UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| (Mark One) | ||
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
OR
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 000-28167
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| Delaware | 52-2126573 | |
| (State or Other Jurisdiction | (I.R.S. Employer | |
| of Incorporation or Organization) | Identification No.) |
600 Telephone Avenue, Anchorage, Alaska 99503
(Address of Principal Executive Offices) (Zip Code)
(907) 297-3000
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former three months, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant’s Common Stock, as of October 28, 2004 was 29,387,159
TABLE OF CONTENTS
2
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 79,689 | $ | 97,798 | ||||
Restricted cash |
4,690 | 3,635 | ||||||
Accounts receivable — trade, net of allowance of $4,005 and $4,432 |
38,233 | 41,718 | ||||||
Materials and supplies |
7,051 | 10,099 | ||||||
Prepayments and other current assets |
7,287 | 5,850 | ||||||
Total current assets |
136,950 | 159,100 | ||||||
Property, plant and equipment |
1,058,889 | 1,041,904 | ||||||
Less: accumulated depreciation |
640,110 | 603,760 | ||||||
Property, plant and equipment, net |
418,779 | 438,144 | ||||||
Goodwill |
38,403 | 38,403 | ||||||
Intangible assets |
21,917 | 22,055 | ||||||
Debt issuance cost |
16,428 | 18,939 | ||||||
Deferred charges and other assets |
9,195 | 8,750 | ||||||
Total assets |
$ | 641,672 | $ | 685,391 | ||||
Liabilities and Stockholders’ Equity (Deficit) |
||||||||
Current liabilities: |
||||||||
Current portion of long-term obligations |
$ | 2,294 | $ | 1,982 | ||||
Accounts payable — affiliates |
3,611 | 5,082 | ||||||
Accounts payable, accrued and other current liabilities |
49,185 | 48,398 | ||||||
Advance billings and customer deposits |
8,678 | 8,766 | ||||||
Total current liabilities |
63,768 | 64,228 | ||||||
Long-term obligations, net of current portion |
530,970 | 548,238 | ||||||
Other deferred credits and long-term liabilities |
75,559 | 71,065 | ||||||
Commitments and contingencies |
— | — | ||||||
Stockholders’ equity (deficit): |
||||||||
Preferred stock, no par, 5,000 authorized, no shares issued and outstanding |
— | — | ||||||
Common stock, $.01 par value; 145,000 authorized,
33,936 and 33,611 issued, and 29,387 and 29,343 outstanding, respectively |
339 | 336 | ||||||
Common stock, $.01 par value; 0 and 267 shares subject to mandatory redemption |
— | (1,198 | ) | |||||
Treasury stock, 4,549 and 4,268 shares at cost, respectively |
(18,443 | ) | (17,118 | ) | ||||
Paid in capital in excess of par value |
280,049 | 278,181 | ||||||
Accumulated deficit |
(286,027 | ) | (253,798 | ) | ||||
Accumulated other comprehensive loss |
(4,543 | ) | (4,543 | ) | ||||
Total stockholders’ equity (deficit) |
(28,625 | ) | 1,860 | |||||
Total liabilities and stockholders’ equity (deficit) |
$ | 641,672 | $ | 685,391 | ||||
See Notes to Consolidated Financial Statements
3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Operating revenue: |
||||||||||||||||
Local telephone |
$ | 51,246 | $ | 53,261 | $ | 159,976 | $ | 162,472 | ||||||||
Wireless |
16,204 | 12,591 | 41,266 | 34,868 | ||||||||||||
Directory |
— | — | — | 11,631 | ||||||||||||
Internet |
5,295 | 8,223 | 15,013 | 24,416 | ||||||||||||
Interexchange |
3,878 | 4,147 | 11,077 | 12,623 | ||||||||||||
Total operating revenues |
76,623 | 78,222 | 227,332 | 246,010 | ||||||||||||
Operating expense: |
||||||||||||||||
Local telephone (exclusive of depreciation and amortization) |
35,170 | 30,160 | 96,806 | 84,267 | ||||||||||||
Wireless (exclusive of depreciation and amortization) |
10,970 | 7,545 | 27,229 | 21,796 | ||||||||||||
Directory (exclusive of depreciation and amortization) |
— | — | — | 5,249 | ||||||||||||
Internet (exclusive of depreciation and amortization) |
7,291 | 11,730 | 21,204 | 35,829 | ||||||||||||
Interexchange (exclusive of depreciation and amortization) |
5,637 | 6,056 | 15,511 | 17,886 | ||||||||||||
Contract termination and asset impairment charges |
— | 54,539 | — | 54,539 | ||||||||||||
Depreciation and amortization |
19,770 | 22,044 | 57,686 | 66,735 | ||||||||||||
Loss (gain) on disposal of assets, net |
2,600 | (15,968 | ) | 2,825 | (112,507 | ) | ||||||||||
Total operating expenses |
81,438 | 116,106 | 221,261 | 173,794 | ||||||||||||
Operating income (loss) |
(4,815 | ) | (37,884 | ) | 6,071 | 72,216 | ||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(11,665 | ) | (22,590 | ) | (38,914 | ) | (51,390 | ) | ||||||||
Interest income and other |
239 | (15,096 | ) | 614 | (10,209 | ) | ||||||||||
Total other income and expense, net |
(11,426 | ) | (37,686 | ) | (38,300 | ) | (61,599 | ) | ||||||||
Income (loss) before income taxes and discontinued operations |
(16,241 | ) | (75,570 | ) | (32,229 | ) | 10,617 | |||||||||
Income tax expense |
— | — | — | — | ||||||||||||
Income (loss) from continuing operations |
(16,241 | ) | (75,570 | ) | (32,229 | ) | 10,617 | |||||||||
Loss from discontinued operations |
— | — | — | (52 | ) | |||||||||||
Net income (loss) |
$ | (16,241 | ) | $ | (75,570 | ) | $ | (32,229 | ) | $ | 10,565 | |||||
Earnings (loss) per share — basic and diluted: |
||||||||||||||||
Earnings (loss) from continuing operations |
$ | (0.55 | ) | $ | (2.54 | ) | $ | (1.10 | ) | $ | 0.35 | |||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
Earnings (loss) per share |
$ | (0.55 | ) | $ | (2.54 | ) | $ | (1.10 | ) | $ | 0.35 | |||||
Weighted average shares outstanding |
||||||||||||||||
Basic and diluted |
29,384 | 29,759 | 29,418 | 30,165 | ||||||||||||
See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| Accumulated | ||||||||||||||||||||||||||||
| Shares Subject | Paid in | Other | ||||||||||||||||||||||||||
| Common | to Mandatory | Treasury | Capital in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| Stock |
Redemption |
Stock |
Excess of Par |
Deficit |
Loss |
Equity (Deficit) |
||||||||||||||||||||||
Balance, January 1, 2003 |
$ | 334 | $ | — | $ | (12,082 | ) | $ | 277,810 | $ | (247,168 | ) | $ | (18,886 | ) | $ | 8 | |||||||||||
Components of comprehensive
income: |
||||||||||||||||||||||||||||
Net Income |
— | — | — | — | 10,565 | — | 10,565 | |||||||||||||||||||||
Interest rate swap marked
to market |
— | — | — | — | — | 6,361 | 6,361 | |||||||||||||||||||||
Total comprehensive income |
16,926 | |||||||||||||||||||||||||||
Issuance of 86,612 shares of
common stock, $.01 par |
2 | — | — | 135 | — | — | 137 | |||||||||||||||||||||
Purchase of 1,389,800
shares of
treasury stock |
— | — | (4,296 | ) | — | — | — | (4,296 | ) | |||||||||||||||||||
266,788 shares subject to
mandatory redemption |
— | (1,198 | ) | — | — | — | — | (1,198 | ) | |||||||||||||||||||
Balance, September 30, 2003 |
$ | 336 | $ | (1,198 | ) | $ | (16,378 | ) | $ | 277,945 | $ | (236,603 | ) | $ | (12,525 | ) | $ | 11,577 | ||||||||||
Balance, January 1, 2004 |
$ | 336 | $ | (1,198 | ) | $ | (17,118 | ) | $ | 278,181 | $ | (253,798 | ) | $ | (4,543 | ) | $ | 1,860 | ||||||||||
Components of comprehensive
loss: |
||||||||||||||||||||||||||||
Net loss |
— | — | — | — | (32,229 | ) | — | (32,229 | ) | |||||||||||||||||||
Total comprehensive loss |
(32,229 | ) | ||||||||||||||||||||||||||
Purchase of 266,788 shares
subject
to mandatory redemption |
— | 1,198 | (1,262 | ) | — | — | — | (64 | ) | |||||||||||||||||||
Purchase of 14,100 shares of
common stock, $.01 par |
— | — | (63 | ) | — | — | — | (63 | ) | |||||||||||||||||||
Issuance of 325,325 shares
of
common stock, $.01 par |
3 | — | — | 1,868 | — | — | 1,871 | |||||||||||||||||||||
Balance, September 30, 2004 |
$ | 339 | $ | — | $ | (18,443 | ) | $ | 280,049 | $ | (286,027 | ) | $ | (4,543 | ) | $ | (28,625 | ) | ||||||||||
See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| Nine Months Ended | ||||||||
| September 30, |
||||||||
| 2004 |
2003 |
|||||||
Cash Flows from Operating Acitivities: |
||||||||
Net income (loss) |
$ | (32,229 | ) | $ | 10,565 | |||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||
Loss on discontinued operations |
— | 52 | ||||||
Depreciation and amortization |
57,686 | 66,735 | ||||||
Loss (gain) on disposal of assets and asset impairment charges, net |
2,825 | (48,748 | ) | |||||
Amortization of debt issuance costs, original issue discount and warrants |
5,003 | 16,113 | ||||||
Other deferred credits |
1,570 | 1,743 | ||||||
Changes in components of working capital: |
||||||||
Accounts receivable and other current assets |
5,096 | 9,055 | ||||||
Accounts payable and other current liabilities |
(772 | ) | (4,448 | ) | ||||
Other |
(445 | ) | (557 | ) | ||||
Net cash used by discontinued operations |
— | (40 | ) | |||||
Net cash provided by operating activities |
38,734 | 50,470 | ||||||
Cash Flows from Investing Activities: |
||||||||
Construction and capital expenditures |
(38,084 | ) | (29,875 | ) | ||||
Net proceeds from sale of business |
— | 155,268 | ||||||
Release of funds from escrow |
— | 3,539 | ||||||
Placement of funds in restricted accounts |
(1,055 | ) | (645 | ) | ||||
Net cash provided (used) by investing activities |
(39,139 | ) | 128,287 | |||||
Cash Flows from Financing Activities: |
||||||||
Payments on long-term debt |
(19,448 | ) | (433,973 | ) | ||||
Proceeds from issuance of long-term debt |
— | 375,970 | ||||||
Debt issuance costs |
— | (14,000 | ) | |||||
Purchase of treasury stock |
(127 | ) | (4,296 | ) | ||||
Issuance of common stock |
1,871 | 137 | ||||||
Net cash used by financing activities |
(17,704 | ) | (76,162 | ) | ||||
Increase (decrease) in cash and cash equivalents |
(18,109 | ) | 102,595 | |||||
Cash and cash equivalents at the beginning of the period |
97,798 | 18,565 | ||||||
Cash and cash equivalents at the end of the period |
$ | 79,689 | $ | 121,160 | ||||
Supplemental Cash Flow Data: |
||||||||
Interest paid, net of amounts capitalized of $140 and $88 |
$ | 35,474 | $ | 32,707 | ||||
Income taxes paid |
1,120 | — | ||||||
Supplemental Noncash Transactions: |
||||||||
Property acquired under capital leases and mortgages |
$ | — | $ | 2,340 | ||||
Interest rate swap marked to market |
$ | — | $ | (6,361 | ) | |||
See Notes to Consolidated Financial Statements
6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
| 1. | DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Alaska Communications Systems Group, Inc. and Subsidiaries (“Company” or “ACS Group”), a Delaware corporation, is engaged principally in providing local telephone, wireless, Internet, interexchange network and other services to its retail consumer, business, and wholesale customers in the State of Alaska through its telecommunications subsidiaries. The Company was formed in October of 1998 for the purpose of acquiring and operating telecommunications properties.
The financial statements for the Company represent the consolidated financial position, results of operations and cash flows principally of the following entities:
| • | Alaska Communications Systems Group, Inc. |
| • | Alaska Communications Systems Holdings, Inc. (“ACS Holdings”) |
| • | ACS of Alaska, Inc. (“ACSAK”) |
| • | ACS of the Northland, Inc. (“ACSN”) |
| • | ACS of Fairbanks, Inc. (“ACSF”) |
| • | ACS of Anchorage, Inc. (“ACSA”) |
| • | ACS Wireless, Inc. (“ACSW”) |
| • | ACS Long Distance, Inc. (“ACSLD”) |
| • | ACS Internet, Inc. (“ACSI”) |
On May 8, 2003, the Company completed the sale of a majority interest (87.42%) in the then newly formed ACS Media LLC (“Directories Business”). Subsequently, on August 27, 2003, the Company sold substantially all of its remaining interest in the Directories Business, and now owns less than 0.1%.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. However, the Company believes the disclosures that are made are adequate to make the information presented not misleading. The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain reclassifications have been made to the 2003 financial statements to make them conform to the current presentation.
In the opinion of management, the financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations for the three and nine months ended September 30, 2004 and 2003 are not necessarily indicative of the results of operations that might be expected for the entire year or any other interim periods.
Revenue Recognition
Access revenue is recognized when earned. The Company participates in access revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the Regulatory Commission of Alaska (“RCA”) within the intrastate jurisdiction and the Federal Communications Commission (“FCC”) within the interstate jurisdiction. Much of the interstate access revenue is initially recorded based on estimates. These estimates are derived from interim financial statements, available separations studies and the most recent information available about achieved rates of return. These estimates are subject to adjustment in future accounting periods as additional operational information becomes available. To the extent that disputes arise over revenue settlements,
7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
| 1. | DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
the Company’s policy is to defer revenue collected until settlement methodologies are resolved and finalized. At September 30, 2004 and 2003, the Company had recorded liabilities of $18,660 and $12,741, respectively, related to its estimate of refundable access revenue.
Regulatory Accounting and Regulation
The local telephone exchange operations of the Company account for costs in accordance with the accounting principles for regulated enterprises prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years.
The Company implemented, effective January 1, 2003, higher depreciation rates for its regulated telephone plant for the interstate jurisdiction, which management believes approximate the economically useful lives of the underlying plant. As a result, the Company has recorded a regulatory asset under SFAS No. 71 of $31,540 and $17,231 as of September 30, 2004 and 2003, respectively, related to depreciation of the regulated telephone plant allocable to its intrastate and local jurisdictions. The Company has also deferred as a regulatory asset $894 of costs incurred in connection with regulatory rate making proceedings, which is being amortized over three years starting in 2003. The balance of this regulatory asset was $372 at September 30, 2004. If the Company were not following SFAS No. 71, these deferred costs would have been charged to expense as incurred. The Company also has a regulatory liability of $53,470 at September 30, 2004 related to accumulated removal costs. If the Company were not following SFAS No. 71, it would have followed SFAS No. 143 for asset retirement obligations. Non-regulated revenues and costs incurred by the local telephone exchange operations and non-regulated operations of the Company are not accounted for under SFAS No. 71 principles.
Stock Incentive Plans
The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock incentive plans. Accordingly, no compensation cost has been recognized for options with exercise prices equal to or greater than fair value on the date of grant. No compensation costs were charged to operations for the three and nine months ended September 30, 2004 or 2003. If compensation costs related to options had been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company’s net income (loss) and earnings (loss) per share on a pro forma basis for the three and nine months ended September 30, 2004 and 2003 would have been as follows:
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
| 1. | DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net Income (Loss): |
||||||||||||||||
As reported |
$ | (16,241 | ) | $ | (75,570 | ) | $ | (32,229 | ) | $ | 10,565 | |||||
Deduct: Total stock based employee
compensation
expense determined under fair value based
method
for all awards, net of tax effect |
(108 | ) | (24 | ) | (420 | ) | 55 | |||||||||
Pro forma |
$ | (16,349 | ) | $ | (75,594 | ) | $ | (32,649 | ) | $ | 10,620 | |||||
Earnings (loss) per share — basic and diluted: |
||||||||||||||||
As reported |
$ | (0.55 | ) | $ | (2.54 | ) | $ | (1.10 | ) | $ | 0.35 | |||||
Pro forma |
(0.56 | ) | (2.54 | ) | (1.11 | ) | 0.35 | |||||||||
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for grants:
| 2004 |
2003 |
|||||||
Risk free rate |
3.49 | % | 2.95 | % | ||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Expected volatility factor |
54.4 | % | 57.0 | % | ||||
Expected option life (years) |
6.68 | 6.1 | ||||||
| 2. | LONG-TERM OBLIGATIONS |
Long-term obligations consist of the following at September 30, 2004 and December 31, 2003:
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Senior credit facility term loan |
$ | 198,500 | $ | 200,000 | ||||
9 7/8% senior unsecured notes due 2011 |
182,000 | 182,000 | ||||||
9 3/8% senior subordinated notes due 2009 |
150,000 | 150,000 | ||||||
Original issue discount - 9 7/8% senior
subordinated notes due 2011 |
(5,460 | ) | (5,856 | ) | ||||
13% senior discount debentures due 2011 |
— | 17,313 | ||||||
Original issue discount - 13% senior discount
debentures due 2011 |
— | (2,097 | ) | |||||
Capital leases and other long-term obligations |
8,224 | 8,860 | ||||||
| 533,264 | 550,220 | |||||||
Less current portion |
2,294 | 1,982 | ||||||
Long-term obligations, net of current portion |
$ | 530,970 | $ | 548,238 | ||||
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
| 2. | LONG-TERM OBLIGATIONS (Continued) |
The aggregate maturities of long-term obligations for each of the five years and thereafter subsequent to September 30, 2004 are as follows:
2004 (October 1 - December 31) |
$ | 525 | ||
2005 (January 1 - December 31) |
2,293 | |||
2006 (January 1 - December 31) |
2,309 | |||
2007 (January 1 - December 31) |
2,295 | |||
2008 (January 1 - December 31) |
2,126 | |||
2009 (January 1 - December 31) |
151,782 | |||
Thereafter |
371,934 | |||
| $ | 533,264 | |||