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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 [NO FEE REQUIRED]
For the transition period from to .
COMMISSION FILE NUMBER 333-82363
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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
510 L STREET, SUITE 500
DELAWARE ANCHORAGE, ALASKA
(State or other jurisdiction of (Address of principal executive offices)
incorporation or organization)
91-1921377 99501
(I.R.S. Employer Identification No.) (Zip Code)
(907) 297-3000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
None
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [_] (Not Applicable)
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) (Not Applicable)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Alaska Communications Systems Group, Inc.'s proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A for the registrant's 2000 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.
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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PAGE
PART I
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 23
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 27
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 52
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS F-1
SIGNATURES
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Alaska Communications Systems Holdings, Inc. ("ACS Holdings" or "the
Company") is a wholly owned subsidiary of Alaska Communications Systems Group,
Inc. ("ACS Group"). ACS Holdings was formed in 1998 by Fox Paine & Company,
members of the former senior management team of Pacific Telecom, and other
experienced telecommunications industry executives. In May 1999, the Company
acquired Century Telephone Enterprises, Inc.'s Alaska properties ("CenturyTel's
Alaska properties") and Anchorage Telephone Utility or ATU. CenturyTel's Alaska
properties were the incumbent provider of local telephone services in Juneau,
Fairbanks and more than 70 rural communities in Alaska and provided Internet
services to customers statewide. CenturyTel's Alaska properties included PTI
Communications of Alaska, Inc. ("PTIC"), Telephone Utilities of Alaska, Inc.
("TUA") and Telephone Utilities of the Northland, Inc. ("TUNI). ATU was the
largest local exchange carrier in Alaska and provided local telephone and long
distance services primarily in Anchorage and cellular services statewide. ATU
provided long distance services through ATU Long Distance, Inc. and cellular
services through MACtel, Inc. In May 1999, the Company changed its name from
ALEC Acquisition Corp. to Alaska Communications Systems Holdings, Inc.
ACS Holdings is in the process of changing the names of several of its
operating companies to unify and promote its brand name statewide. Pending
regulatory approval, the following name changes are planned:
Former Name New Name
- ----------- --------
PTI Communications of Alaska, Inc. ACS of Fairbanks, Inc.
Telephone Utilities of Alaska, Inc. ACS of Alaska, Inc.
Telephone Utilities of the Northland, Inc. ACS of the Northland, Inc.
Anchorage Telephone Utility ACS of Anchorage, Inc.
ATU Long Distance, Inc. ACS Long Distance, Inc.
MACtel, Inc. ACS Wireless, Inc.
PTINet, Inc. ACS Internet, Inc.
Alaskan Choice Television, LLC ACS Television, Inc.
ACS Holdings is the leading diversified, facilities-based
telecommunications provider in Alaska, offering local telephone, cellular, long
distance, data and Internet services to business and residential customers
throughout the state. The Company is the only telecommunications provider in
Alaska using its own network facilities to provide end-to-end communications
services to its customers.
At various times, ACS Holdings evaluates opportunities for establishing
or acquiring other telecommunications businesses through acquisitions or
otherwise in Alaska and, through ACS Group, elsewhere in the United States, and
may make investments in such businesses in the future. ACS Holdings has focused
its attention on local telephone, cellular, interexchange network and data
services, and Internet businesses. On September 30, 1999, ACS Holdings acquired
a 67% interest in Alaskan Choice Television, LLC ("ACTV"), which provides
wireless television services to the Anchorage and Fairbanks areas. On October 6,
1999, the Company entered into an agreement to acquire the remaining one-third
interest in ACTV, together with certain FCC licenses and, on February 14, 2000,
completed the acquisition.
LOCAL TELEPHONE. With over 325,000 access lines, representing
approximately 75% of the access lines in Alaska, ACS Holdings is the largest
local exchange carrier in Alaska and the 15th largest in the U.S. The
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Company provides service to all of the state's major population centers,
including Anchorage, Juneau and Fairbanks.
CELLULAR. ACS Holdings is the largest and only statewide provider of
cellular services in Alaska, currently serving over 73,000 subscribers. Its
cellular network covers over 460,000 residents, including all major population
centers and highway corridors. The Company recently upgraded its network to be
fully digital in substantially all of its service areas.
INTEREXCHANGE NETWORK, DATA SERVICES AND OTHER
Long-distance. ACS Holdings provides long distance and other
interexchange services to approximately 32,000 customers primarily in Anchorage
and intends to market these services statewide beginning in the first quarter of
2000. The Company recently migrated long distance traffic on main routes from
leased circuits onto its own network infrastructure, which it believes will
result in significant cost savings over time.
Data and Internet. ACS Holdings is the third largest provider of
Internet access services in Alaska with approximately 16,000 customers. The
Company also owns 28.5% of the second largest Internet service provider in
Alaska with approximately 28,000 customers. ACS Holdings currently offers
dedicated and dial-up Internet access to its customers and also commenced
offering digital subscriber line, or DSL, services in January of 2000.
ACS Holdings also owns 100% of ACTV, effective February 14, 2000, which
is a provider of wireless television services in the Fairbanks and Anchorage
service areas. ACS Holdings expects to expand its offering of wireless cable
services using digital compression technology.
PRODUCTS SERVICES AND REVENUE SOURCES
ACS Holdings offers a broad portfolio of telecommunications services to
residential and business customers in its markets. The Company's service
offerings are locally managed to better serve the needs of each community. The
Company believes that, as the communications marketplace continues to converge,
the ability to offer an integrated package of communications products will
provide a distinct competitive advantage, as well as increase customer loyalty,
thereby decreasing customer turnover. The Company complements its local
telephone services by actively marketing its cellular, long distance, data and
Internet service offerings.
The following table sets forth the components of ACS Holdings' revenues
on a pro forma combined basis for the periods presented:
COMBINED REVENUE FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1999
---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------ ------ ------
(DOLLARS IN MILLIONS)
REVENUE BY SOURCE:
Local network service $ 93.1 33.0% $ 96.0 31.9%
Network access 98.6 35.0 105.3 35.0
Directory advertising 26.5 9.4 27.9 9.3
Deregulated and other revenue 19.6 7.0 19.7 6.6
------ ------ ------ -----
Local telephone 237.8 84.4 248.9 82.8
Cellular 31.8 11.3 36.1 12.0
Interexchange network, data services and other 12.0 4.3 15.5 5.2
------ ------ ------ -----
Total $281.6 100.0% $300.5 100.0%
====== ====== ====== =====
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LOCAL TELEPHONE SERVICE
Local Network Service. Basic local network service enables customers to
originate and receive telephone calls within a defined "exchange" area. The
Company provides basic local services to residential and business customers,
generally for a fixed monthly charge. The maximum amount that can be charged to
a customer for basic local services is determined by rate proceedings involving
the Regulatory Commission of Alaska ("RCA"). The Company charges business
customers higher rates to recover a portion of the costs of providing local
service to residential customers. On average, U.S. business rates for basic
local services have been over two times the rates of residential customers.
Basic local service also includes non-recurring charges to customers for the
installation of new products and services.
At December 31, 1999, approximately 57% of ACS Holdings' retail access
lines served residential customers, while 43% served business customers.
Currently, monthly charges for basic local service for residential customers
range from $9.42 to $16.30 in ACS Holdings' service areas, as compared to the
national average of $15.99. Monthly charges for business customers range from
$17.65 to $26.05 in ACS Holdings' service areas, as compared to the national
average of $34.55. See "Business - Introduction" for a discussion of the
Company's common statewide branding strategy.
The table below sets forth the annual growth in access lines at
CenturyTel's Alaska properties and ATU from December 31, 1995 to December 31,
1999. The number of access lines shown for CenturyTel's Alaska properties in
1997 includes approximately 37,000 access lines that were acquired by
CenturyTel's Alaska properties as part of its acquisition of the City of
Fairbanks Telephone Operation in October 1997. The number of access lines shown
for ATU represents all revenue producing access lines connected to both retail
and wholesale customers.
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Local Telephone Access Lines:
CenturyTel's Alaska properties 77,660 82,969 124,869 131,858 143,412
ATU 147,934 154,752 158,486 168,536 182,196
--------- --------- --------- --------- ---------
Total 225,594 237,721 283,355 300,394 325,608
========= ========= ========= ========= =========
PERCENTAGE GROWTH:
CenturyTel's Alaska properties 5.6% 6.8% 50.5% 5.6% 8.8%
ATU 2.1% 4.6% 2.4% 6.3% 8.1%
Combined 3.3% 5.4% 19.2% 6.0% 8.4%
On June 1, 1999, as part of the consolidation of its operating and
billing systems, ACS Holdings conformed the methodology by which the number of
access lines is calculated across all of its local exchanges to that used for
CenturyTel's Alaska properties. The Company intends to use the method used to
calculate access lines in service for CenturyTel's Alaska properties to
calculate its access lines in all future periods. In the table above, for the
year ended December 31, 1999, the Company shows ATU's number of access lines
calculated using this method. If the number of ATU's access lines in service at
December 31, 1998 was computed under this same method, the number of access
lines at ATU would increase by 4,940 and the total number of access lines would
equal 305,334 and the combined growth percentage would be 6.6% for 1999. Due to
limited data available to ACS Holdings, no adjustments to the access lines in
service for any year prior to 1998 have been computed.
Future access line growth is expected to be derived from:
- increases in line demand from data-related usage by existing
business customers,
- increases in line demand from Internet usage by residential
customers and
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- population growth in ACS Holdings' service areas.
Enhanced Services. Enhanced services consist of services such as call
waiting, call forwarding, call return, continuous redial, caller ID and voice
mail. These services are generally billed on a monthly basis and included on
customers' bills for basic local service. Customer penetration of enhanced
services, calculated as the number of enhanced services divided by the number of
access lines, in ACS Holdings' service areas is approximately 86%, while other
rural local exchange carriers in the U.S. have achieved a penetration level of
121%, on average.
Operating results for local telephone services are not materially
impacted by seasonal factors.
NETWORK ACCESS
Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than one
company in the provision of such long distance service on an end-to-end basis.
Since toll calls are generally billed to the customer originating the call, a
mechanism is required to compensate each company providing services relating to
the call. This mechanism is the access charge, which the Company bills to each
interexchange carrier for the use of its facilities to access the customer, as
described below.
Intrastate Access Charges. ACS Holdings generates intrastate access
revenue when an intrastate long distance call that involves an interexchange
carrier is originated and terminated within the same state. The interexchange
carrier pays the Company an intrastate access payment for either terminating or
originating the call. The Company records the details of the call through its
carrier access billing system and receives the access payment from the
interexchange carrier. When one of the Company's customers originates the call,
it typically provides billing and collection for the interexchange carrier
through a billing and collection agreement. The access charge for ACS Holdings'
intrastate service is regulated by the RCA.
Interstate Access Charges. ACS Holdings generates interstate access
revenue when an interstate long distance call is originated from a local calling
area in one state to a local calling area in another state. The Company bills
interstate access charges in the same manner as it bills intrastate access
charges; however, the interstate access charge is regulated by the FCC rather
than by the RCA.
Operating results for network access services are not materially
impacted by seasonal factors.
CELLULAR SERVICES
ACS Holdings' cellular business is currently managed separately from its
local exchange carrier business and is subject to a different regulatory
framework and cost structure. Cellular services are provided statewide under the
MACtel brand name. Subsequent to the acquisition of CenturyTel's Alaska
properties and ATU, cellular operations were merged under the MACtel brand name,
which was formerly a subsidiary of ATU. The primary sources of cellular revenue
include subscriber access charges, airtime usage, toll charges, connection fees,
roaming revenues, as well as enhanced features, such as voice mail. A subscriber
may purchase services separately or may purchase rate plans that package these
services in different ways to fit different calling patterns. The Company
provides digital service and advanced features in Anchorage and Fairbanks and
expects to be fully digital in the other service areas by the first quarter of
2000. Upon conversion of all service areas to digital service, ACS Holdings will
be able to offer advanced digital services and features, such as text messaging,
on a statewide basis.
As illustrated in the table below, CenturyTel's Alaska properties and
MACtel have experienced growth in the number of cellular subscribers served and
total covered population over the past five years.
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AS OF DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
Covered population:
CenturyTel's Alaska properties 54,286 55,101 55,927 56,766 56,733
MACtel 294,160 298,573 397,434 403,396 404,069
------- ------- ------- ------- -------
Total 348,446 353,674 453,361 460,162 460,802
======= ======= ======= ======= =======
Ending subscribers
CenturyTel's Alaska properties 1,300 1,678 2,096 2,945 3,692
MACtel 24,855 37,651 53,035 63,627 69,376
------- ------- ------- ------- -------
Total 26,155 39,329 55,131 66,572 73,068
======= ======= ======= ======= =======
Ending penetration
CenturyTel's Alaska properties 2.4% 3.0% 3.7% 5.2% 6.5%
MACtel 8.4% 12.6% 13.3% 15.8% 17.2%
Combined 7.5% 11.1% 12.2% 14.5% 15.9%
Although ACS Holdings has achieved cellular penetration rates of 18% in
Anchorage and 20% in Kenai, penetration rates in the Company's other service
areas are significantly lower. Management believes there are opportunities to
improve the penetration rates of its cellular operations in Fairbanks and
Juneau. Management also believes that the market for cellular services will
continue to grow with the growth in the cellular industry as a whole.
ACS Holdings also owns 10 megahertz E Block PCS licenses covering
Anchorage, Juneau and Fairbanks, which were purchased by CenturyTel's Alaska
properties in 1997. Management is analyzing the build out of these licenses and
technical alternatives for using this spectrum to enhance the Company's service
offerings in its overall business.
Operating results for cellular services are not materially impacted by
seasonal factors.
INTEREXCHANGE NETWORK, DATA AND OTHER
Long Distance Services. ACS Holdings' predecessors began offering long
distance services on a resale basis in October 1997, primarily in Anchorage. The
Company currently has approximately 32,000 long distance customers and less than
2.5% of total long distance revenues in Alaska. ACS Holdings is expanding its
long distance operations into the service areas of CenturyTel's Alaska
properties starting in the first quarter of 2000. Before August 1998,
CenturyTel's Alaska properties were precluded from entering the long distance
business by a non-competition agreement with AT&T Alascom which was signed when
Pacific Telecom sold Alascom, Inc. to AT&T in 1995. To date, ACS Holdings' long
distance operations have generated operating losses.
In April 1999, ACS Holdings entered into a settlement agreement with
General Communication, Inc. ("GCI") under which the Company agreed to enter into
a number of new business arrangements and to settle a number of outstanding
disputes, including GCI's opposition to ACS Holdings' acquisitions of
CenturyTel's Alaska properties and ATU. As part of this agreement and to reduce
the Company's dependence on a resale long distance strategy, ACS Holdings
purchased from GCI $19.5 million of fiber capacity for high-speed links within
Alaska and for termination of traffic in the lower 48 states. Subsequently, the
Company entered into an amendment of the purchase agreement with GCI, whereby,
among other things, ACS Holdings agreed to purchase additional capacity in 2001
for $19.5 million. ACS Holdings expects that migrating long distance traffic
onto its own network facilities will, over time reduce the cost of providing
long distance and other interexchange services and data and Internet access
services.
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ACS Holdings is subject to numerous conditions imposed by the RCA and,
to a lesser degree, by the FCC on the manner in which the Company conducts its
long distance operations. The restrictions are intended to prohibit
cross-subsidization from the regulated local exchange carrier to the unregulated
long distance affiliate and discrimination against other long distance providers
in favor of a local exchange carrier's long distance affiliate. Among the
conditions applied to ACS Holdings' long distance affiliates are those which:
- require the Company to hold all books and records, management,
employees and administrative services separate, except that
services may be provided among affiliates through arm's length
affiliated interest agreements,
- prohibit CenturyTel's Alaska properties from bundling local and
long distance services until competition develops in their local
markets and
- prevent the Company from joint ownership of telephone
transmission or switching facilities with the local exchange
carrier and from using the local exchange carrier's assets as
collateral for its own indebtedness.
As a result of the introduction of competition in ATU's local service
areas, the Alaska Public Utilities Commission ("APUC"), predecessor to the RCA,
lifted the restriction on bundling of local and long distance services in ATU's
service areas in 1998.
Operating results for long distance services are not materially impacted
by seasonal factors.
Internet Access. ACS Holdings provides Internet access services to
approximately 16,000 customers at December 31, 1999. In order to offer Internet
access, the Company provides local dial-up telephone numbers for its customers.
These local dial-up numbers allow customers access, through a modem connection
on their computer, to a series of computer servers ACS Holdings owns and
maintains. These servers allow customers to access their e-mail accounts and to
be routed to local access points that connect customers to the Internet. ACS
Holdings charges customers either a flat rate for unlimited Internet usage or a
usage sensitive rate, which, in either case, is billed on customers' local
telephone bill. Commencing January 2000, ACS Holdings is offering high speed
Digital Subscriber Line service, or DSL, to its Internet subscribers.
ACS Holdings also owns a 28.5% minority interest in Internet Alaska,
Inc., which provides Internet access to approximately 28,000 customers,
primarily in Anchorage and Fairbanks.
Operating results for Internet access services are not materially
impacted by seasonal factors.
Wireless Cable Television. ACS Holdings owns ACTV, a wireless cable
television provider. ACTV provides wireless cable television services over
assigned UHF frequencies to approximately 3,000 customers in the Company's
Anchorage and Fairbanks service areas. As of December 31, 1999, ACS Holdings
held a two-thirds interest in ACTV and completed the acquisition of the
remaining one-third interest on February 14, 2000.
UNIVERSAL SERVICE REVENUE
Universal service revenue supplements the amount of local service
revenue the Company receives to ensure that basic local service rates for
customers in high cost rural areas are not significantly higher than rates
charged in lower cost urban and suburban areas. The Telecommunications Act of
1996 prescribed new standards applicable to universal service, including
mechanisms for defining the types of services to be provided as part of a
universal service program, specific goals or criteria applicable to universal
service programs, new qualifications for receipt of universal service funding
and new requirements for contributions to universal service funding. The FCC,
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in conjunction with a federal-state joint board composed of FCC and state
commission members, has been working since passage of the Telecommunications Act
of 1996 to implement these new statutory provisions. The FCC has chosen to
address universal service matters, initially for non-rural telephone companies,
and subsequently for rural telephone companies. New cost-identification models
for non-rural local carriers were adopted on January 1, 2000 and would be
applicable to ACS Holdings' Anchorage operations. New rules for rural telephone
companies, applicable to CenturyTel's Alaska properties, are not expected to be
adopted before January 1, 2001 at the earliest.
OTHER
ACS Holdings seeks to capitalize on its local presence and network
infrastructure by offering additional services to customers, such as directory
services and billing and collection services for interexchange carriers.
NETWORK FACILITIES
As of December 31, 1999, ACS Holdings' owned 74 exchanges serving over
325,000 access lines. All of the Company's exchanges are served by digital
switches provided predominately by Nortel Networks. ACS Holdings' switches are
linked through a combination of extensive aerial, underground and buried cable,
including 485 miles of fiber optic cable, as well as digital microwave and
satellite links. The Company has 100% single-party services (one customer per
access line), and believes substantially all of its switches have current
generic software upgrades available, allowing for the full range of enhanced
customer features.
ACS Holdings has integrated numerous network elements to offer a variety
of services and applications that meet the increasingly sophisticated needs of
customers. These elements include Signal System 7 signaling networks, voice
messaging platforms, digital switching and, in some communities, integrated
service digital network access. As the telecommunications industry experiences
significant changes in technology, customer demand and competitive pressures,
the Company intends to introduce additional enhancements.
Network operations and monitoring are provided for CenturyTel's Alaska
properties and ATU by ACS Holdings' network operating control center located in
Anchorage. The network operating control center has technicians staffed or
on-call seven days a week, 24 hours a day. Automated alarm systems are in place
should problems arise with the network after normal business hours. The Company
also has customer care call center facilities in Anchorage and Fairbanks along
with additional customer care facilities in Juneau, Sitka, Kenai/Soldotna and
Kodiak. All of these facilities offer extensive business hours to efficiently
handle customer inquiries and orders for service.
ACS Holdings' cellular operations consist of five switching centers, 75
cell sites and four repeaters covering all major population centers and highway
corridors in Alaska. The Company plans to complete the conversion of all of its
switching and cell site equipment to digital service by the first quarter of
2000. The Company's switching and cell site infrastructure is linked by digital
microwave and fiber. MACtel also has a network operating control center located
in Anchorage that supports all cellular switches in ACS Holdings' markets.
Customer care centers are located in Anchorage, Fairbanks, Juneau and
Kenai/Soldotna.
The Company is enhancing its interexchange network to accommodate
developing products and technology. The Company is working with Nortel Networks
on a multiple phase conversion of its network from a time division multiple
access, or TDMA, circuit switched platform to an asynchronous transfer
mode/Internet protocol, or ATM/IP, packet switched platform based on Nortel's
SUCCESSION NETWORK(TM). ACS Holdings believes the implementation of the
SUCCESSION NETWORK(TM) will enhance its capability to provide a complete suite
of telecommunications and data services and achieve significant operating
efficiencies. The Company has completed the first phase of the conversion, which
resulted in the migration of its network traffic to its fiber optic transport
facilities acquired in June 1999. The Company is currently in the second phase,
which will involve the conversion of its transport connections between Anchorage
and each of Fairbanks, Kenai, Juneau and Seattle from TDMA to ATM, which ACS
Holdings expects to complete by the second quarter of 2000. ACS Holdings expects
to complete the implementation of Nortel's SUCCESSION NETWORK(TM) by year-end
2002. Planned network
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enhancements prior to year-end 2002 will include the installation of call
servers in Anchorage and either Fairbanks or Juneau and the conversion of
network switching nodes to accommodate ATM/IP traffic.
Completion of the SUCCESSION NETWORK(TM) will enable the Company to
provide an array of IP products throughout its core business. ACS Holdings
currently offers frame relay, and will offer each of the following services as
the necessary network elements are completed:
- virtual private networks,
- virtual private lines,
- transparent local area networks (LAN),
- proprietary LANs and wide area networks (WAN) and
- high speed Internet access.
SUPPLIERS
ACS Holdings believes it has strong, long-term relationships with its
numerous communications vendors. The Company's primary switching vendor is
Nortel Networks, a leading provider of advanced switching systems. The Company
uses Ericsson switches and radios for its cellular operations. For its billing
systems ACS Holdings uses Saville Systems and for its accounting systems it
uses SAP. ACS Holdings primary information technology architecture is provided
by IBM. While the Company recognizes that the separation of CenturyTel's Alaska
properties from the rest of CenturyTel's properties might result in higher unit
costs for CenturyTel's Alaska properties, it expects that the combination of
CenturyTel's Alaska properties and ATU and the presence of vendor competition
will deter any significant unit increases and may result in unit cost
reductions in the longer term. ACS Holdings enjoys positive relationships with
a variety of vendors for outside plant facilities and other elements of its
network.
COMPETITION
Local Telephone Service
Incumbent local exchange carriers may be subject to any of three types
of competition:
- facilities-based competition from providers with their own local
service network,
- resale competition from resale interconnection, or providers who
purchase local service from the incumbent local exchange carrier
at wholesale rates and resell these services to their customers
and
- competition from unbundled network element interconnection, that
is, providers who lease unbundled network elements from the
incumbent local exchange carrier.
The geographic characteristics of rural areas make the entrance of most
facilities-based competitors uneconomical because of the significant capital
investment required and the limited market size. Thus, competition is likely to
come from resale interconnection or unbundled network element interconnection.
There are no regional Bell operating companies in Alaska.
In September 1997, GCI and AT&T Alascom, the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage. GCI competes principally through unbundled
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network element interconnection with ATU's facilities, while AT&T Alascom
competes exclusively by reselling ATU's services. Competition is based upon
price and pricing plans, types of services offered, customer service, billing
services, quality and reliability. GCI has focused principally on advertising
discount plans for bundled services. AT&T Alascom's strategy has been to resell
ATU's service as part of a package of local and long distance services. As a
result, ATU lost approximately 19% of its retail access lines in Anchorage to
these competitors during the first ten months of competition ended June 1998,
approximately 61% of which resulted from unbundled network element
interconnection by GCI. The majority of this loss was among price-sensitive
residential customers who have lower average monthly bills than ATU's business
customers. Since June 1998, the rate of this loss has slowed, with ATU's
aggregate market share loss rising only from 19% to just over 24% in the last
eighteen months. The Company expects GCI and AT&T Alascom to continue to compete
for local telephone business.
As "rural telephone companies" under the Telecommunications Act of 1996,
ACS Holdings' rural local exchange carriers have historically been exempt from
the obligation to lease their facilities or resell their services on a wholesale
discount basis to competitive local exchange carriers seeking interconnection.
However, on June 30, 1999 the ordered these exemptions terminated, and on
October 11, 1999, the RCA, which replaced the APUC on July 1, 1999, sustained
the APUC's order. As a result, ACS Holdings may be required to provide
interconnection elements and/or wholesale discount services to competitors in
some or all of its rural service areas. However, ACS Holdings believes that its
service offerings, customer relationships and expertise in the local telephone
business may provide a competitive advantage over new local exchange carriers.
See "Business - Regulation".
ACS Holdings expects increasing competition from providers of various
services that provide users the means to bypass its network. Long distance
companies may construct, modify or lease facilities to transmit traffic directly
from a user to a long distance company. Cable television companies, in
particular, may be able to modify their networks to partially or completely
bypass the Company's local network.
In addition, while cellular telephone services have historically
complemented traditional local exchange carrier services, the Company
anticipates that existing and emerging wireless technologies may increasingly
compete with local exchange carrier services. Technological developments in
cellular telephone features, personal communications services, digital microwave
and other wireless technologies are expected to further permit the development
of alternatives to traditional landline services.
Cellular Services
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in the
capacity and quality of digital technology, shorter cycles for new products and
enhancements and changes in consumer preferences and expectations. ACS Holdings
believes that the demand for wireless telecommunications services is likely to
increase significantly as equipment costs and service rates continue to decline
and equipment becomes more convenient and functional. ACS Holdings currently
competes with at least one other cellular provider in each of its cellular
service areas, including AT&T Wireless Services, CenturyTel and Mercury
Communications.
Competition is based on price, quality, network coverage and brand
reputation. In addition, there are six PCS licensees in each of the Company's
cellular service areas. ACS Holdings holds PCS licenses covering Anchorage,
Fairbanks and Juneau. One of the PCS licensees began providing digital PCS
service in Anchorage in October 1998. Another PCS licensee has recently
indicated it will commence trials of its technology. The Company believes that
the unique and vast terrain and the high cost of PCS system buildout makes
entrance into markets outside Anchorage unlikely.
Long Distance Services
The long distance telecommunications market is highly competitive.
Competition in the long distance business is based on price, customer service,
billing services and quality. ACS Holdings currently offers long
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distance service to customers located in ATU's service areas and the Fairbanks
and Juneau areas of CenturyTel's Alaska properties, and intends, subject to
regulatory restrictions, to expand ATU's long distance operations into the
remaining service areas of CenturyTel's Alaska properties. AT&T Alascom and GCI
are currently the two major long distance providers in Alaska, including in ACS
Holdings' service areas. ACS Holdings currently has less than 2.5% of total long
distance revenues in Alaska.
Internet Services
The market for Internet access services is highly competitive. There are
few significant barriers to entry, and the Company expects that competition will
intensify in the future. ACS Holdings currently competes with a number of
established online services companies, interexchange carriers and cable
companies. The Company believes that its ability to compete successfully will
depend upon a number of factors, including the reliability and security of its
network infrastructure, the ease of access to the Internet and the pricing
policies of its competitors.
CUSTOMERS
ACS Holdings has two basic types of customers for its local services:
- business and residential customers located in their local service
areas that pay for local phone service
- interexchange carriers that pay the Company for access to long
distance calling customers located within its local service
areas.
Approximately 57% of ACS Holdings' retail access lines served
residential customers, while 43% served business customers. In addition, no
single ACS Holdings' customer represented more than 10% of its total 1999
consolidated revenue.
SALES AND MARKETING
CenturyTel's Alaska properties and ATU have historically conducted their
sales and marketing operations for each of their respective products on a
stand-alone basis, with each product line having its own sales force and
marketing department. Going forward, ACS Holdings intends to consolidate its
product and service offerings under the "Alaska Communications Systems" brand,
subject to regulatory and strategic business considerations.
See "Business - Introduction".
Key components of the Company's sales and marketing strategy include:
- marketing current and future service offerings aggressively,
including packaged service offerings,
- centralizing marketing functions
- enhancing direct sales efforts.
ACS Holdings believes that it can leverage its position as an
integrated, one-stop provider of telecommunications services with strong
positions in local access, cellular, long distance and data, and Internet
markets. By pursuing, within the bounds of any applicable regulatory
constraints, a marketing strategy that takes advantage of these characteristics
and that facilitates cross-selling and packaging of it products and services,
the Company believes it can increase penetration of new product offerings,
improve customer retention rates, increase its share of its customers' overall
telecommunications expenditures and achieve continued revenue and operating cash
flow growth.
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While CenturyTel's Alaska properties and ATU have, to a limited extent,
marketed local telephone services in attractively-priced, packaged service
offerings with cellular, long distance and Internet services, neither
CenturyTel's Alaska properties nor ATU emphasized these types of offerings.
However, ACS Holdings believes packaged offerings are popular with customers
because they allow customers to enjoy pricing for a number of services at a
substantial discount to A LA CARTE pricing of individual services. Subject to
regulatory limitations, the Company intends to expand this strategy, which it
expects will increase the average revenue per customer and result in a more
loyal and satisfied customer base and reduced churn.
The Company has established a sales and marketing organization where
marketing strategies will be centralized and sales functions will be based
locally. To enhance its direct selling efforts, the Company has established
additional customer and retail service centers in its larger service areas, such
as Juneau and Kenai/Soldotna, and intends to enhance its call center operations
through a combination of technology investments and training and incentive
compensation programs for call center employees.
ENVIRONMENTAL REGULATIONS
ACS Holdings' operations are subject to federal, state and local laws
and regulations governing the use, storage, disposal of, and exposure to,
hazardous materials, the release of pollutants into the environment and the
remediation of contamination. As an owner or operator of property and a
generator of hazardous wastes, the Company could be subject to environmental
laws that impose liability for the entire cost of cleanup at contaminated sites,
regardless of fault or the lawfulness of the activity that resulted in
contamination. The Company believes, however, that its operations are in
substantial compliance with applicable environmental laws and regulations.
Many of ACS Holdings' properties formerly contained, or currently
contain, underground and above ground storage tanks used for the storage of fuel
or wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.
ACS Holdings' cellular operations are also subject to regulations and
guidelines that impose a variety of operational requirements relating to radio
frequency emissions. The potential connection between radio frequency emissions
and negative health effects, including some forms of cancer, has been the
subject of substantial study by the scientific community in recent years. To
date, the results of these studies have been inconclusive. Although the Company
has not been named in any lawsuits alleging damages from radio frequency
emissions, it is possible it could be sued in the future, particularly if
scientific studies conclusively determine that radio frequency emissions are
harmful.
EMPLOYEES
ACS Holdings considers employee relations to be good. As of December 31,
1999, the Company employed a total of 1,231 regular full-time employees, 837 of
whom were represented by the International Brotherhood of Electrical Workers,
Local 1547 ("IBEW"). CenturyTel's Alaska properties had a collective bargaining
agreement with the IBEW that was scheduled to expire in 2004. The ATU collective
bargaining agreement with the IBEW was scheduled to expire on August 31, 1999,
but was extended by mutual agreement to accommodate negotiations to consolidate
the Century and ATU agreements. On November 2, 1999, the IBEW membership for ACS
Holdings ratified the terms of the collective bargaining agreement that governs
the terms and conditions of employment for all IBEW represented employees. The
new agreement, which expires December 31, 2006, provides for wage increases up
to 4% based on the annual increases in the U.S. Department of Labor CPI-U, the
consumer price index for Anchorage. There have been no work stoppages or
strikes, and none are anticipated; management has worked closely with IBEW
leadership for many years.
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REGULATION
OVERVIEW
ACS Holdings' operations are subject to the separate but concurrent
jurisdictional control of both the Federal Communications Commission ("FCC") and
the State of Alaska. The Company's local telephone operating subsidiaries, TUNI,
TUA, PTIC, which was formerly the City of Fairbanks Telephone Operation, and
Alaska Communications Systems, Inc., formerly ATU, are each "telecommunications
carriers" and "local exchange carriers" under the Communications Act of 1934,
which was amended by the Telecommunications Act of 1996, and are subject to FCC
jurisdiction. ACS Holdings' cellular companies are also subject to FCC
jurisdiction because they are telecommunications carriers and because they hold
FCC-issued licenses. The Company's local telephone operating companies are also
"public utilities" within the meaning of the Alaska statutes and are, therefore,
governed by the applicable rules and regulations of RCA. The RCA succeeded to
the regulatory responsibilities of the APUC when it ceased to exist on June 30,
1999. Only one of the new RCA commissioners has prior experience as a
commissioner on the APUC.
FEDERAL REGULATION
Under the federal regulatory scheme, incumbent local exchange carriers
are required to comply with the Communications Act and the applicable rules and
regulations of the FCC. In substantially overhauling the Communications Act, the
Telecommunications Act of 1996 was intended to, among other things, eliminate
unproductive regulatory burdens and promote competition. Despite this,
telecommunications carriers are still subject to extensive ongoing regulatory
requirements. For instance, ACS Holdings' subsidiaries are required to maintain
accounting records in accordance with the Uniform System of Accounts, to
structure access charges according to FCC rules, and to charge for interstate
services at a rate of return not to exceed a rate prescribed by the FCC. The FCC
also must give prior consent to transfers of control and assignments of radio
station licenses. The FCC requires carriers providing access services to file
tariffs with the FCC reflecting the rates, terms and conditions of those
services. These tariffs are subject to review and potential objection by the FCC
or third parties. Additionally, all of the Company's local exchange carriers are
"incumbent local exchange carriers" within the meaning of the Telecommunications
Act of 1996. As such, they are subject to various requirements under that Act,
including specific interconnection duties such as the provisioning of unbundled
network elements and of wholesale discounted resale of end user services.
STATE REGULATION
Telecommunications companies subject to the RCA's jurisdiction are
required to obtain certificates of public convenience and necessity prior to
operating as a public utility in Alaska. The RCA is responsible for approving
new certificates and any transfers of existing certificates. In addition, the
RCA is responsible for implementing a portion of the competitive requirements of
the Telecommunications Act of 1996, as well as for regulating intrastate access
and rates for local and other services of local telephone companies. After
passage of the Telecommunications Act of 1996, the APUC adopted a plan to
address competition issues across Alaska. The APUC established multiple dockets
to investigate different competition-related issues, including revising local
and long distance market structures, reforming its intrastate access charge
system and establishing a state universal service fund. While some of these
dockets have been completed, many others remain open for further processing by
the RCA. In connection with regulatory approval of ACS Holdings' acquisitions of
CenturyTel's Alaska properties and ATU, the APUC imposed several conditions on
its operating companies. Among those conditions was a requirement that ATU,
PTIC, TUA and TUNI each file revenue requirements, cost of service and rate
design studies no later than July 2001. Additionally, restrictions were placed
on the ability of ACS Holdings' rural local exchange carriers to bundle service
offerings with ATU Long Distance, Inc.
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, ACS Holdings is afforded the opportunity
to set maximum rates at a level that allows the Company the opportunity to
recover the reasonable costs incurred in the provision of regulated
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telecommunications services and to earn a reasonable rate of return on the
investment required to provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services
and enhanced service offerings,
- access charges to interexchange carriers for originating and
terminating interstate and intrastate interexchange calls,
- interconnection charges, wholesale service charges and other
rates to competing carriers interconnecting with the Company's
networks or reselling its services and
- high-cost support mechanisms, such as the federal Universal
Service Fund and the Alaska Universal Service Fund.
Maximum rates for regulated services, and the amount of high-cost
support, are set by the FCC with respect to interstate services and by the RCA
with respect to intrastate services.
In conjunction with the recovery of costs and establishment of rates, a
local exchange carrier must first determine its aggregate costs and then
allocate those costs between regulated and nonregulated services.
After identifying the regulated costs of providing local telephone
service, a local exchange carrier must allocate those costs among its various
local exchange and interstate and intrastate interexchange services and between
state and federal jurisdictions. This process is complicated by the difficulty
of allocating specific pieces of plant and equipment to a particular service
because a local exchange carrier's plant and equipment are utilized for
different services, such as local telephone and interstate and intrastate
access. This process is referred to as "separations" and is governed primarily
by the FCC's rules and regulations. The underlying legal purpose of separations
rules is to define how a carrier's expenses are allocated and recovered from
federal and state jurisdictions. The FCC is considering whether to modify or
eliminate the current separations process. This decision could indirectly
increase or reduce earnings of carriers subject to separations rules.
INTERSTATE END-USER RATES
The deployment of the local telephone network from the switching
facility to the customer is known as the "local loop" and is one of the most
significant costs incurred by a local exchange carrier in providing telephone
service. The FCC has established a rate structure that provides for the recovery
of a portion of the cost of the local loop allocated to the interstate
jurisdiction directly from the end user customer through the assessment of a
subscriber line charge. The remaining portion of the local loop costs are
recovered from interstate access charges to an interexchange carrier or, in some
circumstances, from the federal Universal Service Fund.
As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher than in
urban areas. In the absence of an accommodation in the FCC rules to address this
fact, a substantial portion of the costs of smaller local exchange carriers
would remain allocated to the intrastate jurisdiction, leaving such carriers
with little alternative other than to charge higher rates for intrastate
services. Accordingly, the FCC provides for additional interstate recovery by
eligible telecommunications carriers through the federal Universal Service Fund.
The federal Universal Service Fund is available to carriers whose local loop
costs are significantly above the national average as calculated pursuant to FCC
rules. Recent FCC rulings have made this high-cost support available to a
competitive carrier, on an averaged per line basis, for those lines serving
customers switching to the competitive carrier.
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INTERSTATE ACCESS RATES
Interstate access rates are developed on the basis of a local exchange
carrier's measurement of its interstate costs for the provision of access
service to interexchange carriers divided by its projected demand for access
service. The resulting rates are published in a company's interstate access
tariff and filed with the FCC, at which time they are subject to challenge by
third parties and to review by the FCC.
The FCC recognized that this rate making and tariff filing process may
be administratively burdensome for small local exchange carriers. Accordingly,
the FCC established the National Exchange Carriers Association, which is
commonly referred to as NECA, in 1983 to, among other things, develop common
interstate access service rates, terms and conditions. NECA develops interstate
access rates on the basis of data that are provided individually by
participating local exchange carriers and blended to yield average rates. These
rates are intended to generate revenue equal to the aggregate costs plus a
return on the investment of all of the participants. Currently, the authorized
maximum rate of return used in setting interstate access rates is 11.25%.
Individual participating local exchange carriers are likely to have
costs of providing service that are either higher or lower than the revenues
generated by applying the overall NECA tariff rate. To rectify this result, the
revenues generated by applying the NECA rates are pooled from all of the
participating companies and redistributed on the basis of each individual
company's costs. The result of this process not only eliminates the burden of
individual tariff filing, but also produces a system in which small companies
can share and spread risk. For example, if a smaller local exchange carrier
filed its own tariff and subsequently suffered the loss of major customers that
utilize interstate access service, the local exchange carrier could suffer
significant under-recovery of its costs. In the NECA pool environment, the
impact of this loss is reduced because it is spread over all of the pool
participants.
NECA operates separate pools for traffic sensitive costs, which are
primarily switching costs, and non-traffic sensitive costs, which are primarily
loop costs. Companies are also free to develop and administer their own
interstate access charges. ACS Holdings' rural local exchange carriers
participate in both the traffic sensitive and non-traffic sensitive NECA pools.
ATU files its own traffic sensitive access tariffs with the FCC but participates
in the NECA non-traffic sensitive pool.
The FCC has initiated a proceeding to review its policies governing
interstate exchange access rates and the rate of return applicable to incumbent
local exchange carriers who are subject to rate-of-return, rather than price
cap, regulation. Both ATU and the Company's rural local exchange carriers are
rate-of-return regulated, and thus the outcome of this proceeding could directly
affect their earning prospects. The outcome of this proceeding, however, and its
ultimate impact on ACS Holdings, cannot be predicted at this time.
INTRASTATE END USER RATES
The levels of rates charged to end-users for the provision of basic
local service are generally subject to rate-of-return regulation administered by
the RCA. Local rates are typically set at a level that will allow recovery of
embedded costs for local service divided by the number of services and
customers. Recognized costs include an allowance for a rate of return on
investment in plant used to provide local service. Rate cases are typically
infrequent, carrier-initiated and require the carrier to meet substantial
burdens of proof. The last APUC-authorized rates of return were 12.55% and
11.70% for TUA and TUNI, respectively. These rates were ordered in 1989. PTIC
was previously not regulated by the APUC and instead was regulated by the City
of Fairbanks Public Utilities Board. As a condition of the acquisition of the
City of Fairbanks Telephone Operation by ACS Holdings, the APUC required that a
general rate proceeding be initiated for PTIC by June 1999. This proceeding has
been delayed and combined with a company-wide earnings review to be filed with
the RCA by June 30, 2001. ATU's last authorized rate of return was 9.79% for
retail local exchange and 10.85% for intrastate access, ordered in 1991.
The APUC adopted regulations to govern competition in the local exchange
marketplace. The transitional regulations provide for, among other things:
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- initial classification of all incumbent local exchange carriers,
including the Company's rural properties and ATU, as dominant
carriers,
- symmetrical requirements that all carriers, both dominant and
nondominant, offer all retail services for resale at wholesale
rates and
- substantial dominant carrier pricing flexibility in competitive
areas, under which carriers may reduce retail rates, offer new or
repackaged services and implement special contracts for retail
service upon 30 days' notice to the APUC. Only rate increases
affecting existing services are subject to full cost support
showings for local exchange carriers in areas with local
competition.
INTRASTATE ACCESS RATES
In the past, the APUC has required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each local exchange carrier charges interexchange carriers fees for
originating or terminating long distance calls on its network based on the
statewide average cost of access rather than on its costs of access. Access
revenues are collected in a pool administered by the Alaska Exchange Carriers
Association and then redistributed to the local exchange carriers based on their
actual costs. With the passage of the Telecommunications Act of 1996 and
increased competition in the local exchange market, the APUC began a process of
reforming intrastate access charges.
Under recent revisions to the Alaska access system, local exchange
carriers not yet subject to local competition continue to participate in the
Alaska Exchange Carriers Association pool. Participants in this pool recover
their costs based on the embedded cost of services most recently authorized by
the APUC. In the event of competitive entry into a dominant carrier's service
area, these revisions also require the dominant local exchange carrier to exit
the pool and initiate separate access charges. Dominant local exchange carriers
subjected to competitive entry have the right to propose that their access
charges be based on market rates. The RCA has recently initiated a proceeding to
examine whether changes to the current annual process for establishing access
charges are warranted.
An additional consequence of this access reform is the continued removal
of subsidies implicit in access pricing. For instance, the APUC abolished the
"weighting system" for the non-traffic-sensitive rate element that had loaded
extra costs on access charges for lower cost urban exchanges to support rural
exchanges. At the same time, the APUC proposed to support a portion of high
switching costs separately through a state universal service fund. The RCA has
subsequently proposed that such state universal service support be available
only to local companies with access lines of 20,000 or less. If adopted as
proposed, this limitation would reduce the amount of state universal service
support which the Company's rural local exchange carriers would receive in the
future.
The Alaska Universal Service Fund serves as a complement to the federal
Universal Service Fund, but must meet federal statutory criteria concerning
consistency with federal rules and regulations. Currently, the Alaska Universal
Service Fund only subsidizes a portion of higher cost carriers' switching costs,
and the costs of lifeline service--supporting rates of low income customers. The
RCA has proposed to subject existing support paid to carriers for switching
costs to an access line threshold which could reduce or eliminate such support
for some of ACS Holdings' subsidiaries. Although it initially ordered the
suspension of certain payments from the Alaska Universal Service Fund,
associated with such switching costs, to one of the Company's rural local
exchange carriers, the RCA subsequently revoked its order without effect on the
carrier's receipts from the fund.
THE TELECOMMUNICATIONS ACT OF 1996
Among other things, the Telecommunications Act of 1996 was enacted to
enhance competition without jeopardizing the availability of nationwide
universal service at affordable rates. These two objectives have resulted in a
complex set of rules intended to promote competitive entry in the provision of
local telephone services, except where entry would adversely affect the
provision of universal service or the public interest.
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PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL EXEMPTIONS
The Telecommunications Act of 1996 made competitive entry into the local
telephone business more attractive to other carriers by removing barriers to
competition. In order to promote competition, the Telecommunications Act of 1996
established new interconnection rules generally requiring local exchange
carriers to allow competing carriers to interconnect with their local networks.
Congress recognized, however, that when the desire to promote competition
conflicted with the ability of existing carriers to provide universal service to
higher cost customers, local exchange carriers classified as "Rural Telephone
Companies" should be exempted from interconnection requirements until the
continuation of the exemption was no longer required by the public interest, as
defined in the Telecommunications Act of 1996.
Under the Telecommunications Act of 1996, all local exchange carriers,
including both incumbent local exchange carriers and new competitive carriers,
are required to:
- offer reasonable and nondiscriminatory resale of their
telecommunications services,
- ensure that customers can keep their telephone numbers when
changing carriers,
- ensure that competitors' customers can use the same number of
digits when dialing and receive nondiscriminatory access to
telephone numbers, operator service, directory assistance and
directory listing,
- ensure access to telephone poles, ducts, conduits and rights of
way and
- compensate competitors for the costs of terminating traffic.
The Telecommunications Act of 1996 also requires incumbent local exchange
carriers to:
- negotiate in good faith the terms and conditions of
interconnection with any competitive carrier making a request for
same,
- interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point,
- unbundle and provide nondiscriminatory access to unbundled
network elements, such as local loops, switches and transport
facilities, at nondiscriminatory rates and on nondiscriminatory
terms and conditions,
- offer resale interconnection at wholesale rates,
- provide reasonable notice of changes in the information necessary
for transmission and routing of services over the incumbent local
exchange carrier's facilities or in the information necessary for
interoperability and
- provide for the physical collocation of equipment necessary for
interconnection or access to unbundled network elements at the
premises of the incumbent local exchange carrier, at rates, terms
and conditions that are just, reasonable and nondiscriminatory.
In order to implement interconnection requirements, local exchange
carriers generally enter into negotiated interconnection arrangements with
competing carriers. Local exchange carriers may also offer interconnection
tariffs, available to all competitors.
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Competitors are required to compensate a local exchange carrier for the
cost of providing interconnection services. In the case of resale
interconnection, the rules provide that the rates charged should be on a
wholesale basis and reflect the current retail rates of the incumbent local
exchange carrier, excluding the portion of costs avoided by the incumbent local
exchange carrier. In the case of unbundled network element interconnection,
rates are based on costing methodologies that employ a forward-looking economic
cost pricing methodology known as total element long run incremental cost. While
the Supreme Court recently affirmed the FCC's authority to develop pricing
guidelines, the Supreme Court did not evaluate this pricing methodology. Some
incumbent local exchange carriers have argued that total element long run
incremental cost pricing methodology does not allow adequate compensation for
the provision of unbundled network elements. The Eighth Circuit Court of Appeals
heard oral arguments on this pricing issue on September 16, 1999, but has not
yet issued a ruling.
The Telecommunications Act of 1996 specifies that resale and unbundled
network element rates are to be negotiated among the parties, or, if the parties
fail to reach an agreement, arbitrated by the relevant state regulatory
commission. Once the parties have come to agreement, the proposed rates are
subject to final approval by the state regulatory commission.
The Supreme Court has also recently upheld the FCC's authority to
prevent the incumbent local exchange carrier from disaggregating existing
combinations of network elements and to establish "pick and choose" rules
regarding interconnection agreements. "Pick and choose" rules permit a carrier
seeking interconnection to pick and choose among the terms of service from other
interconnection agreements between the incumbent and local exchange carriers and
other competitors.
The Supreme Court also remanded the list of unbundled network elements
that the FCC adopted for further consideration of the necessity of each one
under the statutory standard. On September 15, 1999, the FCC adopted an order
eliminating some previously included unbundled network elements, but adding
other elements to the list. These new FCC rules are likely to be the subject of
further appeals.
In January 1997, ATU entered into an interconnection agreement with GCI,
which provides for resale and unbundled network element interconnection, and
with AT&T Alascom, which provides for resale interconnection. ATU has also
received requests for interconnection from Alaska Fiber Star, L.L.C. and
DSL.net.
ACS Holdings' local operating utilities, TUA, TUNI and PTIC, are defined
as "rural telephone companies" under the Telecommunications Act of 1996. As
rural telephone companies, they were granted rural exemptions from the
requirements relating to both resale interconnection and unbundled network
element interconnection. The rural exemptions were continued until the APUC
determined that interconnection was technically feasible, not unduly
economically burdensome and consistent with the Telecommunications Act of 1996's
universal service provisions.
On June 30, 1999, the APUC issued an order terminating the rural
exemptions of TUNI, TUA and PTIC. On October 11, 1999, the RCA affirmed the
APUC's order. As a result, these rural local exchange carriers are no longer
exempt from the Telecommunications Act of 1996's interconnection requirements
applicable to incumbent local exchange carriers, and are now engaged in the
negotiation of interconnection agreements with potential competitors. ACS
Holdings cannot be certain that it will be able to charge rates that provide
fair compensation for providing unbundled network elements and/or schedule
discounted resale services.
Separately, on September 1, 1999, ACS Holdings filed petitions with the
RCA seeking suspension or modification of interconnection duties and addressing
market structure reforms for the Fairbanks and Juneau-Douglas markets. In those
petitions, the Company's rural local exchange carriers proposed tariffed terms
and conditions, including pricing, for resale of their services at wholesale
discounts, for certain unbundled network elements, and for the interconnection
of their facilities and those of competitive local exchange carriers in the
Fairbanks and Juneau-Douglas markets, effective January 1, 2000. Further, as
part of that proposal, ACS Holdings also requested that the RCA permit its local
exchange carriers to operate subject to competitive regulation and that the RCA
remove or reduce other regulatory limitations in those markets, effective
January 1, 2001. Subsequently, on October 26, 1999, the RCA dismissed the
Company's petitions seeking to establish open competitive markets in
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Fairbanks and Juneau through tariffed interconnection terms and conditions. On
November 10, 1999, the Company filed a formal appeal of the RCA's order
terminating the rural exemptions in the Alaskan Superior Court. On November 12,
1999, the Company filed a parallel appeal of the RCA's order dismissing its
petitions for tariffed interconnection in the Alaskan Superior Court. Although
ACS Holdings believes that the appeals are well founded, it cannot predict the
timing and outcome of this litigation.
In April 1999, a bill was proposed in the Alaska State senate to open to
competition many local telephone markets in which ACS Holdings operates.
Specifically, the bill proposed to allow competitors to provide local telephone
service in local telephone markets throughout Alaska that have at least 5,000
access lines, and would have deprived incumbent local exchange carriers in those
markets of their rural exemptions. Competition resulting from this bill, if it
had been enacted into law, could have materially adversely affected the
Company's profitability. Although this bill was not enacted into law, ACS
Holdings cannot predict at this time whether or to what extent proposals
included in the bill will be offered again and enacted into law.
For 1999, ACS Holdings local exchange carriers benefiting from rural
exemptions accounted for 42.4% of its consolidated operating revenues and 38.0%
of its consolidated operating income. Loss of the rural exemptions, absent
compensating measures, such as rate increases, or market structure reforms, such
as the replacement of implicit subsidies by explicit support mechanisms, or rate
deaveraging, could adversely affect the Company's operating results.
PROMOTION OF UNIVERSAL SERVICE
While the Telecommunications Act of 1996 promoted Congress' policy of
ensuring that affordable service is provided to consumers universally in rural,
high-cost areas of the country, the Telecommunications Act of 1996 altered the
framework for providing universal service by:
- providing for the identification of those services eligible for
universal service support,
- requiring the FCC to make implicit subsidies explicit,
- expanding the types of communications carriers required to pay
universal service contributions and
- allowing competitive local exchange carriers to be eligible for
funding.
These and other provisions were intended to make provision of universal
service support compatible with a competitive market.
Pursuant to the Telecommunications Act of 1996, federal Universal
Service Fund payments are only available to carriers that are designated as
eligible telecommunications carriers by a state public utilities commission. In
areas served by rural local exchange carriers, the Telecommunications Act of
1996 provides that a state public utilities commission may designate more than
one eligible telecommunications carrier, in addition to the incumbent local
exchange carrier, only after determining that the designation of an additional
eligible telecommunications carrier is consistent with the public interest. As a
result, an incumbent rural local exchange carrier has an opportunity to maintain
its status as the sole recipient of federal Universal Service Fund payments in
its service area, even if it is subsequently subjected to competition. TUA, TUNI
and PTIC are currently the sole designated eligible telecommunications carriers
in their respective service areas. The addition of a second eligible
telecommunications carrier in the service areas of ACS Holdings' properties
could have the effect of reducing the amount of funds available from the federal
Universal Service Fund and could materially adversely affect the Company's
ability to achieve a reasonable rate of return on the capital invested in its
network.
In May 1997, the FCC initiated new proceedings addressing federal
universal service support. The new proceedings undertook to separately analyze
and address federal Universal Service Fund requirements and considerations for
rural and for non-rural telephone companies. The FCC indicated its intention
that new rules for
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universal service support of non-rural companies would be based on
forward-looking economic cost principles as applied through cost proxy models.
On October 21, 1999, the FCC issued orders addressing specific implementation
matters for providing universal service support to non-rural carriers. The FCC
established cost input parameters for use in the cost proxy models, upon which
universal service support payments to non-rural carriers would be based in the
future. The FCC also established procedures for allocating universal service
support for non-rural carriers among and between the states. This new system of
universal service support applies only to non-rural carriers and became
effective January 1, 2000.
With respect to universal service support for rural telephone companies,
the FCC established a Rural Task Force in 1997 to investigate rural carrier
universal service needs, including issues concerning whether and how cost proxy
models adopted for non-rural carriers could be applied to rural telephone
companies. The FCC has indicated several times that it will not implement a new
universal service support system for rural telephone companies sooner than
January 1, 2001 and may delay any implementation beyond that date. The October
21, 1999 order described above applies only to non-rural carriers.
Because ACS Holdings provides interstate and international services, it
is required to contribute to the federal Universal Service Fund a percentage of
its revenue earned from its interstate and international services. Although the
Company's rural local exchange carriers receive subsidies from the federal
Universal Service Fund, it cannot be certain of how, in the future, the
Company's contributions to the fund will compare to the subsidies it receives
from the fund.
Separately, the FCC has requested comments concerning ways to promote
basic and advanced services to unserved and underserved areas. As a part of
these proceedings, the FCC is reviewing its authority to designate certain types
of telecommunications carriers, such as cellular carriers, as eligible to
receive payments from the universal service fund. Any determinations concerning
such eligibility could affect either ACS Holdings' rural local exchange
carriers, its cellular carrier, or both, but the Company cannot predict the
outcome of these proceedings at present.
On July 30, 1999, the U.S. Court of Appeals for the Fifth Circuit
overturned certain of the FCC's rules governing the basis on which the FCC
collects subsidy payments from telecommunications carriers and recovery of those
payments by incumbent local exchange carriers. One or more parties to that
litigation may seek review by the Supreme Court. On October 8, 1999, the FCC
revised its universal service rules in response to the decision by the Fifth
Circuit. Among other things, these revised rules provide that intrastate revenue
earned by a contributing carrier will not be considered in determining the
amount of the contribution to the federal universal service fund.
FCC REGULATION OF WIRELESS SERVICES
The FCC regulates the licensing, construction, operation, acquisition
and sale of personal communications services and cellular systems in the United
States. All cellular and personal communications services licenses have a
10-year term, at the end of which they must be renewed. Licenses may be revoked
for cause, and license renewal applications may be denied if the FCC determines
that renewal would not serve the public interest. In addition, all personal
communications services licensees must satisfy certain coverage requirements.
Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license.
The FCC restricts the amount of wireless spectrum that a single entity
may hold in a market. Currently, the FCC's rules prohibit an entity from holding
more than 45 MHz of spectrum, except for certain rural cellular markets, in
which the limit is 55 MHz. Many interested parties in the wireless industry have
proposed elimination of the FCC's cap on wireless spectrum. Until this rule is
relaxed or eliminated, it will limit the amount of wireless spectrum the Company
can acquire in a particular market.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of commercial mobile radio service
which includes personal communications services and cellular services and the
FCC does not regulate such rates. The FCC imposes, however, a variety of
additional regulatory requirements on commercial mobile radio service operators.
These include:
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- Commercial mobile radio service operators must be able to
transmit 911 calls from any qualified handset without credit
check or validation, are required to provide the location of the
911 caller, within an increasingly narrow geographic tolerance
over time, and in the future, will be required to provide 911
service for individuals with speech and hearing disabilities.
- The FCC is considering mechanisms to permit commercial mobile
radio service operators to charge the party initiating the call
for the call (even if it is not a personal communications service
or cellular subscriber)
FCC REGULATION OF INTERSTATE LONG DISTANCE SERVICES
The Company's long distance services are currently not subject to rate
regulation by the FCC, and it is not required to obtain FCC authorization for
the installation, acquisition or replacement of its domestic interexchange
network facilities. However, the Company must comply with the requirements of
common carriage under the Communications Act. ACS Holdings is subject to the
general requirement that its charges and terms for its telecommunications
services be "just and reasonable" and that it not make any "unjust or
unreasonable discrimination" in its charges or terms, as well as to a number of
other requirements of the Communications Act and the FCC's rules. The FCC has
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations, and it has recently levied substantial
fines on carriers that have engaged in "slamming," which is the industry term
for unauthorized switching of a customer's telecommunications service provider.
In 1996, the FCC issued an order that required nondominant interexchange
carriers, like ACS Holdings, to cease filing tariffs for its domestic
interexchange services. The order required mandatory detariffing and gave
carriers nine months to withdraw federal tariffs and move into contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court. If the FCC's order becomes effective, nondominant
interstate services providers will no longer be able to file tariffs with the
FCC and the Company may need to implement customer contracts which could result
in substantial administrative expense.
On March 1, 2000, the FCC and the Federal Trade Commission issued a
joint policy statement on advertising of long distance services. The joint
policy statement establishes guidelines designed to ensure that the information
presented in advertising of long distance services is truthful, non-misleading,
and substantiated, and that the information is complete and conspicuous. The
impact that this newly issued order will have on ACS Holdings' advertising is
still uncertain.
FCC POLICY ON INTERNET SERVICES
The Telecommunications Act of 1996 establishes a distinction between
telecommunications services, which are regulated by the FCC, and information
services, which remain unregulated. ACS Holdings' Internet services are
considered information services and are not regulated by the FCC. Because the
regulatory boundaries in this area are somewhat unclear and subject to dispute,
however, the FCC could seek to characterize some of the Company's information
services as "telecommunications services." If that happens, those services would
become subject to FCC regulations. The impact of a reclassification of ACS
Holdings' Internet services is difficult to predict.
OTHER PROCEEDINGS
A number of other FCC, state and judicial proceedings are currently pending or
may be initiated in the future which could materially affect the Company's
business. Some of these proceedings include:
- The FCC has adopted certain restrictions on the ability of
telecommunications carriers to use and disclose certain types of
customer information in marketing different types of services.
The U.S. Court of Appeals for the Tenth Circuit has held that
these rules are an unconstitutional abridgment of the
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carrier's freedom of speech. At least one interested party has
asked the U.S. Supreme Court to review the Tenth Circuit's
decision. If the FCC's rules are upheld, it may impose
significant restrictions on ACS Holdings' ability to market
packaged service offerings to its customers.
- The FCC has adopted new rules designed to make it easier for
customers to understand the bills of telecommunications carriers.
These new rules, among other things, establish certain
requirements regarding the formatting of bills and the
information that must be included on bills. Judicial review of
these rules is pending.
- ACS Holdings has historically classified ISP costs as interstate,
consistent with past FCC findings concerning the interstate
character of such calls. The FCC staff, pursuant to FCC
accounting policies, has now indicated that such calls, and their
associated costs, should be reclassified as intrastate. The
effect of such a reclassification could be to decrease the level
of expense recognized in the interstate jurisdiction, and thus
require reductions in interstate access charges in the future.
The Company is reviewing the FCC's position and the ultimate
outcome of this matter cannot be predicted at this time.
- The FCC has recently adopted an order that requires
telecommunications service providers to make their services
accessible to individuals with disabilities, if readily
achievable. It is unclear the effect that this order will have on
ACS Holdings' businesses.
- The FCC has ordered telecommunications service providers to
provide law enforcement personnel with a sufficient number of
ports and technical assistance in connection with wiretaps. The
Company cannot predict its cost of complying with this order.
- In 1998, the FCC issued a notice seeking comment and evidence
concerning possible revisions (including reductions) to the
existing authorized rate of return on the federal portion of
telecommunications facilities and other investment of and by
local exchange carriers. Any rate of return prescribed by the FCC
must be utilized in setting the rates for the interstate services
of local exchange carriers (such as exchange access) subject to
FCC regulation. To date, the FCC has taken no final action in
this proceeding to alter the currently authorized return, which
is 11.25 %.
- In June 1999, following prior notification to GCI, PTIC and TUNI
(then under the ownership and control of Century Tel, Inc.)
effected network changes associated with removal of the network
switch located at North Pole, Alaska, in favor of a remote
terminal (remote) served from the Fairbanks switch (host). As a
consequence of this network change, GCI's point of switching for
serving North Pole changed to Fairbanks. GCI filed a formal
complaint against the Company with the RCA. On November 1, 1999,
the RCA issued an order sustaining GCI's complaint and requiring
further filings. The Company met with GCI and made further
filings with the RCA. GCI has asked the RCA to grant GCI
protection from any cost increases for a period of ten years
associated with the changeover at North Pole, but has never
quantified or offered any proof of damages. The RCA has not yet
acted on these further submissions.
The foregoing is not an exhaustive list of proceedings that could
materially affect ACS Holdings' business. The Company cannot predict the outcome
of these or any other proceeding before the FCC, the RCA or the courts.
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ITEM 2. PROPERTIES
At December 31, 1999, ACS Holdings' telecommunications network includes
over 485 miles of fiber optic cable, 176 switching facilities and a statewide
cellular network. In addition, the Company recently purchased fiber capacity for
high-speed links within Alaska and for termination of traffic in the lower 48
states. The Company plans to continue enhancing its network to meet customer
demand for increased bandwidth and advanced services. See "Business -- Network
Facilities".
Local Telephone. ACS Holdings' primary properties consist of 168
switching facilities serving 74 exchanges. The Company owns most of its
administrative and maintenance facilities, central office and remote switching
platforms and transport and distribution network facilities. ACS Holdings leases
its corporate headquarters located in Anchorage.
ACS Holdings' transport and distribution network facilities include a
fiber optic backbone and copper wire distribution facilities that connect
customers to remote switch locations or to the central office and to points of
presence or interconnection with interexchange carriers. These facilities are
located on land pursuant to permits, easements or other agreements.
Cellular. ACS Holdings has 75 cell sites and four repeaters that cover
all major population centers and highway corridors throughout Alaska. In most
cases, the Company leases the land on which these sites are located.
Substantially all of the Companies assets (including those of its
subsidiaries) are pledged as collateral for its senior obligations. See Note 7
"Long-term Obligations" to the Alaska Communications Systems Holdings, Inc.
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Parent are involved in various claims, legal actions
and regulatory proceedings arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. Some of these regulatory proceedings are
described under "Business -- Regulation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
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EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the executive officers and directors of ACS Holdings
as of the date hereof:
NAME AGE POSITION
Charles E. Robinson 66 Chairman and Chief Executive Officer
Wesley E. Carson 49 President and Chief Operating Officer
Donn T. Wonnell 53 Executive Vice President, General Counsel and Secretary
Michael E. Holmstrom 57 Senior Vice President and Chief Financial Officer
John Ayers 57 Senior Vice President of Marketing and Sales
F. Scott Davis 64 Senior Vice President of Non-Regulated Operations
Kevin P. Hemenway 39 Vice President and Treasurer
Carl H. Marrs 50 Director
Byron I. Mallott 57 Director
W. Dexter Paine, III 39 Director
Saul A. Fox 46 Director
Wray T. Thorn 28 Director
CHARLES E. ROBINSON, ACS Holding's Chairman and Chief Executive Officer
since May 1999, has over four decades of experience in the telecommunications
industry. Mr. Robinson was instrumental in creating Alaska's long distance
communications systems, including the White Alice Communications System,
beginning in the late 1950's. Between 1979 and 1982, Mr. Robinson served as
President of Alascom, the state's primary long distance carrier at the time.
Under his guidance, Alascom developed the first statewide long distance service
network in Alaska, connecting with more than 27 independent local companies. Mr.
Robinson served as President and Chief Operating Officer of Pacific Telecom from
1981 until its sale to CenturyTel in 1997 and was appointed Chairman and Chief
Executive Officer in 1989. Mr. Robinson remained as President and Chief
Executive officer at Pacific Telecom until February 1999. Mr. Robinson has been
a member of the National Security Telecommunications Advisory Committee for the
last 18 years, having been appointed by President Reagan. Mr. Robinson has also
served on the Board of Directors of the United States Telecommunications
Association from 1993 to 1995 and from 1999 to the present.
WESLEY E. CARSON, ACS Holding's President and Chief Operating Officer,
has been with the Company since its inception. On October 7, 1999, Mr. Carson
(previously an Executive Vice President) was appointed President and Chief
Operating Officer. Mr. Robinson had previously held the title of President. Mr.
Carson has over 20 years of telecommunications experience. He began his career
in telecommunications in 1980 with TRT Telecommunications Corporation, an
international data and voice carrier located in Washington, D.C. that was
acquired by Pacific Telecom in 1988. From 1989 to 1998, Mr. Carson served as the
Vice President of Human Resources for Pacific Telecom. In 1998, Mr. Carson
became the Director of Human Resources for PacifiCorp and was responsible for
administrative services, the planning, development, implementation and
administration of human resources policies and procedures and employee
relations. From July 1998 to May 1999, Mr. Carson served as the Executive Vice
President of LEC Consulting. Mr. Carson has been involved with labor issues for
nearly 20 years and an active participant in Alaska labor relations since 1989.
Mr. Carson holds a B.A. in International Relations from Brigham Young
University, a Master of Public Administration degree from the University of
Illinois-Springfield and a J.D. from Georgetown University.
DONN T. WONNELL is Executive Vice President, General Counsel and
Secretary, a position he has held since June 1999. Mr. Wonnell has worked in the
telecommunications industry for more than 20 years. Mr. Wonnell served as Vice
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President for legal, regulatory and legislative affairs of Pacific Telecom until
the merger of Pacific Telecom into CenturyTel at the end of 1997. Prior to
joining Pacific Telecom, Mr. Wonnell served as President of the
Telecommunications and Energy Division of California Pacific Utilities in San
Francisco, and, earlier, as Vice President and General Counsel of RCA Alaska
Communications in Anchorage. Mr. Wonnell holds a B.A. from the College of
William & Mary and a J.D. from the University of Pennsylvania School of Law. Mr.
Wonnell has been admitted to practice before the bars of Alaska, California,
Pennsylvania and the District of Columbia.
MICHAEL E. HOLMSTROM, ACS Holdings' Senior Vice President and Chief
Financial Officer since January 1999, is responsible for the Company's
financial, accounting, tax and business development functions. Mr. Holmstrom's
career in telecommunications spans 35 years. Since 1990, he has consulted,
served as Chief Operating Officer for Spectrum Network Systems, Ltd. in Sydney,
Australia, and as Chief Financial Officer for Atlantic Tele-Network in the U.S.
Virgin Islands. From 1983 through 1989 he was Vice President of Unregulated
Operations, Chief Financial Officer and then President of CP National
Corporation, a telecommunications provider that merged with Alltel Corporation
in December 1988. Mr. Holmstrom was Vice President of Finance at Alascom from
1976 through 1980, and Vice President of Financial and Business Planning at
Pacific Telecom, Alascom's parent corporation, from 1980 to 1981. Mr. Holmstrom
has a B.S. in Business Administration from Gannon University.
JOHN R. AYERS is Senior Vice President of Marketing and Sales, a
position he has held since May 1999. Mr. Ayers has more than 20 years of
experience in the telecommunications industry. As President and co-founder of
e.Net, Ltd. in 1996, Mr. Ayers served as a consultant to a variety of
established and start-up businesses. From February 1983 through August 1995, Mr.
Ayers held various leadership positions with Pacific Telecom and its
subsidiaries, including Executive Vice President of Pacific Telecom Services
Company, with responsibility for strategic planning, marketing and business
development, and Executive Vice President and General Manager of Alascom, Inc.,
Alaska's largest interexchange carrier. Mr. Ayers holds a bachelor's degree in
management from Golden Gate University.
F. SCOTT DAVIS was appointed as Senior Vice President of Non-Regulated
Operations on February 9, 2000. He is responsible for the Company's nonregulated
communications enterprises, including cellular, long-distance, Internet and
wireless cable television operations. Prior to his appointment, he served as
President and Chief Operating Officer of MACtel since August of 1995. Mr. Davis
has been with MACtel since 1990, previously serving as Sales and Marketing
Manager, and then General Manager. Mr. Davis has more than 30 years of
experience in the wireless industry, beginning in 1966 at Airsignal
International, Inc., where he advanced to the position of Executive Vise
President before he left in 1982. From 1982 to 1987, he served as Senior Vice
President and General Manager for McCaw Communications Companies, Inc., with
responsibility for Alaska and Hawaii. Mr. Davis worked in Alaska as a
communications broker and consultant from 1987 to 1990. Mr. Davis holds a B.B.A.
degree from Washburn University.
KEVIN P. HEMENWAY joined ACS Holdings as Vice President and Treasurer in
July 1999 with 10 years of prior experience in the telecommunications industry.
Before joining the Company, Mr. Hemenway served as the Chief Financial Officer
and Treasurer of Atlantic Tele-Network, Inc. based in the U.S. Virgin Islands.
From January 1990 to October 1998, as an independent consultant, Mr. Hemenway
performed financial, accounting, management and rate making consulting services
for the telecommunications industry, principally for Atlantic Tele-Network, Inc.
and its subsidiaries. From 1986 through 1989, Mr. Hemenway was employed by
Deloitte & Touche LLP as a CPA and manager, performing both audit and consulting
services and from 1983 to 1986, was employed by Grant Thornton as a CPA and
senior staff accountant. Mr. Hemenway graduated from Creighton University in
1982 with a B.S.B.A., majoring in accounting, and is a non-practicing CPA
certificate holder registered in the State of Nebraska.
CARL H. MARRS, a director since July 1999, is President and Chief
Executive Officer of Cook Inlet Region, Inc. ("Cook Inlet"). Mr. Marrs has been
with Cook Inlet for approximately 25 years. During that period Mr. Marrs has
been employed in a series of management positions, culminating in his
appointment as President in 1986. Mr. Marrs attended the Stanford University
School of Business for Executives in 1983 and the Amos Tuck School of Business
at Dartmouth College in 1986.
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BYRON I. MALLOTT, a director since January 2000, is the President and
Chief Executive Officer of the First Alaskans Foundation. From 1995 until
January 2000, Mr. Mallott served as the Executive Director of the Alaska
Permanent Fund Corporation. Prior to joining the Alaska Permanent Fund
Corporation, Mr. Mallott served in various capacities, including Director,
Chairman and President and Chief Executive Officer of Sealaska Corporation over
a period of nearly 20 years. Mr. Mallott has also served in various political
appointments and elected positions.
W. DEXTER PAINE, III, a director since July 1998, was a Co-founder and
has been President of Fox Paine & Company since its inception in 1997. From 1994
until founding Fox Paine, Mr. Paine served as a senior partner of Kohlberg &
Company. Prior to joining Kohlberg & Company, Mr. Paine served as a general
partner at Robertson Stephens & Company. Mr. Paine has a B.A. in economics from
Williams College.
SAUL A. FOX, a director since May 1999, was a Co-founder and has been
Chief Executive Officer of Fox Paine & Company since its inception in 1997. From
1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis &
Roberts & Co. Prior to joining KKR, Mr. Fox was an attorney at Latham & Watkins,
a law firm headquartered in Los Angeles, California. Mr. Fox has a B.S. in
communications and computer science from Temple University and a J.D. from the
University of Pennsylvania Law School.
WRAY T. THORN, a director since January 2000, has also been a director
with Fox Paine & Company since January 2000. From 1996 until joining Fox Paine &
Company, Mr. Thorn was a principal and founding member of Dubilier & Company.
Prior to joining Dubilier & Company, Mr. Thorn was an associate in the
Acquisition Finance Group of Chase Securities, Inc. Mr. Thorn is a graduate of
Harvard University.
SANJAY SWANI, a director during 1999, left the board in June 1999 for
personal reasons unrelated to ACS Holdings.
J. RUSSELL TRIEDMAN, a director since June 1999, left the board in
October 1999 for personal reasons unrelated to ACS Holdings.
JASON B. HURWITZ, a director since October 1999, left the board in
January 2000 for personal reasons unrelated to ACS Holdings.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of ACS Group, and as such has
no publicly traded equity securities. ACS Group's Common Stock, $.01 par value,
was first listed on the NASDAQ National Market on November 18, 1999 under the
symbol "ALSK". Prior to November 18, 1999, there was no public market for ACS
Group's Common Stock. The following table sets forth quarterly market price
ranges for ACS Group's Common Stock in 1999 for the period during which it was
publicly traded:
1999 QUARTERS HIGH LOW
------------- ----- ---
4th (from November 18 through December 31) 16 12
The approximate number of holders of record of Common Stock of ACS Group
as of March 13, 2000 was 46.
DIVIDENDS
The Company's parent, ACS Group, has never declared or paid any cash
dividends on its common stock. ACS Group intends to retain its earnings, if any,
to finance the development and expansion of its business, and, therefore, it
does not anticipate paying any cash dividends in the foreseeable future.
Moreover, ACS Group's ability to declare and pay cash dividends on its common
stock is restricted by covenants in ACS Holdings' senior credit facility and in
the indentures governing its senior discount debentures and ACS Holdings' senior
subordinated notes.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of ACS Holdings. Consider the following points in connection with
the table:
- The selected historical consolidated operating data for the year
ended December 31, 1999 include the operating results of
CenturyTel's Alaska properties and ATU from their acquisition on
May 14, 1999 through December 31, 1999.
- "EBITDA" is net income before interest expense, income taxes,
depreciation and amortization and extraordinary items. EBITDA is
not intended to represent cash flow from operations as defined
under generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of the
Company's operating performance or cash flows. EBITDA is
presented because management believes it is a useful financial
performance measure for comparing companies in the
telecommunications industry in terms of operating performance and
ability to satisfy debt service, capital expenditures and working
capital requirements.
- "EBITDA margin" is EBITDA divided by total operating revenues.
The selected historical consolidated financial data below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated financial statements of
ACS Holdings and the related notes which are included elsewhere in this Form
10-K.
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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
For the Year Ended December 31, 1999
(Dollars in Thousands)
OPERATING DATA:
Operating revenues:
Local telephone:
Local network service $ 60,989
Network access service 67,174
Directory advertising 17,713
Deregulated and other revenue 13,275
---------
Total local telephone 159,151
Cellular 24,882
Interexchange network, data services and other 9,586
---------
Total operating revenues 193,619
Operating expenses:
Local telephone 106,266
Cellular 15,922
Interexchange network data services and other 14,838
Depreciation and amortization 40,306
---------
Total operating expenses 177,332
Operating income 16,287
Other income and expense:
Interest expense (37,517)
Interest and other income 426
Equity in loss of minority investments (198)
---------
Total other income and expense (37,289)
---------
Loss before income tax benefit (21,002)
Income tax benefit 301
---------
Net Loss (20,701)
=========
OTHER FINANCIAL DATA:
Cash used by operating activities $ (50,648)
Cash used by investing activities (774,368)
Cash provided by financing activities 833,741
EBITDA 56,593
EBITDA margin 29.2%
Capital expenditures (74,052)
OTHER DATA (END OF PERIOD)
Access lines in service 325,608
Cellular subscribers 73,068
Cellular penetration 15.9%
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 937,711
Long-term debt including current portion 598,407
Stockholders' equity 266,541
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SELECTED HISTORICAL COMBINED FINANCIAL DATA--CENTURYTEL'S ALASKA PROPERTIES
The following table sets forth selected historical combined financial
data of CenturyTel's Alaska properties. Consider the following points in
connection with the table:
- The Company derived the selected historical combined financial
data for each of the three years in the period ended December 31,
1998 and as of December 31, 1997 and 1998 from the audited
combined financial statements and the related notes of
CenturyTel's Alaska properties which are included elsewhere in
this Form 10-K.
- The Company derived the selected historical combined financial
data for the year ended December 31, 1995 and as of December 31,
1995 and 1996, from the unaudited combined financial statements
of CenturyTel's Alaska properties which are not included in this
Form 10-K.
- Century acquired its Alaska properties on December 1, 1997 as
part of its acquisition of Pacific Telecom. This acquisition was
accounted for as a purchase, resulting in a pushdown of $248
million of goodwill to CenturyTel's Alaska properties.
- The financial statements for the 11-month period ended November
30, 1997 and prior periods have been presented on Pacific
Telecom's basis of accounting, while the financial statements as
of December 31, 1997, the one-month period ended December 31,
1997 and subsequent periods have been presented on CenturyTel's
basis of accounting.
- The financial statements of CenturyTel's Alaska properties
include the results of the City of Fairbanks Telephone Operation
from October 6, 1997, the date of its acquisition. This
acquisition was accounted for as a purchase.
- On December 31, 1997, the cellular operations in Fairbanks were
sold to ATU. The Fairbanks cellular property had 5,497
subscribers at the time of the sale.
The selected historical combined financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements of CenturyTel's
Alaska properties and the related notes which are included elsewhere in this
Form 10-K.
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CenturyTel's Alaska Properties
-----------------------------------------------------------------------------
Century Telephone
Pacific Telecom Enterprises, Inc.
------------------------------------------- --------------------------
Jan. 1, 1997 Dec. 1, 1997 Year
to Nov. 30, to Dec 31, Ended
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
OPERATING DATA:
Operating revenues:
Local telephone $ 70,540 $ 75,950 $ 79,330 $ 10,255 $ 121,933
Cellular 4,531 4,823 5,120 181 2,576