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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, 2000
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 000-28167
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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1921377
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
510 L STREET, SUITE 500 99501
ANCHORAGE, ALASKA (Zip Code)
(Address of principal executive offices)
(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
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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 (Section 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 2001 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, 2000
PAGE
PART I
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 26
ITEM 6. SELECTED FINANCIAL DATA 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 46
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT 47
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 50
SIGNATURES 52
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS F-1
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS
This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the United States.
Investors should also be aware that while Alaska Communications Systems
Holdings, Inc. ("ACS Holdings" or the "Company") does, at various times,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Holdings
agrees with any statement or report issued by an analyst irrespective of the
content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of ACS Holdings.
INTRODUCTION
ACS Holdings 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
(collectively the "Predecessor Entities"). 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 ACS of Fairbanks, Inc., ACS
of Alaska, Inc., and ACS of the Northland, Inc. ATU was the largest local
exchange carrier ("LEC") 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. These companies are now known as ACS of Anchorage,
Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.
The financial statements for the ACS Holdings represent the operations
of the following entities:
- Alaska Communications Systems Holdings, Inc.
- ACS of Alaska, Inc. ("ACSAK") (formerly Telephone Utilities of
Alaska, Inc.)
- ACS of the Northland, Inc. ("ACSN") (formerly Telephone Utilities
of the Northland, Inc.)
- ACS of Fairbanks, Inc. ("ACSF") (formerly PTI Communications of
Alaska, Inc.)
- ACS of Anchorage, Inc. ("ACSA") (formerly Alaska Communications
Systems, Inc.)
- ACS Wireless, Inc. ("ACSW") (formerly MACtel, Inc.)
- ACS Long Distance, Inc. ("ACSLD") (formerly ATU Long Distance,
Inc.)
- ACS Television, L.L.C. ("ACSTV") (formerly Alaskan Choice
Television, L.L.C.)
- ACS Internet, Inc. ("ACSI") (formerly PTINet, Inc.)
- Internet Alaska, Inc. ("IAI")
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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. ACS Holdings is the only telecommunications provider in
Alaska using its own network facilities to provide full service end-to-end
communications to its customers.
At various times, ACS Holdings evaluates opportunities for establishing
or acquiring other telecommunications businesses through acquisitions or
otherwise in Alaska and 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.
LOCAL TELEPHONE. With almost 330,000 access lines, representing
approximately 70% of the access lines in Alaska, ACS Holdings is the largest LEC
in Alaska and the 14th largest in the U.S. The 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 approximately 76,000 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.
INTERNET. ACS Holdings is the second largest provider of Internet access
services in Alaska with over 45,000 customers. ACS Holdings offers dedicated and
dial-up Internet access and digital subscriber line, or DSL, Internet access to
its customers.
INTEREXCHANGE NETWORK AND OTHER
Wireless cable television. Long-distance. ACS Holdings provides long
distance and other interexchange services to over 57,000 customers in Alaska.
ACS Holdings has migrated long distance traffic on main routes from leased
circuits onto its own network infrastructure.
Wireless cable television. ACS Holdings provides wireless cable
television services in the Fairbanks and Anchorage service areas. ACS Holdings
is evaluating opportunities to expand its offering of wireless cable television
services.
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
and competition continues to enter the market, the ability to offer an
integrated package of communications products will provide a distinct
competitive advantage, as well as increase customer loyalty, and thereby
decrease customer turnover. The Company complements its local telephone services
by actively marketing its cellular, Internet, and interexchange network and
other service offerings.
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Profit or loss and total assets for each of the Company's segments is
disclosed in Note 13 "Business Segments" of the Alaska Communications Systems
Holdings, Inc. Consolidated Financial Statements. The following table sets forth
the components of ACS Holdings' consolidated revenues for the year ended
December 31, 2000 and pro forma combined revenues for the years ended December
31, 1999 and 1998 (dollars in millions):
REVENUE FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998
CONSOLIDATED COMBINED COMBINED
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Revenue by Source:
Local network service $ 92.4 29.5% $ 94.5 31.5% $ 93.1 33.1%
Network access 105.2 33.6 105.3 35.1 98.6 35.0
Directory advertising 32.0 10.2 27.9 9.3 26.5 9.4
Deregulated and other revenue 21.8 7.0 21.2 7.1 19.6 7.0
------ ------ ------ ------ ------ ------
Local telephone 251.4 80.3 248.9 83.0 237.8 84.4
Cellular 39.5 12.6 36.1 12.0 31.8 11.3
Internet 9.2 2.9 4.9 1.6 5.2 1.8
Interexchange network and other 12.9 4.1 10.0 3.3 6.8 2.4
------ ------ ------ ------ ------ ------
Total $313.0 100.0% $299.9 100.0% $281.6 100.0%
====== ====== ====== ====== ====== ======
LOCAL TELEPHONE
The Company provides local telephone service through its four LECs.
Local telephone revenue consist of local network service, network access,
directory advertising, and deregulated and other revenue, each of which is
described below.
Local Network Service
Basic 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 on a retail basis 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 as is customary in the
industry. 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 and recurring charges for enhanced features such as call waiting
and caller ID.
At December 31, 2000, approximately 56% of ACS Holdings' retail access
lines served residential customers, while 44% 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 compared to the
national average for urban areas of $13.84. Monthly charges for business
customers range from $17.65 to $26.05 in ACS Holdings' service areas compared to
the national average for urban areas of $34.31.
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The table below sets forth the annual growth in access lines for ACS
Holdings and its Predecessor Entities from December 31, 1996 to December 31,
2000. The number of access lines shown for 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 represents all revenue producing access lines
connected to both retail and wholesale customers.
AS OF DECEMBER 31,
---------------------------------------------------------- --------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Retail access lines 272,936 281,726 266,704 275,549 237,721
Wholesale access lines 17,303 15,680 13,010 5,106 --
Unbundled network elements 39,221 28,202 20,680 2,700 --
-------- -------- -------- -------- --------
Total Local Telephone Access Lines 329,460 325,608 300,394 283,355 237,721
Percentage Growth 1.2% 8.4% 6.0% 19.2% 5.4%
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.
Management believes that future access line growth is dependent on among
other things, the economic outlook in Alaska and the United States, the impact
of technology on line demand and population growth in the Company's serving
areas.
Competitive Local Network Service. The Company also provides
interconnection through wholesale access to its basic local service and through
leasing unbundled network elements ("UNEs") to its competitors as required by
the Telecommunications Act of 1996 (the "1996 Act"). Revenues for these services
are included in local network service revenues. The Company currently provides
56,524 lines to competitors in the Anchorage service area on either a wholesale
or UNE basis. UNE rates in Anchorage are currently $13.85, which, in the opinion
of management, is below the Company's forward looking and embedded cost. The RCA
has lifted the Company's rural exemption for the Fairbanks and Juneau serving
areas and awarded interconnection rates to a competitor on a UNE basis of $19.19
and $16.71, respectively, which the Company also believes to be below its cost.
As of March 8, 2001, no facilities have been provided to competitors on a
wholesale or UNE basis in Fairbanks or Juneau. See "Business -- Regulation" for
further discussion of regulatory matters including interconnection under the
1996 Act.
While there is some seasonality, 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. The
Company also receives universal service revenue, which it includes in its
reported network access revenue. These components of network access revenue are
described below.
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Intrastate Access Charges. ACS Holdings generates intrastate access
revenue when an intrastate long distance call that involves an ACS Holdings LEC
and 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. The company also provides billing and
collection ("B&C") services for interexchange carriers through negotiated B&C
agreements for certain types of toll calls placed by the Company's local
customers. ACS Holdings' LECs in competitive areas are under their own
stand-alone tariffs for intrastate access. In non-competitive areas, ACS
Holdings' LECs participate in a statewide tariff and access charge pooling
arrangement that is administered by the Alaska Exchange Carriers Association
("AECA"). 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 an Alaskan
local calling area served by an ACS Holdings' LEC and is terminated in a local
calling area in another state, and vice versa. The Company bills interstate
access charges in a manner similar to intrastate access charges. However,
interstate access charges are regulated by the Federal Communications Commission
("FCC") rather than the RCA. ACS Holdings' LECs participate in a nationwide
tariff and access charge pooling arrangement that is administered by the
National Exchange Carrier Association ("NECA") for all ACS Holdings LECs except
ACSA. ACSA participates in the NECA common line tariff, but has its own
interstate access tariff for traffic sensitive and special access services.
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 1996 Act
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, in conjunction with a
federal-state joint board composed of FCC and state commission members, has been
working since passage of the 1996 Act 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 effective on January 1, 2000. New rules for rural telephone companies,
applicable to all ACS Holdings LEC operations except ACSA, have been proposed to
the FCC by the Joint Board. If these rules are adopted in 2001, they are
unlikely to have a material impact on ACS Holdings' revenue.
Operating results for network access services are not materially
impacted by seasonal factors.
Directory Advertising
Directory advertising revenues are derived by ACS Holdings principally
from yellow pages advertising in the local telephone books of each of the
Company's local exchange service areas. The Company provides this service under
a contractual arrangement with a directory publishing company. Directory
advertising is billed in conjunction with local telephone service. ACS Holdings
competes for directory advertising services in substantially all of its service
areas.
Deregulated and Other Revenue
Deregulated and other revenues consist of B&C contracts, space and power
rents, pay telephone service, customer premise equipment sales, and other
miscellaneous revenues generated by the Company's LECs. ACS Holdings seeks to
capitalize on its local presence and network infrastructure by offering these
additional services to customers and interexchange carriers.
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CELLULAR
ACS Holdings' cellular business is currently managed separately from its
LEC business and is subject to a different regulatory framework and cost
structure. Cellular services are provided statewide under the ACS Wireless and
MACtel brand names. The primary sources of cellular revenue include subscriber
access charges, airtime usage, toll charges, connection fees, roaming revenues,
and enhanced features, such as caller ID and call waiting. A subscriber may
purchase services separately or may purchase rate plans that package these
services in different ways to fit different calling patterns and desired
features.
The table below sets forth the annual growth in the number of cellular
subscribers served and total covered population for ACS Holdings and its
Predecessor Entities from December 31, 1996 to December 31, 2000.
AS OF DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Estimated covered population 462,057 460,802 460,162 453,361 353,674
Ending subscribers 75,933 73,068 66,572 55,131 39,329
Ending penetration 16.4% 15.9% 14.5% 12.2% 11.1%
Although ACS Holdings has achieved cellular penetration rates of 17% in
Anchorage and Fairbanks, and 21% 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
Juneau. Management also believes that the market for cellular services will
continue to grow with the expansion of 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.
Cellular revenue declines in the winter months and increases in the
summer months due to Alaska's northern latitude and the wide swing in available
daylight. However, operating results for cellular services are not materially
impacted by seasonal factors.
INTERNET
ACS Holdings provides Internet access services to approximately 45,000
customers at December 31, 2000. In order to offer Internet access, the Company
provides local dial-up telephone numbers for its customers. ACS Holdings also
offers high speed DSL. These local dial-up numbers and dedicated DSL connections
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.
Operating results for Internet access services are not materially
impacted by seasonal factors.
INTEREXCHANGE NETWORK 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 57,000 long distance customers and less than
5% of total long distance revenues in Alaska. 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'
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long distance operations have generated significant operating losses. The
Company is evaluating its long distance strategy.
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 support
other aspects of the Company's business 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 49 states. Subsequently, the Company entered
into an amendment to the purchase agreement with GCI, whereby, among other
things, ACS Holdings agreed to purchase additional capacity for $19.5 million.
The Company fulfilled this commitment to purchase additional capacity on January
12, 2001.
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 LEC to the long distance affiliate and
discrimination against other long distance providers in favor of a LEC'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 ACSAK, ACSN and ACSF 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 LEC and from using the LEC's assets as
collateral for its own indebtedness.
As a result of the introduction of competition in ACSA'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 ACSA's
service areas in 1998. The status of this bundling restriction for ACSA is
unclear based on recent RCA actions.
Operating results for long distance services are not materially impacted
by seasonal factors.
Wireless Cable Television. ACS Holdings owns ACSTV, a wireless cable
television provider. ACSTV provides wireless cable television services over
assigned UHF frequencies to approximately 2,300 customers in the Company's
Anchorage and Fairbanks service areas. ACS Holdings is evaluating opportunities
to expand its offering of wireless cable television services.
NETWORK FACILITIES
As of December 31, 2000, ACS Holdings owned 74 exchanges serving
approximately 330,000 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 installed, 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, digital subscriber lines and, in some
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communities, integrated service digital network access. As the
telecommunications industry experiences significant changes in technology,
customer demand and competition, the Company intends to introduce additional
enhancements.
Network operations and monitoring are provided 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 extended business hours to efficiently handle customer inquiries and
orders for service.
ACS Holdings' cellular operations consist of three switching centers, 89
cell sites and four repeaters covering substantially all major population
centers and highway corridors in Alaska. The Company uses Ericsson switches and
radios for its cellular operations. The Company converted substantially of all
of its switching and cell site equipment to digital service in 2000. The
Company's switching and cell site infrastructure is linked by fiber and digital
microwave. ACS Holdings' network operating control center located in Anchorage
also 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
and other vendors 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. ACS Holdings believes the
implementation of an ATM/IP network will enhance its capability to provide a
complete suite of telecommunications and data services and achieve significant
operating efficiencies. The Company completed the first phase of the conversion
in 1999, which resulted in the migration of its network traffic to its fiber
optic transport facilities acquired in June 1999. The Company completed the
second phase in 2000, which involved the conversion of its transport connections
between Anchorage and each of Fairbanks, Kenai, Juneau and Seattle from TDMA to
ATM/IP. ACS Holdings expects to complete the implementation of its ATM/IP
network by year-end 2002. Planned network 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 ATM/IP network 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.
CUSTOMERS
ACS Holdings has three basic types of customers for the services of its
LECs:
- business and residential customers located in their local service
areas that pay for local phone service,
- interexchange carriers that pay for access to long distance
calling customers located within the Company's local service
areas and
- competitive local exchange carriers ("CLECs") that pay for
wholesale access to the Company's network in order to provide
competitive local service on either a wholesale or UNE basis as
prescribed under the 1996 Act.
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Approximately 56% of ACS Holdings' retail access lines served
residential customers, while 44% served business customers.
ACS Holdings also has approximately 76,000 cellular subscribers, 45,000
Internet subscribers and 57,000 long-distance subscribers consisting
substantially of retail residential and business consumers.
No single ACS Holdings customer represented more than 10% of its total
2000 consolidated revenue.
COMPETITION
Local Telephone Service
Incumbent local exchange carriers ("ILECs") 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 ILEC at wholesale rates and
resell these services to their customers and
- competition from UNE interconnection, that is, providers who
lease UNEs from the ILEC.
The geographic characteristics of rural areas presently make the
entrance of most facilities-based competitors uneconomical because of the
significant capital investment required and the limited market size. Therefore
ACS Holdings believes competition is likely to come from resale interconnection
or UNE 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 UNE interconnection with ACSA
facilities, while AT&T Alascom competes primarily by reselling ACSA'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 ACSA's service as part of a package of local and
long distance services. As a result, ACSA now has approximately 37% competitive
market penetration as of December 31, 2000. The Company expects GCI and AT&T
Alascom to continue to compete for local telephone business.
As "rural telephone companies" under the 1996 Act, ACS Holdings' rural
LECs have historically been exempt from the obligation to lease their facilities
or resell their services on a wholesale discount basis to CLECs seeking
interconnection. However, on June 30, 1999 the APUC ordered these exemptions
terminated for certain rural service areas of ACS Holdings, 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' rural LECs entered into interconnection
arbitration with GCI. This arbitration resulted in arbitration agreements for
certain rural service areas of ACS Holdings. See "Business - Regulation" for
further discussion.
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 also 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 LEC services, the Company anticipates that existing and
emerging wireless technologies may increasingly compete with LEC services. For
example, AT&T has recently introduced its fixed wireless product to the
Anchorage market. At this time it is not possible to predict the impact of this
product on the Company's share of the local market. 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 wireline services.
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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. Competition is based on
price, quality, network coverage, packaging features 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.
ACS Holdings currently competes with at least one other wireless provider in
each of its cellular service areas, including AT&T Wireless Services, Alaska
DigiTel, and Dobson Communications. At least one new wireless competitor is
expected to enter the Alaska market in 2001. The Company believes that the
unique and vast terrain and the high cost of PCS system buildout make entrance
into markets outside Anchorage uneconomical at this time.
As the market for simple cellular voice services approaches maturity,
providers are experiencing downward pressure on price. ACS Holdings is
positioning itself to offset this impact by bringing new higher margin services
to market. By developing products for targeted market segments, the Company is
leveraging the advantage in market share and geographical coverage to attract
new customers and increase monthly revenues from existing customers. New
products will be coming to market in 2001 that will address the specific needs
of the oil and construction industries. New consumer offerings will also come to
market in 2001. These new services are expected to provide a means for
differentiation, produce additional revenues and increase margins.
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. The Company currently offers long distance service
to customers located throughout the state of Alaska; however, it is focused
primarily on the more populous communities in the state. AT&T Alascom and GCI
are currently the two major competing long distance providers in Alaska. The
Company currently has less than 5% of total long distance revenues in Alaska.
The Company provides traditional "1+" direct distance dialing (DDD), toll-free
services, calling cards and private line services for data and voice
applications. In late 2000, The Company introduced its flat-rate long distance
"Infinite Minutes" program, which helped to increase its market share in the
residential long distance segment over previous periods. ACS Holdings expects to
continue offering innovative products of this nature in the future.
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.
SALES AND MARKETING
ACS Holdings and its Predecessor Entities 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. ACS Holdings has consolidated its product and service
offerings under the "Alaska Communications Systems" and "ACS" brands, subject to
regulatory and strategic business considerations.
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 and
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- 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.
ACS Holdings has begun, to a limited extent, within regulatory bounds,
marketing local telephone services in attractively priced, packaged service
offerings with cellular, long distance and Internet services. 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 in 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, training, and incentive
compensation programs for call center employees.
EMPLOYEES
ACS Holdings considers employee relations to be good. As of December 31,
2000, the Company employed a total of 1,163 regular full-time employees, 857 of
whom were represented by the International Brotherhood of Electrical Workers,
Local 1547 ("IBEW"). On November 2, 1999, the IBEW membership for ACS Holdings
ratified the terms of the new master collective bargaining agreement that
governs the terms and conditions of employment for all IBEW represented
employees working for ACS Holdings in the State of Alaska. The master agreement
embraces a labor-management relationship that is founded on trust, cooperation
and shared goals. The November 1999 agreement, which expires December 31, 2006,
provides for wage increases up to 4% in specified years based on the annual
increases in the U.S. Department of Labor CPI-U, the consumer price index for
Anchorage. The last wage increase under the agreement was implemented in January
2000 and the next scheduled wage review is in July 2001. The master agreement
also provides escalation in contributions of up to 4% annually for the health
and welfare contributions that are made by ACS Holdings on behalf of the
represented employee group. There have been no work stoppages or strikes, and
none are anticipated.
ACS Holdings enjoys good relations with the employee group that is not
represented by the IBEW as well. Non-represented employees qualify for wage
increases based on individual and company performance. Additionally, employees
represented by ACS Holdings receive health and welfare packages that are
competitive in the marketplace in which ACS Holdings competes.
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REGULATION
OVERVIEW
The Company's local telephone operating subsidiaries, ACSA, ACSF, ACSAK,
and ACSN, are each "telecommunications carriers" and ILECs under the
Communications Act of 1934 (the "Communications Act"), which was amended by the
1996 Act, and are subject to FCC jurisdiction. ACSLD, ACS Holdings' long
distance subsidiary, is also subject to both the FCC and RCA's regulatory
jurisdiction. ACS Holdings' cellular and PCS 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 the RCA. The RCA succeeded
to the regulatory responsibilities of the APUC when it ceased to exist on June
30, 1999.
FEDERAL REGULATION
Under the federal regulatory scheme, ILECs are required to comply with
the Communications Act and the applicable rules and regulations of the FCC. In
substantially overhauling the Communications Act, the 1996 Act was intended to,
among other things, eliminate unproductive regulatory burdens and promote
competition. Despite this, telecommunications carriers are still subject to
extensive ongoing regulatory requirements. For instance, 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 frequency licenses. The FCC requires ILECs
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 LECs are "ILECs" within the meaning of the 1996 Act. As such, they are
subject to various requirements under that Act, including specific
interconnection duties such as providing requesting telecommunications carriers
with UNEs and wholesale discounted resale of end user services.
As of 2001, long distance companies will be precluded from filing
tariffs for interstate domestic services. Federal tariffing is being replaced
with Internet web site posting of offers, terms and prices. ACSLD was fully
detariffed prior to the end of 2000.
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 1996 Act, as well as for regulating intrastate access and rates for local
and other services of local telephone companies. After passage of the 1996 Act,
the APUC adopted a plan to address competition issues across Alaska. The APUC
established multiple dockets to investigate different competition-related
issues, including revising local and long distance market structures, reforming
its intrastate access charge system and establishing a state universal service
fund. In addition to its preliminary actions to mandate access charge depooling
for ILECs operating in competitive markets, the RCA made operational the new
Alaska Universal Service Fund ("AUSF"). In a subsequent rulemaking, the RCA
revised its eligibility standards for companies receiving high-cost switching
support from the AUSF. These new rules resulted in a loss of support to ACS
Holdings' rural affiliates. Rather than seeking interim local relief for this
cost recovery shift, ACS Holdings has opted to include consideration of this
issue in the more comprehensive rate proceedings described below.
In connection with regulatory approval of ACS Holdings' acquisitions of
CenturyTel's Alaska Properties and ATU in 1999, the APUC imposed several
conditions on its operating companies. Among those conditions was a requirement
that ACSA, ACSF, ACSAK, and ACSN each file revenue requirement, cost of service
and rate design studies no later than July 2001. All of these companies except
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ACSF were also required to file updated depreciation analyses concurrently with
the rate case filings. ACS Holdings is actively involved in the production of
these filings and anticipates that a comprehensive schedule will be established
after a pre-hearing conference.
As previously noted, restrictions were placed on the ability of ACS
Holdings' rural LECs to bundle service offerings with ACSLD. In October 2000,
ACSLD offered its innovative, flat-rated long distance plan called "Infinite
Minutes." Initially, Infinite Minutes was offered in the interstate jurisdiction
and included an eligibility requirement that customers subscribe to ACS
Holdings' local service (or Internet service where ACS Holdings' local service
was not otherwise available). After introducing the interstate plan, ACS
Holdings' filed a similar instate plan with the RCA. Although approved on an
interim basis, the RCA imposed several conditions on t Infinite Minutes. Among
these was the conclusion that requiring LEC subscription as an eligibility
criterion violated ACSLD's certificate restrictions regarding "bundled offers."
The RCA ordered ACSLD to "de-link" the instate Infinite Minutes offer from any
LEC bundling requirement for all markets, including Anchorage. The RCA also
ordered ACSLD to offer instate Infinite Minutes to all customers on a statewide
basis and to do so via a "1-800" platform in those locations where ACSLD did not
already operate. Finally, the RCA directed ACSLD to order equal access
interconnection with its competitor, GCI, in Anchorage, to facilitate access to
Infinite Minutes by GCI's LEC customers. After considerable review of the
changing economic profile of this offer as imposed by the RCA, ACSLD has
determined to discontinue its instate Infinite Minutes plan and has made
appropriate filings with the RCA to do so.
Having secured both LEC certification and interconnections agreements to
serve the local exchange markets in Juneau and Fairbanks, Alaska, GCI's CLEC
operation has filed for "Eligible Telecommunications Carrier" ("ETC") status
with the RCA. ETC designation is an essential first step in securing "portable"
or shared universal service support. ACS Holdings' operating companies are
currently designated as ETCs in the same two markets for which GCI seeks similar
designation. Although it is possible to have multiple ETCs in a single market,
GCI's request is unusual in that it asks the RCA to act in advance of all
eligibility requirements having been met. ACS Holdings and the Alaska Telephone
Association are expected to file comments with the RCA.
The RCA also commenced a rulemaking geared towards new regulations for
the "deaveraging" of LEC study areas for purposes of computing universal service
support. The regulatory objectives include creating competitive incentives in
the lower cost components of the study area without placing undue pressure on
support mechanisms for the higher cost segments. Although currently inactive,
this rulemaking is of particular interest to ACS Holdings and is likely to be
scheduled for further proceedings in 2001 along with an anticipated new
rulemaking targeted at further access charge reform.
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, the operating subsidiary companies of ACS
Holdings are afforded the opportunity to set maximum rates at a level that
allows the Company to recover the reasonable costs incurred in the provision of
regulated telecommunications services and to earn a reasonable rate of return on
the investment required to provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services
and enhanced service offerings,
- access charges to interexchange carriers for originating and
terminating interstate and intrastate interexchange calls,
- interconnection charges, wholesale service charges, UNE 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 AUSF.
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.
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In conjunction with the recovery of costs and establishment of rates for
regulated services, a LEC 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 LEC must
allocate those costs between state and federal jurisdictions and among its
various interstate and intrastate services. This process is complicated by the
necessity to allocate specific pieces of plant and equipment to a particular
service because a LEC's plant and equipment are utilized for different
jurisdictional 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 by
reallocating costs between the federal and state jurisdictions.
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 LEC 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. A number of new initiatives under review at the FCC have
the potential to shift substantial portions of the interexchange contribution
directly to the end user. Both the Coalition for Affordable Local and Long
distance Services ("CALLS") and the proposed Multi-Association Group ("MAG")
plans include an appreciable increase in the subscriber line charge paid by both
residential and business customers. The CALLS plan, affecting companies
servicing predominantly large, urban markets, has already been given FCC
approval. The similarly structured MAG plan, which may, if adopted, have direct
application to markets in Alaska, is under review by the FCC at this time.
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 LECs would remain allocated
to the intrastate jurisdiction placing substantial pressure on such carriers to
charge higher rates for intrastate services. Accordingly, the FCC provides for
additional interstate cost 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. See "Promotion of Universal Service," below. Rules for rural telephone
companies are still being developed by the FCC and have not been adopted as of
March 8, 2001.
INTERSTATE ACCESS RATES
Interstate access rates are developed on the basis of a LEC'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 LECs. Accordingly, the FCC established
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 LECs 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%.
On August 24, 2000, GCI, filed a formal complaint with the FCC under
various provisions of the Communications Act of 1934 (as amended), alleging that
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ACSA (formerly known as ATU) exceeded their federally authorized rates of
return related to the 1997-1998 monitoring period. The principal issue raised in
the complaint focuses on the proper jurisdictional recognition (federal versus
state) of minutes of use associated with Internet service provider traffic. On
January 24, 2001, the FCC issued an order finding for GCI on the matter and
ordering the Company to pay GCI approximately $2.7 million plus interest. The
Company has filed an appeal in the United States Court of Appeals for the
District of Columbia Circuit and will seek a stay concerning its obligation to
pay GCI during the pendency of the appeal. The Company believes it has adhered
to applicable legal requirements and is actively defending its position, but
cannot predict the ultimate outcome of the proceedings. Amounts potentially
refundable under the FCC's order are fully reserved at December 31, 2000.
Individual participating LECs 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 LEC filed its own tariff and subsequently suffered the
loss of major customers that utilize interstate access service, the LEC 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 LECs participate in both the
traffic sensitive and non-traffic sensitive NECA pools. ACSA 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 ILECs who
are subject to rate-of-return, rather than price cap, regulation. All of the
Company's LEC subsidiaries are rate-of-return regulated, and thus the outcome of
this proceeding could directly affect their earning prospects. The FCC has not
yet taken final action in this proceeding. In October, 2000, the MAG composed of
three trade associations representing small rural telephone companies, submitted
a proposal to the FCC that would, if adopted: (1) preserve the current 11.25
percent authorized rate of return for LECs subject to rate-of-return regulation;
(2) permit these carriers to elect "incentive" regulation that would allow them
to earn in excess of the authorized rate of return under some circumstances; and
(3) decrease overall interstate access charge rate levels, while increasing
universal service support payments. The FCC sought comment on the MAG Plan in
January 2001. The outcome of this proceeding and its ultimate impact on the
Company cannot be predicted at this time.
On October 26, 2000, the FCC granted the petition of a subsidiary of ACS
Holdings, ACSA (previously filed under the name of ATU), seeking a waiver of
certain federal access charge rules. The effect of the waiver is to permit ACSA
pricing flexibility through the ability to offer term and volume discount
pricing in connection with its switched access services. The FCC waiver was
granted, in part, upon findings concerning the level of competition in the
Anchorage marketplace, as demonstrated in the record of the proceedings.
END USER LOCAL 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 ACSAK and ACSN, respectively. These rates were ordered in 1989.
ACSA's last authorized rate of return was 8.97% for retail local exchange and
10.85% for intrastate access, ordered in 1991. ACSF 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 a predecessor company, the APUC required that a general rate
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proceeding be initiated for ACSF by June 1999. This proceeding has been delayed
and combined with a requirement that all ACS Holdings' affiliate LECs file
revenue requirement analyses, cost of service studies and proposed rate designs
with the RCA no later than July 1, 2001.
The APUC adopted regulations to govern competition in the local exchange
marketplace. The transitional regulations provide for, among other things:
- initial classification of all ILECs, including the Company's rural
properties and ACSA, 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 LECs in areas with local competition.
INTRASTATE ACCESS RATES
In the past, the APUC had required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each LEC charges interexchange carrier fees for originating or
terminating long distance calls on its network based on the statewide average
cost of access rather than on its individual costs of access. Access revenues
are collected in a pool administered by the AECA and then redistributed to the
LECs based on their actual costs. With the passage of the 1996 Act and increased
competition in the local exchange market, the APUC began a process of reforming
intrastate access charges.
Under recent revisions to the Alaska access system, LECs not yet subject
to local competition continue to participate in the AECA pool. Participants in
this pool recover their costs based on the embedded cost of services most
recently authorized by the RCA. In the event of competitive entry into a
dominant incumbent carrier's service area, these revisions also require the
dominant LEC to exit the pool and initiate separate access charges. Dominant
LECs subjected to competitive entry have the right to propose that their access
charges be based on market rates. The RCA is currently advancing a proceeding to
examine whether changes to the current annual process for establishing access
charges are warranted. The RCA is also expected to issue a new access charge
reform Notice of Inquiry in early 2001 which will target further substantive
changes in access charge derivation.
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 shifted the support requirement for high
switching costs to a state universal service fund. The RCA has adopted new
regulations which limit this switching support to local companies with access
lines of 20,000 or less. This change has reduced the amount of AUSF, which the
Company's rural LECs receive and the resulting cost recovery shift will be
addressed in the local service rate cases to be filed in 2001.
The AUSF 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 AUSF only subsidizes a portion of higher
cost carriers' switching costs, and the costs of lifeline service, which
supports rates of low income customers. It is expected that application of the
fund to support certain public interest payphones will occur in 2001. It is
unclear the degree to which the AUSF might be used to absorb cost shifts that
occur if federal universal service support is scaled back in the future.
THE TELECOMMUNICATIONS ACT OF 1996
Among other things, the 1996 Act was enacted to enhance competition
without jeopardizing the availability of nationwide universal service at
affordable rates. These two objectives have resulted in a complex set of rules
intended to promote competitive entry in the provision of local telephone
services except where entry would adversely affect the provision of universal
service or the public interest.
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PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL EXEMPTIONS
The 1996 Act made competitive entry into the local telephone business
more attractive to other carriers by removing barriers to competition. In order
to promote competition, the 1996 Act established new interconnection rules
generally requiring LECs 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, LECs 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 1996 Act.
Under the 1996 Act, all LECs, including both ILECs 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 1996 Act also requires ILECs 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 UNEs, such as
local loops, switches and transport facilities, at
nondiscriminatory rates and on nondiscriminatory terms and
conditions, unless such carriers are exempt as rural telephone
companies,
- offer resale interconnection at wholesale rates,
- provide reasonable notice of changes in the information necessary
for transmission and routing of services over the ILEC's
facilities or in the information necessary for interoperability
and
- provide for the physical collocation of equipment necessary for
interconnection or access to UNEs at the premises of the ILEC, at
rates, terms and conditions that are just, reasonable and
nondiscriminatory.
In order to implement interconnection requirements, LECs generally enter
into negotiated interconnection arrangements with competing carriers. LECs may
also offer interconnection tariffs, available to all competitors.
Competitors are required to compensate a LEC 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 ILEC, excluding the portion of costs avoided by the
ILEC. In the case of UNE interconnection, rates are based on costing
methodologies that employ a forward-looking economic cost pricing methodology
known as Total Element Long Run Incremental Cost ("TELRIC").
On January 25, 1999, in AT&T Corp. et al. v. Iowa Utilities Board et
al. 525 U.S. 366 (1999), the U.S. Supreme Court affirmed the FCC's authority to
develop national pricing guidelines, but the Supreme Court did not evaluate the
substance of these rules. Some ILECs have argued that the FCC improperly placed
upon them the burden of proof in rural exemption proceedings and improperly
defined the meaning of the term "not unduly economically burdensome" as used in
the 1996 Act. In addition, some ILECs argued that the FCC's forward-looking
TELRIC pricing methodology does not allow adequate compensation for the
provision of UNEs.
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On July 18, 2000, in Iowa Utilities Board, et al. v. Federal
Communications Commission 219 F.3d 744 (8th Cir. 2000) ("Iowa II"), the Eighth
Circuit Court of Appeals ordered some of these FCC rules to be vacated on the
grounds they were inconsistent with the 1996 Act. The Eighth Circuit said the
FCC's rural exemption rules were contrary to the plain language of the 1996 Act.
As to the FCC's TELRIC pricing methodology, the Eighth Circuit upheld the use of
a forward-looking economic model but vacated the FCC's rule requiring the
pricing model to assume a hypothetical network based upon the most efficient
technology currently available and the lowest cost network configuration.
On September 22, 2000, the Eighth Circuit stayed that portion of its
mandate which vacated the FCC hypothetical network rule (set out at 47 C.F.R.
Section 51.505(b)(1)). This suspension was ordered by the Court to permit
parties to the proceeding to seek review of its Iowa II decision by the U.S.
Supreme Court. On January 22, 2001, the U.S. Supreme Court granted certiorari to
review the Eighth Circuit's decision requiring the FCC to vacate its
hypothetical network rule. The Eighth Circuit did not suspend other portions of
its decision, including those portions vacating FCC rules addressing the "rural
exemption" provisions of 47 U.S.C. Section 251(f)(1), and the U.S. Supreme Court
declined to review the Eighth Circuit's rural exemption decision.
Subsequent to staying its mandate concerning the hypothetical network
rule, on January 8, 2001, the Eighth Circuit, in Southwestern Bell v. Missouri
Public Service Commission, 2001 W.L. 13289 (8th Cir. 2001), vacated an
interconnection agreement approved by the Missouri PSC on the grounds that it
relied on the hypothetical network rule that the Eighth Circuit had previously
found invalid. The Eighth Circuit, in that case, specifically held that despite
staying its mandate in Iowa II, all interconnection agreements must be based on
use of a pricing methodology that is consistent with the court's ruling in Iowa
II.
The 1996 Act also specifies that resale and UNE 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.
In January 1997, ACSA's predecessor ATU entered into an interconnection
agreement with GCI, which provides for resale and UNE interconnection, and with
AT&T Alascom, which provides for resale interconnection. Neither interconnection
agreement contained a defined term or a termination date. Near the end of 1999,
the Company notified GCI and AT&T of its view that the interconnection
agreements pertaining to ACSA had reached the end of a reasonable period of
availability. In January of 2000, the Company filed a motion with the RCA to
reopen the original GCI arbitration proceedings involving ACSA for the purpose
of establishing of an appropriate forward looking cost model and the re-pricing
various interconnection services and UNEs in the Anchorage market. The RCA
subsequently granted the essence of the Company's motion and has reopened the
docket for such purposes. No action was taken in 2000, but the Company expects
the RCA to hold hearings and consider the matter in 2001.
Certain of ACS Holdings' local operating utilities, ACSAK, ACSN, and
ACSF, are defined as "rural telephone companies" under the 1996 Act. As rural
telephone companies, they were granted rural exemptions from the requirements
relating to both resale interconnection and UNE interconnection. The rural
exemptions were to continue until the APUC determined that interconnection was
technically feasible, not unduly economically burdensome and consistent with the
1996 Act's universal service provisions.
On June 30, 1999, the APUC issued an order terminating the rural
exemptions of ACSN, ACSAK and ACSF. On October 11, 1999, the RCA affirmed the
APUC's order. As a result, these rural LECs are no longer exempt from the 1996
Act's interconnection requirements applicable to ILECs, and the Company's
competitors immediately requested interconnection agreements.
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 LECs proposed tariffed terms and conditions,
including pricing, for resale of their services at wholesale discounts, for
certain UNEs, and for the interconnection of their facilities and those of CLECs
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
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LECs to operate subject to cometitive 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 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 Alaska 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 Alaska Superior Court. The issues
in the case were fully briefed during the year 2000. Recently, the court denied
the Company's request to stay the RCA's order terminating the rural exemptions.
Although ACS Holdings believes that the appeals are well founded, it cannot
predict the timing and outcome of this litigation. The Company believes that the
RCA's order is inconsistent with the pronouncements of the Eighth Circuit and
that tariffing terms and conditions for interconnection will promote more open
competitive markets and thus eventually promote regulatory flexibility and/or
reduced regulation.
Subsequent to terminating the rural exemptions for the Fairbanks and
Juneau-Douglas markets, the Company entered into unsuccessful negotiations for
interconnection agreements with GCI. Interconnection issues, including the
pricing for UNEs, were subject to a RCA arbitration during the year 2000. On
September 5, 2000, the RCA issued orders largely ratifying the findings of the
arbiter in the Fairbanks and Juneau interconnection arbitration proceedings
involving the Company and GCI. On September 25, 2000, the Company filed
protective appeals in the State Superior Court and in the Federal District Court
for the District of Alaska, alleging various errors in the RCA orders. On
October 5, 2000, the RCA issued final orders affirming the interconnection
agreements arbitrated in these proceedings. On October 20, 2000, the Company
filed a petition for reconsideration with the RCA, seeking Commission review and
redetermination of specific elements in its final order. The RCA did not act on
this petition. Although ACS Holdings believes that the appeals are well founded,
it cannot predict the timing and outcome of this litigation. The Company has and
will continue to vigorously defend its proposed cost models and interconnection
charges but it cannot be certain that it will be able to charge rates that
provide fair compensation for providing UNEs and/or schedule discounted resale
services.
In 1999, the Company also received requests for interconnection from
Alaska Fiber Star, L.L.C. In 2000, the Company executed interconnection
agreements with Alaska Fiber Star, L.L.C. with terms tied to the Company's
interconnection agreements with GCI. The Company expects other interconnection
requests in the future.
For 2000, ACS Holdings' LECs benefiting from rural exemptions accounted
for 40.2% of its consolidated operating revenues and 44.4% of its consolidated
operating income. The loss of the rural exemptions, absent compensating
measures, such as rate increases or market structure reforms, including the
replacement of implicit subsidies by explicit support mechanisms, rate
deaveraging, or regulatory flexibility, could adversely affect the Company's
operating results.
PROMOTION OF UNIVERSAL SERVICE
While the 1996 Act promoted Congress' policy of ensuring that affordable
service is provided to consumers universally in rural, high-cost areas of the
country, the 1996 Act 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 CLECs 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 1996 Act, 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
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LECs, the 1996 Act provides that a state public utilities commission may
designate more than one eligible telecommunications carrier, in addition to the
ILEC, only after determining that the designation of an additional eligible
telecommunications carrier is consistent with the public interest. As a result,
an incumbent rural LEC 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. ACSAK, ACSN and ACSF are
currently the sole designated eligible telecommunications carriers in their
respective service areas, although GCI has requested that the RCA designate it
as an eligible telecommunications carrier in Fairbanks, Juneau, Eielson, and
Fort Wainwright, all of which are currently served by the Company's
subsidiaries. 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.
The FCC has adopted new universal service rules for non-rural LECs, such
as ACSA, effective January 1, 2000. These rules, like those previously in
effect, provide no federal universal service fund support to ACSA.
Rules for rural telephone companies are still being developed by the
FCC, in consultation with a Federal-State Joint Board on Universal Service
("Joint Board"). The RCA Chairman is a member of this Joint Board, and the
Company's remaining LEC subsidiaries are rural telephone companies as defined in
the 1996 Act. In September 1997, the Joint Board created a Rural Task Force
(RTF) to study universal service issues facing rural telephone companies. In
September 2000, the RTF issued a recommendation to the Joint Board that, if
adopted by the FCC, would largely preserve or increase existing universal
service support to rural carriers. The FCC has sought comment on the RTF Plan
and is expected to act on it in 2001.
Because the operating subsidiary companies of ACS Holdings provide
interstate and international services, they are required to contribute to the
federal Universal Service Fund a percentage of their revenue earned from their
interstate and international services. Although the Company's rural LECs receive
subsidies from the federal Universal Service Fund, they cannot be certain of
how, in the future, the Company's contributions to the fund will compare to the
subsidies they receive from the fund.
Separately, the FCC has conducted a rulemaking concerning ways to
promote basic and advanced services to unserved and underserved areas. In June
2000, the FCC determined that all carriers, including cellular and other
carriers, must first consult with the relevant state commission to determine
whether the state commission or the FCC may properly designate the carrier as an
eligible telecommunications carrier to receive federal universal service support
for services provided on non-tribal lands. The FCC has indicated that it will
act on carrier requests to be designated as an eligible telecommunications
carriers for non-tribal lands only if the carrier provides a statement from the
state commission or a court of competent jurisdiction that the state commission
lacks authority to do so.
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. On January 23, 2001,
the FCC initiated a proceeding to examine whether conditions in wireless markets
warrant elimination or modification these spectrum "cap" rules. Until this rule
is relaxed or eliminated, it will limit the amount of wireless spectrum the
Company can acquire in a particular market.
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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:
- 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 upheld by the
United States Court of Appeals for the District of Columbia Circuit. As a
result, all interstate interexchange carriers, including ACSLD, were required to
detariff contract-type interstate, interexchange services by January 31, 2001,
and must detariff interstate consumer long distance services by April 30, 2001.
These rules also require ACSLD to post the rates, terms, and conditions of its
service on its Internet web site, and engage in other public disclosure
activities. The FCC has also proposed rules that would require nondominant
international carriers to detariff international services. ACSLD is already in
compliance with these current FCC requirements.
FCC POLICY ON INTERNET SERVICES
The 1996 Act 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.
In June 2000, the United States Court of Appeals for the Ninth Circuit
held that AT&T's high-speed Internet access service, delivered using cable
television facilities, constituted both a "telecommunications" and an
"information" service. In response to this holding, in September 2000, the FCC
launched a proceeding to examine whether providers of high-speed Internet access
over such cable facilities should be required to provide "open access" to their
facilities to competing Internet service providers on a nondiscriminatory basis.
If the FCC implements such a requirement, the Company may be able to supplement
its own high-speed Internet access offerings by obtaining access to GCI's
high-speed Internet access cable lines for its own Internet service provider.
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OTHER REGULATORY PROCEEDINGS
In addition to the foregoing matters, 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 1996 Act placed statutory 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 the FCC's
rules implementing this provision of the 1996 Act were an
unconstitutional abridgment of the carrier's freedom of speech. In
June 2000, the United States Supreme Court denied a petition to
review the Tenth Circuit's decision. The FCC has not yet acted to
develop revised implementing regulations. Although the Company
continues to adhere to the statutory restrictions and the FCC's
former rules pending further legal developments, any further FCC
action to create new implementing rules may impose significant
additional 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. In response to
several petitions for reconsideration, in March 2000, the FCC largely
reaffirmed its rules.
- The FCC has 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. In August 2000, the
United States Court of Appeals for the District of Columbia Circuit
vacated portions of these FCC rules and remanded the matter to the
FCC for further consideration. The FCC has not yet taken action on
remand. The Company cannot predict its costs of complying with these
rules at this time.
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.
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 and television 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,
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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 in the future, particularly if
scientific studies conclusively determine that radio frequency emissions are
harmful.
ITEM 2. PROPERTIES
At December 31, 2000, ACS Holdings' telecommunications network includes
over 485 miles of fiber optic cable, over 170 switching facilities and a
statewide cellular network. In addition, the Company purchased fiber capacity in
May of 1999 and in January of 2001 for high-speed links within Alaska and for
termination of traffic in the lower 49 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 local telephone properties
consist of 168 switching facilities serving 74 exchanges. The Company owns most
of its administrative and maintenance facilities, customer service center,
central office and remote switching platforms and transport and distribution
network facilities. The Company's local telephone assets are located in Alaska.
The ACS Holdings leases its corporate headquarters located in Anchorage, Alaska.
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, right of ways or other
agreements.
Cellular. ACS Holdings has three cellular switches, 89 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.
Internet. ACS Holdings has point of presence facilities in over 25
communities serving the majority of Alaska's populated areas. These communities
are linked over both owned and leased facilities to the Internet at Seattle,
Washington.
Interexchange network and other. ACS Holdings is a facilities based
interexchange carrier. The Company has invested in fiber optic capacity through
an indefeasible right of use that provides bandwidth between the Company's
Anchorage, Fairbanks, and Juneau locations and Seattle, Washington. The Company
also leases transport facilities and has arrangements with other interexchange
carriers to terminate traffic in the lower 49 states.
Substantially all of the Company's 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 for further discussion.
ITEM 3. LEGAL PROCEEDINGS
The Company is 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 the legal proceedings involving regulatory matters are described
under "Business -- Regulation." In addition, the ALLTEL Publishing Corporation
initiated litigation alleging improper termination of certain directory
publishing contracts on February 25, 2000. Following various discovery
proceedings in August and September 2000, ALLTEL filed a second amended
complaint on October 10, 2000, alleging new facts in connection
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with its cause of action. Subsequently, in December 2000, the Company negotiated
an agreement with ALLTEL that released it from all claims, known or unknown, in
exchange for cash consideration.
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 2000.
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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 2000 and in 1999 for the period during which it was
publicly traded:
2000 QUARTERS HIGH LOW
------------- -------- --------
1st $16.7500 $12.0625
2nd $14.5000 $ 9.8750
3rd $10.8750 $ 5.4375
4th $ 9.0000 $ 4.6250
1999 QUARTERS HIGH LOW
------------- -------- --------
4th (from November 18 through December 31) $16.0000 $12.0000
The approximate number of holders of record of Common Stock of ACS Group
as of March 7, 2001 was 48. Management believes that actual holders exceed
1,500, including those held in the broker/dealers name on behalf of their
clients.
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' bank credit agreement 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 represents the consolidated results of ACS Holdings
from May 15, 1999 through December 31, 1999. Certain reclassifications
have been made to the 1999 combined operations to conform to the current
presentation of ACS Holdings' consolidated operations.
- "EBITDA" is net income before interest expense, taxes on income,
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. See Index to Financial Statements and
Schedules which appears on page F-1 hereof.
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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2000 and 1999
(dollars in thousands, except share data)
2000 1999
--------- ---------
OPERATING DATA:
Operating revenues:
Local telephone $ 251,424 $ 159,151
Cellular 39,490 24,836
Internet 9,170 2,853
Interexchange network and other 12,909 6,305
--------- ---------
Total operating revenues 312,993 193,145
Operating expenses:
Local telephone 144,876 106,266
Cellular 24,641 15,494
Internet 11,785 5,121
Interexchange network and other 21,207 9,671
Unusual charges 5,288 --
Depreciation and amortization 72,265 40,306
--------- ---------
Total operating expenses 280,062 176,858
--------- ---------
Operating income 32,931 16,287
Other income and expense:
Interest expense (62,109) (37,517)
Interest income and other 3,631 426
Equity in loss of investments (303) (198)
--------- ---------
Total other income (expense) (58,781) (37,289)
--------- ---------
Loss before income taxes (25,850) (21,002)
Income tax benefit (197) (301)
--------- ---------
Net loss $ (25,653) $ (20,701)
========= =========
OTHER FINANCIAL DATA:
Cash provided (used) by operating activities $ 143,547 $ (50,648)
Cash used by investing activities (74,699) (774,368)
Cash provided (used) by financing activities (15,958) 833,741
EBITDA 108,524 56,821
EBITDA margin 34.7% 29.4%
Capital expenditures (72,253) (74,792)
OTHER DATA (END OF PERIOD)
Access lines in service 329,460 325,608
Cellular subscribers 75,933 73,068
Cellular penetration 16.5% 15.9%
BALANCE SHEET DATA (END OF PERIOD)
Total assets $ 909,306 $ 937,711
Long-term debt including current portion 599,642 598,407
Stockholders' equity 231,153 266,541
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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
as of December 31, 1996, from the unaudited combined financial
statements of CenturyTel's Alaska Properties which are not included
in this Form 10-K.
- CenturyTel 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. See Index to Financial Statements and
Schedules which appears on page F-1 hereof.
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CenturyTel's Alaska Properties
------------------------------------------------------------
Century Telephone
Enterprises, Inc. Pacific Telecom
---------------------------- ----------------------------
Year Dec. 1, 1997 Jan. 1, 1997
Ended to Dec 31, to Nov. 30,
1998 1997 1997 1996
--------- ------------ ------------- ---------
(Amounts in Thousands)
OPERATING DATA:
Operating revenues:
Local telephone $ 121,933 $ 10,255 $ 79,330 $ 75,950
Cellular 2,576 181 5,120 4,823
--------- --------- --------- ---------
Total operating revenues 124,509 10,436 84,450 80,773
Operating expenses:
Local telephone 72,008 6,434 42,404 41,789
Cellular 2,128 147 3,082 3,381
Depreciation and amortization 30,459 2,466 15,823 15,348
--------- --------- --------- ---------
Total operating expenses 104,595 9,047 61,309 60,518
Operating income 19,914 1,389 23,141 20,255
Interest expense, net (1,405) (171) (2,169) (1,996)
Other income (expense) 356 53 (298) (33)
--------- --------- --------- ---------
Income before income taxes 18,865 1,271 20,674 18,226
Income taxes 9,218 736 7,746 6,737
--------- --------- --------- ---------
Net income