acquire and manage telecommunication operations in Alaska. The principal activities in 1998 were the preparation of systems and obtaining financing for the recently completed acquisitions.
A summary of significant accounting policies followed by the Company is set forth below:
The accompanying unaudited consolidated financial statements are for six months ended June 30, 1999 and include the operations of Alaska Communications Systems Holdings for the full six month period and the PTI Alaska companies, ATU Long Distance, ATU Communications and MACtel since their acquisition on May 14, 1999. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
The local telephone exchange activities of the Company are subject to rate regulation by the Federal Communications Commission (FCC) for interstate telecommunication service, and the Regulatory Commission of Alaska (RCA) for intrastate and local exchange telecommunication service. The Company, as required by the FCC, accounts for such activity separately. Long distance services are
subject to rate regulation as a non-dominant interexchange carrier by the FCC for interstate telecommunication services and the RCA for intrastate telecommunication services. Cellular operations are not subject to rate regulation.
TELEPHONE plant is stated substantially at original cost of construction. Telephone plant retired in the ordinary course of business, together with cost of removal, less salvage, is charged to accumulated depreciation with no gain or loss recognized. Renewal and betterment of telephone plant are capitalized while repairs, as well as renewals of minor items, are charged to operating expense. The Company provides for depreciation of telephone plant on the straight-line method, using rates approved by the regulatory authorities.
NON-TELEPHONE plant is stated at cost and, when sold or retired, a gain or loss is recognized. Depreciation of such property is provided on the straight-line method over its estimated service live ranging from seven to 15 years.
Minority investments consist of investments in companies which are accounted for using the equity method.
Cellular licenses are stated at net book value. Amortization is computed on the straight-line method over an estimated useful life of 40 years.
Goodwill is amortized on the straight-line method over 40 years.
Recurring revenues are billed one month in advance and are deferred until the month earned. Nonrecurring revenues are billed in arrears and are recognized when earned.
The Company has adopted FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under the provisions of this statement, the Company has evaluated its long-lived assets for financial impairments and will continue to evaluate them if events or changes in circumstance indicate the carrying amount of such assets may not be fully recoverable.
The common stock of the Company is not traded in a public market; therefore, earnings per share amounts are not presented in accordance with SFAS 128, EARNINGS PER SHARE.
The Company has adopted FASB Statement No. 130, COMPREHENSIVE INCOME. The Company's comprehensive loss is equal to its net loss.
2. ACQUISITIONS
On May 14, 1999, Alaska Communications Systems Holdings, a 100%-owned subsidiary of the Company, acquired Century's Alaska holdings (PTI properties), including Telephone Utilities of Alaska, Inc., Telephone Utilities of the Northland, Inc., PTI Communications of Alaska, Inc., Pacific Telecom of Alaska PCS, Inc., and Pacific Telecom Cellular of Alaska, Inc., excluding the assets, liabilities and equity of Alaska RSA#1. On the same date, ACS also acquired from the Municipality of Anchorage ATU Communications, Inc. and its subsidiaries, MACtel and ATU Long Distance. These holdings include local area exchanges, long distance service, internet service and cellular operations throughout rural Alaska and Anchorage.
Both acquisitions were accounted for under the purchase method of accounting. The financial statements reflect the allocation of the purchase price and assumption of certain liabilities and include the operating results of both ATU and PTI Alaska from the date of acquisition. In total, the Company paid Century Telephone Enterprise $411,784 for the PTI properties and the Municipality of Anchorage $265,115 for the assets acquired. Deferred acquisition expenses totaling $14,079 were also allocated to the purchase price. The purchase price information presented is subject to final settlement adjustments, which management does not expect to be material.
The following reflects the preliminary allocation of the purchase price and the sources of funds to finance the purchase (in thousands).
PTI
PROPERTIES ATU TOTAL
---------- ---------- ----------
Current assets............................................................... $ 20,905 $ 45,142 $ 66,047
Property, plant & equipment.................................................. 153,181 247,694 400,875
Other assets................................................................. 9,765 20,750 30,515
Less liabilities assumed..................................................... (12,701) (38,518) (51,219)
---------- ---------- ----------
Net assets acquired.......................................................... 171,150 275,068 446,218
Goodwill..................................................................... 244,593 167 244,760
---------- ---------- ----------
Total cost of acquisition.................................................... 415,743 275,235 690,978
Acquisition expenses......................................................... (3,959) (10,120) (14,079)
---------- ---------- ----------
Total purchase price paid.................................................... $ 411,784 $ 265,115 $ 676,899
---------- ---------- ----------
---------- ---------- ----------
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Net assets acquired were purchased for cash provided from the following sources:
Revolving credit facility (of ACS)................................. $ 6,700
Term loan facilities (of ACS)...................................... 435,000
9 3/8% Senior subordinated notes due 2009 (of ACS)................. 150,000
13% Senior discount debentures due 2011............................ 19,911
Issuance of common stock/warrants.................................. 126,289
---------
Total sources...................................................... $ 737,900
---------
---------
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These sources also provided $12,600 of working capital and entailed $48,400 of transaction fees and expenses.
The goodwill acquired will be amortized on a straight line basis over 40 years.
The following are the pro forma results for the six month periods ended June 30, 1998 and 1999:
1998 1999
---------- ----------
Revenues.................................................................................. $ 134,038 $ 145,236
Net Loss.................................................................................. (8,835) (11,639)
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3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
JUNE 30, 1999
-------------
Term Loan A Facility............................................................. $ 150,000
Term Loan B Facility............................................................. 150,000
Term Loan C Facility............................................................. 135,000
9 3/8% Senior subordinated notes due 2009........................................ 150,000
13% Senior discount debentures due 2011.......................................... 19,911
Note to Municipality of Fairbanks................................................ 1,602
Capital Lease Obligations........................................................ 7,500
-------------
614,013
Less current portion............................................................. (4,248)
-------------
Total long-term obligations...................................................... $ 609,765
-------------
-------------
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The Company's senior discount debentures balance of $19,911 is the $25,000 book value minus original issue discount of $5,089. The Original Issue Discount resulted from the issuance of detachable warrants in connection with the 13% senior discount debentures. These detachable warrants are exercisable at any time from May 14, 1999 through May 15, 2011 at $0.01 per share. The original issue discount represents the difference between the exercise price and the fair value of the underlying shares at the date of issue.
4. STOCK OPTIONS
At June 30, 1999, the Company has authorized a total of 3,410,486 shares of common stock for issuance under the 1999 Stock Incentive Plan. At June 30, 1999, 2,806,500 shares are reserved for issuance upon the exercise of outstanding options. The options are exercisable at $6.1542 per share of common stock. No options are currently vested.
5. BUSINESS SEGMENTS
The Company has adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Utility has three reportable segments: local telephone (consisting of local telephone service, directory advertising, deregulated revenue and other revenues), long distance and cellular. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Each reportable segment is a strategic business offering different services and is managed separately.
The following table illustrates selected financial data for each segment for the consolidated period ended June 30, 1999 (in thousands):
LOCAL LONG
TELEPHONE DISTANCE CELLULAR TOTAL
---------- --------- --------- ----------
Operating revenues................................................. $ 32,375 $ 1,387 $ 4,568 $ 38,330
Operating income (loss)............................................ 1,477 (256) 1,153 2,374
Depreciation and amortization...................................... 7,649 68 376 8,093
Capital expenditures............................................... 7,403 19,502 326 27,231
Total assets....................................................... 708,375 22,458 65,513 796,346
|
6. INCOME TAXES
There was no current provision for income taxes in the consolidated period ended June 30, 1999. In general, the provision for income taxes may differ from the federal statutory rate due to the effect of federal and state alternative minimum taxes and net operating losses incurred for the period that are not benefited. In the current period, operating losses were not benefited because its is not certain that the Company will be able to use the losses going forward.
Board of Directors
Alaska Communications Systems Holdings, Inc.
Anchorage, Alaska
We have audited the consolidated balance sheet of Alaska Communications Systems Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1998, and the related consolidated statement of cash flows for the period from July 16, 1998 (date of inception) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alaska Communications Systems Holdings, Inc. and Subsidiaries as of December 31, 1998, and their cash flows for the period from July 16, 1998 (date of inception) through December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 24, 1999
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................................................................... $ 281,236 $ 180,422
Receivable from employees and related party (Note 2)............................... 41,771 44,770
------------ ------------
Total current assets........................................................... 323,007 225,192
PROPERTY, PLANT, AND EQUIPMENT, Net (Notes 1 and 3).................................. 36,536 565,482
DEFERRED ACQUISITION AND FINANCING COSTS (Note 1).................................... 248,637 1,709,089
DEPOSITS............................................................................. 11,820 15,720
------------ ------------
$ 620,000 $ 2,515,483
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accrued Liabilities................................................................ $ -- $ 495,483
Advances payable to stockholder (Note 2)........................................... 620,000 2,020,000
------------ ------------
Total current liabilities...................................................... 620,000 2,515,483
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)........................................ -- --
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares; outstanding,
1 share.......................................................................... -- --
------------ ------------
$ 620,000 $ 2,515,483
------------ ------------
------------ ------------
|
See notes to consolidated financial statements.
PERIOD FROM
JULY 16,
1998
(DATE OF
INCEPTION)
THROUGH THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
------------ --------------
(UNAUDITED)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property, plant, and equipment...................................... $ (36,536) $ (528,946)
Deferred acquisition costs....................................................... (248,637) (1,460,452)
Deposits......................................................................... (11,820) (3,900)
Accounts receivable from employees and related party............................. (41,771) (2,999)
Accrued liabilities.............................................................. -- 495,483
------------ --------------
Net cash used in investing activities........................................ (338,764) (1,500,814)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from stockholder.......................................... 620,000 1,400,000
------------ --------------
NET (DECREASE) INCREASE IN CASH.................................................... 281,236 (100,814)
CASH, BEGINNING OF PERIOD.......................................................... -- 281,236
------------ --------------
CASH, END OF PERIOD................................................................ $ 281,236 $ 180,422
------------ --------------
------------ --------------
|
See notes to consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for Alaska Communications Systems Holdings, Inc. and Subsidiaries (the "Company") represent the operating results of the following three legal entities:
Alaska Communications Systems Holdings, Inc. (formerly ALEC Acquisition Corporation)
The Company was organized in 1998 as the principal entity to acquire and manage telecommunication operations in Alaska. The principal activities in 1998 and through March 31, 1999 were the preparation of systems and obtaining financing for pending acquisitions (see Note 5). In May 1999, the Company was acquired and became a wholly owned subsidiary of ALEC Holdings, Inc.
A summary of significant accounting policies followed by the Company is set forth below:
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
PROPERTY, PLANT, AND EQUIPMENT is stated at cost. At December 31, 1998, the Company was in the early stages of opening its Corporate Headquarters in Anchorage. No depreciation was claimed in 1998 since the assets in service were acquired at year end.
DEFERRED ACQUISITION AND FINANCING COSTS are stated at cost and are direct costs incurred in connection with the Company's acquisitions and related financings.
REVENUES--No revenues or expenses have been generated since the Company was not in operation as of December 31, 1998.
2. TRANSACTIONS WITH RELATED PARTIES
Fox Paine Capital Fund, the majority stockholder of the Company's parent,
ALEC Holdings, Inc., has advanced cash to allow the Company to operate until
permanent funding is put in place at the closing of the acquisitions (see Note
5). Outstanding advances were $620,000 as of December 31, 1998. Fox Paine
Capital Fund will continue to fund the Company until permanent funding is
obtained at the closing of the acquisitions.
The Company advanced cash to a related party to perform certain consulting services in connection with the Company's pending acquisitions. Cash used is capitalized as deferred acquisition costs. Any unused cash that was advanced to this related party is to be repaid to the Company. As of December 31, 1998, the total amount of unused cash was $41,771.
3. PROPERTY, PLANT, AND EQUIPMENT
The balances by category of property, plant, and equipment, at December 31, 1998 are:
Office furniture, equipment, and other............................. $ 3,049
Construction work in progress...................................... 33,487
---------
Total property, plant, and equipment............................. 36,536
Less: Accumulated depreciation..................................... --
---------
Property, plant, and equipment, net.............................. $ 36,536
---------
---------
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4. LEASES
The Company has entered into an operating lease for office space in Anchorage, Alaska for its corporate headquarters. The lease is for 60 months and, under this lease agreement, future minimum annual rental payments are as follows:
YEAR ENDING
DECEMBER 31,
----------------------------------------------------------------------------------
1999.............................................................................. $ 278,772
2000.............................................................................. 139,060
2001.............................................................................. 141,841
2002.............................................................................. 144,678
2003.............................................................................. 147,571
----------
Total......................................................................... $ 851,922
----------
----------
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5. COMMITMENTS AND CONTINGENCIES
The Company has announced two purchase agreements that will allow the Company to enter the telecommunications industry. The first agreement involves the acquisition of CenturyTel's Alaska holdings including Telephone Utilities of Alaska, Inc., Telephone Utilities of the Northland, Inc., PTI Communications of Alaska, Inc., Pacific Telecom of Alaska PCS, Inc., and Pacific Telecom Cellular of Alaska, Inc. and the second is with the Municipality of Anchorage to acquire all of its telecommunication investments. Upon completion of these two contracts, the Company will have in excess of 300,000 local telephone, 70,000 cellular, 20,000 long distance, and 16,000 internet access lines. The combined purchase price is approximately $700 million. The Company is being funded by a $145 million equity contribution from its parent, ALEC Holdings, Inc., and the remainder with bank financed debt.
It is currently anticipated that by mid-1999 all regulatory approvals will have been granted and the acquisitions will be completed. At that time, the Company's primary business will be to provide traditional local telephone, long distance, cellular, and internet service throughout the state of Alaska. Until the completion of the acquisitions, the Company is incurring costs to facilitate certain transition and financing activities.
6. BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for the three months ended March 31, 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.
The Board of Directors
Century Telephone Enterprises, Inc.:
We have audited the accompanying combined balance sheet of CenturyTel's Alaska Properties as of December 31, 1998, and the related combined statement of income and retained earnings, and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of CenturyTel's Alaska Properties as of December 31, 1998, and the results of their operations and their cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Shreveport, Louisiana
February 26, 1999
Board of Directors
Century Telephone Enterprises, Inc.
Monroe, Louisiana
We have audited the combined balance sheet of CenturyTel Alaska Properties as of December 31, 1997, and the related combined statements of income and retained earnings and of cash flows for the year ended December 31, 1996, eleven months ended November 30, 1997, and one month ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of CenturyTel Alaska Properties as of December 31, 1997, and the results of their operations and their cash flows for the year ended December 31, 1996, eleven months ended November 30, 1997, and one month ended December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 25, 1999
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 871 $ 5,728 $ 10,739
Accounts receivable:
Customers, less allowance for doubtful accounts of $376, $164 and $162 at
December 31, 1997 and 1998, and March 31, 1999, respectively.............. 5,071 $ 8,446 $ 8,362
Affiliates (Note 8)......................................................... 20,404 31,922 38,361
Connecting companies........................................................ 4,146 10,984 6,596
Receivable from sale of cellular license.................................... 5,022 -- --
Miscellaneous accounts receivable and other................................. 2,760 1,213 1,326
Material and supplies (at cost)............................................... 2,653 2,072 2,058
Prepayments................................................................... 1,513 610 602
--------- --------- -----------
Total current assets........................................................ 42,440 60,975 68,044
--------- --------- -----------
PROPERTY, PLANT AND EQUIPMENT, Net (Note 4)..................................... 158,590 161,710 157,866
--------- --------- -----------
OTHER ASSETS:
Excess cost of net assets acquired, less accumulated amortization of $5,056,
$6,853 and $8,455 at December 31, 1997 and 1998, and March 31, 1999,
respectively (Note 1)....................................................... 248,948 242,632 241,030
Investments, at cost.......................................................... 997 976 976
Other, net.................................................................... 8,200 6,367 5,753
--------- --------- -----------
Total other assets.......................................................... 258,145 249,975 247,759
--------- --------- -----------
TOTAL ASSETS.................................................................... $ 459,175 $ 472,660 $ 473,669
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5)................................. $ 1,316 $ 1,427 $ 1,451
Accounts payable.............................................................. 3,275 5,322 2,589
Accrued expenses and other accrued liabilities:
Salaries and benefits....................................................... 2,434 1,949 2,321
Taxes....................................................................... 1,123 1,008 1,937
Other....................................................................... 684 1,849 1,841
Advance billings and customer deposits (Note 1)............................... 1,643 2,019 2,026
--------- --------- -----------
Total current liabilities................................................. 10,475 13,574 12,165
--------- --------- -----------
LONG-TERM DEBT (Note 5)......................................................... 41,634 41,981 41,643
--------- --------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes (Note 6)................................................ 11,297 13,523 13,914
Deferred investment tax credits............................................... 1,421 909 780
Other......................................................................... 3,034 1,711 1,282
--------- --------- -----------
Total deferred credits and other liabilities................................ 15,752 16,143 15,976
--------- --------- -----------
SHAREHOLDER'S EQUITY:
Common stock (103, 104 and 104 shares authorized and 23, 24, and 24 issued and
outstanding, respectively).................................................. 23 24 24
Paid-in capital............................................................... 393,026 393,026 393,026
Retained earnings............................................................. (1,735) 7,912 10,835
--------- --------- -----------
Total shareholder's equity................................................ 391,314 400,962 403,885
--------- --------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................................... $ 459,175 $ 472,660 $ 473,669
--------- --------- -----------
--------- --------- -----------
|
See accompanying notes to combined financial statements.
THREE MONTHS
ELEVEN ONE MONTH ENDED MARCH 31,
YEAR ENDED MONTHS ENDED ENDED YEAR ENDED ------------------------
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, 1998 1999
1996 1997 1997 1998 ----------- -----------
------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED)
OPERATING REVENUES:
Telephone.................. $ 75,950 $ 79,330 $ 10,255 $ 121,933 $ 27,967 $ 30,815
Cellular................... 4,823 5,120 181 2,576 408 546
------------- ------------- ------------- ------------- ----------- -----------
Total operating
revenues............. 80,773 84,450 10,436 124,509 28,375 31,361
------------- ------------- ------------- ------------- ----------- -----------
OPERATING EXPENSES:
Cost of sales and operating
expenses--telephone...... 41,789 42,404 6,434 72,008 16,451 17,270
Cost of sales and operating
expenses--cellular....... 3,381 3,082 147 2,128 330 396
Depreciation and
amortization............. 15,348 15,823 2,466 30,459 7,209 7,785
------------- ------------- ------------- ------------- ----------- -----------
Total operating
expenses............. 60,518 61,309 9,047 104,595 23,990 25,451
------------- ------------- ------------- ------------- ----------- -----------
OPERATING INCOME............. 20,255 23,141 1,389 19,914 4,385 5,910
------------- ------------- ------------- ------------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense........... (3,176) (3,027) (253) (3,588) (797) (965)
Interest income (Note 8)... 1,180 858 82 2,183 495 607
Other income (expense),
net...................... (33) (298) 53 356 357 80
------------- ------------- ------------- ------------- ----------- -----------
Total other income
(expense)............ (2,029) (2,467) (118) (1,049) 55 (278)
------------- ------------- ------------- ------------- ----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE.................... 18,226 20,674 1,271 18,865 4,440 5,632
INCOME TAX EXPENSE (Note
6)......................... 6,737 7,746 736 9,218 2,214 2,709
------------- ------------- ------------- ------------- ----------- -----------
NET INCOME................... 11,489 12,928 535 9,647 2,226 2,923
------------- ------------- ------------- ------------- ----------- -----------
RETAINED EARNINGS AT
BEGINNING OF PERIOD........ 63,216 61,079 -- (1,735) (1,735) 7,912
Less dividends to
shareholder................ 13,626 7,080 2,270 -- -- --
------------- ------------- ------------- ------------- ----------- -----------
RETAINED EARNINGS AT END OF
PERIOD..................... $ 61,079 $ 66,927 $ (1,735) $ 7,912 $ 491 $ 10,835
------------- ------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ------------- ----------- -----------
|
See accompanying notes to combined financial statements.
THREE MONTHS
ELEVEN ONE MONTH ENDED MARCH 31,
YEAR ENDED MONTHS ENDED ENDED YEAR ENDED ------------------------
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, 1998 1999
1996 1997 1997 1998 ----------- -----------
------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income.......................... $ 11,489 $ 12,928 $ 535 $ 9,647 $ 2,226 $ 2,923
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 15,348 15,823 2,466 30,459 7,209 7,785
Deferred income taxes and
unamortized investment tax
credits, net.................... 1,538 1,160 65 24 148 66
Change in current assets and
liabilities:
Accounts receivable............. 14,476 (1,383) 3,873 (3,644) (2,105) 4,359
Accounts payable................ (6,828) (2,986) (1,527) 1,479 (282) (2,733)
Other current assets and
liabilities, net.............. (1,434) (4,329) 176 2,427 1,588 1,322
Other, net...................... -- -- -- (2,101) 2,241 381
------------- ------------- ------------- ------------- ----------- -----------
Net cash provided by operating
activities.................. 34,589 21,213 5,588 38,291 11,025 14,103
------------- ------------- ------------- ------------- ----------- -----------
INVESTING ACTIVITIES:
Payments for property, plant, and
equipment......................... (20,465) (14,575) (1,825) (26,799) (2,321) (2,200)
Other, net.......................... (146) 1,021 (1,454) 135 4,268 (139)
------------- ------------- ------------- ------------- ----------- -----------
Net cash provided (used) by
investing activities........ (20,611) (13,554) (3,279) (26,664) 1,947 (2,339)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.............................. 1,739 -- -- -- -- --
Dividends paid...................... (13,626) (7,080) (2,270) -- -- --
Payments of long-term debt.......... (1,060) (1,129) (293) (1,322) (2,047) (314)
Change in affiliate balance......... -- -- -- (5,448) (9,540) (6,439)
------------- ------------- ------------- ------------- ----------- -----------
Net cash used by financing
activities.................. (12,947) (8,209) (2,563) (6,770) (11,587) (6,753)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................... 1,031 (550) (254) 4,857 1,385 5,011
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................. 644 1,675 1,125 871 871 5,728
------------- ------------- ------------- ------------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................ $ 1,675 $ 1,125 $ 871 $ 5,728 $ 2,256 $ 10,739
------------- ------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ------------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Net assets of acquisitions
contributed as paid-in capital,
including push-down of goodwill of
$32,159........................... $ -- $ 89,132 $ -- $ -- $ -- $ --
Push-down of excess costs of Alaskan
entities from CenturyTel
acquisition....................... -- -- 208,389 -- -- --
Paydown of minority interest
liability through transfer of
property, plant, and equipment.... -- -- 1,525 -- -- --
Income tax paid..................... 5,344 4,653 3,207 600 1,428 2,076
Interest paid....................... 3,510 2,706 261 3,434 577 954
|
See accompanying notes to combined financial statements.
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL--The combined financial statements for CenturyTel Alaska Properties (the "Company") represent the operating results of the following legal entities ("Alaskan Entities"):
Telephone Utilities of Alaska, Inc. ("TUA")
Telephone Utilities of the Northland, Inc. ("TUN")
PTI Communications of Alaska, Inc. ("PTICA")
Pacific Telecom of Alaska PCS, Inc. ("PTAPCS")
Pacific Telecom Cellular of Alaska, Inc. ("PTCA"), excluding the assets, liabilities and equity of Alaska RSA #1
TUA, TUN, PTICA, and PTAPCS were wholly owned subsidiaries of Pacific Telecom, Inc. ("PTI") and PTCA was a wholly owned subsidiary of Pacific Telecom Cellular, Inc., which was a wholly owned subsidiary of PTI. Until December 1, 1997, PacifiCorp Holdings owned 100% of the voting securities of PTI. The Company was acquired on December 1, 1997 as a result of Century Telephone Enterprises, Inc.'s ("CenturyTel") acquisition of Pacific Telecom, Inc. (the "Acquisition") (Note 13). The financial statements beginning December 1, 1997 reflect the excess cost of net assets acquired and the subsequent amortization expense which was allocated to the Alaska properties in accordance with purchase accounting.
TUA, TUN, PTICA, and PTAPCS became wholly owned subsidiaries of CenturyTel of the Northwest, Inc. ("CNI") which is a wholly owned subsidiary of CenturyTel. PTCA is a wholly owned subsidiary of CenturyTel Wireless, Inc. ("CT Wireless") which is a wholly owned subsidiary of CenturyTel.
The Company's primary business is to provide traditional and cellular telephone service to its customers which are located in the state of Alaska. The Company was dependent on PTI and certain subsidiaries prior to the Acquisition and is dependent upon CenturyTel and certain CenturyTel subsidiaries to provide construction and maintenance services, materials and supplies and managerial, technical and accounting services. Intercompany billings include a return on investment to the related company.
The Company's telephone operations are regulated in nature and its telephone
accounting records are maintained in accordance with the rules and regulations
of the Alaska Public Utilities Commission ("APUC") which substantially adhere to
the rules and regulations of the Federal Communications Commission. The
Company's regulated operations are subject to the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 71, ACCOUNTING FOR THE EFFECTS OF
CERTAIN TYPES OF REGULATION.
ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
REVENUE RECOGNITION--Revenues are recognized when earned. The Company participates in toll revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the APUC within the intrastate jurisdiction and the Federal Communications Commission within the interstate jurisdiction. Much of the interstate toll service revenue earned through various pooling processes is initially recorded based on estimates. These estimates are derived from interim financial statements, available separations studies and the most recent rate of return published by the National Exchange Carriers Association. These estimates are subject to subsequent adjustment in future accounting periods as refined operational information becomes available. Any subsequent adjustments have not been material.
PROPERTY, PLANT, AND EQUIPMENT--Telephone plant is stated substantially at original cost of construction. Telephone plant retired in the ordinary course of business, together with cost of removal, less salvage, is charged to accumulated depreciation with no gain or loss recognized. Renewals and betterments of telephone plant are capitalized while repairs, as well as renewals of minor items, are charged to operating expense.
The Company provides depreciation for telephone plant on the straight-line method, using rates approved by the regulatory authorities. Depreciation expense for telephone plant amounted to $13,774, $14,406, $1,737, and $23,550 for the year ended December 31, 1996, eleven months ended November 30, 1997, one month ended December 31, 1997, and year ended December 31, 1998, respectively. Included in 1998 expense is additional depreciation of approximately $1,506 which was approved by the regulatory authorities. The composite depreciation rate was 5.7% for the year ended December 31, 1996, 5.8% for the eleven months ended November 30, 1997 and the one month ended December 31, 1997, and 6.1% for the year ended December 31, 1998.
Non-telephone plant is stated at cost and, when sold or retired, a gain or loss is recognized. Depreciation of such property is provided on the straight-line method over its estimated service lives ranging from 7 to 15 years. Depreciation for non-telephone plant amounted to $1,198, $922, $190, and $583 for the year ended December 31, 1996, eleven months ended November 30, 1997, one month ended December 31, 1997, and the year ended December 31, 1998, respectively.
LONG-LIVED ASSETS AND EXCESS COST OF NET ASSETS ACQUIRED (GOODWILL)--The carrying value of long-lived assets, including allocated goodwill, is reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that such carrying value may not be recoverable, by assessing the recoverability of such carrying value through estimated undiscounted future net cash flows expected to be generated by the assets. The excess cost of net assets acquired is being amortized over 40 years. Amortization expense was $333 for the year ended December 31, 1996, $455 during the
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) eleven months ended November 30, 1997, $537 during the one month ended December 31, 1997, and $6,326 for the year ended December 31, 1998.
INCOME TAXES--Prior to the Acquisition, the Company was included in the consolidated federal income tax return of PacifiCorp Holdings and CenturyTel in subsequent periods. For financial accounting purposes, federal income taxes are computed and recorded as if the Company filed a separate federal income tax return, except that, (i) in the event the Company generates a net tax loss which is utilized in the respective consolidated return, the Company will be given the benefit of such loss, and (ii) income taxes are calculated based upon the statutory tax rate in effect for PacifiCorp prior to the Acquisition and CenturyTel and its subsidiaries for subsequent periods on a consolidated basis. The Company periodically settles amounts owed to CenturyTel for federal income taxes. The Company is included in a consolidated Alaska state income tax return.
The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are established for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Investment tax credits related to plant have been deferred and are being amortized as a reduction of federal income tax expense over the estimated useful lives of the assets giving rise to the credits.
Pursuant to SFAS 71, the regulatory liability, net of the related tax impact, is being amortized as a reduction of federal income tax expense over the estimated remaining lives of the assets which generated the deferred taxes.
CASH EQUIVALENTS--For purposes of the statement of cash flows, the Company considers all demand deposits, central depository bank account ("CDA") deposits, and all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
INVESTMENTS--The Rural Telephone Bank ("RTB") requires borrowers of RTB funds to purchase RTB stock as a percentage of loan funds provided. These investments have been accounted for using the cost method.
ADVANCE BILLINGS--Advance billings creditable to revenue accounts in future months are recorded in advance billings until the service is rendered.
EARNINGS PER SHARE--The common stock of the Company is not traded in a public market; therefore, earnings per share amounts are not presented in accordance with SFAS 128, EARNINGS PER SHARE.
2. PCS LICENSE ACQUISITION COSTS
In early 1997, the Company was awarded three 10 MHz licenses to provide personal communications services ("PCS") in Alaska. The Company paid $3,023 for such licenses, which will be
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. PCS LICENSE ACQUISITION COSTS (CONTINUED) amortized over the useful economic lives once construction is complete. At this time, construction has not yet begun. These licenses are included in Other Assets on the balance sheet.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND CUSTOMER DEPOSITS--The carrying amount approximates the fair value due to the short maturity of these instruments.
OTHER INVESTMENTS--The Company's other investments are represented by its investment in RTB stock. The carrying amount of such investment approximates the fair market value of these instruments.
LONG-TERM DEBT--The carrying value of the Company's long-term debt had a fair value of $42,669 at December 31, 1997 and $45,853 at December 31, 1998. The fair value was estimated by discounting the scheduled payment streams to present value based upon rates currently offered to the Company for debt of similar remaining maturities. Prepayment penalties and other costs of debt retirement are not reflected in the estimates.
4. PROPERTY, PLANT, AND EQUIPMENT, NET
The following table summarizes the major classes of property, plant, and equipment as of December 31, 1997 and 1998:
1997 1998
---------- ----------
General support....................................................... $ 33,508 $ 31,811
Central office........................................................ 113,040 120,613
IOT................................................................... 21,283 5,652
Cable and wire........................................................ 221,428 232,819
Construction in progress.............................................. 5,633 9,345
Nonregulated and other................................................ 677 8,452
---------- ----------
Telephone property, plant, and equipment............................ 395,569 408,692
Less accumulated depreciation......................................... (238,228) (248,915)
---------- ----------
Net telephone property, plant, and equipment........................ 157,341 159,777
---------- ----------
Wireless property, plant, and equipment............................... 1,340 2,617
Less accumulated depreciation......................................... (91) (684)
---------- ----------
Net wireless property, plant, and equipment......................... 1,249 1,933
---------- ----------
Property, plant, and equipment, net................................. $ 158,590 $ 161,710
---------- ----------
---------- ----------
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MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. PROPERTY, PLANT, AND EQUIPMENT, NET (CONTINUED) The Company retired approximately $1,762 of telephone property, plant, and equipment and a like amount of accumulated depreciation in 1998.
5. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1998 is summarized below:
1997 1998
--------- ---------
First mortgage notes:
5.0%-6.5%, due in installments to 2027................................ $ 29,226 $ 28,546
7.2%-9.4%, due in installments to 2020................................ 10,820 10,588
10.1%-11.8%, due in installments to 2017.............................. 2,904 2,672
Unsecured note at 3%, due in installments to 2007....................... -- 1,602
--------- ---------
Subtotal............................................................ 42,950 43,408
Less current maturities................................................. (1,316) (1,427)
--------- ---------
Total long-term debt, excluding current maturities.................. $ 41,634 $ 41,981
--------- ---------
--------- ---------
|
The approximate annual debt maturities for the five years subsequent to December 31, 1998 are as follows: 1999, $1,427; 2000, $1,527; 2001, $1,637; 2002, $1,755; and 2003, $1,551.
At December 31, 1998, under the most restrictive covenant of the Company's long-term debt agreement, all of the Company's retained earnings were available for the payment of cash dividends.
Substantially all of the Company's telephone property, plant, and equipment is pledged to secure the first mortgage notes.
6. INCOME TAXES
Income tax expense consists of the following components:
ELEVEN MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
----------------- --------------------- ------------------- -----------------
Federal:
Current....................... $ 4,733 $ 5,689 $ 575 $ 7,093
Deferred...................... 265 109 (12) (177)
State:
Current....................... 1,388 1,708 170 2,101
Deferred...................... 351 240 3 201
------ ------ ----- ------
Income tax expense.......... $ 6,737 $ 7,746 $ 736 $ 9,218
------ ------ ----- ------
------ ------ ----- ------
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MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED) The following is a reconciliation from the statutory federal income tax rate to the Company's effective income tax rate:
ELEVEN MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------- --------------- --------------- ---------------
Statutory federal income tax rate..................... 35.00% 35.00% 35.00% 35.00%
State income taxes, net of federal income tax
benefit............................................. 6.00% 6.00% 8.44% 7.90%
Amortization of nondeductible excess cost of net
assets acquired..................................... -- -- 14.20% 10.10%
Amortization of excess deferred income taxes.......... (1.67)% (1.32 )% (2.18 )% (1.60 )%
Amortization of deferred investment tax credits....... (3.15 )% (2.27 )% (3.76 )% (2.70 )%
Other, net............................................ 0.78% 0.06% 6.20% 0.20%
----- ----- ----- -----
Effective income tax rate........................... 36.96% 37.47% 57.90% 48.90%
----- ----- ----- -----
----- ----- ----- -----
|
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1998 were as follows:
1997 1998
---------- ----------
Deferred tax assets:
Regulatory liability.................................................................... $ 18 $ 388
Deferred investment tax credits......................................................... 991 374
Other................................................................................... 829 567
---------- ----------
Total gross deferred tax assets......................................................... 1,838 1,329
Less: Valuation allowances............................................................ -- --
---------- ----------
Net Deferred tax assets............................................................... 1,838 1,329
Deferred tax liabilities:
Property, plant, and equipment, primarily due to depreciation differences............... (13,088) (14,112)
Excess costs of net assets acquired..................................................... (47) (740)
---------- ----------
Total gross deferred tax liabilities.................................................... (13,135) (14,852)
---------- ----------
Net deferred tax liability.............................................................. $ (11,297) $ (13,523)
---------- ----------
---------- ----------
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MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
7. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company, except those which are members of the International Brotherhood of Electrical Workers ("IBEW"), are covered by a pension plan (the "Plan") which is sponsored by PTI before the Acquisition and CNI subsequently which includes other affiliated companies. The Plan provides benefits based upon employees' total years of service and the highest five years compensation during their last 10 years of service. The Company's portion of pension income was $57 during the year ended December 31, 1996, $219 during the eleven months ended November 30, 1997, $23 during the one month ended December 31, 1997, and $384 for the year ended December 31, 1998. Because actuarial information regarding the status of the Plan is computed for the Plan in total, the Company does not separately determine its portion of the actuarial present value of the accumulated plan benefits, projected benefit obligation, or net assets available for benefits.
In accordance with the purchase agreement with Alaska Communications Systems Holdings, Inc., formerly known as ALEC Acquisition Corporation ("ALEC") (see Note 13), the Plan assets and obligations will be valued at the closing date. Based on this valuation, assets equaling the actuarial present value of the accrued benefits of the Company's employees, plus an additional $250, will be transferred to a replacement plan.
The Company participates in a postretirement health care and insurance plan (the "PRB Plan") which is sponsored by PTI prior to acquisition and by CNI subsequently which includes other affiliated companies.
The Company recognizes the cost of other postretirement benefits over the active service period of its employees. PTI's policy was to fund annually an amount of the postretirement benefit liability that will systematically reduce that liability using available funds and allow deductibility for federal income tax purposes. Due to income tax regulations that restrict the deductibility of certain contributions for postretirement benefits, PTI elected to make non-tax contributions to meet funding requirements imposed by state regulatory commissions. PTI recognized the transition obligation, which represents the previously unrecognized prior service cost, over a period of 20 years. Because actuarial information regarding the status of the PRB Plan is computed for the PRB Plan in total, PTI did not separately determine its portion of the actuarial present value of the accumulated plan benefit, projected benefit obligations or net assets available for benefits. At December 31, 1997, the date of the latest actuarial evaluation for the PRB Plan, plan assets were less than the projected benefit obligation by approximately $46,246 and the unamortized portion of the transition obligation was $26,099. The Company's portion of the net periodic postretirement benefit cost was $846 during the year ended
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED) December 31, 1996, $485 during the eleven months ended November 30, 1997, $41 during the one month ended December 31, 1997, and $471 during the year ended December 31, 1998, as follows
Service cost......................................................... $ 183
Interest cost........................................................ 392
Amortization of transition obligation................................ 116
Amortization of unrecognized prior service cost...................... (4)
Expected return on assets............................................ (216)
---------
Net periodic postretirement benefit cost....................... $ 471
---------
---------
|
At the time of adoption of SFAS 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, the Company elected to amortize the transition obligation, at the date of implementation, over 20 years.
In accordance with the purchase agreement with ALEC (see Note 13), the purchaser assumes the liability for postretirement benefits related to employees that retire subsequent to the closing date.
8. CERTAIN TRANSACTIONS
The Company purchases certain plant materials and other services (including certain operating expenses) from PTI, CenturyTel, and other affiliated companies. Materials and services purchased by the Company from PTI prior to acquisition and CenturyTel and its subsidiaries subsequently totaled approximately $9,227 for the year ended December 31, 1996, $8,581 for the eleven months ended November 30, 1997, $1,626 for the one month ended December 31, 1997, and $29,306 (which included $15,648 of operating expenses) during the year ended December 31, 1998. Many of the costs that are allocated to the Alaska companies are based on time distribution and are, therefore, representative of what costs would have been on a stand-alone basis. General and administrative costs are allocated based on expense levels of all companies. Such costs, when allocated to the subsidiaries, include a reasonable rate of return on investment to the related affiliate and, therefore, are representative of what costs would have been on a stand-alone basis.
Prior to the Acquisition, short-term advances were made to PTI under an agreement providing interest at the prime commercial rate for funds held more than 90 days. Interest income on these advances was $1,052 during the year ended December 31, 1996, $797 during the eleven months ended November 30, 1997, and $81 during the one month ended December 31, 1997.
Subsequent to the Acquisition, the Company participates in a Central Depository Account ("CDA") with CenturyTel and other affiliates. The Company is assessed or receives interest on the net amount of its CDA balance and the net accounts receivable or payable to CenturyTel and its affiliates. Related interest income amounted to $2,156 for the year ended December 31, 1998. The rate used to calculate the related interest income was the three month U.S. T-Bill rate. Related interest expense
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. CERTAIN TRANSACTIONS (CONTINUED) amounted to $637 for the year ended December 31, 1998. The rate used to calculate the related interest expense was the weighted average rate of CenturyTel's debt.
9. BUSINESS AND CREDIT CONCENTRATIONS
The Company provides telephone services to customers (business and residential) located in the state of Alaska. Receivables from connecting companies represent the amounts due from various long distance carriers such as AT&T and the Bell operating companies.
The ultimate realization of the Company's balance in the CDA discussed above is dependent upon the financial resources of CenturyTel.
10. COMMITMENTS AND CONTINGENCIES
Expenditures for property, plant, and equipment are anticipated to be approximately $19,469 for telephone operations and $615 for wireless operations during 1999.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the matters will not have a material adverse effect on the Company's financial position or results of operations.
The Company's operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner or operator of property and a generator of hazardous wastes, the Company could be subject to certain environmental laws that impose liability for the entire cost of cleanup at contaminated sites, regardless of fault or the lawfulness of the activity that resulted in contamination. The Company believes, however, that its operations are in substantial compliance with applicable environmental laws and regulations and that there is no material exposure to loss related to environmental issues.
Many of the Company's properties formerly contained, or currently contain, underground and aboveground storage tanks used for the storage of fuel or wastes. Some of these tanks have leaked. The Company believes that known contamination caused by these leaks has been, or is being, investigated or remediated. The Company cannot be sure, however, that it has discovered all contamination or that the regulatory authorities will not request additional remediation at sites that have previously undergone remediation.
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
11. BUSINESS SEGMENTS
The Company is engaged in providing local exchange telephone services and cellular telephone services in Alaska. The following tables illustrate selected financial data for each segment:
YEAR ENDED DECEMBER 31, 1996 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 75,950 $ 4,823 $ 80,773 Depreciation and amortization............................... 14,383 965 15,348 Operating income............................................ 19,778 477 20,255 Capital expenditures........................................ 19,694 771 20,465 |
ELEVEN MONTHS ENDED NOVEMBER 30, 1997 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 79,330 $ 5,120 $ 84,450 Depreciation and amortization............................... 15,090 733 15,823 Operating income............................................ 21,836 1,305 23,141 Capital expenditures........................................ 14,225 350 14,575 |
ONE MONTH ENDED DECEMBER 31, 1997 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 10,255 $ 181 $ 10,436 Depreciation and amortization............................... 2,375 91 2,466 Operating income (loss)..................................... 1,446 (57) 1,389 Capital expenditures........................................ 1,732 93 1,825 Total assets................................................ 450,155 9,020 459,175 |
YEAR ENDED DECEMBER 31, 1998 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 121,933 $ 2,576 $ 124,509 Depreciation and amortization............................... 29,734 725 30,459 Operating income (loss)..................................... 20,190 (276) 19,914 Capital expenditures........................................ 26,664 135 26,799 Total assets................................................ 470,649 2,011 472,660 |
THREE MONTHS ENDED MARCH 31, 1998 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 27,967 $ 408 $ 28,375 Depreciation and amortization............................... 7,069 140 7,209 Operating income (loss)..................................... 4,447 (62) 4,385 Capital expenditures........................................ 2,225 96 2,321 Total assets................................................ 458,847 1,972 460,819 |
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
11. BUSINESS SEGMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 TELEPHONE CELLULAR TOTAL ------------------------------------------------------------ ---------- ----------- ---------- Operating revenues.......................................... $ 30,815 $ 546 $ 31,361 Depreciation and amortization............................... 7,643 142 7,785 Operating income (loss)..................................... 5,902 8 5,910 Capital expenditures........................................ 2,194 6 2,200 Total assets................................................ 471,652 2,017 473,669 |
The following is a reconciliation of operating income to income before income tax expense:
ELEVEN MONTHS ONE MONTH THREE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED MARCH 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, --------------------
1996 1997 1997 1998 1998 1999
------------ -------------- ------------- ------------ --------- ---------
Operating income........................... $ 20,255 $ 23,141 $ 1,389 $ 19,914 $ 4,385 $ 5,910
Interest expense........................... (3,176) (3,027) (253) (3,588) (797) (965)
Interest income............................ 1,180 858 82 2,183 495 607
Other income (expense), net................ (33) (298) 53 356 357 80
------------ ------- ------ ------------ --------- ---------
Income before income tax expense........... $ 18,226 $ 20,674 $ 1,271 $ 18,865 $ 4,440 $ 5,632
------------ ------- ------ ------------ --------- ---------
------------ ------- ------ ------------ --------- ---------
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12. ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company currently accounts for its regulated telephone operations in accordance with the provisions of SFAS 71. While the ongoing applicability of SFAS 71 to the Company's telephone operations is being monitored due to the changing regulatory, competitive, and legislative environments, the Company believes that SFAS 71 still applies. However, it is possible that changes in regulation or legislation or anticipated changes in competition or in the demand for regulated services or products could result in the Company's telephone operations not being subject to SFAS 71 in the near future. In that event, implementation of SFAS 101, REGULATED ENTERPRISES--ACCOUNTING FOR THE DISCONTINUANCE OF APPLICATION OF FASB STATEMENT NO. 71, would require the write-off of previously established regulatory assets and liabilities, along with an adjustment of certain accumulated depreciation accounts to reflect the difference between recorded depreciation and the amount of depreciation that would have been recorded had the Company's telephone operations not been subject to rate regulation. Regulatory assets were $45,600,000, and regulatory liabilities were $880,000. Such discontinuance of the application of SFAS 71 would result in a material, noncash charge against earnings which would be reported as an extraordinary item. While the effect of implementing SFAS 101 cannot be precisely estimated at this time, management believes that the noncash, after-tax, extraordinary charge would be between $25,000 and $28,000.
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
13. ACQUISITIONS AND DISPOSITIONS
On September 8, 1997, the Company acquired the outstanding stock of Polarnet, Inc., an Internet service provider. The purchase price was approximately $1,100 and was accounted for by the purchase method. The excess of the purchase price over the estimated fair value of net assets acquired amounted to approximately $968, which is included in goodwill. The results of operations of Polarnet, Inc. from September 8, 1997 are included in the statement of income.
On October 6, 1997, PTI acquired the net assets of the local exchange utilities ("PTI-Fairbanks") from the City of Fairbanks. The purchase price was approximately $87 million and was accounted for by the purchase method. The excess of the purchase price over the estimated fair value of net assets acquired amounted to approximately $31 million, which is included in goodwill. The results of operations of PTI-Fairbanks from October 6, 1997 are included in the statements of income. Assets and liabilities acquired were as follows:
Fair value of assets acquired...................................... $ 86,750
Cash paid for net assets........................................... (85,000)
---------
Liabilities assumed.............................................. $ 1,750
---------
---------
|
On December 1, 1997, PTI was sold to CenturyTel for approximately $2.2 billion (including assumed debt). As a result of this transaction, the Company recorded all previously retained earnings as paid-in capital and pushed down excess costs of approximately $208 million to the Alaskan entities to reflect the change from PTI's to CenturyTel's basis of accounting.
In August 1998 CNI and CT Wireless entered into a definitive agreement to sell the stock of the Company to ALEC for approximately $409 million, subject to certain adjustments. The transaction is anticipated to close in 1999 subject to regulatory approvals and various closing conditions.
14. YEAR 2000 (UNAUDITED)
The Company has initiated a plan ("Year 2000 Plan") to identify, assess, and remediate "Year 2000" issues within each of its significant computer programs and certain equipment which contain micro-processors. The Year 2000 Plan is addressing the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000, if a program or chip uses only two digits rather than four to define the applicable year. The Company has divided the Year 2000 Plan into four major phases--assessment, planning, implementation, and testing. After completing the assessment and planning phases earlier this year, the Company is currently in the implementation and testing phases. Systems which have been determined not to be Year 2000 compliant are being either replaced or reprogrammed, and thereafter tested for Year 2000 compliance. The Year 2000 Plan anticipates that by October 1999 the implementation and testing phases will be completed.
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
14. YEAR 2000 (UNAUDITED) (Continued) The Company is identifying and contacting critical suppliers and customers whose computerized systems interface with the Company's systems, regarding their plans and progress in addressing their Year 2000 issues. The Company has received varying information from such third parties on the state of compliance or expected compliance. Contingency plans are being developed in the event that any critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's operations, liquidity, and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether consequences of Year 2000 failures will have a material impact on the Company's operations, liquidity, or financial condition.
15. BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.
Board of Directors
Century Telephone Enterprises, Inc.
Monroe, Louisiana
We have audited the combined balance sheet of Telephone Fund of Fairbanks Municipal Utilities Services (the "Company") as of October 6, 1997, and the related combined statements of income and fund equity and of cash flows for the period ended October 6, 1997 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Telephone Fund of Fairbanks Municipal Utilities Services as of October 6, 1997, and the results of their operations and their cash flows for the period ended October 6, 1997 and the year ended December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Portland, Oregon
March 25, 1999
ASSETS
CURRENT ASSETS:
Accounts receivable:
Customers, less allowance for doubtful accounts of $156........................ $ 903
Connecting companies and other................................................. 1,949
Material and supplies (at cost).................................................. 2,608
Prepayments...................................................................... 23
---------
Total current assets......................................................... 5,483
PROPERTY, PLANT, AND EQUIPMENT, Net................................................ 50,279
---------
$ 55,762
---------
---------
LIABILITIES AND FUND EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 290
Accrued expenses and other accrued liabilities................................... 2,869
Advance billings and customer deposits (Note 1).................................. 1,140
Capital leases................................................................... 262
---------
Total current liabilities.................................................... 4,561
DEFERRED CREDIT (Note 1)........................................................... 1,180
FUND EQUITY........................................................................ 50,021
---------
$ 55,762
---------
---------
|
See accompanying notes to combined financial statements.
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 1997
------------ ------------
OPERATING REVENUES--Telephone........................................................ $ 28,602 $ 22,796
------------ ------------
OPERATING EXPENSES:
Cost of sales and operating expenses--telephone.................................... 17,678 14,074
Depreciation and amortization...................................................... 5,172 4,249
------------ ------------
Total operating expenses....................................................... 22,850 18,323
------------ ------------
OPERATING INCOME..................................................................... 5,752 4,473
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense................................................................... (1,552) (1,520)
Interest income.................................................................... 462 416
Other income (expense), net........................................................ 555 217
------------ ------------
Total other expense............................................................ (535) (887)
------------ ------------
NET INCOME........................................................................... 5,217 3,586
FUND EQUITY, BEGINNING OF YEAR....................................................... 48,298 49,690
DIVIDENDS............................................................................ (3,825) (3,255)
------------ ------------
FUND EQUITY, END OF YEAR............................................................. $ 49,690 $ 50,021
------------ ------------
------------ ------------
|
See accompanying notes to combined financial statements.
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 1997
------------ -------------
OPERATING ACTIVITIES:
Net income......................................................................... $ 5,216 $ 3,586
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 5,172 4,249
Change in current assets and liabilities:
Accounts receivable............................................................ 167 996
Accounts payable............................................................... (563) (2,133)
Other current assets and liabilities, net...................................... 132 529
------------ -------------
Net cash provided by operating activities.................................... 10,124 7,227
------------ -------------
INVESTING ACTIVITIES:
Payments for property, plant, and equipment........................................ (6,023) (3,452)
------------ -------------
FINANCING ACTIVITIES:
Dividends paid to MUS.............................................................. (3,825) (3,255)
Payments of lease obligation....................................................... (276) (520)
------------ -------------
Net cash used in financing activities........................................ (4,101) (3,775)
------------ -------------
INCREASE (DECREASE) IN CASH.......................................................... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... -- --
------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ -- $ --
------------ -------------
------------ -------------
|
See notes to combined financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Telephone Utility of Fairbanks Municipal Utilities Services' (the "Company") primary business is to provide telephone service to its customers who are located in the City of Fairbanks and surrounding local areas. The Company's telephone operations are regulated in nature and its telephone accounting records are maintained in accordance with the rules and regulations of the Alaska Public Utilities Commission ("APUC") which substantially adhere to the rules and regulations of the Federal Communications Commission. The Company's regulated operations are subject to the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. In an asset purchase agreement effective October 6, 1997, the Company was sold by the Municipal Utilities System ("MUS"), an enterprise fund of the City of Fairbanks, to PTI Communications of Alaska, Inc. and began doing business as PTI-Fairbanks. The financial statements do not reflect any purchase adjustments from this transaction. The financial statements also exclude the cellular fund which operates the RSA #1 A-Side cellular property site license.
The accompanying financial statements represent the financial position of the Company as of October 6, 1997 and the results of its operations and cash flows for the period ended October 6, 1997 and the year ended December 31, 1996.
A summary of significant accounting policies followed by the Company is set forth below:
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT, AND EQUIPMENT--The Company states its property, plant and equipment at cost. Additions to plant include direct costs and related indirect charges. Depreciation is provided using the straight-line method based primarily on the estimated service lives of the various classes of depreciable assets. The composite depreciation rate for depreciable telecommunications plant was 5.7% for the period ended October 6, 1997 and 4.9% for the year ended 1996.
INCOME TAXES--As MUS is a public entity, it is exempt from paying any federal, state or local taxes. In place of property taxes, MUS makes a payment in lieu of taxes (see Note 2).
REVENUE RECOGNITION--The Company participates in access revenue pools for certain interstate and intrastate revenues, which are initially recorded based on estimates. Certain network access revenues are estimated under cost separations procedures that base revenues on current operating costs and investments in facilities to provide such services. These estimates are derived from interim financial statements, available separations studies and the most recent rate of return published by the National Exchange Carriers Association. These estimates are subject to subsequent adjustment in future accounting periods as refined operational information becomes available. Any subsequent adjustments have not been material.
ADVANCE BILLINGS--Advance billings creditable to revenue accounts in future months are recorded in advance billings until the service is rendered.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED CREDIT--In prior years contributions were made by outside third parties to fund construction of certain property, plant, and equipment of the Company. These contributions have been recorded as a deferred credit and are being amortized over the lives of the funded assets.
2. TRANSACTIONS WITH RELATED PARTIES
The Company purchases certain administrative, engineering, personnel, and legal services from the City of Fairbanks. These services, which are charged at cost to various capital and expense accounts, were $596 for the period ended October 6, 1997 and $853 for the year ended December 31, 1996.
The Company makes payments in lieu of taxes at 4% of gross revenue, with payments capped at $2,243, plus a 3% supplemental, with payments capped at $1,300 for all utilities. Payments in lieu of taxes to the City of Fairbanks General Fund by the Company amounted to $1,536 for the period ended October 6, 1997 and $1,715 for the year ended December 31, 1996.
MUS also allocates interest expense on revenue bonds as well as interest income earned on short-term investments to each of its utilities as part of its centralized cash management program. The amount of interest expense and income allocated to the Company was $1,520 and $416 during the period ended October 6, 1997 and $1,552 and $462 during the year ended December 31, 1996.
3. PROPERTY, PLANT, AND EQUIPMENT, NET
The balances by category of property, plant, and equipment, net at October 6, 1997 are:
Central office equipment........................................... $ 25,533
Poles, cable, and conduit.......................................... 60,195
Buildings.......................................................... 6,675
Office furniture, equipment, and other............................. 25,884
Construction work in progress...................................... 4,897
---------
Total property, plant, and equipment, gross.................... 123,184
Accumulated depreciation........................................... (72,905)
---------
Property, plant, and equipment, net............................ $ 50,279
---------
---------
|
4. EMPLOYEE BENEFIT PLANS
All permanent employees of the Company are eligible to participate as members of the State of Alaska Public Employees Retirement System ("PERS"), a defined benefit agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for the State of Alaska and any political subdivision or public organization that elects to join the system. Eligible employees contribute 6.75% of their gross salary to PERS. The Company is required to contribute the remaining amounts necessary to fund PERS, using the actuarial basis specified by the PERS Board. Because actuarial information regarding the status of the PERS plan is computed for the Plan in total, the Company does not separately determine its portion of the actuarial present value for the accumulated plan benefits, projected benefit obligation, or net assets available for benefits. At
4. EMPLOYEE BENEFIT PLANS (CONTINUED) June 30, 1997, the date of the latest actuarial evaluation for the Plan, Plan assets of $70,726 exceeded the projected benefit obligation by approximately $33,837.
Certain employees of the Company are members of the International Brotherhood of Electrical Workers ("IBEW") and are eligible to participate in two different union-sponsored multiple employer defined benefit plans, a pension plan and a thrift plan. Under the pension plan, the Company contributed between $4 and $5.09 per compensable hour to the Alaska Electrical Pension Fund and the total contribution was $782 for the period ended October 6, 1997 and $864 for the year ended December 31, 1996. Under the thrift plan, the Company pays a minimum of 4% of the participant's gross wages into the plan plus after one year it matches the employee's contributions, to a maximum of 3%. The Company's contributions to the thrift plan was $332 for the period ended October 6, 1997 and $298 for the year ended December 31, 1996.
5. EMPLOYEES' DEFERRED COMPENSATION
The Company offers its employees three deferred compensation plans which are part of the MUS multiemployer plan. The plans are available to all Company employees and permit them to defer a portion of their salary until future years. Participants' rights under the plans are equal to those of general creditors of MUS in an amount equal to the fair market value of the deferred account for each participant. The fair market value of both the assets and liabilities for the Plan in total at October 6, 1997 was $13,247.
6. COMMITMENTS AND CONTINGENCIES
Expenditures under the Company's 1998 construction and capital expenditure program are expected to approximate $7,193.
* * * * * *
The Honorable Mayor and Members of the Assembly Municipality of Anchorage:
We have audited the accompanying balance sheets of the Municipality of Anchorage Telephone Utility Fund (Utility) as of December 31, 1998 and 1997, and the related statements of revenues, expenses, and changes in retained earnings, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Utility's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The financial statements present only the Municipality of Anchorage Telephone Utility Fund and are not intended to present fairly the financial position and results of operations of the Municipality of Anchorage in conformity with generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Municipality of Anchorage Telephone Utility Fund as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Anchorage, Alaska
February 19, 1999
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash...................................................................... $ 10,474 $ 25,755 $ 23,034
Accounts receivable, net of uncollectibles of $1,586, $1,343 and $1,735 in
1998, 1997 and March 31, 1999........................................... 21,216 23,733 24,026
Inventories............................................................... 4,415 3,074 3,138
---------- ---------- -----------
Total current assets.................................................. 36,105 52,562 50,198
RESTRICTED CASH............................................................. 2,067 754 492
RESTRICTED INVESTMENTS...................................................... 12,895 14,838 16,817
NET TELEPHONE PLANT......................................................... 250,669 257,703 255,184
OTHER ASSETS
Cellular licenses......................................................... 9,670 16,315 16,203
Minority investments...................................................... 7,983 5,535 5,107
Other..................................................................... 3,735 2,538 2,695
---------- ---------- -----------
Total other assets.................................................... 21,388 24,388 24,005
---------- ---------- -----------
TOTAL ASSETS................................................................ $ 323,124 $ 350,245 $ 346,696
---------- ---------- -----------
---------- ---------- -----------
FUND EQUITY AND LIABILITIES
CURRENT LIABILITIES
Accounts payable.......................................................... $ 23,211 $ 24,366 $ 22,967
Accrued interest.......................................................... 1,730 2,227 1,779
Compensated absences payable.............................................. 3,297 2,786 2,857
Accrued employee benefits................................................. 2,141 1,938 2,313
Advance billings and customer deposits.................................... 4,386 4,523 3,790
Current installments of long-term obligations............................. 16,719 17,614 17,249
---------- ---------- -----------
Total current liabilities............................................. 51,484 53,454 50,955
LONG-TERM OBLIGATIONS....................................................... 135,226 154,907 150,369
FUND EQUITY
Retained Earnings......................................................... 136,414 141,884 145,372
---------- ---------- -----------
TOTAL FUND EQUITY AND LIABILITIES........................................... $ 323,124 $ 350,245 $ 346,696
---------- ---------- -----------
---------- ---------- -----------
|
See accompanying notes to financial statements.
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING REVENUES
Local telephone.................................. $ 113,415 $ 116,555 $ 121,057 $ 29,735 $ 30,364
Cellular......................................... 16,897 21,845 29,225 5,879 6,710
Long distance.................................... 2 1,541 6,815 1,144 2,683
---------- ---------- ---------- ----------- -----------
Total operating revenue........................ 130,314 139,941 157,097 36,758 39,757
---------- ---------- ---------- ----------- -----------
OPERATING EXPENSES
Cost of sales and operating expenses--local...... 75,980 74,994 74,240 18,231 18,844
Cost of sales and operating expenses--
cellular....................................... 12,379 14,455 19,961 4,048 4,740
Cost of sales and operating expenses--long
distance....................................... 543 4,644 10,395 1,898 3,243
Depreciation and amortization.................... 20,496 26,839 29,608 7,099 7,434
---------- ---------- ---------- ----------- -----------
Total operating expenses....................... 109,398 120,932 134,204 31,276 34,261
OPERATING INCOME................................... 20,916 19,009 22,893 5,482 5,496
---------- ---------- ---------- ----------- -----------
Interest expense................................... (9,187) (9,308) (9,394) (2,448) (1,996)
Equity in earnings (loss) of minority
investments...................................... (45) 158 (2,945) (250) (509)
Interest income.................................... 2,347 2,540 2,967 608 411
Other income (expense), net........................ (174) (281) 49 67 86
---------- ---------- ---------- ----------- -----------
Net other expense.............................. (7,059) (6,891) (9,323) (2,023) (2,008)
---------- ---------- ---------- ----------- -----------
NET INCOME....................................... 13,857 12,118 13,570 3,459 3,488
RETAINED EARNINGS, JANUARY 1....................... 126,839 132,596 136,414 136,414 141,884
Utility Revenue Distribution to Municipality of
Anchorage........................................ (8,100) (8,300) (8,100) 0 0
---------- ---------- ---------- ----------- -----------
RETAINED EARNINGS, PERIOD END...................... $ 132,596 $ 136,414 $ 141,884 $ 139,873 $ 145,372
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
|
See accompanying notes to financial statements.
YEARS ENDED THREE MONTHS ENDED MARCH 31,
DECEMBER 31,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Income from operations........................................... $ 20,477 $ 19,005 $ 22,548 $ 5,629 $ 5,666
Adjustments to reconcile income from operations to net cash
provided by operating activities
Depreciation and amortization.................................. 20,496 26,839 29,608 7,099 7,434
Provision for uncollectible accounts........................... 1,112 1,113 1,643 441 944
Loss on disposition of fixed assets............................ 288 100 174 56 --
Nonregulated income and other.................................. 439 43 95 (464) (165)
Changes in assets and liabilities which increase (decrease)
cash
Accounts receivable.......................................... (996) (4,040) (4,160) (1,184) (1,237)
Inventory of materials, supplies, and goods for resale....... 159 (504) 1,341 63 (64)
Other assets................................................. (364) 120 1,244 751 (157)
Accounts payable............................................. (25) 4,172 1,155 (4,290) (1,399)
Accrued employee benefits and compensated absences payable... 1,198 194 (713) 408 446
Customer deposits............................................ (620) (262) (292) (115) (733)
Advance billings............................................. 306 558 428 -- --
Other liabilities............................................ (350) (697) 136 -- --
--------- --------- --------- ------------- -------------
Net cash provided by operating activities.......................... 42,120 46,641 53,207 8,394 10,735
--------- --------- --------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from noncapital financing activities
Utility revenue distribution--Municipality of Anchorage........ (8,100) (8,300) (8,100) -- --
Cash flows from capital and related financing activities
Acquisition of telephone plant................................. (24,958) (35,187) (29,644) 8,404 3,383
Short-term advance from Municipality of Anchorage General
Fund......................................................... (12,000) -- -- -- --
Principal payments on long-term obligations.................... (22,002) (19,617) (17,340) (2,497) (6,475)
Bond issuance.................................................. 43,659 24,790 29,592 29,592 --
Interest payments on long-term obligations..................... (6,513) (7,952) (8,011) (2,060) (2,292)
Cost of removal of telephone plant............................. (181) (650) (77) -- --
--------- --------- --------- ------------- -------------
Net cash provided (used) by capital and related financing
activities..................................................... (21,995) (38,616) (25,480) 16,631 (12,150)
--------- --------- --------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest......................................................... 2,347 2,325 2,968 744 411
Minority investments............................................. (2,398) (5,227) (7,283) (7,283) --
Proceeds from sale of restricted investments..................... 12,865 12,109 13,912 13,912 15,655
Purchase of restricted investments............................... (13,601) (12,872) (15,256) (15,417) (17,634)
--------- --------- --------- ------------- -------------
Net cash used by investing activities.............................. (787) (3,665) (5,659) (8,044) (1,568)
--------- --------- --------- ------------- -------------
NET CHANGE IN CASH................................................. 11,238 (3,940) 13,968 16,981 (2,983)
CASH, JANUARY 1.................................................... 5,243 16,481 12,541 12,541 26,509
--------- --------- --------- ------------- -------------
CASH, PERIOD END (including Restricted Cash (see Note 1)).......... $ 16,481 $ 12,541 $ 26,509 $ 29,522 $ 23,526
--------- --------- --------- ------------- -------------
NON-CASH CAPITAL, FINANCING, AND INVESTING ACTIVITIES
Retirement of telephone plant.................................... $ 7,124 $ 9,077 $ 3,401 -- --
Write down of long-term investments.............................. -- -- 1,888 -- --
Financed equipment purchased..................................... -- -- 6,655 -- 1,420
--------- --------- --------- ------------- -------------
Total Non-cash Capital, Financing, and Investing Activities...... $ 7,124 $ 9,077 $ 11,944 -- 1,420
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
|
See accompanying notes to financial statements.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the activities of the Telephone Utility Fund (Utility), a public utility of the Municipality of Anchorage (Municipality), ATU Communications, Inc. (ACI), a holding company, MACtel, Inc. (MACtel) and ATU Long Distance, Inc. (ATU LD), wholly owned subsidiaries of ACI. All significant intercompany transactions have been eliminated.
The regulated arm of the Utility provides local telecommunications service and access to long distance telecommunications service to the Anchorage Bowl area and to Girdwood and other small communities in the area south of the Anchorage Bowl both inside and outside the boundaries of the Municipality. The nonregulated arm of the Utility sells, rents, and leases customer premise equipment to customers throughout the State of Alaska. MACtel is a wholesale/retail cellular service provider that operates in Anchorage, the Kenai Peninsula, and the North Star and North Slope Boroughs. ATU LD provides long distance service to customers in Anchorage, Fairbanks, Juneau, the Kenai Peninsula and the Matanuska Valley. Approximately 70% of the Utility's employees are covered under a labor contract with the International Brotherhood of Electrical Workers (IBEW) which expires on August 31, 1999.
On January 5, 1998, MACtel acquired certain assets of Pacific Telecom Cellular of Alaska RSA #1, Inc. and stock of Prudhoe Communications, Inc., collectively d/b/a Cellulink, a cellular service company in Fairbanks, Alaska for $8,900.
The purchase price was allocated as follows:
Property and equipment.............................................. $ 1,817
Cellular licenses................................................... 7,083
---------
$ 8,900
---------
---------
|
Results of operations for the acquired companies have been included in 1998 operations since the date of acquisition. Pro forma information for prior periods is not presented because it is not material.
During 1998, the Municipal Assembly accepted a bid in the amount of $295,000 from Alaska Communications Systems, Inc. to acquire substantially all of the assets and assume substantially all of the liabilities of the Utility. The sale will become effective after review and approval by the Alaska Public Utilities Commission (APUC), the Federal Communications Commission (FCC), and non-action by the United States Department of Justice under the Hart-Scott-Rodino Act. The sales price will be adjusted based upon levels of cash and net plant on the closing date.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REGULATION
The Utility is subject to rate regulation by the FCC for interstate telecommunication service, and the APUC for intrastate and local exchange telecommunication service. The Utility, as required by the FCC, accounts for such activity separately.
The services of ATU LD are subject to rate regulation as a non-dominant interexchange carrier by the FCC for interstate telecommunication services and the APUC for intrastate telecommunication services. The operations of MACtel are not subject to rate regulation.
The accounting records of the Utility conform to Part 32 Uniform System of Accounts as prescribed by the FCC and the APUC.
The accompanying financial statements are prepared on the accrual basis of accounting. The accounting policies of the Utility are in conformity with the requirements of the FCC and the APUC. The Utility prepares its financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Accounting under SFAS No. 71 is appropriate as long as rates are established by or subject to approval by independent third-party regulators; rates are designed to recover the specific enterprise's cost-of-service; and in view of demand for service, it is reasonable to assume that rates are set at levels that will recover costs and can be collected from customers.
Under Governmental Accounting Standards Board (GASB) Statement No. 20,
ACCOUNTING AND FINANCIAL REPORTING FOR PROPRIETARY FUNDS AND OTHER GOVERNMENTAL
ENTITIES THAT USE PROPRIETARY FUND ACCOUNTING, the Utility applies all
applicable GASB pronouncements and all Financial Accounting Standards Board
(FASB) Statements and Interpretations, Accounting Principles, Board Opinions and
Accounting Research Bulletins, unless they conflict with or contradict GASB
pronouncements. ATU follows the provisions of GASB Statement No. 27 to account
for pension and post-retirement costs, which differs from FAS Statement No. 87
and FAS Statement No. 106 regarding the methodology for calculation of such
costs, and how they are recorded and disclosed. It is not practicable to
quantify the differences between the statements without an additional complete
actuarial valuation because the actuarial calculations for FAS Statement No. 87
purposes require different assumptions and represent different measurement
bases. Other differences between GASB and FAS have been evaluated and have been
determined not to be material for the periods presented.
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The more significant accounting and reporting policies and estimates applied in the preparation of the accompanying financial statements are discussed below.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH POOLS AND RESTRICTED INVESTMENTS
The Municipality uses a central treasury to account for all cash and investments to maximize interest income. Interest income from cash pool investments is allocated to the Utility based on its monthly closing cash pool equity balance. Restricted investments are recorded at fair value. All amounts in the cash pools and in restricted investments are interest bearing and consist primarily of repurchase agreements, banker's acceptances or U.S. Government securities. The Utility adopted GASB Statement No. 31, ACCOUNTING AND FINANCIAL REPORTING FOR CERTAIN INVESTMENTS AND FOR EXTERNAL INVESTMENT POOLS, during 1998. The impact of adopting this statement was not material to the financial statements.
Under GASB Statement No. 3, DEPOSITS WITH FINANCIAL INSTITUTIONS, INVESTMENTS (INCLUDING REPURCHASE AGREEMENTS), AND REVERSE REPURCHASE AGREEMENTS, the Utility's cash and investments are classified in credit risk category 1 because they are insured or registered or are securities held by the Utility or its agent in the Utility's name.
The Utility has adopted GASB Statement No. 9, REPORTING CASH FLOWS OF PROPRIETARY AND NONEXPENDABLE TRUST FUNDS AND GOVERNMENTAL ENTITIES THAT USE PROPRIETARY FUND ACCOUNTING. For purposes of the statement of cash flows, the Utility has defined cash as the demand deposits and investments maintained in the general and construction cash pools, including restricted and unrestricted balances, as well as cash balances maintained separately from the cash pools. Maturity periods of investments have been disregarded, since the Utility uses the general and construction cash pools as demand deposit accounts.
Cash consists of the following at December 31:
1996 1997 1998
--------- --------- ---------
Equity in general cash pool...................................................... $ 14,427 $ 9,401 $ 19,254
Cash............................................................................. 963 1,073 6,501
--------- --------- ---------
Total cash................................................................. 15,390 10,474 25,755
Amounts included with restricted investments:
Equity in construction cash pool................................................. -- 927 --
Equity in general cash pool reserved for customer deposits....................... 1,091 830 537
Cash included in revenue bond reserve investments................................ -- 310 217
--------- --------- ---------
$ 16,481 $ 12,541 $ 26,509
--------- --------- ---------
--------- --------- ---------
|
The Utility's inventories, consisting primarily of parts and supplies, are valued at the lower of weighted average cost or market.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TELEPHONE PLANT
Telephone plant is stated at cost. The additions to telephone plant in service are recorded at the original cost of contracted services, direct materials and labor, and indirect overhead charges. When property is retired, the cost of the property unit, plus removal costs, less salvage, is charged to accumulated depreciation. Gain or loss on the retirement of regulated telephone plant is not recognized except for extraordinary retirements.
The Utility's depreciation is computed using the straight-line method over the estimated lives of the assets. Current rates on regulated plant were implemented January 1, 1997 and were based on APUC Docket U-96-78. MACtel and ATU LD property and equipment are depreciated using the straight-line and declining balance methods over the estimated useful asset lives.
The estimated life in years of major plant and equipment categories follows:
ESTIMATED
PLANT AND EQUIPMENT LIFE
----------------------------------------------------------------------------------- -----------
Buildings.......................................................................... 56
Central office equipment........................................................... 9-10
Cable, wire and conduit............................................................ 12-46
Furniture, computers and support equipment......................................... 7-22
Vehicles........................................................................... 11-19
Leasehold improvements............................................................. 2-3
Nonregulated....................................................................... 3-10
|
Minority investments consist of investments in companies which are accounted for using the equity method.
Cellular licenses are stated at net book value. Amortization is computed on the straight-line method over an estimated useful life of 40 years.
The discount on revenue bonds payable is amortized over the life of the related bond issue using the effective interest method.
Recurring revenues are billed one month in advance and are deferred until the month earned. Nonrecurring revenues are billed in arrears and are recognized when earned.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During 1998 the Utility participated in both interstate and intrastate common line pooled settlements. During 1998 the Utility did not participate in any traffic-sensitive pools. Pooled revenues are based on settlements with the applicable pool's administrator. Intrastate pooled revenues are settled on a monthly basis with the Alaska Exchange Carrier Association (AECA) and are final at the time of settlement. Participation in the AECA pool was discontinued effective January 1, 1999. Interstate pooled revenues are settled on a monthly basis with the National Exchange Carrier Association (NECA). The NECA settlements may be adjusted for a period of up to twenty-four months. Interstate traffic sensitive revenue is based on rates and charges defined in the Utility's interstate tariff approved by the FCC. Interstate traffic sensitive revenue is recognized when earned for both recurring and nonrecurring charges.
To the extent that disputes arise over revenue settlement procedures, the Utility's policy is to defer revenue collected until settlement methodologies are resolved and finalized.
The Municipal Utility Service Assessment (MUSA) is assessed by the Municipality and is calculated based on the net book value of telephone plant in the prior year. Net book value for each tax district is multiplied by the current mill rate to determine the assessment. The Utility also pays a gross receipt tax, which is 1.25% of gross operating revenues, excluding nonregulated revenues.
Advertising costs are expensed in the period in which they are incurred.
The Internal Revenue Code provides that gross income for tax purposes does not include income accruing to a state or territory, or any political subdivision thereof, which is derived from the exercise of any essential governmental function or from any public utility. The Utility is a public utility of the Municipality and is therefore exempt from federal and state income taxes. ACI and its subsidiaries are exempt from federal and state income taxes because ACI is a holding company owned 100% by the Utility.
The Utility adopted GASB Statement No. 27, ACCOUNTING FOR PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS, during 1998. GASB No. 27 establishes standards for the measurement, recognition and display of pension expense and related liabilities, assets, note disclosure and applicable required supplementary information in the financial reports of state and local governmental employers. The impact of adopting GASB No. 27 was not material to the financial statements.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS
The Utility has adopted FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under the provisions of this statement, the Utility has evaluated its long-lived assets for financial impairments and will continue to evaluate them if events or changes in circumstance indicate the carrying amount of such assets may not be fully recoverable.
Certain reclassifications have been made to the December 31, 1997 and 1996 financial statements to conform to the current year's presentation.
(2) TELEPHONE PLANT
A summary of telephone plant and equipment at December 31, follows:
1997 1998
----------- -----------
Plant in Service
Cable, wire and conduit........................................... $ 166,055 $ 169,705
Central office equipment.......................................... 124,199 126,364
Buildings......................................................... 43,908 44,207
Furniture, computers and support equipment........................ 21,580 21,380
Nonregulated equipment............................................ 30,413 36,269
Vehicles.......................................................... 7,523 7,499
Land.............................................................. 5,101 5,168
Leasehold improvements............................................ 468 741
----------- -----------
399,247 411,333
Less accumulated depreciation..................................... (162,990) (187,179)
----------- -----------
Net plant in service............................................ 236,257 224,154
Construction work in progress..................................... 14,412 33,549
----------- -----------
Net telephone plant............................................. $ 250,669 $ 257,703
----------- -----------
----------- -----------
|
(3) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
Bonds payable:
1997 1998
---------- ----------
1993 Series, effective interest rate of 5.49%, due in 2013.............................. $ 17,390 $ 16,670
1994 Series, effective interest rate of 4.38%, due in 2010.............................. 66,210 54,265
1996 Series, effective interest rate of 5.71%, due in 2016.............................. 42,745 41,430
1997 Series, effective interest rate of 5.18%, due in 2017.............................. 25,000 24,275
1998 Series, effective interest rate of 4.44%, due in 2010.............................. -- 30,000
---------- ----------
151,345 166,640
Less: Unamortized loss on refunding..................................................... (2,295) (1,643)
Less: Current portion................................................................... (14,705) (16,370)
Less: Unamortized discount.............................................................. (257) (226)
Plus: Unamortized premium............................................................... 238 678
---------- ----------
Net long-term revenue bonds payable....................................................... 134,326 149,079
---------- ----------
Equipment financing obligations, interest rates range from approximately 4-5%, final
payment due in 2004..................................................................... -- 6,034
Less: Current portion................................................................... -- (1,071)
---------- ----------
Net equipment financing obligations....................................................... -- 4,963
---------- ----------
Note payable:
Note payable, effective interest rate of 5.98%, due in 1999............................. 2,187 173
Less: Current portion................................................................... (2,014) (173)
---------- ----------
Net note payable.......................................................................... 173 --
---------- ----------
Arbitrage payable......................................................................... 727 865
---------- ----------
Total long-term obligations............................................................... $ 135,226 $ 154,907
---------- ----------
---------- ----------
|
(3) LONG-TERM OBLIGATIONS (CONTINUED) Debt service requirements are the following for the years ended December 31:
PRINCIPAL INTEREST TOTAL
---------- --------- ----------
1999....................................................... $ 17,614 $ 8,272 $ 25,886
2000....................................................... 17,686 7,592 25,278
2001....................................................... 18,381 6,853 25,234
2002....................................................... 19,176 6,063 25,239
2003....................................................... 9,989 5,152 15,141
2004-2008.................................................. 41,461 18,580 60,041
2009-2013.................................................. 30,825 9,164 39,989
2014-2017.................................................. 17,715 1,720 19,435
---------- --------- ----------
$ 172,847 $ 63,396 $ 236,243
---------- --------- ----------
---------- --------- ----------
|
The 1993 revenue bond covenants require the establishment of reserves over a five-year period equal to the maximum annual debt service on all outstanding bonds. The 1994 refunding bond covenants require establishment of a reserve in the amount of $9,750. The 1996 revenue bond covenants require an amount equal to the lesser of $4,400 or the maximum annual debt service to be funded in equal installments over four years. The 1997 revenue bond covenants require an amount equal to the lessor of $2,500 or the maximum annual debt service to be funded in equal installments over four years. The 1998 revenue bond covenants require an amount equal to the lessor of $3,000 or the maximum annual debt service to be funded in equal installments over four years. The revenue bond covenants further stipulate that revenues less expenses will be equal to at least 1.4 times the debt service requirements for that year. Expenses are defined as costs for operation and maintenance of the system, excluding depreciation and MUSA for each year. For the years ended December 31, 1998, 1997 and 1996, the Utility complied with the revenue bond covenants.
(4) REFUNDING OF LONG-TERM OBLIGATIONS
In 1994, the Utility issued refunding bond issues for the purpose of redeeming certain bond issues when they become due or callable. The net proceeds of the refunding bond issue were used to purchase US Government securities which were deposited in an irrevocable trust with an escrow agent to provide all future debt service payments on the refunded bonds. Since payment of these advance refunded issues has been provided, as described above, neither the liability nor the assets irrevocably pledged, including related interest income and expense, are reflected in the accompanying financial statements.
Defeased bonds as of December 31, 1998 total $11,390 for the 1990 issue.
(5) RETIREMENT PLANS
Substantially all employees are covered by one of the following plans.
The IBEW Plan is a union sponsored defined benefit pension plan for members of the IBEW #1547 Union. The Utility contributed $3.67 per compensable employee hour to the Alaska Electrical Trust Fund in 1998, 1997 and 1996. Utility contributions to this plan were $3,130, $3,379 and $3,608 for the years ended December 31, 1998, 1997 and 1996, respectively. The hourly rate paid by the Utility is determined by the collective bargaining process. The Utility's obligation for IBEW employee retirement is limited to the amount paid to the Alaska Electrical Trust Fund.
As discussed in note 1, the Utility adopted the provisions of GASB Statement No. 27, ACCOUNTING FOR PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (GASB 27), in 1998.
The Utility contributes to the State of Alaska Public Employees' Retirement System (PERS), a defined benefit, agent multiple-employer public employee retirement system which was established and is administered by the State of Alaska (State) to provide pension, postemployment healthcare, death and disability benefits to eligible employees.
All full-time Utility employees not covered by the IBEW Plan are eligible to participate in PERS. Benefit and contribution provisions are established by State law and may be amended only by the State Legislature.
Each fiscal year, PERS issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing to the State of Alaska, Department of Administration, Division of Retirement and Benefits, P.O. Box 110203, Juneau, Alaska, 99811-0203 or by calling (907) 465-4460.
Employee contribution rates are 6.75% as required by State statute. The funding policy for PERS provides for periodic employer contributions at actuarially determined rates that, expressed as a percentage of annual covered payroll, are sufficient to accumulate sufficient assets to pay benefits when due.
(5) RETIREMENT PLANS (CONTINUED) The Utility's annual pension cost for the current year and the related information is as follows:
POSTEMPLOYMENT
PENSION HEALTHCARE
--------------------------- -----------------
Contribution rates:
Employee...................................... 4.86% 1.89%
Employer...................................... 6.36% 2.47%
Annual pension cost............................. $750 $ 291
Contributions made.............................. $750 $ 291
Actuarial valuation date........................ June 30, 1996 Same
Actuarial cost method........................... Projected unit credit Same
Amortization method............................. Level dollar, open Same
Amortization period............................. Rolling 25 years Same
Asset valuation method.......................... 5-year smoothed market Same
Actuarial assumptions:
Inflation rate................................ 4% Same
Investment return............................. 8.25% Same
Projected salary increase..................... 5.5% N/A
Health cost trend............................... N/A 5.5%
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The components of annual pension cost for the year ended December 31, 1998 are as follows:
Annual required contribution (ARC).................................. $ 1,041
Interest on the net pension obligation (NPO)........................ --
Adjustment to the ARC............................................... --
---------
Annual pension cost (APC)........................................... 1,041
Contributions made.................................................. 1,041
Increase in NPO..................................................... --
NPO, beginning of year.............................................. --
---------
NPO, end of year.................................................... $ --
---------
---------
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(5) RETIREMENT PLANS (CONTINUED) Three year trend information follows:
YEAR PERCENTAGE
ENDED OF APC
DECEMBER 31 APC CONTRIBUTED NPO
--------------- --------- --------------- ---------
Pension......................................... 1996 $ 1,032 100% $
1997 827 100% --
1998 750 100% --
Postemployment healthcare....................... 1996 $ 382 100% $ --
1997 306 100% --
1998 291 100% --
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In the current year (the transition year), the Utility determined, in accordance with provisions of GASB No. 27, that no pension liability (asset) existed to PERS and there was no previously reported liability (asset) to PERS.
Information regarding funding progress follows:
UNFUNDED
ACTUARIAL
ACTUARIAL ACTUARIAL ACTUARIAL ACCRUED UAAL AS A
VALUATION VALUE ACCRUED LIABILITY PERCENTAGE
YEAR ENDED OF PLAN LIABILITY (ASSET) FUNDED COVERED OF COVERED
JUNE 30 ASSETS (AAL) (UAAL) RATIO PAYROLL PAYROLL
------------- --------- --------- ----------- ----------- --------- -------------
Pension benefits 1995 $ 5,417 $ 4,457 $ (960) 122% $ 11,288 (9)%
1996 6,656 5,702 (954) 117% 11,436 (8)%
1997 10,180 7,419 (2,761) 137% 12,290 (22)%
Postemployment healthcare
benefits 1995 $ 2,036 $ 1,675 $ (361) 122% $ 11,288 (3)%
1996 2,565 2,198 (367) 117% 11,436 (3)%
1997 3,794 2,765 (1,029) 137% 12,290 (8)%
Total 1995 $ 7,453 $ 6,132 $ (1,321) 122% $ 11,288 (12)%
1996 9,221 7,900 (1,321) 117% 11,436 (11)%
1997 13,974 10,184 (3,790) 137% 12,290 (31)%
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(6) OTHER EMPLOYEE BENEFITS
The Municipality offers its employees, including employees of the Utility, a deferred compensation plan (Plan) created in accordance with Internal Revenue Code Section 457. The Plan, available to all Municipal employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. It is the opinion of the Municipality's legal counsel that the Municipality has no liability for losses under the Plan but does have the duty of due care that would be required of an ordinary
(6) OTHER EMPLOYEE BENEFITS (CONTINUED) prudent investor. The Municipality believes that it is unlikely that it will use the assets to satisfy the claims of general creditors in the future.
In accordance with labor agreements, IBEW employees' medical/dental coverage is provided through the Alaska Electrical Health and Welfare Trust Fund. Utility contributions to this fund were $2,859, $3,143 and $2,888 for the years ended December 31, 1998, 1997 and 1996, respectively.
(7) MINORITY INVESTMENTS
Minority investments held consist of the following at December 31:
1997 1998 OWNERSHIP %
--------- --------- -----------------
Alaskan Choice Television, LLC.............................. $ 4,627 $ 2,651 33%
Alaska Network Systems, Inc................................. 2,353 2,015 47%
Internet Alaska, Inc........................................ 803 500 30%
Security One, LLC........................................... 200 369 20%
--------- ---------
$ 7,983 $ 5,535
--------- ---------
--------- ---------
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The Utility is one of three members of a limited liability company, Alaskan Choice Television, LLC (ACTV). ACTV has accumulated substantial losses since inception and is not generating sufficient cash flow to sustain operations. These factors, among others, indicate that ACTV may be unable to continue as a going concern for a reasonable period of time. ACTV's continuation as a going concern is dependent upon its ability to attain additional equity and debt financing and achieve positive cash flow and profitability. ACTV is in negotiation with a potential investor who will provide working capital. The other two members of the limited liability company have agreed to sell their interests to this investor. ACTV expects to complete this transaction in the second quarter of 1999. Additionally, ACTV is in discussion with several financial institutions to provide the necessary debt financing. Pursuant to Statement of Financial Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock", the Utility assessed the recoverability of its investment in ACTV during 1998 and adjusted the carrying value of the investment to its estimated fair value resulting in a noncash impairment loss of approximately $1,500.
(8) RELATED PARTY TRANSACTIONS
Certain general and administrative functions of the Municipality, including data processing, workers' compensation insurance and medical/dental/life insurance, are centralized and the related cost is allocated to the various funds of the Municipality, including the Utility. Such costs allocated to the Utility totaled $3,187, $3,672, and $3,204 for the years ended December 31, 1998, 1997, and 1996, respectively.
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
These costs are allocated to ATU from the Municipality of Anchorage through an inter-governmental charge system ("IGC") based upon ATU's proportionate share of certain cost drivers, such as manned positions, building square footage or number of transactions processed, depending upon the type of cost being allocated. Certain IGC's are based upon work orders for specific projects between departments. Management believes that the methodology utilized is reasonable. It is not practicable to quantify what such costs would have been on a stand-alone basis.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical cost amounts.
The following methods and assumptions were used by the Utility in estimating fair value disclosures for financial instruments:
Cash, restricted investments, accounts receivable, accounts payable and accrued liabilities, accrued interest, customer deposits and accrued employee benefits--The carrying amounts at December 31, 1998 and 1997 approximate the fair values due to the short maturity of these instruments.
Long-term debt--The fair value of the Utility's long-term debt is estimated by discounting the future cash flows of the various instruments at rates currently available to the Utility for similar debt instruments of comparable maturities.
The carrying amount of long-term debt and its estimated fair value at December 31 are as follows:
1997 1998
---------- ----------
Carrying amount....................................................... $ 153,532 $ 172,847
Fair value............................................................ 161,000 181,000
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(10) BUSINESS SEGMENTS
The Utility has adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Utility has three reportable segments: local telephone, long distance and cellular. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Each reportable segment is a strategic business offering different services and is managed separately.
(10) BUSINESS SEGMENTS (CONTINUED) The following table illustrates selected financial data for each segment.
LOCAL LONG
YEAR ENDED 1996 TELEPHONE DISTANCE CELLULAR TOTAL
----------------------------------------------------------------------- ----------- --------- ----------- ---------
Operating income (loss)................................................ $ 18,975 $ (542) $ 2,483 $ 20,916
Depreciation and amortization.......................................... 18,460 -- 2,036 20,496
Capital expenditures................................................... 22,280 -- 4,992 27,272
Total assets........................................................... 278,354 81 30,375 308,810
YEAR ENDED 1997
-----------------------------------------------------------------------
Operating income (loss)................................................ $ 17,850 $ (3,218) $ 4,377 $ 19,009
Depreciation and amortization.......................................... 23,712 114 3,013 26,839
Capital expenditures................................................... 28,922 664 6,201 35,787
Total assets........................................................... 287,419 1,757 33,948 323,124
YEAR ENDED 1998
-----------------------------------------------------------------------
Operating income (loss)................................................ $ 21,490 $ (3,744) $ 5,147 $ 22,893
Depreciation and amortization.......................................... 25,327 164 4,117 29,608
Capital expenditures................................................... 26,751 275 9,431 36,457
Total assets........................................................... 295,810 2,532 51,903 350,245
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------------------------
Operating income (loss)................................................ $ 5,318 $ (753) $ 917 $ 5,482
Depreciation and amortization.......................................... 6,184 -- 915 7,099
Total assets........................................................... 304,132 2,494 44,564 351,190
THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------------------
Operating income (loss)................................................ $ 5,807 $ (605) $ 916 $ 5,496
Depreciation and amortization.......................................... 6,335 45 1,054 7,434
Total assets........................................................... 292,581 3,083 51,032 346,696
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(11) COMMITMENTS AND CONTINGENCIES
The Municipal Assembly has approved the Utility's 1999 capital budget of $29,200.
The Utility is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of the matters will not have a material adverse effect on the Utility's financial position or results of operations.
(12) BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for the three months ended March 31, 1998 and 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation has the power to indemnify its officers, directors, employees and agents (or persons serving in such positions in another entity at the request of the corporation) against expenses, including attorneys' fees, judgments, fines or settlement amounts actually and reasonably incurred by them in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation (and, with respect to any criminal action, had no reasonable cause to believe the person's conduct was unlawful), except that if such action shall be by or in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware, or another court in which the suit was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity. The Registrant's Certificate of Incorporation provides that the Registrant will indemnify its officers and directors to the fullest extent permitted by Delaware law.
As permitted by Section 102 of the DGCL, the Registrant's Certificate of
Incorporation provides that no director shall be liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as a director
other than (i) for breaches of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for the
unlawful payment of dividends or unlawful stock purchases or redemptions under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
2.1 Purchase Agreement, dated as of August 14, 1998, as amended, by and among ALEC
Acquisition Sub Corp., CenturyTel of the Northwest, Inc. and CenturtyTel Wireless,
Inc.*
2.2 Asset Purchase Agreement, dated as of October 20, 1998, by and between Alaska
Communications Systems, Inc. and the Municipality of Anchorage.*
3.1 Certificate of Incorporation of the Registrant.
3.2 By-Laws of the Registrant.*
3.3 Certificate of Incorporation of Alaska Communications Systems Holdings, Inc.*
3.4 By-Laws of Alaska Communications Systems Holdings, Inc.*
3.5 Certificate of Incorporation of ALEC Acquisition Sub Corp.*
3.6 By-Laws of ALEC Acquisition Sub Corp.*
3.7 Certificate of Incorporation of Alaska Communication Systems, Inc.*
3.8 By-Laws of Alaska Communications Systems, Inc.*
3.9 Certificate of Incorporation of Telephone Utilities of the Northland, Inc.*
3.10 By-Laws of Telephone Utilities of the Northland, Inc.*
3.11 Certificate of Incorporation of Telephone Utilities of Alaska, Inc.*
3.12 By-Laws of Telephone Utilities of Alaska, Inc.*
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3.13 Certificate of Incorporation of Pacific Telecom Cellular of Alaska, Inc.*
3.14 By-Laws of Pacific Telecom Cellular of Alaska, Inc.*
3.15 Certificate of Incorporation of Pacific Telecom of Alaska PCS, Inc.*
3.16 By-Laws of Pacific Telecom of Alaska PCS, Inc.*
3.17 Certificate of Incorporation of PTI Communications of Alaska, Inc.*
3.18 By-Laws of PTI Communications of Alaska, Inc.*
3.19 Certificate of Incorporation of MACtel, Inc.*
3.20 By-Laws of MACtel, Inc.*
3.21 Certificate of Incorporation of MACtel License Sub, Inc.*
3.22 By-Laws of MACtel License Sub, Inc.*
3.23 Certificate of Incorporation of MACtel Fairbanks, Inc.*
3.24 By-Laws of MACtel Fairbanks, Inc.*
3.25 Certificate of Incorporation of MACtel Fairbanks License Sub, Inc.*
3.26 By-Laws of MACtel Fairbanks License Sub, Inc.*
3.27 Certificate of Incorporation of Prudhoe Communications, Inc.*
3.28 By-Laws of Prudhoe Communications, Inc.*
3.29 Certificate of Incorporation of ATU Communications, Inc.*
3.30 By-Laws of ATU Communications, Inc.*
3.31 Certificate of Incorporation of ATU Long Distance, Inc.*
3.32 By-Laws of ATU Long Distance, Inc.*
3.33 Certificate of Incorporation of Peninsula Cellular Services, Inc.*
3.34 By-Laws of Peninsula Cellular Services, Inc.*
3.35 Certificate of Incorporation of PTINet, Inc.*
3.36 By-Laws of PTINet, Inc.*
4.1 Indenture, dated as of May 14, 1999, by and among Alaska Communications Systems
Holdings, Inc., the Guarantors (as defined therein) and IBJ Whitehall Bank & Trust
Company.*
4.2 Purchase Agreement, dated as of May 11, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Guarantors, Chase Securities Inc., CIBC World Markets
Corp. and Credit Suisse First Boston Corporation.*
4.3 Indenture, dated as of May 14, 1999, by and between the Registrant and The Bank of
New York.*
4.4 Purchase Agreement, dated as of May 11, 1999, by and among the Registrant, DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II, L.P.*
5.1 Opinion of Wachtell, Lipton, Rosen & Katz (including consent).
10.1 Exchange and Registration Rights Agreement, dated as of May 14, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Guarantors, Chase Securities Inc.,
CIBC World Markets Corp. and Credit Suisse First Boston Corporation.*
10.2 Exchange and Registration Rights Agreement, dated as of May 14, 1999, by and among
the Registrant, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ
ESC II L.P.*
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10.3 Credit Agreement, dated as of May 14, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Registrant, the financial institutions Lenders party
thereto, The Chase Manhattan Bank, Credit Suisse First Boston and Canadian Imperial
Bank of Commerce.*
10.4 Stockholders' Agreement, dated as of May 14, 1999, by and among the Registrant and
the Investors listed on the signature pages thereto.*
10.5 Employment Agreement, dated as of March 12, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Registrant and Charles E. Robinson.*
10.6 Employment Agreement, dated as of March 12, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Registrant and Wesley E. Carson.*
10.7 Employment Agreement, dated as of April 19, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Registrant and Michael E. Holmstrom.*
10.8 ALEC Holdings, Inc. 1999 Stock Incentive Plan.*
12.1 Statements re computation of ratios.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP relating to the audited financial statements of
ALEC Holdings, Inc. as of March 31, 1999.
23.2 Consent of Deloitte & Touche LLP relating to the audited financial statements of
Alaska Communications Systems Holdings, Inc. as of December 31, 1998 and for the
period from June 16, 1998 (date of inception) through December 31, 1998 (included in
Exhibit No. 23.1).
23.3 Consent of KPMG LLP relating to the audited combined financial statements of
CenturyTel's Alaska Properties as of December 31, 1998 and for the year then ended.
23.4 Consent of Deloitte & Touche LLP relating to the audited financial statements of
Telephone Fund of Fairbanks Municipal Utilities Services as of October 6, 1997 and
for the period ended October 6, 1997 and the year ended December 31, 1996 (included
in Exhibit No. 23.1).
23.5 Consent of KPMG LLP relating to the audited financial statements of Municipality of
Anchorage Telephone Utility Fund as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998.
23.6 Consent of Deloitte & Touche LLP relating to the audited financial statements of
CenturyTel Alaska Properties as of December 31, 1997 and for the year ended December
31, 1996, the eleven months ended November 30, 1997 and the one month ended December
31, 1997 (included in Exhibit No. 23.1).
23.7 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit No. 5.1).
24.1 Powers of Attorney (included in signature pages to Registration Statement).*
25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of The Bank of New
York under the Trust Indenture Act of 1939.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal for the 13% Senior Discount Debentures due 2011.
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Guidelines for Certification of Taxpayer Identification Number on Substitute Form
W-9.*
99.4 Form of Institutions Letter.*
99.5 Form of Client Letter.*
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* Previously filed
(b) Financial Statement Schedule. |
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change in such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in the documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective.
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Municipality of Anchorage, State of Alaska, on September 24, 1999.
By: /s/ MICHAEL E. HOLMSTROM
-----------------------------------------
Michael E. Holmstrom
Senior Vice President and
Chief Financial Officer
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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles E. Robinson, Wesley E. Carson and Michael E. Holmstrom, and each of them, his attorney-in-fact with power of substitution for him in any and all capacities, to sign any amendments, supplements, subsequent registration statements relating to the offering to which this Registration Statement relates, or other instruments he deems necessary or appropriate, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
* Chairman of the Board,
------------------------------ President and Chief September 24, 1999
Charles E. Robinson Executive Officer
/s/ MICHAEL E. HOLMSTROM Senior Vice President and
------------------------------ Chief Financial Officer September 24, 1999
Michael E. Holmstrom
* Executive Vice President
------------------------------ and Assistant Secretary September 24, 1999
Wesley E. Carson
* Executive Vice President,
------------------------------ General Counsel and September 24, 1999
Donn T. Wonnell Secretary
* Vice President, Controller
------------------------------ and Assistant Treasurer September 24, 1999
Dean A. Ryland
(signing in his capacity as
principal accounting
officer)
* Director
------------------------------ September 24, 1999
Saul A. Fox
* Director
------------------------------ September 24, 1999
W. Dexter Paine, III
* Director
------------------------------ September 24, 1999
J. Russell Triedman
/s/ CARL H. MARRS Director
------------------------------ September 24, 1999
Carl H. Marrs
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/s/ MICHAEL E. HOLMSTROM
-----------------------------------
Michael E. Holmstrom
*By: ATTORNEY-IN-FACT
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I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "ALEC ACQUISITION CORPORATION", CHANGING ITS NAME FROM "ALEC ACQUISITION CORPORATION" TO "ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.", FILED IN THIS OFFICE ON THE NINTH DAY OF APRIL, A.D. 1999, AT 4 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
2918478 8100 AUTHENTICATION: 9725659
991177441 DATE: 05-05-99
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ALEC Acquisition Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment as follows: The name of the corporation has been changed to Alaska Communications Systems Holdings, Inc.
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon at which the necessary number of shares as required by statues were voted in favor of the amendment.
THIRD: That said amendment duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, ALEC Acquisition Corporation has caused this certificate to be signed by Deborah Johnson Harwood, its Vice President and Corporate Secretary this 26th day of March 1999.
By: /s/ Deborah Johnson Harwood
-----------------------------
Title: Vice President & Secretary
--------------------------
Deborah Johnson Harwood
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991140257 -- 2918478
WE, THE UNDERSIGNED, being all of the members of the board of directors of ALEC Acquisition a corporation organized and existing under the laws of the State of Delaware, DO HEREBY, pursuant to Sections 141 and 242 of the General Corporation Law of the State of Delaware, propose and declare advisable the following amendment to the Certificate of Incorporation: The name of the corporation has been changed to Alaska Communications Systems Holdings, Inc. and hereby authorize the proper officers of this corporation, if the stockholders adopt said amendment, to file the necessary certificate effecting said amendment with the Secretary of State of Delaware and to file with the proper state official of any state I which this corporation is authorized to do business as a foreign corporation such evidence of said amendment and/or any other instrument as may be required by the laws of such state.
WITNESS our hands this 26th day of March.
By: /s/ W. Dexter Paine III
-------------------------------
Title: Director/W. Dexter Paine III
By: /s/ Sanjay Swani
-------------------------------
Title: Sanjay Swani/Director
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WE, THE UNDERSIGNED, being the sole shareholder of ALEC Acquisition a corporation organized and existing under the laws of the State of Delaware, DO HEREBY, pursuant to Sections 141 and 242 of the General Corporation Law of the State of Delaware, propose and declare advisable the following amendment to the Certificate of Incorporation: The name of the corporation has been changed to Alaska Communications Systems Holdings, Inc. and hereby authorize the proper officers of this corporation, if the stockholders adopt said amendment, to file the necessary certificate effecting said amendment with the Secretary of State of Delaware and to file with the proper state official of any state I which this corporation is authorized to do business as a foreign corporation such evidence of said amendment and/or any other instrument as may be required by the laws of such state.
WITNESS our hands this 26th day of March.
By: /s/ W. Dexter Paine III
-------------------------------
Title: Director/W. Dexter Paine III
By: /s/ Sanjay Swani
-------------------------------
Title: Sanjay Swani/Director
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I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "ALEC HOLDINGS, INC.", FILED IN THIS OFFICE ON THE TENTH DAY OF MAY, A.D. 1999, AT 11:30 O'CLOCK A.M.
/s/ Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
2954530 8100 AUTHENTICATION: 9734592
991184857 DATE: 05-10-99
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ALEC Holdings, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"),
FIRST: That by unanimous written consent of the members of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Corporation's Certificate of Incorporation be amended in accordance with Section 242 of the General Corporation Law of the State of Delaware to increase the authorized number of shares of common stock from One Thousand (1,000) to Forty Million (40,000,000);
SECOND: That Article IV, Section 1 of the Certificate of Incorporation is hereby amended to read in its entirety as follows:
"1. The Corporation shall be authorized to issue 40,000,000 shares of capital stock, all of which shall be shares of Common Stock, $.01 par value ("Common Stock")."
THIRD: That in lieu of a meeting and vote of stockholders, the sole stockholder of the Corporation has given its written consent to said amendments and said amendments were duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware.
By: Deborah J. Harwood
Name: Deborah J. Harwood
Title: Asst. Secretary
ALEC Holdings, Inc.
510 L. Street, Suite 500
Anchorage, Alaska 99501
Ladies and Gentlemen:
We have acted as counsel for ALEC Holdings, Inc., a Delaware corporation (the "Company"), in connection with the preparation of the Company's Registration Statement on Form S-4, registration number 333-82361 (the "Registration Statement"), first filed with the Securities and Exchange Commission on July 7, 1999, relating to an offer to exchange (the "Exchange Offer") 13% Senior Discount Debentures due 2011 of the Company (the "Exchange Debentures") which will have been registered under the Securities Act of 1933, as amended, for an equal principal amount of the Company's outstanding 13% Senior Discount Debentures due 2011 (the "Old Debentures").
The Exchange Debentures will be issued under an Indenture dated as of May 14, 1999 (the "Indenture"), among the Company and The Bank of New York, as trustee (the "Trustee").
As counsel, we have examined the Registration Statement, the Indenture, the form of the Exchange Debentures, the form of the Old Debentures and such other documents, records and other matters as we have deemed necessary or appropriate in order to give the opinions set forth herein.
In giving the opinions contained herein, we have, with your approval, relied upon representations of officers of the Company and certificates of public officials with respect to the accuracy of the material factual matters addressed by such representations and certificates. We have, with your approval, assumed the genuineness of all signatures or instruments submitted to us, and the conformity or certified copies submitted to us with the original documents to which such certified copies relate.
We are members of the bar of the State of New York and we express no opinion as to the laws of any jurisdiction other than the federal laws of the United States and the laws of the State of New York.
Based upon and subject to the foregoing, assuming that the Indenture has been duly authorized, executed and delivered by, and represents the valid and binding obligations of, the Trustee, it is our opinion that:
(1) the Indenture has been duly executed and delivered by, and constitutes the legal, valid and binding obligation of, the Company, enforceable against the Company in accordance with its terms; and
(2) the Exchange Debentures, when duly executed and delivered by the Company upon the terms set forth in the Exchange Offer, will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms;
subject in each case to (a) bankruptcy, insolvency, moratorium, reorganization and other laws of general applicability relating to or affecting creditors' rights from time to time in effect and (b) application of general principles of equity, including standards of commercial reasonableness and good faith (regardless of whether considered in proceedings in equity or at law).
We express no opinion with respect to: (i) the enforceability of provisions
in the Indenture relating to delay or omission of enforcement of rights or
remedies, or waivers of defenses, or waivers of benefits of usury, appraisement,
valuation, stay, extension, moratorium, redemption, statutes of limitation, or
other non-waivable benefits bestowed by operation of law; or (ii) the lawfulness
or
enforceability of exculpation clauses, clauses relating to releases of unmatured claims, clauses purporting to waive unmatured rights, severability clauses, and clauses similar in substance or nature to those expressed in the foregoing clause (i) and this clause (ii), insofar as any of the foregoing are contained in the Indenture. In addition, we express no opinion as to whether a federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Indenture.
We consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to our firm in the Prospectus that is a part of the Registration Statement. In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
Wachtell, Lipton, Rosen & Katz
We consent to the use in this Amendment No. 2 to Registration Statement No. 333-82361 of ALEC Holdings, Inc. on Form S-4 of our reports dated March 24, 1999, March 25, 1999 and June 28, 1999 appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus
DELOITTE & TOUCHE LLP
Portland, Oregon
September 22, 1999
The Board of Directors
CenturyTel, Inc.:
We consent to the use of our report dated February 26, 1999, on CenturyTel's Alaska Properties as of and for the year ended December 31, 1998 included herein and to the references to our firm under the heading "Experts" in this registration statement and related prospectus.
Shreveport, Louisiana
September 22, 1999
The Honorable Mayor and Member of the Assembly Municipality of Anchorage Telephone Utility Fund
We consent to the use of our report dated February 19, 1999 on the balance sheet of the Municipality of Anchorage Telephone Utility Fund as of December 31, 1998 and 1997, and the related statements of revenues, expenses and changes in retained earnings, and cash flows for each of the years in the three-year period ended December 31, 1998, included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report contains a paragraph which emphasizes that the financial statements represent the financial position and results of operations of the Municipality of Anchorage, Alaska, Telephone Utility Fund and not the Municipality of Anchorage, Alaska taken as a whole.
Anchorage, Alaska
September 22, 1999
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER OR BY HAND:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
Floor 7 East Ground Level
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section New York, New York 10286
Attention: Reorganization Section
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Delivery of this instrument to an address other than as set forth above or transmission of instructions via a facsimile number other than the ones listed above will not constitute a valid delivery. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed.
The undersigned hereby acknowledges receipt of the Prospectus dated , 1999 (the "Prospectus") of ALEC Holdings, Inc. ("Holdings") and this Letter of Transmittal, which together constitute Holdings' offer (the "Exchange Offer") to exchange $1,000 principal amount of its 13% Senior Discount Debentures due 2011 (the "Exchange Debentures"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of its outstanding 13% Senior Discount Debentures due 2011 (the "Debentures"), respectively. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1999, unless Holdings, in its reasonable judgment, extends the Exchange Offer, in which case the term shall mean the latest date and time to which the Exchange Offer is extended. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
DESCRIPTION OF 13% SENIOR DISCOUNT DEBENTURES DUE 2011 TENDERED HEREBY
AGGREGATE
CERTIFICATE PRINCIPAL
OR AMOUNT PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) REGISTRATION REPRESENTED AMOUNT
(PLEASE FILL IN) NUMBERS* BY DEBENTURES TENDERED**
Total
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* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the full aggregate principal amount represented by such Debentures. All tenders must be in integral multiples of $1,000.
This Letter of Transmittal is to be used (i) if certificates of Debentures are to be forwarded herewith or (ii) if tender of the Debentures is to be made according to the guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer--Guaranteed delivery procedures." See Instruction 2. Delivery of documents to a book-entry transfer facility does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in whose name Debentures are registered on the books of Holdings or any other person who has obtained a properly completed bond power from the registered holder. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Debentures must complete this letter in its entirety.
/ / CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DEPOSITORY TRUST COMPANY
(THE "DEPOSITORY") AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Account Number
Transaction Code Number
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Holders whose Debentures are not immediately available or who cannot deliver their Debentures and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date must tender their Debentures according to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer--Guaranteed delivery procedures." See Instruction 2.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to Holdings the principal amount of the Debentures indicated above. Subject to, and effective upon, the acceptance for exchange of such Debentures tendered hereby, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, Holdings all right, title and interest in and to such Debentures as are being tendered hereby, including all rights to accrued and unpaid interest thereon as of the Expiration Date. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said Exchange Agent acts as the agent of Holdings in connection with the Exchange Offer) to cause the Debentures to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Debentures and to acquire Exchange Debentures issuable upon the exchange of such tendered Debentures, and that when the same are accepted for exchange, Holdings will acquire good and unencumbered title to the tendered Debentures, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim.
The undersigned represents to Holdings that (i) the Exchange Debentures acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Debentures, whether or not such person is the undersigned, and (ii) neither the undersigned nor any such other person is engaged or intends to engage in, or has an arrangement or understanding with any person to participate in, the distribution of such Exchange Debentures. If the undersigned or the person receiving the Exchange Debentures covered hereby is a broker-dealer that is receiving the Exchange Debentures for its own account in exchange for Debentures that were acquired as a result of market-making activities or other trading activities, the undersigned acknowledges that it or such other person will deliver a prospectus in connection with any resale of such Exchange Debentures; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned and any such other person acknowledge that, if they are participating in the Exchange Offer for the purpose of distributing the Exchange Debentures, (i) they cannot rely on the position of the staff of the Securities and Exchange Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989), MORGAN STANLEY & CO., INC. (available June 5, 1991) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in
The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or Holdings to be necessary or desirable to complete the exchange, assignment and transfer of tendered Debentures or transfer ownership of such Debentures on the account books maintained by a book-entry transfer facility. The undersigned further agrees that acceptance of any tendered Debentures by Holdings and the issuance of Exchange Debentures in exchange therefor shall constitute performance in full by Holdings of its obligations under the Registration Rights Agreement and that Holdings shall have no further obligations or liabilities thereunder for the registration of the Debentures or the Exchange Debentures.
The Exchange Offer is subject to certain conditions set forth in the Prospectus under the caption "The Exchange Offer--Conditions." The undersigned recognizes that as a result of these conditions (which may be waived, in whole or in part, by Holdings), as more particularly set forth in the Prospectus, Holdings may not be required to exchange any of the Debentures tendered hereby and, in such event, the Debentures not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned.
All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tendered Debentures may be withdrawn at any time prior to the Expiration Date.
Unless otherwise indicated in the box entitled "Special Registration Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, certificates for all Exchange Debentures delivered in exchange for tendered Debentures, and any Debentures delivered herewith but not exchanged, will be registered in the name of the undersigned and shall be delivered to the undersigned at the address shown below the signature of the undersigned. If an Exchange Debenture is to be issued to a person other than the person(s) signing this Letter of Transmittal, or if an Exchange Debenture is to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address different than the address shown on this Letter of Transmittal, the appropriate boxes of this Letter of Transmittal should be completed. If Debentures are surrendered by Holder(s) that have completed either the box entitled "Special Registration Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by an Eligible Institution (defined in Instruction 2).
To be completed ONLY if the Exchange Debentures are to be issued in the name of someone other than the undersigned.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
Name: ______________________________________________________________________
Address: ___________________________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on the Debentures or on a security position listing as the owner or the Debentures or by person(s) authorized to become registered holder(s) by properly completed bond powers transmitted herewith. If signature is by attorney-in-fact, trustee, executor, administrator, guardian, officer of a corporation or other person acting in a fiduciary capacity, please provide the following information (Please print or type:)
Name and Capacity (full title)
SIGNATURE GUARANTEE
(IF REQUIRED--SEE INSTRUCTION 4)
Address (including zip code) (Signature of Representative of Signature
Guarantor)
(Area Code and Telephone Number) (Name and Title)
(Taxpayer Identification or Social Security (Name of Plan)
No.)
(Area Code and Telephone Number)
Dated: , 19 Dated: , 19
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THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED. Please provide your social security number on the following Substitute Form W-9 and certify therein that you are subject to backup withholding.
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SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN IN THE
FORM W-9 BOX AT THE RIGHT AND CERTIFY BY SIGNING
DEPARTMENT OF THE TREASURY AND DATING BELOW. For all accounts, Social Security Number
INTERNAL REVENUE SERVICE enter TIN in the box at right. (For
most individuals, this is your social OR
security number. If you do not have a Employer Identification Number
number, see enclosed Guidelines for
Certification of Taxpayer (If awaiting TIN write
Identification Number on Substitute "Applied For")
Form W-9.) Certify by signing and
dating below.
------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER PART II--For Payees exempt from backup withholding, see the enclosed
IDENTIFICATION NUMBER (TIN) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 and complete as instructed therein.
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CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number or a Taxpayer Identification Number
has not been issued to me and either (a) I have mailed or delivered an application to receive a Taxpayer
Identification Number to the appropriate Internal Revenue Service ("IRS") Center or Social Security
Administration Office or (b) I intend to mail or deliver an application in the near future; and
(2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, (b) I have not
been notified by the IRS that I am subject to backup withholding as a result of failure to report all interest
or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATE INSTRUCTIONS--You must cross out item (2) above if you have been notified by the IRS that you are
subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the
enclosed Guidelines.)
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The IRS does not require your consent to any provision of this document other than the certifications required to
avoid backup withholding.
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SIGNATURE DATE , 199
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NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU ON ACCOUNT OF THE EXCHANGE DEBENTURES.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all reportable payments made to me will be withheld until I provide a number, but will be refunded if I provide a certified taxpayer identification number within 60 days.
Signature Dated: |
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. All physically delivered Debentures or confirmation of any book-entry transfer to the Exchange Agent's account at a book-entry transfer facility of Debentures tendered by book-entry transfer, as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein on or prior to expiration of the Exchange Offer (the "Expiration Date"). The method of delivery of this Letter of Transmittal, the Debentures and any other required documents is at the election and risk of the Holder, and except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. If such delivery is by mail, it is suggested that registered mail with return receipt requested, properly insured, be used.
No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the Debentures for exchange.
Delivery to an address other than as set forth herein, or instructions via a facsimile number other than the ones set forth herein, will not constitute a valid delivery.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Debentures, but whose Debentures are not immediately available and thus cannot deliver their Debentures, the Letter of Transmittal or any other required documents to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date, may effect a tender if:
(a) the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the registration number(s) of such Debentures and the principal amount of Debentures tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the Debentures (or a confirmation of book-entry transfer of such Debentures into the Exchange Agent's account at the Depository) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as all tendered Debentures in proper form for transfer (or a confirmation of book-entry transfer of such Debentures into the Exchange Agent's account at the Depository) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Debentures according to the guaranteed delivery procedures set forth above. Any Holder who wishes to tender Debentures pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery relating to such Debentures prior to the Expiration Date. Failure to comply with the guaranteed delivery procedures
3. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount of Debentures evidenced by a submitted certificate is tendered, the tendering Holder should fill in the principal amount tendered in the column entitled "Principal Amount Tendered" in the box entitled "Description of Debentures Tendered Hereby." A newly issued Debenture for the principal amount of Debentures submitted but not tendered will be sent to such Holder as soon as practicable after the Expiration Date. All Debentures delivered to the Exchange Agent will be deemed to have been tendered in full unless otherwise indicated.
Debentures tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date, after which tenders of Debentures are
irrevocable. To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Debentures to be withdrawn (the "Depositor"), (ii) identify the Debentures
to be withdrawn (including the registration number(s) and principal amount of
such Debentures, or, in the case of Debentures transferred by book-entry
transfer, the name and number of the account at the Depository to be credited),
(iii) be signed by the Holder in the same manner as the original signature on
this Letter of Transmittal (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Debentures register the transfer of such Debentures into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Debentures are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by Holdings, whose determination shall be
final and binding on all parties. Any Debentures so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no Exchange
Debentures will be issued with respect thereto unless the Debentures so
withdrawn are validly retendered. Any Debentures which have been tendered but
which are not accepted for exchange will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of Exchange Offer.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered Holder(s) of the Debentures tendered hereby, the signature must correspond with the name(s) as written on the face of the certificates without alteration or enlargement or any change whatsoever. If this Letter of Transmittal is signed by a participant in the Depository, the signature must correspond with the name as it appears on the security position listing as the owner of the Debentures.
If any of the Debentures tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Debentures registered in different names are tendered, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of Debentures.
Signatures of this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution unless the Debentures tendered hereby are tendered (i) by a registered Holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders of Debentures (which term, for the purposes described herein, shall include a participant in the Depository whose name appears on a security listing as the owner of the Debentures) listed and tendered hereby, no endorsements of the tendered Debentures or separate written instruments of transfer or exchange are required. In any other case, the registered Holder (or acting Holder) must either properly endorse the Debentures or transmit properly completed bond powers with this Letter of Transmittal (in either case, executed exactly as the
If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by Holdings, proper evidence satisfactory to Holdings of their authority so to act must be submitted.
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box, the name and address (or account at the Depository) in which the Exchange Debentures or substitute Debentures for principal amounts not tendered or not accepted for exchange are to be issued (or deposited), if different from the names and addresses or accounts of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification number or social security number of the person named must also be indicated and the tendering Holder should complete the applicable box.
If no instructions are given, the Exchange Debentures (and any Debentures not tendered or not accepted) will be issued in the name of and sent to the acting Holder of the Debentures or deposited at such Holder's account at the Depository.
6. TRANSFER TAXES. Holdings shall pay all transfer taxes, if any, applicable to the transfer and exchange of Debentures to it or its order pursuant to the Exchange Offer. If a transfer tax is imposed for any reason other than the transfer and exchange of Debentures to Holdings or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted herewith, the amount of such transfer taxes will be collected from the tendering Holder by the Exchange Agent.
Except as provided in this Instruction 6, it will not be necessary for transfer stamps to be affixed to the Debentures listed in this Letter of Transmittal.
7. WAIVER OF CONDITIONS. Holdings reserves the right, in its reasonable judgment, to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the Prospectus.
8. MUTILATED, LOST, STOLEN OR DESTROYED DEBENTURES. Any Holder whose Debentures have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number(s) set forth above. In addition, all questions relating to the Exchange Offer, as well as requests for assistance or additional copies of the Prospectus and this Letter of Transmittal, may be directed to ALEC Holdings, Inc., 510 L. Street, Anchorage, Alaska 99501, Attention: Corporate Secretary; telephone (907) 297-3000.
10. VALIDITY AND FORM. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Debentures and withdrawal of tendered Debentures will be determined by Holdings in its sole discretion, which determination will be final and binding. Holdings reserves the absolute right to reject any and all Debentures not properly tendered or any Debentures Holdings' acceptance of which would, in the opinion of counsel for Holdings, be unlawful. Holdings also reserves the right, in its reasonable judgment, to waive any defects, irregularities or conditions of tender as to particular
Under federal income tax law, a Holder tendering Debentures is required to provide the Exchange Agent with such Holder's correct TIN on Substitute Form W-9 above. If such Holder is an individual, the TIN is the Holder's social security number. The Certificate of Awaiting Taxpayer Identification Number should be completed if the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the Exchange Agent is not provided with the correct TIN, the Holder may be subject to a $50 penalty imposed by the IRS. In addition, payments that are made to such Holder with respect to tendered Debentures may be subject to backup withholding.
Certain Holders (including, among others, all domestic corporations and certain foreign individuals and foreign entities) are not subject to these backup withholding and reporting requirements. Such a Holder who satisfies one or more of the conditions set forth in Part 2 of the Substitute Form W-9 should execute the certification following such Part 2. In order for a foreign Holder to qualify as an exempt recipient, that Holder must submit to the Exchange Agent a properly completed Internal Revenue Service Form W-9, signed under penalties of perjury, attesting to that Holder's exempt status. Such forms can be obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to withhold 31% of any amounts otherwise payable to the Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS.
PURPOSE OF SUBSTITUTE FORM W-9. To prevent backup withholding on payments that are made to a Holder with respect to Debentures tendered for exchange, the Holder is required to notify the Exchange Agent of his or her correct TIN by completing the form herein certifying that the TIN provided on Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (i) such Holder is exempt, (ii) such Holder has not been notified by the IRS that he or she is subject to backup withholding as a result of failure to report all interest or dividends or (iii) the IRS has notified such Holder that he or she is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT. Each Holder is required to give the Exchange Agent the social security number or employer identification number of the record Holder(s) of the Debentures. If Debentures are in more than one name or are not in the name of the actual Holder, consult the instructions on IRS Form W-9, which may be obtained from the Exchange Agent, for additional guidance on which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER. If the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, write "Applied For" in the space for the TIN on Substitute Form W-9, sign and date the form and the Certificate of Awaiting Taxpayer Identification Number and return them to the Exchange Agent. If such certificate is completed
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with Debentures or confirmation of book-entry transfer and all other required documents) or a Notice of Guaranteed Delivery must be received by the Exchange Agent on or prior to the Expiration Date.