Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants 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.
x
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
¨
No
x
The aggregate market value of the shares of all classes of voting stock of the registrant held by non-affiliates of the registrant on June 30, 2015 was
approximately $116 million computed upon the basis of the closing sales price of the Common Stock on that date. For purposes of this computation, shares held by directors (and shares held by any entities in which they serve as officers) and officers
of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.
As of February 12, 2016 there were outstanding 50,612,014 shares of Common Stock, $.01 par value, of the registrant.
Information required by Part II (Item 5) and Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrants
definitive proxy statement for its 2016 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2015
.
This Form 10-K and future filings by Alaska Communications Systems Group, Inc. and its consolidated subsidiaries (we,
our, us, the Company and Alaska Communications) on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than
statements of historical fact are forward-looking statements for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and
availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as anticipates, believes, could, estimates,
expects, intends, may, plans, projects, seeks, should and variations of these words and similar expressions are intended to identify these forward-looking
statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements
by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Forward-looking statements may be contained in this Form 10-K under Item 1A, Risk Factors and Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a
result of a number of important factors. Examples of these factors include (without limitation):
In light of these risks, uncertainties and
assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-K
or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events, changed circumstances or any other reason after the date of this Form 10K.
Investors should also be aware that while we do, at various times,
communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by
an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
PART I
Item 1. Business
OVERVIEW
Over the past
four years, through a series of transactions and investments, we have evolved from a wireline/wireless telecom provider to a fiber broadband and managed information technology (managed IT) services provider, focused primarily on business
and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers throughout the state. Our facilities based communications network extends throughout Alaska and connects to the contiguous states via our two
diverse undersea fiber optic cable systems and our usage rights on a third undersea system. Our network is among the most expansive in Alaska and forms the foundation of service to our customers. We operate in a two player terrestrial wireline
market and we estimate our market share to be less than 25% statewide. However, our revenue performance relative to our largest competitor suggests that we are
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gaining market share in the markets we are targeting. Our primary focus is to: (i) generate industry leading revenue growth through increasing broadband and managed IT service revenue with our
business, wholesale and consumer customers, (ii) continuously improve our customer service, (iii) generate Adjusted EBITDA and Free Cash Flow (both as defined in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations) growth through top line growth and margin management, and (iv) work with state and federal regulatory agencies to provide an appropriate level of high cost support funding relative to the cost to provide broadband
services in our service territories.
The sale of our wireless operations (the Wireless Sale), which closed on February 2, 2015, included
the sale of both our one-third interest in the Alaska Wireless Network (AWN) and our wireless customer contracts, but excluded our wifi-based services and the wireless backhaul contracts (which provide wireline broadband services to
cellular towers) that we entered into after the formation of AWN. This transaction allowed us to exit a line of business facing increasing levels of competition and declining roaming revenues at an attractive price. AWN was a wireless wholesale
joint venture formed in 2013 (AWN Formation) in which both Alaska Communications and General Communications (GCI) combined their wireless networks. Alaska Communications was a one-third owner of AWN and GCI owned the
remaining two-thirds. AWN owned spectrum licenses, cell sites, backhaul facility usage rights, and other assets necessary for AWN to operate as a wireless infrastructure company, and operated a statewide wholesale wireless network. GCI and Alaska
Communications independently sold retail wireless services to their respective retail customers while paying AWN a wholesale charge as compensation for that company owning and operating the network.
Our parent company, Alaska Communications Systems Group, Inc., was incorporated in 1998 under the laws of the state of Delaware. Our principal executive
offices are located at 600 Telephone Avenue, Anchorage, Alaska 99503-6091. Our telephone number is (907) 297-3000 and our investor internet address is
www.alsk.com
. Our customer internet address is www.AlaskaCommunications.com.
Markets, Services and Products
We operate our business
under a single reportable segment. Prior to the Wireless Sale we provided retail wireless services and generated certain revenue streams related to our ownership in AWN. Prior to the AWN Formation, we also generated foreign roaming revenue from
national wireless carriers whose customers traveled in Alaska. Our focus is now exclusively on serving customers in the following areas:
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Business and Wholesale (broadband, voice and managed IT services)
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Consumer (broadband and voice services)
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Other Services (including carrier termination, equipment sales, access services and high cost support services receiving federal support funding)
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The brand pillars supporting our products and services are reliability, customer service, trustworthiness and local presence. These are represented by the
promise we make to our customers: You can always expect to get the service as promised to you by an Alaska Communications representative. If you are not satisfied, we will work with you to provide a solution that meets your
satisfaction.
Our services and products are described below. See Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, for a summary of service and product revenues generated by each of these customer groups.
Business and
Wholesale
Providing services to Business and Wholesale customers provides the majority of our service revenues and is expected to be the primary
driver of our growth over the next few years. We are the only Alaska-based carrier that is Carrier Ethernet 2.0 Certified. This certification means that we meet international standards for the quality of our broadband services. We also offer IP
based voice, including the largest SIP implementations in the state of Alaska, and are establishing secure connections to cloud infrastructure as evidenced b y our agreement with CyrusOne. We believe our network differentiates us in the markets we
serve. We prefer not to compete on price; but on the quality, reliability and the overall value of our solutions. Accordingly, we have significant capacity to sell into the network we operate and do so at what we believe are attractive
incremental gross margins.
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Our business customers include small and medium businesses, larger enterprises, and government customers which
include municipal, local, state and federal government entities, school districts, libraries and rural health care hospitals. Business services have experienced significant growth and we believe the incremental economics of business services are
attractive. Given the demand from our customers for more bandwidth and other services, we expect revenue growth from these customers to continue for the foreseeable future. We provide services such as voice and broadband, and managed IT services
including remote network monitoring and support service, managed IT security and IT professional services, and long distance services primarily over our own terrestrial network. We are also positioning the Company to become the premier Cloud Enabler
for business in the state of Alaska.
Our wholesale customers are statewide, national and international telecommunications carriers who rely on us to
provide connectivity for broadband and other needs to access their customers over our Alaskan network. The wholesale market is characterized by larger transactions that can create variability in our operating performance. We have a dedicated sales
team that sells into this customer segment, and we expect wholesale revenue to grow for the foreseeable future.
Consumer
We also provide voice and broadband services to residential customers. Given that our primary competitor has extensive quad play capabilities (video, voice,
wireless and broadband) we target how and where we offer products and services to this customer group in order to maintain our returns. Our focus is to offer higher bandwidth speeds to these customers, leveraging the capabilities of our existing
network. Our primary competitive advantage is that we offer bandwidth without data caps, while our competitor charges customers or throttles customers speeds for exceeding given levels of data usage. We expect modest declines in revenues from
these customers in the near term and expect to stabilize revenues within a couple of years.
Other Services
We provide voice and broadband origination and termination services to inter and intrastate carriers who serve our retail customers. We are compensated for
these services, primarily by charging terminating and originating per minute rates to these carriers. These revenue streams have been in decline and we expect them to continue to decline.
We also assess monthly surcharges to our customers, as required by various state and federal regulatory agencies, and then remit these surcharges to these
agencies. These surcharges vary from year to year, and are primarily recognized as revenue, and the remittance as a cost of sale. The rates imposed by regulators continue to increase. However, we expect these revenue streams to decline over time as
the revenue base declines.
We also receive inter and intrastate high cost universal support funds and similar revenue streams from state and federal
regulatory agencies that allow us to partially recover our costs of providing universal service in Alaska. As further discussed under Regulation, as a result of substantial regulatory changes enacted by the Federal Communications
Commission (FCC), certain of these revenue streams are undergoing significant reform and until this reform process is complete it is difficult to predict the future growth in these revenue streams and the extent of obligations we will
need to undertake in order to qualify for future funding.
Wireless and AWN Related
Prior to the Wireless Sale, we provided wireless voice and broadband services, and other value-added wireless products and services, such as wireless devices,
across Alaska with roaming coverage available in the contiguous states, Hawaii and Canada by utilizing the AWN network. Prior to the AWN Formation, we provided these services utilizing our own network and generated foreign roaming revenue from
national wireless carriers whose customers traveled in Alaska.
Following the AWN Formation, and prior to the Wireless Sale, we reported certain revenues
based on our ownership position in AWN as follows:
Because our network provides access to the retail marketplace, and as a result of the cost of
providing
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service to high cost areas, we generated Competitive Eligible Telecommunications Carrier (CETC) revenues established by either state or federal regulatory agencies. As part of the AWN
Formation, we agreed to pay a service charge to AWN for an amount equal to our CETC Revenue, and therefore CETC Revenue had no impact on our net income (loss) or Adjusted EBITDA calculations.
Prior to the AWN Formation, we also provided backhaul services to other wireless carriers. Backhaul services are broadband connections between a wireless
carriers cell site, their central office switch and connectivity to the Internet. Upon the AWN Formation, all existing backhaul contracts were transferred to AWN. However, we were not excluded from providing backhaul services in the future,
and now compete for these services. We have since added wireless backhaul contracts, and expect to continue to vigorously compete for and grow these revenues.
Following the Wireless Sale, we began the process to wind-down our retail wireless operation. We were required to provide transition services to GCI, which
required us to continue to maintain certain aspects of these retail wireless operations such as the operation of our retail stores, maintaining wireless retail customer support functions in our contact center and providing certain supply chain
management, billing and collection and treasury management functions. These transition services were completed on April 17, 2015.
Network and
Technology
There are two extensive facilities based wireline telecommunications networks in Alaska. We operate one of these networks and GCI operates
the other. We provide switched and dedicated voice and broadband services as well as a host of other value added services such as network hosting, managed IT services and long distance services. We continuously upgrade our network to provide higher
levels of performance, higher bandwidth speeds, increased levels of security and additional value added services to our customers. Our networks are monitored for performance around the clock in redundant monitoring centers to provide a high level of
reliability and performance. Our fiber network, which serves as the backbone of our network, is extensive within Alaskas urban areas and connects our largest markets, including Anchorage, Fairbanks and Juneau with each other and the contiguous
states. It offers us the opportunity to provide our customers with a high level of network reliability and speed for voice and broadband applications. We also own and operate one of the most expansive Internet Protocol (IP) networks in
Alaska using multi-protocol label switching (MPLS), Metro Ethernet technology and Virtual Private LAN Service (VPLS). Our MPLS network provides the long-haul framework for our Metro Ethernet service, which we market to
businesses and government customers. Metro Ethernet offers our customers scalable, high-speed broadband and customized IT products and services, as well as Internet connectivity. VPLS allows customers to connect their dispersed locations with the
ease of use and control offered by Metro Ethernet and the quality and reliability of our MPLS services. We are one of the few Metro Ethernet Forum certified carriers in the nation, providing the highest degree of assurance to our customers regarding
the quality of our network and services.
We also own and operate an undersea fiber optic cable system that connects our Alaskan network to our facilities
in Oregon and Washington. These facilities provide the most survivable service to and from Alaska, with key monitoring and disaster recovery capabilities for our customers. Most recently, we acquired certain capacity on another providers
network providing us with diverse connectivity into Juneau, thus eliminating what was previously a single point of failure. We also have usage rights along another undersea fiber network connected to the lower-48.
Our network in Oregon and Washington includes terrestrial transport components linking Nedonna Beach, Oregon to a Network Operations Control Center in
Hillsboro, Oregon and collocation facilities in Portland, Oregon and Seattle, Washington. In addition, AKORN
®
, our undersea fiber optic cable system, connects our Alaska network from Homer,
Alaska to our facilities in Florence, Oregon along a diverse path within Alaska, the Pacific Northwest and undersea in the Pacific Ocean. Northstar, our other undersea fiber optic system, comprises approximately 2,100 miles with cable landing
facilities in Whittier, Juneau, and Valdez, Alaska, and Nedonna Beach, Oregon. Together, these fiber optic cables provide extensive bandwidth as well as survivability protection designed to serve our own, as well as our most demanding
customers critical communications requirements. Through our landing stations in Oregon, we also provide an at-the-ready landing point for other large fiber optic cables, and their operators, connecting the U.S. to networks in Asia and other
parts of the world.
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In April 2015, we entered into an agreement with ConocoPhillips Alaska, Inc. to purchase a terrestrial fiber
network on the North Slope of Alaska. This network allows us to provide broadband solutions to the oil and gas sector in a market that previously had no competition, and continue to advance our sales of managed IT services. Also in April 2015,
the Company entered into a joint venture agreement with Quintillion Holdings, LLC (Quintillion) for the purpose of expanding the fiber optic network and making the network available to other telecom carriers. The joint venture may also
participate in and facilitate other capital and service initiatives in the telecom industry. During 2015 we focused on beginning to make the network operational in order to meet our service level standards.
Additionally, our joint venture partner, Quintillion, is investing in a global submarine network with contemplated landing stations in several northwest
Alaska communities, including a terrestrial route from the North Slope to Fairbanks. Opportunities to acquire capacity on this system should allow for meaningful extensions to our network reach in Alaska.
Competition
Management estimates the telecom market in
Alaska to be approximately $1.9 billion, including the wireless market of approximately $400 million. Subsequent to the Companys exit from the wireless market in early 2015, its relevant market is approximately $1.5 billion, including the IT
service market of approximately $700 million, the broadband market of approximately $400 million, the managed network services market of approximately $230 million and the voice market of approximately $170 million. Management estimates that over
85% of this market opportunity is from the business and wholesale customer segment.
We entered the IT service market as part of our TekMate transaction
and we expect to experience significant growth over time by providing services to our broadband customers. We believe the competition for managed IT services is fragmented.
We face strong competition in our markets from larger competitors with substantial resources. For traditional voice and broadband services, we compete with
GCI and AT&T on a statewide basis, and smaller providers such as Matanuska Telephone Association, Inc. (MTA) on a more localized basis.
As the largest facilities based operator in Alaska, GCI is the dominant statewide provider of broadband, voice and video services, and has up to 80% market
share in the customer segments it serves. GCI continues to expand its voice and data network, often taking advantage of subsidized government programs which create a monopoly for services in certain markets. AT&Ts primary focus is to be
the provider of voice and broadband services to its nation-wide customers. AT&T tends to use its existing broadband network to serve these customers or it leases capacity from GCI or Alaska Communications to augment its existing network.
Prior to the Wireless Sale, we competed with AT&T, GCI, with Verizon for retail wireless services. AT&Ts strong market position in Alaska is in
wireless, and we estimated that AT&T had over 50% market share. The wireless market experienced significant disruption over the past several years, primarily related to Verizons entry into the Alaska market in 2013 and reforms in wireless
CETC Revenue for wireless carriers in Alaska.
Overall competitive dynamics are significant, and our operating performance is impacted accordingly. For
more information associated with the risks of our competitive environment see Item 1A, Risk Factors.
Marketing
Our marketing strategy relies on our history of understanding the Alaskan customer. We increasingly tailor our products and services based on understanding our
customers needs, location, and type of service they desire. For business customers we bundle our products and provide value added managed IT services using our local service delivery model and highly reliable network. For consumer customers we
focus on offering one flat rate price and no data usage caps for internet services, differentiating ourselves from GCI who charges for excess data usage or throttles bandwidth.
Sales and Distribution Channels
Our sales strategy
combines primarily direct and some indirect distribution channels to retain current customers and drive sales growth. Our focus in 2016 is to continue leveraging our direct sales channels serving Business and Wholesale customers, and our web and
contact center channels for consumer customers for continued sustained performance. In 2015, we began moving more consumer transactions to the web and will continue this trend in 2016.
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Customer Base
We generate our revenue through a diverse statewide customer base and there is no reliance on a single customer or small group of customers. Business and
wholesale customers are our primary focus and they comprised 75.1% of service revenue and 54.7% of our total wireline (service and other) revenue in 2015. In prior years we had significant reliance on roaming revenue from Verizon which accounted for
11.5% of our revenue in 2013.
Seasonality
We believe
our revenue is impacted by seasonal factors. This is due to Alaskas northern latitude and the resulting wide swing in available daylight and weather conditions between summer and winter months. These conditions, unique to Alaska, affect
business, tourism and telecom use patterns in the state. Our spending patterns are also impacted by seasonality as we incur more capital spending and operating spending during the summer and early fall periods of the year, reflecting the heightened
economic activity from the summer months and our own construction activities during this time period.
Employees
As of December 31, 2015, we employed 655 regular full-time employees, 6 regular part-time employees and 3 temporary employees. Approximately 56% of our
employees are represented by the International Brotherhood of Electrical Workers, Local 1547 (IBEW). Our Master Collective Bargaining Agreement (CBA) with the IBEW, which was amended in November 2014, governs the terms
and conditions of employment for all IBEW represented employees working for us in the state of Alaska through December 31, 2016. Management considers employee relations to be generally good.
Regulation
While a substantial amount of our revenues
are derived from non-regulated or non-common carrier services, we continue to generate revenue from services that are regulated. The following summary of the regulatory environment in which our business operates does not describe all present and
proposed federal, state and local legislation and regulations affecting the telecommunications industry in Alaska. Some legislation and regulations are currently the subject of judicial review, legislative hearings and administrative proposals,
which could change the manner in which this industry operates. We cannot predict the outcome of any of these matters or their potential impact on our business. Regulation in the telecommunications industry is subject to rapid change, and any such
change may have an adverse effect on us.
Overview
Some of the telecommunications services we provide are subject to extensive federal, state and local regulation. These regulations govern, in part, our rates
and the way we conduct our business, including the requirement to offer telecommunications services pursuant to nondiscriminatory rates, terms, and conditions, the obligation comply with E-911 rules, the Communications Assistance for Law Enforcement
Act (CALEA), the obligation to safeguard the confidentiality of customer proprietary network information (CPNI), as well as our obligation to maintain specialized records and file reports with the FCC and state regulators.
These requirements are subject to frequent change. Compliance is costly, and limits our ability to respond to some of the demands of our increasingly competitive service markets.
We generate revenue from these regulated services through regulated charges to our retail customers, access and other charges to other carriers, and federal
and state universal service support mechanisms for telecommunications and broadband services. These revenues are recorded throughout our customer categories. Prior to the sale of our interest in AWN to GCI, we remitted an amount equal to the federal
universal service support associated with our wireless business to AWN, and that support therefore, had no direct impact to our net income (loss), cash flow from operating activities or Adjusted EBITDA. After the sale, we ceased to receive that
support, but continue to receive federal and state universal service support associated with our wireline operations.
At the federal level, the FCC
generally exercises jurisdiction over some of the services regulated common carriers provide that originate or terminate interstate or international communications and related facilities.
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The Regulatory Commission of Alaska (RCA) generally exercises jurisdiction over services and
facilities used to provide, originate or terminate communications between points in Alaska.
In this section, Regulation, we
refer to our local exchange carrier (LEC) subsidiaries individually as follows:
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ACS of Anchorage, LLC (ACSA);
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ACS of Alaska, LLC (ACSAK);
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ACS of Fairbanks, LLC (ACSF); and
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ACS of the Northland, LLC (ACSN).
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Federal Regulation
We must comply with the Communications Act of 1934, as amended (the Communications Act) and regulations promulgated thereunder, which require,
among other things, that we offer regulated interstate services upon request at just, reasonable and non-discriminatory rates and terms. The Communications Act also requires us to offer competing carriers interconnection and non-discriminatory
access to certain facilities and services designated as essential for local competition, and permits the FCC to deregulate us as markets become more competitive. Under the Communications Act we are eligible for support revenues to help defray the
cost of providing services to rural, high cost areas, low-income consumers, schools and libraries, and rural health care providers. Many of these regulations recently have been modified by the FCC and others are the subject of on-going FCC rule
makings that are expected to result in further changes; in both cases, the changes are intended to expand the support mechanisms to include broadband Internet access services, and promote additional deployment of equipment, facilities, and systems
necessary to support such services.
Rate Regulation
Our LEC subsidiaries are regulated common carriers offering local voice and limited local data services and are subject to a mixture of competitive market
regulations and rate of return regulations for intrastate services we offer in Alaska, and price-cap rate regulation for interstate services regulated by the FCC. Because they face competition, our LEC subsidiaries may not be able to charge their
maximum permitted rates under price cap regulation or realize their allowed intrastate rate of return even where they are rate-of-return regulated. A broader range of data and information services are offered by our unregulated affiliates or as
unregulated services by our regulated companies.
In establishing their costs of regulated telecommunications services, our LEC subsidiaries determine
their aggregate costs and place them within an FCC-prescribed Uniform System of Accounts, then allocate those costs between regulated and non-regulated services, then separate the regulated portion of these costs between the state and federal
jurisdictions, and finally among specific inter- and intra-state services. This process is governed primarily by the FCC and the RCA rules and regulations. In August 2014, the FCC opened a proceeding to consider whether to modify or eliminate
its cost accounting rules. In addition, for more than a decade, the FCC has been considering whether to modify or eliminate these current jurisdictional separations process. These questions remain pending with the FCC. The FCCs decision, when
it comes, could indirectly increase or reduce earnings of carriers subject to jurisdictional separations rules by affecting the way regulated costs are divided between the federal and state jurisdictions. In addition, these changes could affect the
ways in which the FCC and RCA evaluate the reasonableness of our regulated rates for telecommunications services.
Regulation of
Broadband Internet Access Services
Historically, the FCC has considered broadband Internet access service to be an information
service. Information services, historically, have not been subject to the FCCs common carrier regulations that govern the rates, terms, conditions, and business practices associated with our regulated telecommunications
services. In March 2015, the FCC reclassified mass market broadband Internet access services as a telecommunications service, subject to common carrier pricing and other regulations under Title II of the Communications Act, which
had historically applied only to traditional telephone service. The FCC thus departed from its long history of treating broadband Internet access services as information services, which are subject to far less intrusive federal
oversight, though the
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FCC has declared its intention not to require broadband Internet access service providers to file federal tariffs or otherwise obtain advance FCC review or approval of the rates,
terms, and conditions under which they offer broadband Internet access service.
The FCCs decision prohibits broadband Internet access service
providers from engaging in certain conduct, as follows:
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No blocking of lawful content, applications, services, or non-harmful devices, subject to reasonable network management practices, which must have primarily a technical, rather than business, justification.
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No throttling,
e.g.
, slowing down or otherwise impairing service based on content, application, service, or use of a non-harmful device, subject to reasonable network management.
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No paid prioritization of traffic,
i.e.
, favoring some traffic over other traffic in exchange for monetary or other consideration, or to benefit an affiliate. This rule is not subject to reasonable network
management.
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No unreasonable interference or causing unreasonable disadvantage to end users ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or
devices of their choice, or . . . edge providers ability to make lawful content, applications, services, or devices available to end users, subject to reasonable network management. The FCC identified seven factors it would consider on a
case-by-case basis when applying this rule.
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In addition, the FCCs order preserved and expanded requirements to disclose broadband
service performance, network management, and applicable commercial terms, although the FCC created a temporary exemption for service providers like the Company that have 100,000 or fewer broadband subscribers, which has now been extended through
December 15, 2016. Before that date, the FCCs Consumer and Governmental Affairs Bureau is expected to assess whether and in what form this exemption should continue beyond that date.
As a result of this FCC order, much of our broadband Internet access service is now subject to federal laws and regulations that previously have only applied
to legacy common carrier telecommunications services, including:
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That our rates, terms, and conditions of service be just, reasonable, and not unreasonably discriminatory, although the FCC has offered little guidance on how it will evaluate compliance with these standards;
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That we adhere to statutory confidentiality, usage, and disclosure protections that apply to CPNI, such as the quantity, technical configuration, type, destination, location, and amount of use of a customers
broadband Internet access service;
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That our broadband Internet access service meet disabilities access requirements specified by statute;
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That we provide broadband Internet access providers with nondiscriminatory access to our poles, ducts, conduits, and rights-of-way formerly available only to telecommunications carriers and cable system operators;
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That we adhere to universal service deployment conditions associated with federal universal service support, and may in the future be required to contribute to universal service support mechanisms based on our status as
a provider of broadband Internet access services; and
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That the FCC has asserted enforcement jurisdiction over disputes concerning our provision of broadband Internet access service, as well as our interconnection and exchange of traffic with other intermediate providers.
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Because these legal requirements have never before applied to broadband services, and the FCCs order lacks many specifics, it is
difficult for us to assess the full extent of the impact of this new regulatory framework on our business.
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Interconnection with Local Telephone Companies and Access to Other Facilities
The Communications Act imposes a number of requirements on LECs. Generally, a LEC must: not prohibit or unreasonably restrict the resale of its services;
provide for telephone number portability so customers may keep the same telephone number if they switch service providers; provide access to their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when a call
originates on its network, compensate other telephone companies for terminating or transporting the call (see the Interstate Access discussion below).
All of our LEC subsidiaries are considered incumbent LECs (ILECs) and have additional obligations under the Communications Act: to negotiate in
good faith with any carrier requesting interconnection; to provide interconnection for the transmission and routing of telecommunications at any technically feasible point in our ILEC network on just, reasonable and non-discriminatory rates, terms
and conditions; to provide access to unbundled network elements (UNEs), such as local loops at non-discriminatory, cost-based rates to competing carriers that would be impaired without them; to offer retail local telephone
services to resellers at discounted wholesale rates; to provide notice of changes in information needed for another carrier to transmit and route services using its facilities; and to provide, at rates, terms and conditions that are just,
reasonable, and non-discriminatory, physical collocation, which allows a competitive LEC (CLEC) to install and maintain its network termination equipment in an ILECs central office, or to obtain functionally equivalent forms of
interconnection.
Our ACSN ILEC subsidiary is classified as a rural telephone company under the statute and therefore falls within a federal statutory
exemption from the requirements imposed on most ILECs to provide UNEs to a CLEC. The RCA may terminate the exemption if it determines that interconnection is technically feasible, not unduly economically burdensome and consistent with universal
service. Although the RCA has not terminated ACSNs UNE exemption, the RCA granted GCI, subject to certain conditions, approval to provide local exchange telephone service in the Glacier State study area and Sitka exchange of ACSN on its own
facilities. Other than the City of Sitka, all other exchanges in the Sitka study area remain unserved by any CLEC at this time.
On December 28,
2006, the FCC conditionally and partially granted ACSA forbearance from the obligation to lease UNEs to our competitors. This forbearance was limited to five wire centers within the Anchorage service area. Even where relief was granted, however, the
FCC has required ACSA to lease loops and sub-loops at commercially negotiated rates, or if there is no commercial agreement, at the rates for these UNEs in Fairbanks. As a result of this decision, on March 15, 2007, our LECs entered into a five
year global interconnection and resale agreement with GCI governing the provision of UNEs and other services. This agreement has been updated and currently remains in effect.
On December 28, 2015, the FCC issued an order granting forbearance from certain ILEC obligations under the Communications Act and the
FCCs rules. As of that date, the FCC has relieved our ILEC subsidiaries of dialing parity and equal access obligations that, formerly, required us to ensure that customers were able to route their calls to other
telecommunications service providers without having to dial additional digits, and to offer each of our ILEC telephone service customers to choose among any available providers of stand-alone interstate long-distance service, which the customer
could then reach simply by dialing 1. We must continue to offer those capabilities to any customer that has presubscribed to a stand-alone interstate long-distance provider prior to December 28, 2015, but are not required to make
long-distance presubscription available to new customers. This decision is the subject of a Petition for Reconsideration with respect to rural areas of Alaska, which remains pending with the FCC.
In the same order, the FCC granted our ILEC affiliates forbearance in two additional areas: (1) the FCC granted limited forbearance from our ILEC
affiliates obligation to offer competitive access to newly-deployed entrance conduit running from the property line to a commercial building in greenfield situations where no service provider has an established presence; and (2)
our ILECs are no longer required to offer competitors unbundled access to a 64-kilobit-per-second voice channel in areas where we have replaced last mile copper loop connections to our customers with fiber optic cables.
Interstate Access Charges
The FCC
regulates the prices that ILECs charge for the use of their local telephone facilities in originating or terminating interstate calls. For the years ended December 31, 2015, 2014 and 2013, interstate access charges represented approximately
8.1%, 9.0% and 10.3%, respectively, of our total Service and Other revenues.
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Special Access
Rates for interstate telecommunications services offered by our ILEC subsidiaries are determined using price cap regulation, under which the rates vary from
year to year based on mathematical formulae, and not based on changes to our costs, including both inter-carrier rates and retail end user rates. Since 2010, ACSA, ACSF, and ACSAK have had the right under the FCCs Phase I and Phase II pricing
flexibility rules to offer flexible pricing arrangements such as volume and term discounts free from FCC rate structure and price-cap rules for qualifying services, including dedicated transport and special access services in the Anchorage, Juneau
and Fairbanks areas. The FCC has since ceased making any new grants of pricing flexibility, and has collected data on the state of competition in the special access markets to evaluate possible changes. We (and other carriers) filed data sets
relating to our local exchange markets in Alaska in February 2015. The FCC is currently evaluating these data nationwide, and is considering whether to create new or different competitive triggers for pricing flexibility and whether to
maintain, expand, or withdraw pricing flexibility that it has previously granted. Because the pricing flexibility currently granted to three of our ILECs could be affected by future changes to the FCCs pricing flexibility rules, any reforms
that the FCC adopts could affect the Companys revenues in ways we cannot currently predict.
Under a 2011 FCC order (the Transformation
Order), our ILEC interstate and intrastate switched access rates and reciprocal compensation rates (ICC rates) are capped and declining toward zero, in pursuit of the FCCs goal that carriers will recover their costs from
their end-users and, in some cases, universal service support mechanisms.
The transition is unfolding over a six year period beginning July 1, 2012,
as follows:
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intrastate terminating switched end-office rates, intrastate terminating switched transport rates (to the extent they are above the ILECs interstate rates) and reciprocal compensation rates were reduced in two
equal steps to parity with interstate rates effective July 1, 2012 and July 1, 2013; transport rates will remain at this level;
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intrastate and interstate terminating switched end-office rates and reciprocal compensation rates will be reduced in three equal steps to $0.0007 effective July 1, 2014, July 1, 2015, and July 1, 2016;
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all terminating switched end-office rates and reciprocal compensation rates will be reduced to zero on July 1, 2017; and
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for a terminating ILEC that owns the tandem switch, terminating switched end-office rates and terminating switched transport rates will be reduced to $0.0007 for all traffic within the tandem serving area on
July 1, 2017, and to zero on July 1, 2018.
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The Transformation Order provides for a certain amount of compensation for lost
revenue through two optional programs: (i) an access recovery charge on subscribers and (ii) a temporary access replacement support mechanism with broadband build-out obligations. However, the FCC does not intend the results of the changes to be
revenue-neutral to any ILEC and various caps, limitations, market forces, and, ultimately, phase-outs apply to both of these programs. Based on these factors, it is difficult to predict the ultimate impact on our future revenues.
Federal Universal Service Support
The Communications Act requires the FCC to establish a universal service program to ensure that affordable, quality telecommunications services are available
to all Americans. The Company receives universal support in several forms: (1) high cost support received by its ILEC subsidiaries in 2015 for its wireline business under the Connect America Fund; (2) high cost support provided to the Company in
2015 for its wireless business as CETC Revenue, which we remitted to AWN prior to the sale of our interest in that business to GCI, and which ceased thereafter; (3) support for services that the Company provides to schools and libraries, provided
through the federal schools and libraries universal service support mechanism (E-Rate); (4) support from the federal Rural Health Care (RHC) support mechanism, which supports telemedicine and rural health care communications;
and (5) low-income support under the FCCs Lifeline program, which subsidizes telephone service for low-income consumers.
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For the year ended December 31, 2015, the Company recognized $1.7 million in wireless CETC Revenue (which we
remitted to AWN) and $19.7 million in high cost support for its LECs. Combined, these amounts represent approximately 9.2% of our total revenue for the twelve month period ended December 31, 2015. For the year ended December 31, 2014, the
corresponding amounts were $19.6 million and $23.2 million, respectively. With the closing of the Wireless Sale, we will not be receiving CETC Revenue going forward.
Historically, the level of high cost support received by the Companys LEC subsidiaries was based on the costs those subsidiaries incurred in providing
telecommunications services, although a portion of the support was frozen at the time our LEC subsidiaries converted to federal price cap regulation and, for ACSA, based on the results of a cost model. The 2011 Transformation Order made a number of
changes, including replacing legacy high cost support mechanisms with the Connect America Fund (CAF) mechanism discussed below.
CAF Phase
I
The FCC is implementing CAF in two primary phases. CAF Phase I, currently still in effect for the Company, froze our LECs high cost support,
beginning in 2012, at the 2011 level, and requires us to use that support to provide broadband fixed services in high cost areas served by our price-cap LEC subsidiaries. Price-cap ILECs, such as ours, must use this frozen CAF I support to deploy
and operate modern communications networks capable of supporting broadband and voice services, and over time must target areas that are substantially unserved by any unsupported competitor providing such services. Broadband for purposes
of CAF Phase I support programs is defined as delivering actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time services such as VoIP, and must be offered at prices reasonably comparable to those in
urban areas.
The Transformation Order set the Companys ILEC CAF Phase I support at a level of $19.7 million annually. In 2015, we were required to
spend 100 percent of this support to build and operate broadband-capable networks used to offer our own retail broadband service in areas substantially unserved by an unsubsidized competitor.
In 2012 and 2013, and in conjunction with CAF Phase I, the FCC made additional CAF Phase I Incremental Support available to certain price-cap carriers serving
the highest-cost wire centers, conditioned on the carriers deploying additional broadband service to unserved locations over the three-year period following the award of support. In 2012 (Round 1 Incremental Support), a price cap ILEC
accepting this support was required to deploy broadband service delivering actual speeds of at least 4 Mbps downstream and 1 Mbps upstream within three years to at least one unserved location for every $775.00 of support it accepts. The FCC offered
us approximately $4.2 million of this support in 2012, which we accepted.
In September 2012, we filed a request for waiver with the FCC seeking
greater flexibility to use this support in ways that we believe will increase the benefits of this support to our subscribers. That petition remains pending at the FCC. In July 2013, we informed the FCC that, under the conditions governing use
of Round 1 Incremental Support, we would be able to deploy broadband service to 2,291 locations, utilizing roughly $1.8 million of the Round 1 Incremental Support that we originally accepted. In 2015, we completed this deployment in a timely manner.
If the waiver was to be granted, the time period for deployment would require an extension. Alaska Communications has completed the build out in the three-year period required to the 2,291 locations and expected to return the remaining funds to the
FCC in late 2016.
In 2013, the FCC offered price cap ILECs additional CAF Phase I Incremental Support (Round 2 Incremental Support), and an
additional alternative to use the support in areas served by broadband, but that do not receive actual speeds of at least 3 Mbps/768 kbps. A price cap ILEC accepting Round 2 Incremental Support for use in such areas must agree to deploy broadband
delivering actual speeds of at least 4 Mbps downstream and 1 Mbps upstream to one location for each $550.00 it accepts. In 2013, the Company accepted $0.2 million in Round 2 Incremental Support to serve 320 locations at $550.00 per location. We
completed the required build-out under Round 2 in advance of the October 31, 2016 deadline.
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CAF Phase II
The FCC is currently implementing a transition from CAF Phase I frozen support to CAF Phase II. Funding under the new programs will generally require
recipients to provide broadband service to unserved locations throughout the designated coverage area by the end of a specified build-out period, and meet interim milestone build-out obligations.
On April 22, 2013, the FCC adopted a model platform that it used to establish the geographic area and support levels offered under CAF Phase II. The FCC
made offers of model-based CAF Phase II support and associated broadband deployment commitments to price cap carriers operating in the other 49 states and Micronesia on April 29, 2015, which they were required to accept or decline by
August 27, 2015. For those price cap ILECs that accepted, CAF Phase II has now replaced CAF Phase I frozen support. Those price cap ILECs that accepted CAF Phase II support in a given state, will be required to make a statewide commitment to
offer voice service and broadband delivering actual speeds of at least 10 Mbps downstream and 1 Mbps upstream to a number of customer locations prescribed by the FCC in that state within the geographic area covered by CAF Phase II.
In part as a result of our advocacy, the FCCs Wireline Competition Bureau acknowledged shortcomings in the nationwide CAF Phase II cost model as a means
to set CAF Phase II universal service support levels and broadband deployment obligations in areas outside the lower 48 contiguous states, and, in particular, that the model does not accurately reflect broadband costs in Alaska. As a result, the FCC
offered us (and other price cap carriers serving areas outside the lower 48 contiguous states) the alternative option to continue to receive universal service support at current, CAF Phase I frozen level, instead of based on the results of the
nationwide cost model. In January 2015, we notified the FCC that we would elect to continue to receive support at the CAF Phase I frozen level (CAF Phase II Frozen Support), if it were linked to achievable broadband deployment and
service commitments.
The FCC has received industry comment on how it should establish broadband deployment obligations that should accompany such CAF
Phase II Frozen Support in the absence of a working cost model. We continue to engage in ongoing and active dialogue with the FCC and the Wireline Competition Bureau staff on this subject, and continue to analyze the impact of these changes on
Alaska, but uncertainty remains regarding the deployment and service obligations we may be required to meet in connection with CAF Phase II Frozen Support, potential limitations on our use of such support, and the term of years during which such
support will be available. While we expect the FCC to require us to deploy new broadband service to a substantial number of locations within our service area, the FCC has yet to determine the number of new locations that we must serve, or the range
of geographic areas where deployment will meet our universal service obligation. We expect the FCC to issue additional rules in the near future.
Lifeline Reform
Revenue generated
from our lifeline customers represented less than 1% and just over 1% of our total revenue for the twelve months ended December 31, 2015 and 2014, respectively. Under reforms adopted in the FCCs January 2012 Lifeline Order, we are
required to recertify each of our Lifeline customers annually to verify continued eligibility for Lifeline service. In part as a result of those efforts, our Lifeline enrollment decreased, and we will face continuing compliance obligations with
respect to Lifeline customers served by our LEC subsidiaries. There are a number of matters under consideration that could increase the Companys regulatory compliance obligations and customer administrative responsibilities, and impact revenue
received from regulatory funding sources. The FCC is considering whether to reduce our federal Lifeline subsidy support. In June 2015, the FCC proposed additional changes to its Lifeline support program. Lifeline today subsidizes the cost of
voice services for low-income consumers, and provides a higher level of support for those living on Tribal Lands, including the entire state of Alaska. Among other things, the FCC sought comment on the use of federal low-income universal service
support to subsidize the cost of broadband Internet access service. In addition, the FCC sought comment on whether to tie the level of additional low-income support available to consumers living in areas of Tribal Lands to population density, with
higher density areas receiving less support. Until the FCC issues final rules, it is difficult for us to assess the extent to which these proposals may affect our business.
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Wireless Services
Federal law preempts state and local regulation of the entry of, or the rates charged by, any provider of commercial mobile radio services (CMRS),
which includes personal communications services and cellular services. The regulatory burden associated with our wireless business was removed with the closing of the Wireless Sale.
Other Federal Regulations
In
August 2015, the FCC adopted new rules to govern aspects of the ongoing transition from legacy copper transmission facilities to new IP-based networks. In general, the new rules impose an additional 180-day advance disclosure requirement when
incumbent local exchange carriers, such as the Company, plan to retire copper transmission lines connecting to our customers premises or replace them, in whole or in part, with fiber optic cable. While the effects of this rule are difficult to
predict, it is possible that the new rule may require us to slow our deployment of broadband facilities in some cases. In addition, the FCC has created more rigorous rules governing the discontinuance of legacy retail services in favor of those
based on newer technology, and sought comment on certain issues related to the implementation of that rule. Until those implementation issues are resolved, it is difficult for us to assess the full extent of the impact that this new regulation may
have on our business.
Also in August 2015, with respect to residential, fixed, facilities-based voice services that do not receive electrical power
through the telephone line (such as fiber-to-the-home services), the FCC adopted rules requiring us to offer our customers the option to purchase equipment providing eight hours of standby backup power. Within three years, the FCCs rules
require us to offer these customers the option to purchase equipment that provides 24 hours of standby backup power.
On June 2, 2015, Congress
enacted the USA Freedom Act. This law amended the Foreign Intelligence Surveillance Act of 1978 (FISA), 50 USC § 1801, and certain parts of the U.S. criminal code (18 USC), and supersedes portions of the 2001 USA Patriot Act. Importantly for
the Company, the law bans the bulk collection of telephone call detail records, effective 180 days after enactment. The Act addresses circumstances under which telecommunications carriers must produce customer telephone call detail records (some of
which the Company does not actually keep, such as call detail for local calling) at the request of law enforcement. The FISA court now will adjudicate requests for such records in most cases. The bill also enacts certain additional changes to
existing wiretap laws. Until the new statute takes full effect and we gain additional understanding of how it will be administered and implemented, it is difficult for us to assess the full extent of the impact that this new statute may have on our
business.
In 2013, the FCC adopted new 911 reliability and reporting rules that, among other things, require us to take reasonable measures, where
feasible, to ensure the reliability of 911 service, including diversity audits of 911 and network monitoring circuits, central office backup power requirements, and reporting of certain network outages affecting 911 service. The majority of these
rules took effect during 2014, and the first annual report of the status of our efforts to meet these requirements was due in 2015.
State Regulation
Telecommunication companies are required to obtain certificates of public convenience and necessity from the RCA prior to operating as a public
utility in Alaska. In addition, RCA approval is required if an entity acquires a controlling interest in any of our certificated subsidiaries, acquires a controlling interest in another intrastate utility or discontinues an intrastate service. The
RCA also regulates rates, terms and conditions for local, intrastate access and intrastate long distance services, supervises the administration of the Alaska Universal Service Fund (AUSF) and decides on Eligible Telecommunications
Carrier (ETC) status for purposes of qualifying for federal USF. The Communications Act specifies that resale and UNE rates are to be negotiated among the parties subject to the approval or arbitration of the RCA. Our ILECs have entered
into interconnection agreements with a number of entities.
On June 30, 2015, our Local Exchange Companies, operating under competitive market
regulations, raised their residential local rates by $2.00 for the first time in over ten years. These rate changes are now effective.
The FCCs
March 2015 order reclassifying broadband Internet access service as a telecommunications service also sought to limit the authority of state regulator over the service by finding that it is jurisdictionally interstate in nature. The FCC
prohibited state regulators from imposing new state universal
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service contribution obligations on broadband Internet access services, and announced its intent to preempt any attempts by state regulators to impose entry certification restrictions, rate
regulation, or tariff filing requirements in connection with broadband Internet access service.
Alaska Universal Service Fund
The AUSF serves as a complement to the federal USF, but must meet federal statutory criteria concerning consistency with federal rules and
regulations. Revenue from the AUSF represented 1.8% and 1.9% of our revenue for the twelve month periods ended December 31, 2015 and 2014, respectively.
Currently, the AUSF supports a portion of certain higher cost carriers switching costs, the costs of Lifeline service (which supports rates of
low-income customers) and other costs associated with regulated service. The RCA has adopted regulations that limit high cost switching support to local companies with access lines of 20,000 or less. This change has eliminated the switching support
that our rural ILECs received.
The RCAs August 2010 access charge order added a new Carrier Common Line (CCL) support program to
the AUSF as well as expanded the AUSF to include support for carriers of last resort (COLRs). The new AUSF support programs were implemented in 2011. Some of our ILECs also receive COLR support from the AUSF.
Other State Regulatory Matters
On
July 8, 2014, HB169 was signed into law which eliminates the RCAs jurisdiction over telephone directories (Chapter No. 64, SLA 2014). The new law went into effect on October 6, 2014. The effect of the legislation reduces the Companys
costs for production and distribution of white page directories. On April 15, 2015, the RCA commenced a new rulemaking to consider modification of its regulations in response to the enactment of HB169. After industry comment, the RCA determined
that it would remove the requirement to produce, publish and distribute a directory in paper or electronic format from its regulations. This change in regulation went into effect in 2015.
On July 17, 2014 the Companys local exchange subsidiaries filed a request with the RCA to waive regulations that require them to maintain a tariff
and submit tariff filings in competitive study areas that have no dominant carrier. On October 22, 2014, the RCA declined to grant the requested waiver and, instead, commenced a new rulemaking to address tariff issues statewide. In 2015, the
RCA opened additional rulemakings to address tariff formatting, electronic tariff filing, annual operating reports and ongoing reporting requirements. We continue to advocate for changes that reduce reporting requirements, tariff requirements and
support electronic tariff filing. Neither the outcomes, nor the impacts, of these rulemakings are clear.
On February 27, 2015, the RCA concluded its
inquiry into interexchange Carrier of Last Resort issues via an ongoing rulemaking proceeding. Final regulations have been issued. We continue to anticipate that the outcome of this proceeding is unlikely to result in our assuming additional
responsibilities.
On December 1, 2015, ACSA petitioned to be designated a nondominant carrier regarding requirements for line extension, special
construction, subdivision agreements and access. The RCAs statutory timelines requires a final decision by May 29, 2016.
Website Access to
Reports
Our investor relations website Internet address is www.alsk.com. The information on our website is not incorporated by reference in this
annual report on Form 10-K. We make available, free of charge, on our investor relations website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Code of Ethics
We post our code of business conduct and
ethics entitled Code of Ethics, on our investor website at www.alsk.com. Our code of business conduct and ethics complies with Item 406 of SEC Regulation S-K and the rules of Nasdaq. We intend to disclose any changes to the code that
affect the provisions required by Item 406 of Regulation S-K and any waivers of the code of ethics for our executive officers, senior financial officers or directors, on that website.
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Item 1A. Risk Factors
We face a variety of risks that may affect our business, financial condition and results of operations, some of which are beyond our control. The risks
described below are not the only ones we face and should be considered in addition to the other cautionary statements and risks described elsewhere and the other information contained in this report and in our other filings with the SEC, including
our subsequent reports on Forms 10-Q and 8-K. Additional risks and uncertainties not known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our
business, financial condition and results of operations could be seriously harmed.
Risks Relating to Our Industry
Competition
The telecommunications
industry in Alaska is competitive and creates pressure on our pricing and customer retention efforts.
Strong competitors make it more difficult for
us to attract and retain customers, which could result in lower revenue, cash flow from operating activities and Free Cash Flow.
Our principal
facilities-based competitor for voice and broadband services is GCI, who is also the dominant cable television provider in Alaska. In the business and wholesale market, GCI holds a dominant position through its extensive fiber optic, microwave and
satellite based middle mile network as well as its undersea fiber cable network, where it owns and operates two of the four existing undersea fiber optic cables connecting Alaska to the contiguous states. In the consumer market, GCI bundles its
cable video services with voice, broadband and wireless services. We do not offer video service and wireless, and thus, are unable to offer competing bundles.
GCI continues to expand its statewide reach, including through its Terra Southwest project which is funded with federal subsidies, consisting of grants from
the USDA Rural Utilities Service and federal low-interest loans. This subsidy gives GCI a substantial competitive advantage in the markets served by Terra Southwest, and GCI receives substantial additional funding for services offered over this
facility from the federal E-Rate and Rural Health Care universal service support mechanisms. GCI has indicated it intends to replicate this government subsidized model in other markets in Alaska, which will create monopoly-type conditions in these
markets which are subject to minimal regulatory oversight.
With a long history of operating in Alaska, AT&T has a terrestrial long-haul network in
Alaska where the focus is on serving certain national customers. AT&Ts primary focus in Alaska is providing wireless services.
As we compete
more extensively in the managed IT services business, we are likely to face new competition, both local and national. An example of this new competition is World Wide Technologies, a large equipment value add reseller. There are many smaller firms
that compete for IT business in Alaska. We believe that competition for managed IT services is fragmented in Alaska with no clear or dominant provider.
Our New Cost Structure
We may not be
able to maintain our new cost structure following the Wireless Sale which would create risk to our ability to generate bottom-line growth.
Subsequent
to the Wireless Sale, wind-down of our wireless operations and positioning the Company as a more focused broadband and managed IT services company, we commenced a plan to generate synergies and achieve cost reductions. This plan was substantially
implemented during the third and fourth quarters of 2015. Maintaining these cost reductions is a critical factor impacting our generation of cash flow from operating activities. If we fail to maintain these cost reductions, our financial condition
will be impacted.
Technological Advancements and Changes in Telecommunications Standards
If we do not adapt to rapid technological advancements and changes in telecommunications standards, our ability to compete could be strained, and as a
result, we would lose customers.
Our success will likely depend on our ability to adapt and fund the rapid technological changes in our industry. Our
failure to adopt a new technology or our choice of one technology over another may have an adverse effect on our ability to compete or meet the demands of our customers. Technological
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changes could, among other things, reduce the barriers to entry facing our competitors providing local service in our service areas. The pace of technology change and our ability to deploy new
technologies may be constrained by insufficient capital and/or the need to generate sufficient cash to make interest payments on our debt.
New products
and services may arise out of technological developments and our inability to keep pace with these developments may reduce the attractiveness of our services. Some of our competitors may have greater resources to respond to changing technology than
we do. If we fail to adapt successfully to technological changes or fail to obtain access to new technologies, we could lose customers and be unable to attract new customers and/or sell new services to our existing customers. We may be unable to
successfully deliver new products and services, and we may not generate anticipated revenues from such products or services.
To be competitive we need to
maintain an on-going investment program to continuously upgrade our access network. We define the access network as the connection from the end user location either a home or a business to the first aggregation point in the network.
The connection can be copper or fiber and the aggregation point is typically a central office or remote serving node. The access network determines the speeds we are able to deliver to our end customer. We may not be able to maintain the level of
investment needed for long term competitiveness in offering broadband speeds to all segments of our market.
As we seek to grow as the leading Cloud
Enabler for businesses in Alaska, we will have to partner with various IT technology and cloud services providers. Technology trends and developments in this area can be far more disruptive and tend to change in shorter cycles compared to
telecommunications technologies. Our ability to invest in the training, certifications, and skills required to develop these partnerships will be important in determining our success in this area of managed IT services.
Our limited access to middle mile infrastructure limits our ability to compete in certain geographic and customer segments in Alaska.
We define middle mile as the connection between the first aggregation point into a local community and the interconnection point to the internet or switch
which connects the community to the outside world. These are typically high capacity connections and can span hundreds of miles in the case of Alaska. It is unlikely that we will have the capital needed for middle mile investments, and GCI controls
significant elements of the middle mile network in Alaska, and through its government funded programs is creating monopoly conditions in certain areas of the state. This limits our ability to compete in certain markets.
Risks Relating to Our Debt
Our debt could adversely
affect our financial health, financing options and liquidity position, and our ability to service debt is, in part, dependent on maintaining the synergies achieved following the Wireless Sale. Due to uncertainty in the capital markets, we may be
unable to retire or refinance our long-term debt when it becomes due, or if we are able to refinance it, we may not be able to do so with attractive interest rates or terms.
Since 2012 we have been aggressively reducing the amount of our outstanding debt. As of December 31, 2015, we had total debt of $193.1 million, net of
debt discounts. The Wireless Sale resulted in $240.5 million of debt reductions. In the third quarter of 2015, we entered into a combined $100.0 million of senior secured financing. Proceeds of $81.5 million and $10.0 million were used to repay in
full the remaining balance of our 2010 Senior Credit Facility and purchase a portion of our 6.25% Notes, respectively. Our relatively complex debt structure involves two tranches of secured debt and a convertible notes issue. This requires us to
enter the debt markets on a fairly regular basis as components of this structure mature. Continuing global, national, and state fiscal insecurity, as well as uncertainty regarding our future performance adds refinancing risk to the Company. At
December 31, 2015, our debt consists of $89.8 million under the senior secured credit facilities, $104.0 million of 6.25% Convertible Notes ($99.3 million net of discounts) and $4.0 million of capital lease obligations.
Our debt obligations require the following:
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Maintain a fixed amortization schedule of principal payments on our 2015 Senior Credit Facilities of $3,000 in 2016 and $4,000 in 2017.
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Perform against financial covenants under our 2015 Senior Credit Facilities.
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The term loan components of our
2015 Senior Credit Facilities of $65,000 and $25,000, net of scheduled payments described above, mature on January 2, 2018 and March 3, 2018, respectively. Our revolving loan facility, which is undrawn, matures on January 2, 2018. The
maturity dates on our 2015 Senior Credit Facilities may be extended to 2020 if the Company meets certain Convertible Note repurchase targets and liquidity requirements. Our Convertible notes are not callable and limit our flexibility with strategic
acquisitions.
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Our debt also exposes us to adverse changes in interest rates. As a component of our cash flow hedging strategy
and as required under the terms of the 2015 Senior Credit Facilities, we hold a pay-fixed, receive-floating interest rate swap in the notional amount of $44.8 million at 5.833%, inclusive of a 4.5% LIBOR spread, for the period December 2015
through December 2017.
We are also subject to credit risk related to our counterparties on the swaps and to interest rate fluctuations on interest
generated by our debt in excess of the notional term loans referenced above. For more specific information related to our exposure to changes in interest rates and our use of interest rate swaps, please see Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.
Risks Related to our Business
Access and High Cost Support Revenue
Revenues from access charges will continue to decline and revenue from high cost loop support is subject to rule changes at the FCC.
We received approximately 22.9% and 18.6% of our operating revenues for the years ended December 31, 2015 and 2014, respectively, from interstate and
intrastate access charges. The amount of revenue that we receive from these access charges is calculated in accordance with requirements set by the FCC and the RCA. Any change in these requirements may reduce our revenues and earnings. Access
charges have consistently decreased in past years and we expect this trend to continue due to declines in voice usage and migration to VoIP services which do not generate access revenue for us.
Furthermore, the FCC has actively reviewed new mechanisms for inter-carrier compensation that will eliminate certain access charges entirely. Elimination of
access charges would have a material adverse effect on our revenue and earnings. Similarly, the RCA has adopted regulations modifying intrastate access charges that may reduce our revenue.
As discussed in Regulations substantial changes are expected to be enacted by the FCC regarding our future high cost loop support funding and
obligations thereunder. It is difficult to predict the future growth in this source of revenue as well as the future obligations that we will be required to accept that are tied to this funding.
Regulations
New governmental
regulations may impose obligations on us to upgrade our existing technology or adopt new technology that may require additional capital and we may not be able to comply in a timely manner with these new regulations.
Some of our markets are regulated and we cannot predict the extent to which the government will impose new unfunded mandates on us. Such mandates have
included those related to emergency location, emergency E-911 calling, law enforcement assistance and local number portability. Each of these government mandates has imposed new requirements for capital that we could not have predicted
with any precision. Along with these obligations, the FCC has imposed deadlines for compliance with these mandates. We may not be able to provide services that comply with these or other regulatory mandates. Further, we cannot predict whether other
mandates from the FCC or other regulatory authorities will occur in the future or the demands they may place on our capital expenditures. For more information on our regulatory environment and the risks it presents to us, see Item 1, Business
Regulation.
There is a risk that FCC Orders will materially impact our revenue.
The 2011 Transformation Order establishes a new framework for high cost universal service support that replaced existing support mechanisms that provide
support to carriers, like us, that serve high-cost areas with new CAF support mechanisms and service obligations that are focused on broadband Internet access services. Though the future rules remain unclear, we do not expect them to be as favorable
to the Company as the prior rules and we expect conditions attached to future high cost support to require significant increases in capital spending to meet broadband deployment and service targets. We recognized $19.7 million and $23.2 million in
federal high cost universal service payment
20
revenues to support our wireline operations in high cost areas in the twelve months ended December 31, 2015 and 2014, respectively. The FCC is currently considering what broadband deployment
and service obligations it will require us to meet in connection with future federal high cost CAF support, along with the duration and other terms of support. The resulting uncertainty prevents us from accurately measuring the amount of our future
high cost support, or the capital investment the Company will be required to make in connection with this support or the duration of the support. In addition, in March 2015, the FCC reclassified broadband Internet access service as a
telecommunications service that is now subject to a substantial body of legacy regulations that formerly applied only to traditional circuit switched telephone services. See the heading Regulation, above, for more detailed
information.
In addition, the FCC has imposed strict new compliance requirements governing enrollment of low-income subscribers in the FCCs
Lifeline program, which provides carriers like us with USF support to reduce the cost of wireline and wireless services to low-income consumers. For the twelve months ended December 31, 2015, we recognized wireline and wireless lifeline revenue
of $0.5 million and $0.2 million, respectively. Over the same period the number of Lifeline customers we served shifted from 1,828 wireline and 7,232 wireless lifeline customers to 1,402 wireline and 5,616 wireless Lifeline customers. Following the
February 2015 completion of the sale of our wireless business, we no longer serve any wireless Lifeline customers. We expect the amount of Lifeline USF support we receive in connection with our wireline customers to continue to decrease,
because we expect that it will be more difficult for low-income consumers to qualify for Lifeline, and to remain enrolled in Lifeline, than it was under the former rules.
Economic Conditions
The successful
operation and growth of our businesses depends on economic conditions in Alaska which may deteriorate due to reductions in crude oil prices and other factors.
The vast majority of our customers and operations are located in Alaska. Due to our geographical concentration, the successful operation and growth of our
businesses depends on economic conditions in Alaska. The Alaska economy, in turn, depends upon many factors, including:
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the strength of the natural resources industries, particularly oil production and prices of crude oil;
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the strength of the Alaska tourism industry;
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the level of government and military spending; and
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the continued growth of service industries.
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The population of Alaska is approximately 730,000 with Anchorage,
Fairbanks and Juneau serving as the primary population and economic centers in the state.
It is estimated that one-third of Alaskas economy is
dependent on federal spending, one-third on natural resources, in particular the production of crude oil, and the remaining one-third on drivers such as tourism, mining, timber, seafood, international air cargo and miscellaneous support services.
Alaskas economy is dependent on investment by oil companies, and state tax revenues correlate with the price of oil as the State assesses a tax
based on the retail price of oil that transits the pipeline from the North Slope. During 2014 and 2015, the price of crude oil dropped substantially, which is primarily impacting the state in two ways:
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1.
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Resource based companies have indicated, that although Alaska is a strategic area of investment, they are reducing their level of spending in the state, and in particular the North Slope, through reducing their
operating costs. In flight development projects are continuing, however, should the price of oil remain at its current levels, spending on future development is expected to be lower.
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2.
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The State of Alaska is expected to incur budget deficits, requiring reduction in state spending across multiple programs. The State of Alaska is not immune to volatility in the price of oil, and has established
multi-year budgetary reserves that mitigate the impact of short term price declines. The State is expecting to reduce spending in its current fiscal year, but the amount of reduction is mitigated by the significant level of reserves on hand. Reduced
spending by the State is expected to have a dampening effect on overall economic activity in the state.
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While the economy in Alaska, and Anchorage in particular, showed resilience in 2015, economists are forecasting
that Alaska may experience declining population growth and a weaker job environment in certain employment sectors, including oil and gas, government, construction and business services, as a result of these dynamics.
Our terrestrial fiber network on the North Slope of Alaska (described below) which allows us to provide broadband solutions to the oil and gas sector may be
negatively impacted by declining crude oil prices in the near term. Additionally, overall macro impacts from a sustained lower price of crude oil, if maintained over time, will ultimately impact our growth in the future.
The tourism industry in Alaska remained strong through the summer of 2015. Visitor volume was up 7% year over year, increasing from 1,659,600 in the summer of
2014 to 1,780,000 in the summer of 2015. Reductions in crude oil prices typically result in lower retail prices of gasoline and other processed fuels. Such reductions can have a positive impact on the levels of tourism, including travel to and
within the state of Alaska. Economists are currently predicting moderate employment growth in the leisure and hospitality sector in 2016.
North Slope Fiber Optic Network
Our
joint venture with Quintillion Holdings, LLC established, in part, to provide broadband solutions to the North Slope of Alaska may not prove to be as successful as currently anticipated.
During the second quarter of 2015, we acquired a fiber optic network on the North Slope of Alaska from ConocoPhillips Alaska, Inc. and entered into a joint
venture with Quintillion to operate and expand the network. This network will enable commercially-available, high-speed connectivity where only high-cost microwave and satellite communications were available. The success of this joint venture is
dependent, in part, on the utilization of the network by other telecom carriers.
Quintillion is investing in a fiber optic system with contemplated
landing stations in several northwest Alaska communities, including a link from the North Slope to Fairbanks. Delays in the completion of this system could impact our ability to acquire capacity on the North Slope to Fairbanks segment, thereby
negatively impacting our market potential in that region.
Erosion of Access Lines
We provide services to many customers over access lines, and if we continue to lose access lines, our revenues, earnings and cash flow from operating
activities may decrease.
Our business generates revenue by delivering voice and data services over access lines. We have experienced net access line
loss over the past few years and the rate of loss has been accelerating. During the year ended December 31, 2015 and 2014 our business access line erosion was 2,570 and 648, respectively, while over the same period our consumer access line
erosion was 6,090 and 5,524 respectively. We expect to continue to experience net access line loss in our markets, affecting our revenues, earnings and cash flow from operating activities.
Network / E-911 Failure
A failure of
our network could cause significant delays or interruptions of service, which could cause us to lose customers.
To be successful, we will need to
continue to provide our customers reliable service over our network. Our network and infrastructure are constantly at risk of physical damage as a result of human, natural or other factors. These factors may include pandemics, acts of terrorism,
sabotage, natural disasters, power surges or outages, software defects, contractor or vendor failures, labor disputes and other disruptions that may be beyond our control. Should we experience a prolonged system failure or a significant service
interruption, our customers may choose a different provider and our reputation may be damaged. Further, we may not have adequate insurance coverage, which would result in unexpected expense. Notably, similar to other undersea fiber optic cable
operators, we do not carry insurance that would cover the cost of repair of our undersea cables and, thus, we would bear the full cost of any necessary repairs.
22
A failure of enhanced emergency calling services associated with our network may harm our business.
We provide E-911 service to our customers where such service is available. We also contract from time to
time with municipalities to upgrade their dispatch capabilities such that those facilities become capable of receiving our transmission of a 911 callers
location information and telephone number. If the emergency call center is unable to process such information, the caller is provided only basic 911 services. In these instances, the emergency caller may be required to verbally advise the operator
of such callers location at the time of the call. Any inability of the dispatchers to automatically recognize the callers location or telephone number, whether or not it occurs as a result of our network operations, may cause us to incur
liability or cause our reputation or financial results to suffer.
Employees
We depend on the availability of personnel with the requisite level of technical expertise in the telecommunications industry.
Our ability to develop and maintain our networks and execute our business plan is dependent on the availability of technical engineering, IT, service delivery
and monitoring, product development, sales, management, finance and other key personnel within our geographic location.
Labor costs and the terms of
our principal collective bargaining agreement can negatively impact our ability to remain competitive, which could cause our financial performance to suffer.
Labor costs are a significant component of our expenses and, as of December 31, 2015, approximately 56% of our workforce is represented by the IBEW. We
believe our labor costs are higher than our competitors who employ a non-unionized workforce because we are required by the CBA to contribute to the IBEW Health and Welfare Trust and the Alaska Electrical Pension Fund for benefit programs, including
defined benefit pension plans and health benefit plans, that are not reflective of the competitive marketplace. Furthermore, work rules under the existing agreement limit our ability to efficiently manage our workforce and make the incremental cost
of work performed outside normal work hours high. In addition, we may make strategic and operational decisions that require the consent of the IBEW. While we believe our relationship with the IBEW is constructive, and although the IBEW generally has
provided necessary consents, the IBEW may not provide consent when we need it, it may require additional wages, benefits or other consideration be paid in return for its consent, or it may call for a work stoppage against the Company.
Our current CBA with the IBEW that is in effect until December 31, 2016, includes provisions that allow us to be more cost competitive in certain areas.
The IBEW has entered into several agreements with us over the last year which have provided for isolated cost savings; however, we may face resistance to changes that are essential for our future success. Should we not reach agreement with the IBEW
on a new collective bargaining agreement that allows us to be competitive, our future financial results may be impacted. In the event of a work stoppage, we may be required to utilize cash on hand to support the funding of operations during the
affected period.
In addition, the IBEW has brought unfair labor practice complaints and may continue to bring grievances to binding arbitration. The IBEW
may also bring court actions and may seek to compel us to engage in the bargaining processes where we believe we have no such obligation. If successful, there is a risk these administrative, judicial or arbitral avenues could create additional costs
that we did not anticipate.
Vendors
We rely on a limited number of key suppliers and vendors for timely supply of equipment and services for our network infrastructure and customer support
services. If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain the equipment and services we require to operate our business successfully.
We depend on a limited number of suppliers and vendors for equipment and services for our network and certain customer services. If suppliers of our equipment
or providers of services on which we rely experience financial difficulties, service or billing interruptions, patent litigation or other problems, subscriber growth and our operating results could suffer.
Suppliers that use proprietary technology, effectively lock us into one or a few suppliers for key network components. Other suppliers require us to maintain
exclusive relationships under a contract. As a result, we have become reliant upon a limited number of suppliers of network equipment. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain
satisfactory replacement suppliers or vendors on economically attractive terms on a timely basis, or at all, which could increase costs and may cause disruption in service.
23
Networks, Monitoring Centers and Data Hosting Facilities
Maintaining the Companys networks, around the clock monitoring centers and data hosting facilities requires significant capital expenditures, and our
inability or failure to maintain and upgrade our networks and data centers would have a material impact on our market share and ability to generate revenue.
The Company currently operates an extensive network that includes monitoring and hosting facilities. To provide contractual levels of service to our customers
and remain competitive, we must expend significant amounts of capital. In many cases, we must rely on outside vendors whose performance and costs may not be sufficiently within our control.
Information Technology Systems
A
failure of back-office IT systems could adversely affect the Companys results of operations and financial condition.
The efficient operation of
the Companys business depends on back-office IT systems. The Company relies on back-office IT systems, including certain systems provided by third party vendors, to effectively manage customer billing, business data, communications, supply
chain, order entry and fulfillment and other business processes. Some of these systems are no longer supported under maintenance agreements from the underlying vendor. A failure of the Companys IT systems, or the IT systems provided by third
party vendors, to perform as anticipated could disrupt the Companys business and result in a failure to collect accounts receivable, transaction errors, processing inefficiencies, and the loss of sales and customers, causing the Companys
reputation and results of operations to suffer. In addition, IT systems may be vulnerable to damage or interruption from circumstances beyond the Companys control, including fire, natural disasters, systems failures, security breaches and
viruses. Any such damage or interruption could have a material adverse effect on our business, operating results, margins and financial condition.
Undersea Fiber Optic Cable Systems
If
failures occur in our undersea fiber optic cable systems, our ability to immediately restore our service may be limited.
Our undersea fiber optic
cable systems carry a large portion of our traffic to and from the contiguous lower 48 states. If a failure occurs and we are not able to secure alternative facilities, some of the communications services we offer to our customers could be
interrupted, which could have a material adverse effect on our business, financial position, results of operations or liquidity.
Managed IT Services
Our expansion
into managed IT services may not be achieved as planned which could impact our ability to grow revenue.
We are expanding our business to provide more
managed IT services along with our traditional telecom services. The delivery of professional services is not without risk, and it is possible that we may fail to execute on one or more managed IT service projects exposing the company to legal
claims and reputational risk.
Intellectual Property
Third parties may claim that the Company is infringing upon their intellectual property, and the Company could suffer significant litigation or licensing
expenses or be prevented from selling products.
Although the Company does not believe that any of its products or services infringe upon the valid
intellectual property rights of third parties, the Company may be unaware of intellectual property rights of others that may cover some of its technology, products or services. Any litigation growing out of third party patents or other intellectual
property claims could be costly and time consuming and could divert the Companys management and key personnel from its business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation
increase these risks. Resolution
24
of claims of intellectual property infringement might also require the Company to enter into costly license agreements. Likewise, the Company may not be able to obtain license agreements on
acceptable terms. The Company also may be subject to significant damages or injunctions against development and sale of certain of its products. Further, the Company often relies on licenses of third party intellectual property for its businesses.
The Company cannot ensure these licenses will be available in the future on favorable terms or at all. If any of these risks materialize, it could have a material adverse effect on our business, operating results, margins and financial condition.
Security Breaches
A failure in
or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, result in the disclosure of confidential information or damage our reputation. Any such failure also could have a
significant adverse effect on our cash flows, financial condition, and results of operations.
Our operations rely on the secure processing, storage
and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software and networks may
be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. Additionally, breaches of security may occur through intentional or unintentional acts by those
having authorized or unauthorized access to confidential or other information. If one or more such events occur, this potentially could jeopardize our information or our customers information processed and stored in, and transmitted through,
our computer systems and networks. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from operational and security risks, and we
may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
With
regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Such
disruptions could involve electrical, communications, internet, transportation or other services used by us or third parties with whom we conduct business. The costs associated with such disruptions, including any loss of business, could have a
significant adverse effect on our results of operations or financial condition.
Any of these operational and security risks could lead to significant and
negative consequences, including reputational harm as well as loss of customers and business opportunities, which in turn could have a significant adverse effect on our businesses, financial condition and results of operations.
Cyber-attacks may damage our networks or breach customer and other proprietary data, leading to service disruption, harm to reputation, loss of customers,
and litigation over privacy violations.
All industries that rely on technology in customer interactions are increasingly at risk for cyber-attacks. A
cyber-attack could be levied against our network, causing disruption of operations and service, requiring implementation of greater network security measures, and resulting in lost revenue due to lost service. A cyber-attack could also be targeted
to infiltrate customer proprietary and other data, breaching customer privacy, resulting in misuse of customer information and other data, and possibly leading to litigation over privacy breaches and causing harm to the Companys reputation. We
rely on a variety of procedures to guard against cyber-attacks, but the frequency of threats from these attacks is growing globally and the risk to us is also growing.
Pension Plans
We may incur
substantial and unexpected liabilities arising out of our pension plans.
Our pension plans could result in substantial liabilities on our balance
sheet. These plans and activities have and will generate substantial cash requirements for us and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between projected plan
obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Changes in interest rates, mortality rates,
health care costs, early retirement rates,
25
investment returns and the market value of plan assets can affect the funded status of our defined benefit pension and cause volatility in the net periodic benefit cost and future funding
requirements of the plans. In the future, we may be required to make additional contributions to our defined benefit plan. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a
competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
Our most significant pension plan is
the Alaska Electrical Pension Fund (the AEPF) in which we participate on behalf of substantially all of our employees. The AEPF is a multi-employer pension plan to which we make fixed, per employee, contributions through our collective
bargaining agreement with the IBEW, which covers our IBEW represented workforce, and a special agreement, which covers most of our non-represented workforce. Because our contribution requirements are fixed, we cannot easily adjust our annual plan
contributions to address our own financial circumstances. Currently, this plan is not fully funded, which means we may be subject to increased contribution obligations, penalties, and ultimately we could incur a contingent withdrawal liability
should we choose to withdraw from the AEPF for economic reasons. Our contingent withdrawal liability is an amount based on our pro-rata share among AEPF participants of the value of the funding shortfall. This contingent liability becomes due and
payable by us if we terminate our participation in the AEPF. Moreover, if another participant in the AEPF goes bankrupt, we would become liable for a pro-rata share of the bankrupt participants vested, but unpaid, liability for accrued
benefits for that participants employees. This could result in a substantial unexpected contribution requirement and making such a contribution could have a material adverse effect on our cash position and other financial results. These
sources of potential liability are difficult to predict.
Given the complexity of pension-related matters we may not, in every instance, be in full
compliance with applicable requirements.
Key Members of Senior Management
We depend on key members of our senior management team; our performance could be adversely impacted if they depart and we cannot find suitable replacements.
Our success depends largely on the skills, experience and performance of key members of our senior management team as well as our ability to attract
and retain other highly qualified management and technical personnel. There is competition for qualified personnel in our industry and we may not be able to attract and retain the personnel necessary for the development of our business. Our remote
location also presents a challenge to us in attracting new talent. If we lose one or more of our key employees, our ability to successfully implement our business plan could be materially adversely affected. We do not maintain any key
person insurance on any of our personnel.
Future Acquisitions
Future acquisitions could result in operating and financial difficulties.
Our future growth may depend, in part, on acquisitions. To the extent that we grow through acquisitions, we will face the operational and financial risks that
commonly accompany that strategy. We would also face operational risks, such as failing to assimilate the operations and personnel of the acquired businesses, disrupting their ongoing businesses, increasing the complexity of our business, and
impairing management resources and managements relationships with employees and customers as a result of changes in their ownership and management. Further, the evaluation and negotiation of potential acquisitions, as well as the integration
of an acquired business, may divert management time and other resources. Some acquisitions may not be successful and their performance may result in the impairment of their carrying value.
Volatility Risks Related to our Common Stock
Continued volatility in the price of our common stock could negatively affect us and our stockholders.
The trading price of our common stock has been impacted by the limited number of shares outstanding, and by a significant number of transactions such as the
AWN Formation and the Wireless Sale. Additional factors, many of which are beyond our control, include actual or anticipated variations in quarterly financial results, changes in financial expectations by securities analysts and announcements by our
26
current and future competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments. In addition, our financial results in the future may be below the
expectations of securities analysts and investors. Broad market and industry factors could also negatively affect the price of our common stock regardless of our operating performance. Future volatility in our stock price could materially adversely
affect the trading market and prices for our common stock as well as our ability to issue additional securities or to secure additional financing.
Declines in our Market Capitalization or Share Price
Declines in our market capitalization or share price may affect our ability to access the capital markets.
Our ability to issue convertible notes is, in part, a function of our share price and market capitalization, as is our ability to be listed on a national
stock exchange. To the extent either declines substantially, our ability to access the capital markets may be impaired.
Location
Specific Risk
We operate in remote areas subject to geologic instability and other natural events which could negatively impact our operations.
Many of our operations are located in areas that are prone to earthquakes, fires, and other natural disturbances. Many of these areas have limited
emergency response assets and may be difficult to reach in an emergency situation. Should an event occur, it could be weeks or longer before remediation efforts could be implemented, if they could be implemented at all. The scope and risk of such an
event occurring is difficult to gauge.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Our principal properties do not lend themselves to simple description by character and location. The components of our gross investment in property,
plant and equipment consisted of the following as of December 31, 2015 and 2014:
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(in thousands)
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2015
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2014
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Land, buildings and support assets
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$
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198,485
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$
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209,349
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Central office switching and transmission
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381,511
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385,016
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Outside plant, cable and wire facilities
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722,582
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674,914
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Other
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5,207
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3,606
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Construction work in progress
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29,313
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60,249
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$
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1,337,098
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$
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1,333,134
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Our property, plant and equipment are used in our communications networks.
Land, buildings and support assets consist of land, land improvements, central office and certain administrative office buildings as well as general purpose
computers, office equipment, vehicles and other general support equipment. Central office switching and transmission and wireless switching and transmission consist primarily of switches, routers and transmission electronics for our regulated and
wireless entities, respectively. Outside plant and cable and wire facilities include primarily conduit and cable. We own substantially all of our telecommunications equipment required for our business. However, we lease certain facilities and
equipment under various capital and operating lease arrangements when the leasing arrangements are more favorable to us than purchasing the assets.
We
own and lease office facilities and related equipment for our headquarters, central office buildings and operations in locations throughout Alaska and Oregon. Our principal executive and administrative offices are located in Anchorage, Alaska. We
believe we have appropriate easements, rights-of-way and other arrangements for the accommodation of our pole lines, underground conduits, aerial, underground and undersea cables, and wires. However, these properties do not lend themselves to simple
description by character and location.
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In addition to land and structures, our property consists of equipment necessary for the provision of
communication services. This includes central and IP office equipment, customer premises equipment and connections, towers, pole lines, remote terminals, aerial, underground and undersea cable and fiber optic and copper wire facilities, vehicles,
furniture and fixtures, computers and other equipment. We also own certain other communications equipment held as inventory for sale or lease. Substantially all of our communications equipment and other network equipment are located in buildings
that we own or on land within our local service coverage area.
We have insurance to cover certain losses incurred in the ordinary course of business,
including excess general liability, property coverage including business interruption, director and officers and excess employment practices liability, excess auto, crime, fiduciary, workers compensation and non-owned aircraft insurance in
amounts and with deductibles that are typical of similar operators in our industry and with reputable insurance providers. Central office equipment, buildings, furniture and fixtures and certain operating and other equipment are insured under a
blanket property insurance program. This program provides substantial limits of coverage against all risks of loss including fire, windstorm, flood, earthquake and other perils not specifically excluded by the terms of the policies. As
is typical in the communications industry, we are self-insured for damage or loss to certain of our transmission facilities, including our buried, undersea and above ground transmission lines. We self-insure with respect to employee health
insurance, primary general liability, primary auto liability and primary employment practices liability subject to stop-loss insurance with insurance carriers that caps our liability at specified limits. We believe our insurance coverage is
adequate; however, if we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.
Substantially all of our assets (including those of our subsidiaries) have been pledged as collateral for our 2015 Senior Credit Facilities.
Item 3. Legal Proceedings
We are involved in various claims, legal actions, personnel matters and regulatory proceedings arising in the ordinary course of business, including various
legal proceedings involving regulatory matters described under Item 1, BusinessRegulation. We have recorded a liability for estimated litigation costs of $0.6 million as of December 31, 2015, against certain current claims and
legal actions. We believe that the disposition of these matters will not have a material adverse effect on the Companys consolidated financial position, comprehensive income or cash flows. It is the Companys policy to expense costs
associated with loss contingencies, including any related legal fees, as they are incurred.
Item 4. Mine Safety
Disclosures
Not applicable.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Alaska Communications Systems
Group, Inc. (we, our, us, the Company, or Alaska Communications), a Delaware corporation, through its operating subsidiaries, provides integrated communication services to business,
wholesale and consumer customers in the state of Alaska and beyond using its statewide and interstate telecommunications network.
The accompanying
consolidated financial statements are as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013. They represent the consolidated financial position, results of operations and cash flows of Alaska
Communications and the following wholly-owned subsidiaries:
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Alaska Communications Systems Holdings, Inc. (ACS Holdings)
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ACS of Alaska, LLC (ACSAK)
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ACS of the Northland, LLC (ACSN)
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ACS of Fairbanks, LLC (ACSF)
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ACS of Anchorage, LLC (ACSA)
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ACS Wireless, Inc. (ACSW)
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ACS Long Distance, LLC (ACSLD)
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ACS Internet, LLC (ACSI)
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ACS Messaging, Inc. (ACSM)
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ACS Cable Systems, LLC (ACSC)
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Crest Communications Corporation (Crest)
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Alaska Northstar Communications, LLC
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Worldnet Communications, Inc.
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TekMate, LLC (TekMate)
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In addition to the wholly-owned subsidiaries, the Company has a fifty percent interest in ACS-Quintillion JV,
LLC, a joint venture formed by its wholly-owned subsidiary ACS Cable Systems, LLC and Quintillion Holdings, LLC (QHL) in connection with the North Slope fiber optic network transactions. See Note 3
Joint Venture
for
additional information. The Company previously owned a one-third interest in the Alaska Wireless Network, LLC (AWN) which is represented in the Companys consolidated financial statements as an equity method investment through
February 1, 2015. On February 2, 2015, the Company sold this one-third interest in connection with the sale of its wireless operations. See Note 2
Sale of Wireless Operations
for additional information. On
August 31, 2010, the Company acquired a 49% interest in TekMate, a leading managed information technology services firm in Alaska. On January 31, 2014, the Company purchased the remaining 51% interest in TekMate. Prior to that date,
TekMate was represented in the Companys consolidated financial statements as an equity method investment. Subsequent to that date, TekMate has been recorded as a wholly-owned subsidiary.
A summary of significant accounting policies followed by the Company is set forth below.
Basis of Presentation
The consolidated financial
statements and footnotes include all accounts and subsidiaries of the Company in which it maintains a controlling financial interest. Intercompany accounts and transactions have been eliminated. Investments in entities where the Company is able to
exercise significant influence, but not control, are accounted for by the equity method. For transactions with entities accounted for under the equity method, any intercompany profits on amounts still remaining are eliminated. Amounts originating
from any deferral of intercompany profits are recorded within either the Companys investment account or the account balance to which the transaction specifically relates (e.g., construction of fixed assets). Only upon settlement of the
intercompany transaction with a third party is the deferral of the intercompany profit recognized by the Company. The Company has consolidated the financial results of the joint venture with QHL based on its determination that, for accounting
purposes, it holds a controlling financial interest in the joint venture and is the primary beneficiary of this variable interest entity. The Company has accounted for and reported QHLs 50% ownership interest in the joint venture as a
noncontrolling interest. See Note 3
Joint Venture
for additional information. Certain reclassifications have been made to the prior years financial statements to conform to the current year presentation.
F-8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable, assets held-for-sale, and long-lived assets, the value of derivative instruments, deferred
capacity revenue, legal contingencies, stock-based compensation and income taxes. These estimates and assumptions are based on managements best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, including the current economic environment, which management believes is reasonable under the circumstances. Assumptions are adjusted as facts and circumstances dictate. More volatile capital markets,
uncertainty on interest rates, and declines in crude oil pricing have combined to increase the uncertainty in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ
significantly from those estimates. Changes in those estimates will be reflected in the financial statements of future periods.
Cash and Cash
Equivalents
For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, the Company generally considers all highly
liquid investments with a maturity at acquisition of three months or less to be cash equivalents.
Restricted Cash
Restricted cash as of December 31, 2015 consists of $1,824 held in certificates of deposits as required under the terms of certain contracts to which the
Company is a party. When the restrictions are lifted, the Company will transfer these funds into its operating accounts.
Trade Accounts Receivable
and Bad Debt Reserves
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts
receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company does not have any off-balance sheet credit exposure related to its customers. The Company evaluates its bad debt as a
single portfolio since most of its subsidiaries primarily operate within Alaska and are subject to the same economic and risk conditions across industry segments and geographic locations. Bad debt reserves against uncollectible receivables are
established and incurred during the period. These estimates are derived through an analysis of account aging profiles and a review of historical recovery experience. Receivables are charged off against the allowance when management confirms it is
probable amounts will not be collected. Subsequent recoveries, if any, are credited to the allowance. The Company records bad debt expense as a component of Selling, general and administrative expense in the Consolidated Statements of
Comprehensive Income (Loss).
Materials and Supplies
Materials and supplies are carried in inventory at the lower of moving average cost or market. Cash flows related to the sale of inventory are included in
operating activities in the Companys Consolidated Statements of Cash Flows.
F-9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Assets and Liabilities Held-for-Sale
Assets and liabilities held-for-sale represented the assets and liabilities that were sold in connection with the Companys sale of its wireless
operations. At December 31, 2014, these assets and liabilities were recorded at the lower of carrying value or net realizable value which approximated the consideration expected to be received from the sale of those assets and liabilities.
Impairment, if applicable, on property, plant and equipment classified as held-for-sale was recorded to reduce the carrying value to its fair value less cost to sell. Depreciation expense on the property, plant and equipment and capital leases
identified as held-for-sale was discontinued on December 4, 2014, with the exception of certain buildings accounted for as capital leases which were in use beyond that date.
Exit Obligations
In connection with the decision
to sell its wireless operations, the Company incurred certain costs associated with the wind-down of its retail wireless operations that met the criteria for reporting as exit obligations. These costs were incurred in the fourth quarter of 2014
through 2015. The accounting policies for these costs were as follows:
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Employee termination costs associated with reductions in retail stores, contact center, and other support organizations, and termination costs associated with synergies and future cost reductions resulting from the
Company becoming a more focused broadband and managed IT services company were accrued equal to the payout amount, undiscounted due to the short duration, and amortized over the remaining required service period. These termination benefits included
costs accounted for under both Accounting Standards Codification (ASC) 420, Exit or Disposal Costs Obligations (ASC 420) and ASC 712, Compensation Nonretirement Postemployment Benefits (ASC
712).
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Contract termination costs were accrued for retail store leases and a software contract where we incurred a charge to terminate the contract prior to their stated maturity. These costs were measured equal to the actual
cost to terminate the contract and were recognized at the date the contract was terminated.
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For retail store leases that were vacated, the costs were measured equal to the fair value of the remaining lease payments and recognized when the Company had ceased to use the property.
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Costs associated with marking wireless handset and accessory inventory held for sale to fair value were expensed in the fourth quarter of 2014 and are included in Cost of service and sales, non-affiliate in
the Companys Consolidated Statement of Comprehensive Income (Loss).
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Other associated costs that met the criteria of an exit activity were accrued when incurred.
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Property,
Plant and Equipment
Telephone property, plant and equipment are stated at historical cost of construction including certain capitalized overhead
and interest charges. Renewals and betterments of telephone plant are capitalized, while repairs and renewals of minor items are charged to cost of services and sales as incurred. The Company uses a group composite depreciation method in accordance
with industry practice. Under this method, telephone plant, with the exception of land and capital leases, retired in the ordinary course of business, less salvage, is charged to accumulated depreciation with no gain or loss recognized.
Non-telephone plant is stated at historical cost including certain capitalized overhead and interest charges, and when sold or retired, a gain or loss is recognized. Depreciation of property is provided on the straight-line method over estimated
service lives ranging from 3 to 50 years.
The Company is the lessee of equipment and buildings under capital leases expiring in various years through
2034. The assets and liabilities under capital leases are initially recorded at the lower of the present value of the minimum lease payments or the fair value of the assets at the inception of the lease. The assets are amortized over the shorter of
their related lease terms or the estimated productive lives. Amortization of assets under capital leases is included in depreciation and amortization expense.
The Company is also the lessee of various land, building and personal property under operating lease agreements for which expense is recognized on a monthly
basis. Increases in rental rates are recorded as incurred which approximates the straight-line method.
F-10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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The Company capitalizes interest charges associated with construction in progress based on a weighted average
interest cost calculated on the Companys outstanding debt.
Asset Retirement Obligations
The Company records liabilities for obligations related to the retirement and removal of long-lived assets, consisting primarily of batteries. The Company
records, as liabilities, the estimated fair value of asset retirement obligations on a discounted cash flow basis when incurred, which is typically at the time the asset is installed or acquired. The obligations are conditional on the occurrence of
future events. Uncertainty about the timing or settlement of the obligation is factored into the measurement of the liability. Amounts recorded for the related assets are increased by the amount of these obligations. Over time, the liabilities
increase due to the change in their present value, the potential changes in assumptions or inputs, and the initial capitalized assets decline as they are depreciated over the useful life of the related assets. The liabilities are eventually
extinguished when the asset is taken out of service.
Indefeasible Rights of Use
Indefeasible rights of use (IRU) consist of agreements between the Company and a third party whereby one party grants access to a portion of its
fiber network to the other party, or receives access to a portion of the fiber network of the other party. The access may consist of individually specified fibers or a specified number of fibers on the network. Certain of the Companys IRU
agreements consist of like kind exchanges for which the value of the access given up is determined to be equal to the value received. Cash may or may not be exchanged depending on the terms of the agreement. For IRU agreements in which an equal
amount of cash is received and paid and the transaction is determined to not have commercial substance, revenue and expense is not recognized in connection with the cash exchanged. For IRU agreements that are not like kind exchanges and for which
the Company receives or pays cash, revenue and expense are recognized over the term of the agreement.
Non-operating Assets
The Company periodically evaluates the fair value of its non-current investments and other non-operating assets against their carrying value whenever market
conditions indicate a change in that fair value. Any changes relating to declines in the fair value of non-operating assets are charged to non-operating expense under the caption
Other
in the Consolidated Statements of
Comprehensive Income (Loss).
Variable Interest Entities
The Companys ownership interest in ACS-Quintillion JV, LLC is a variable interest entity as defined in ASC 810, Consolidation. The Company
consolidated the financial results of this entity based on its determination that, for accounting purposes, it holds a controlling financial interest in, and is the primary beneficiary of, the entity. The Company has accounted for and reported the
interest of this entitys other owner as a noncontrolling interest. Note 3
Joint Venture
for additional information.
Equity
Method of Accounting
Investments in entities where the Company is able to exercise significant influence, but not control, are accounted for by
the equity method. Under this method, our equity investments are carried at acquisition cost, increased by the Companys proportionate share of the investees comprehensive income, and decreased by the investees comprehensive losses
up to our proportional ownership interest and cash distributions. The Company evaluates its investments in equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
At December 31, 2015, the Company had no equity method investments.
Deferred Capacity Revenue
Deferred capacity liabilities are established for usage rights on the Companys network provided to third parties. These liabilities are established at
fair value and amortized to revenue on a straight line basis over the contractual life of the relevant contract. These liabilities included certain network usage rights necessary for AWN to operate the Alaska network that were eliminated in
connection with the Companys sale of its wireless operations. A new deferred capacity revenue liability for future services to be provided to GCI was established and will be amortized over the contract life of up to 30 years.
F-11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Goodwill
Goodwill is assessed for impairment annually, or more frequently if events or changes in circumstances indicate potential impairment. The Company may first
assess qualitative factors to determine whether it is more-likely-than-not that the carrying value of its single reporting unit exceeds its fair value. If this assessment indicates that it is more-likely-than-not that the carrying value of the
reporting unit exceeds its fair value, a two-step quantitative assessment will be completed. The first step consists of comparing the carrying value of the reporting unit with its estimated fair value. The Company determines the estimated fair value
of its reporting unit utilizing a discounted cash flow valuation technique. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates and the estimated cost of capital for
purposes of determining a discount factor. If the carrying value of the reporting unit exceeds its estimated fair value, the Company will determine the implied fair value of its goodwill and an impairment loss will be recognized to the extent the
carrying value of goodwill exceeds the implied fair value. The carrying value of the Companys goodwill, net of accumulated impairment, was zero at December 31, 2015.
Long-lived Asset Impairment
Long-lived assets,
such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested for possible impairment, the Company will compare undiscounted cash flows expected to be generated by that asset to its carrying amount. If the carrying amount of the long-lived asset
is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals. Impairment is displayed in the caption Operating expenses in the Companys Consolidated Statements of Comprehensive Income (Loss).
Debt Issuance Costs and Discounts
Debt issuance
costs are capitalized and amortized to interest expense using the effective interest method over the term of the related instruments. Debt discounts are accreted to interest expense using the effective interest method. Debt issuance costs and debt
discounts are presented as a direct deduction from the carrying amount of debt on the Companys Consolidated Balance Sheet.
Preferred Stock
The Company has 5,000 shares of $0.01 par value preferred stock authorized, none of which were issued or outstanding at December 31, 2015 and
2014.
Revenue Recognition
Substantially all
recurring non-usage sensitive service revenues are billed one month in advance and are deferred until earned. Non-recurring and usage sensitive revenues are billed in arrears and are recognized when earned. Revenue is recognized on the sale of
equipment when the equipment is installed. Certain of the Companys bundled products and services have been determined to be revenue arrangements with multiple deliverables. Total consideration received in these arrangements is allocated and
measured using units of accounting within the arrangement based on relative fair values. Prior to February 2, 2015, wireless offerings included wireless devices and service contracts sold together in the Companys stores and agent
locations. The revenue for the device and accessories associated with these direct and indirect sales channels were recognized at the time the related wireless device was sold and was classified as equipment sales. Monthly service revenue from the
majority of the Companys customer base is recognized as services are rendered. Revenue earned from the Companys wireless Lifeline customer base was less certain and was therefore recognized on the cash basis as payments were received.
F-12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Concentrations of Risk
Cash is maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits and the Company
enters into arrangements to collateralize these amounts with securities of the underlying financial institutions. Generally, these deposits may be redeemed upon demand. The Company has not experienced any losses on such deposits.
The Company also depends on a limited number of suppliers and vendors for equipment and services for its network. The Companys subscriber base and
operating results could be adversely affected if these suppliers experience financial or credit difficulties, service interruptions, or other problems.
As of December 31, 2015, approximately 56% of the Companys employees are represented by the International Brotherhood of Electrical Workers, Local
1547 (IBEW). The Master Collective Bargaining Agreement (CBA) between the Company and the IBEW expires on December 31, 2016. The CBA provides the terms and conditions of employment for all IBEW represented employees
working for the Company in the state of Alaska and has significant economic impacts on the Company as it relates to wage and benefit costs and work rules that affect our ability to provide superior service to our customers. The Company considered
relations with the IBEW to be stable in 2015; however any deterioration in the relationship with the IBEW would have a negative impact on the Companys operations.
The Company provides voice, broadband and managed IT services to its customers throughout Alaska. Accordingly, the Companys financial performance is
directly influenced by the competitive environment in Alaska, and by economic factors specifically in Alaska. The most significant economic factor is the level of Alaskan oil production and the per barrel price of relevant crude oil. A significant
majority of the states unrestricted revenue comes from taxes assessed upon the production of this resource, and the price of crude oil impacts the level of investment by resource development companies. The recent drop in crude oil prices is
resulting in the State of Alaska reducing its spending, which is expected to have a dampening impact on the overall state economy. Other important factors influencing the Alaskan economy include the level of tourism, government spending, and the
movement of United States military personnel. Any deterioration in these factors, particularly over a sustained period of time, would likely have a negative impact on the Companys performance.
As an entity that relies on the Federal Communications Commission (FCC) and state regulatory agencies to provide stable funding sources to provide
services in high cost areas, the Company is also impacted by any changes in regulations or future funding mechanisms that are being established by these regulatory agencies. In 2015, 9.0% of the Companys total service and other revenues were
derived from high cost support. Funding mechanisms for high cost loop support are undergoing substantial changes with the FCC that will impact our level of funding as well as future obligations we must meet as a condition to that funding.
Additionally, the Company considers the vulnerabilities of its network and IT systems to various cyber threats. While the Company has implemented several
mitigating policies, technological safeguards and some insurance coverage, it is not possible to prevent every possible threat to its network and IT systems from deliberate cyber related attacks.
Advertising Costs
The Company expenses
advertising costs as incurred. Advertising expense totaled $4,065, $4,741 and $5,918 in 2015, 2014 and 2013, respectively and is included in Selling, general and administrative expense in the Companys Consolidated Statements of
Comprehensive Income (Loss).
Income Taxes
The Company utilizes the asset-liability method of accounting for income taxes. Under the asset-liability method, deferred taxes reflect the temporary
differences between the financial and tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent
that management believes it is more-likely-than-not
F-13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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that such deferred tax assets will not be realized. The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the
tax positions are more-likely-than-not of being sustained by the applicable tax authority. The Company records interest and penalties for underpayment of income taxes as income tax expense.
Taxes Collected from Customers and Remitted to Government Authorities
The Company excludes taxes collected from customers and payable to government authorities from revenue. Taxes payable to government authorities are presented
as a liability on the Consolidated Balance Sheets.
Regulatory Accounting and Regulation
Certain activities of the Company are subject to rate regulation by the FCC for interstate telecommunication service and the Regulatory Commission of Alaska
(RCA) for intrastate and local exchange telecommunication service. The Company, as required by the FCC, accounts for such activity separately. Long distance services of the Company are subject to regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and the RCA for intrastate telecommunication services. Wireless, Internet and other non-common carrier services are not subject to rate regulation.
Derivative Financial Instruments
The Company does
not enter into derivative contracts for speculative purposes. The Company recognizes all asset or liability derivatives at fair value. The accounting for changes in fair value is contingent on the intended use of the derivative and its designation
as a hedge. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in fair value either offset the change in fair value of the hedged assets, liabilities
or firm commitments through earnings, or are recognized in Other comprehensive income (loss) until the hedged transaction is recognized in earnings. On the date a derivative contract is entered into, the Company designates the derivative
as either a fair value or cash flow hedge. The Company formally assesses, both at the hedges inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the
fair values or cash flows of hedged items. If the Company determines that a derivative is not highly effective as a hedge or that it has ceased to be highly effective, the Company discontinues hedge accounting prospectively. The change in a
derivatives fair value related to the ineffective portion of a hedge is immediately recognized in earnings. Amounts recorded to accumulated other comprehensive loss from the date of the derivatives inception to the date of
ineffectiveness are amortized to earnings over the remaining term of the hedged item. If the hedged item is settled prior to its originally scheduled date, any remaining accumulated comprehensive loss associated with the derivative instrument is
reclassified to earnings. Termination of a derivative instrument prior to its scheduled settlement date may result in charges for termination fees.
Dividend Policy
The Companys dividend
policy is set by the Companys Board of Directors and is subject to the terms of its 2015 Senior Credit Facilities and the continued current and future performance and liquidity needs of the Company. Dividends on the Companys common stock
are not cumulative to the extent they are declared. The Board has not authorized the payment of a dividend since 2012, and has not updated its dividend policy.
Share-based Payments
Restricted Stock
The Company determines the fair value of restricted stock based on the number of shares granted and the quoted market price of the Companys common stock
on the date of grant, discounted for estimated dividend payments that do not accrue to the employee during the vesting period. Compensation expense is recognized over the vesting period and adjustments are charged or credited to expense.
Performance Share Units (PSUs)
The
Company measures the fair value of each new PSU at the grant date. Adjustments each reporting period are based on changes to the expected achievement of the performance goals or if the PSUs otherwise vest, expire, or are determined by the
Compensation Committee of the Companys Board of Directors to be unlikely to vest prior to expiration. Adjustments are charged or credited to expense. Compensation expense is recorded over the expected performance period.
F-14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Employee Stock Purchase Plan (ESPP)
The Company makes payroll deductions of from 1% to 15% of compensation from employees who elect to participate in the ESPP. A liability accretes during the
6-month offering period and at the end of the offering period (June 30 and December 31), the Company issues the shares from the 2012 Employee Stock Purchase Plan (2012 ESPP). Compensation expense is recorded based upon the
estimated number of shares to be purchased multiplied by the discount rate per share.
Tax Treatment
Stock-based compensation is treated as a temporary difference for income tax purposes and increases deferred tax assets until the compensation is realized for
income tax purposes. To the extent that realized tax benefits exceed the book based compensation, the excess tax benefit is credited to additional paid in capital.
Pension Benefits
Multi-employer Defined
Benefit Plan
Pension benefits for substantially all of the Companys Alaska-based employees are provided through the Alaska Electrical Pension
Fund. The Company pays a contractual hourly amount based on employee classification or base compensation. The accumulated benefits and plan assets are not determined for, or allocated separately to, the individual employer.
Defined Benefit Plan
The ACS Retirement Plan, which is
the Companys sole single-employer defined benefit plan and covers a limited number of employees previously employed by a predecessor to one of our subsidiaries, is frozen. The Company recognizes the under-funded status of this plan as a
liability on its balance sheet and recognizes changes in that funded status in the year in which the changes occur. The ACS Retirement Plans accumulated benefit obligation is the actuarial present value, as of the Companys
December 31 measurement date, of all benefits attributed by the pension benefit formula. The amount of benefit to be paid depends on a number of future events incorporated into the pension benefit formula, including estimates of the average
life of employees or survivors and average years of service rendered. It is measured based on assumptions concerning future interest rates and future employee compensation levels. Unrecognized prior service credits and costs and net actuarial gains
and losses are recognized as a component of other comprehensive income (loss), net of tax.
Defined Contribution Plan
The Company provides a 401(k) retirement savings plan covering substantially all of it employees. Discretionary company-matching contributions are determined
by the Board of Directors.
Earnings per Share
The Company computes earnings per share based on the weighted number of shares of common stock and dilutive potential common share equivalents outstanding.
This includes all issued and outstanding share-based payments.
Recently Adopted Accounting Pronouncements
In the third quarter of 2015, the Company adopted the provisions of Accounting Standards Update (ASU) No.
2015-03,
Interest Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs
(ASU
2015-03). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt
discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. ASU 2015-03 is to be applied on a retrospective basis. Accordingly, the Company reclassified debt issuance costs of $4,469 at
December 31, 2014 from Assets to Long-term obligations, net of current portion to conform to the current presentation. The provisions of ASU 2015-03 are effective for financial statements issued for fiscal years
beginning after December 15, 2015, and the Company elected early adoption as permitted by the update. See Note 11
Long-Term Obligations
for the disclosures required by ASU 2015-03.
F-15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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In the fourth quarter of 2015, the Company adopted the provisions of ASU No. 2015-17,
Income Taxes
(Topic 740), Balance Sheet Classification of Deferred Taxes
(ASU 2015-17). The amendments in ASU 2015-17 are intended to reduce complexity in accounting standards and eliminate the current requirement for entities to present
deferred tax liabilities and assets as current and non-current on the classified balance sheet. ASU 2015-17 requires that all deferred tax assets and liabilities be classified as non-current. The provisions of ASU 2015-17 are effective for financial
statements issued for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company elected early adoption as permitted by the update. See Note 16
Income Taxes
for additional
disclosures required by ASU 2015-17.
Accounting Pronouncements Issued Not Yet Adopted
In February 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-02,
Consolidation (Topic 810), Amendments to
the Consolidation Analysis
(ASU 2015-02). This update amends the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the amendments: (i) modify
the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities; (ii) eliminates the presumption that a general partner should consolidate a limited partnership; (iii) affects the
consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships; and (iv) provides a scope exception from the consolidation guidance for
reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The
provisions of ASU 2015-02 are effective for quarterly and annual reporting periods beginning after December 15, 2015. The Company does not currently expect that adoption of ASU 2015-02 will have a material effect on its consolidated financial
statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
(ASU 2014-09). The amendments in ASU 2014-09 require that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In July 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date
which deferred the effective
date of ASU 2014-09 from annual periods beginning after December 15, 2016 to annual periods beginning after December 15, 2017. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and
related disclosures. The Company has not yet selected a transition method.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic
842)
(ASU 2016-02). The primary change in GAAP addressed by ASU 2016-02 is the requirement for a lessee to recognize on the balance sheet a liability to make lease payments (lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For finance leases, a lessee is required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments; (ii)
recognize interest on the lease liability separately from amortization of the right-of-use asset; and (iii) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease
liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, a lessee is required to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments; (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and (iii) classify all cash payments within operating activities in the statement of
cash flows. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should
recognize lease expense for such leases generally on a straight-line basis over the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. ASU 2016-02 also requires qualitative and quantitative
disclosures to enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those years.
F-16
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Lessees must apply a modified retrospective transition approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
2.
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SALE OF WIRELESS OPERATIONS
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On December 4, 2014, the Company entered into a Purchase and Sale Agreement to sell to General Communication, Inc. (GCI),
ACSWs interest in AWN and substantially all the assets and subscribers used primarily in the wireless business of Alaska Communications and its affiliates (the Acquired Assets), as described below, for a cash payment of $300,000,
which amount was subject to adjustment for certain working capital assets and liabilities as well as minimum subscriber levels and preferred distributions (the Wireless Sale).
The Acquired Assets included, without limitation, all the equity interests of AWN owned or held by ACSW, substantially all of Alaska Communications
wireless subscriber assets, including subscriber contracts, and certain network assets at predetermined demarcation points to the cell site locations, including certain fiber strands and associated cell site electronics and microwave facilities and
associated electronics. This transaction also includes a capacity agreement with GCI that is similar to the capacity agreement provided in the July 23, 2013 transaction with AWN, whereby Alaska Communications provides certain capacity from the
predetermined demarcation points to a central switch location and, if required, to points outside of Alaska.
The transaction was completed on
February 2, 2015, subject to resolution of potential additional purchase price adjustments. After final resolution in the third quarter of 2015 (as described below) of adjustments for certain working capital assets and liabilities, minimum
subscriber levels, preferred distributions and other adjustments totaling $14,840, cash proceeds on the sale were $285,160, of which $240,472 was used to pay down the Companys 2010 Senior Secured Credit Facility (2010 Senior Credit
Facility). The Company recorded a gain before income tax of $48,232 in the twelve-month period ended December 31, 2015.
The two companies
entered into a service transition plan in which Alaska Communications continued to provide certain retail and back office services to its previous wireless customers for an interim period, which was completed on April 17, 2015. This arrangement
did not cover the full cost of providing the service. The fair value of these services was $4,769 and was reported as operating revenue. The fair value of the services exceeded the consideration received for this service by approximately $522. The
$522 loss was included in the calculation of the gain on the sale.
In May 2015, the Company received a cash payment from GCI of $1,680 for timely
completion of a transition support agreement. The services provided by the Company in connection with this agreement were not consistent with services rendered in the normal course of business. Accordingly, this amount was included in cash proceeds
and gain on the sale.
On August 4, 2015, the Company and GCI entered into an agreement to resolve all outstanding issues between the parties associated
with the Wireless Sale including finalization of the purchase price adjustments. Final resolution of escrow disbursements was originally scheduled for February 2016. In the third quarter of 2015, $7,092 of $9,000 cash placed in escrow at
closing pending resolution of potential additional purchase price adjustments was disbursed to the Company and $1,680 was disbursed to GCI. The gain on and proceeds from the Wireless Sale described above include the $7,092 received from escrow in
the third quarter of 2015. The remaining $228 of cash placed in escrow was disbursed to the Company upon timely completion of certain backhaul orders during the fourth quarter of 2015. These backhaul orders consisted of services rendered by the
Company in the normal course of business, and the resulting margin was consistent with that typically generated from such services. Accordingly, the $228 was recorded as revenue.
F-17
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
2.
|
SALE OF WIRELESS OPERATIONS (Continued)
|
The following table provides the calculation of the gain:
|
|
|
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
44,688
|
|
Principal payment on 2010 Senior Credit Facility
|
|
|
240,472
|
|
|
|
|
|
|
Total consideration
|
|
|
285,160
|
|
Carrying value of assets and liabilities sold:
|
|
|
|
|
Equity investment in AWN
|
|
|
250,192
|
|
Assets and liabilities, net
|
|
|
5,121
|
|
Net change in deferred capacity revenue
|
|
|
(18,385
|
)
|
|
|
|
|
|
Total carrying value of assets and liabilities sold
|
|
|
236,928
|
|
|
|
|
|
|
Gain on disposal of assets
|
|
$
|
48,232
|
|
|
|
|
|
|
In addition to the major elements discussed above, Alaska Communications and its controlled affiliates are restricted from
operating a wireless network or providing wireless products or services in Alaska for a period of four years after closing, except for: (a) fixed wireless replacement, (b) WiFi, (c) wireless backhaul and transport, (d) cell site leases and (e)
acting as a wireless internet service provider.
As part of the transaction, the Company initiated a plan to sell certain assets associated with realigning
operations. These assets included certain handset inventory, which was sold, and retail store leases which were actively marketed for sale to third parties. Upon completion of the service transition plan, the Company accelerated its plan to achieve
cost savings related to the wind-down of the wireless business and from the synergies derived from becoming a more focused broadband and managed IT services company. As of December 31, 2015, key cost avoidance milestones have been achieved,
including completing the exit from all retail store locations.
The Company considered the sale of assets to GCI under the guidance of ASC 205-20,
Discontinued Operations
and concluded that the assets sold did not meet the definition of a component of an entity. The conclusion was based on the determination that the assets did not comprise operations that can be clearly
distinguished, either operationally or for financial reporting purposes. The Company has one operating segment and one reporting unit, and although there are revenue streams that are clearly identifiable, the majority of the operating costs are
integrated across the operations of its business and cannot be reasonably separated.
The following table provides a reconciliation of the major classes
of assets and liabilities included on the Consolidated Balance Sheet under the captions Current assets held-for-sale, Non-current assets held-for-sale, Current liabilities held-for-sale and Non-current
liabilities held-for-sale at December 31, 2014. There were no assets or liabilities held for sale at December 31, 2015.
F-18
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
2.
|
SALE OF WIRELESS OPERATIONS (Continued)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Accounts receivable, non-affiliates, net
|
|
$
|
7,607
|
|
Materials and supplies
|
|
|
1,958
|
|
|
|
|
|
|
Total current assets held-for-sale
|
|
$
|
9,565
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of $8,835
|
|
|
14,664
|
|
|
|
|
|
|
Total non-current assets held-for-sale
|
|
$
|
14,664
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Current portion of long-term obligations
|
|
$
|
287
|
|
Accounts payable, accrued and other current liabilities, non-affiliates
|
|
|
301
|
|
Accounts payable, accrued and other current liabilities, affiliates, net
|
|
|
14,411
|
|
Advance billings and customer deposits
|
|
|
3,729
|
|
|
|
|
|
|
Total current liabilities held-for-sale
|
|
$
|
18,728
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion
|
|
|
2,107
|
|
|
|
|
|
|
Total non-current liabilities held-for-sale
|
|
$
|
2,107
|
|
|
|
|
|
|
Although they did not meet the criteria for classification as held-for-sale, certain other assets and liabilities were
impacted by the transaction as follows:
|
|
|
The equity method investment in AWN, valued at $250,192, was sold to GCI on February 2, 2015.
|
|
|
|
The remaining Deferred AWN capacity revenue, which was created during the AWN transaction in 2013 and was being amortized over the 20-year contract life, was removed. This capacity had a carrying value of $59,672 on
February 2, 2015. It was replaced with a new service obligation in the amount of $41,287 which was recorded at the estimated fair value of the services to be provided to GCI in the future and will be amortized over the new contract life of up
to 30 years.
|
|
|
|
On February 2, 2015, the Companys 2010 Senior Credit Facility was amended resulting in $240,472 in principal payments and the write-off of associated debt discount and debt issuance costs of $721 and $1,907,
respectively, in 2015. For additional information on this amendment, see Note 11
Long-term
Obligations.
|
|
|
|
Current deferred tax assets of $84,233 representing Federal and state net operating loss carry forwards and state alternative minimum tax credit carry forwards, and non-current deferred tax liabilities of $70,577
related to the Companys investment in AWN reversed in 2015 as a result of the Wireless Sale.
|
In connection with its decision to sell
its wireless operations, the Company incurred a number of transaction related and wind-down costs throughout 2015. In addition, costs were incurred in connection with plans associated with synergies and future cost reductions resulting from the
Company becoming a more focused broadband and managed IT services company. The costs incurred for wind-down and synergy activities include those associated with workforce reductions, termination of retail store and other contracts, and other
associated obligations that meet the criteria for reporting as exit obligations under ASC 420,
Exit or Disposal Cost Obligations
(ASC 420). The Company also incurred costs associated with termination benefits accounted
for under ASC 712,
Compensation Nonretirement Postemployment Benefits
(ASC 712). Significant wind-down costs included contract termination costs associated with retail store leases. These obligations included
costs associated with the disposal of capital lease assets and liabilities and costs to vacate operating leases which had a remaining term of approximately 11 years and a remaining contract value of $2,797 at February 2, 2015. Exit from these
leases was complete as of December 31, 2015. Transaction costs included legal, debt amendment, accounting and other costs necessary to consummate the transaction. The Company incurred costs totaling $13,272 in 2015 associated with the
transaction and wind-down activities. These costs included exit costs of $10,745 presented in the table below and transaction and certain transition costs totaling $2,527. Of the $13,272, $4,893 was recorded to Cost of services and sales,
non-affiliates and $8,379 was recorded to Selling, general and administrative in the Companys Consolidated Statements of Comprehensive Income (Loss).
F-19
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
2.
|
SALE OF WIRELESS OPERATIONS (Continued)
|
The following table summarizes the Companys current obligations for exit activities, including costs
accounted for under both ASC 420 and ASC 712, as of and for the twelve month periods ended December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor
Obligations
|
|
|
Contract
Terminations
|
|
|
Other
Associated
Obligations
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Charged to expense
|
|
|
490
|
|
|
|
|
|
|
|
634
|
|
|
|
1,124
|
|
Paid and/or settled
|
|
|
|
|
|
|
|
|
|
|
(634
|
)
|
|
|
(634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
490
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
490
|
|
Charged to expense
|
|
|
6,485
|
|
|
|
3,966
|
|
|
|
294
|
|
|
|
10,745
|
|
Paid and/or settled
|
|
|
(5,752
|
)
|
|
|
(3,966
|
)
|
|
|
(294
|
)
|
|
|
(10,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
1,223
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exit liability is included in Accounts payable, accrued and other current liabilities, non-affiliates on the
Companys Consolidated Balance Sheets.
In the second quarter of 2015, the Company entered into a series of transactions with
ConocoPhillips Alaska, Inc. (CPAI) and QHL which included the acquisition of a fiber optic network on the North Slope of Alaska from CPAI and the establishment of a joint venture with QHL. The network will enable commercially-available,
high-speed connectivity where only high-cost microwave and satellite communications were available. Through the Alaska Communications and QHL joint venture, this network will be made available to other telecom carriers in the market. The
transactions described below were all entered into concurrently on April 2, 2015 and in contemplation of each of the other transactions.
Transactions with CPAI
The Company, through its
wholly-owned subsidiary ACS Cable Systems, LLC, acquired from CPAI a fiber optic cable (including conduit, licenses, permits and right-of-ways) running from the Kuparuk Operating Center to the Trans-Alaska Pipeline System Pump Station #1 (the
Fiber Optic System). The purchase price was $11,000, $5,500 of which was paid by the Company at closing and the balance of which is payable on or before April 4, 2016. The Company sold to CPAI a 30 year IRU on certain fibers from the
Fiber Optic System. The sales price was $400, all of which was paid by CPAI at closing. The Company and CPAI also entered into agreements for the exchange of IRUs, pipeline access, conduit and future capacity, and the prepayment of certain fees and
services.
Transactions with QHL
The Company sold
certain fiber strands from the Fiber Optic System to QHL for $5,300, $2,650 of which was paid by QHL at closing and the balance of which is payable on or before April 1, 2016. The Company and QHL also exchanged 30 year IRU agreements.
Formation of Joint Venture
On April 2, 2015, the
Company, through its wholly-owned subsidiary ACS Cable Systems, LLC, entered into a joint venture agreement with QHL to form ACS-Quintillion JV, LLC (the Joint Venture) for the purpose of expanding the fiber optic network, and making the
network available to other telecom carriers. The Joint Venture may also participate in and facilitate other capital and service initiatives in the telecom industry. The Company and QHL each contributed to the Joint Venture IRUs with a combined value
of $1,844 ($922 by each party).
F-20
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
3.
|
JOINT VENTURE (Continued)
|
Each party also contributed cash of $250. The Company contributed an additional IRU with a value of $461. The
Company and QHL each hold a 50% voting interest in the Joint Venture.
Accounting Treatment
The transactions in which no cash was exchanged are considered to be nonmonetary transactions. These nonmonetary transactions have also been determined to be
reciprocal transfers because, for each individual transaction, or combination of transactions, an asset or obligation was received for an asset or obligation relinquished. The transactions have been determined to have commercial substance based on
the Companys expectations regarding the future cash flow streams from the assets received. The nonmonetary transactions, including both assets and services, have been recorded at fair value which was equivalent to carrying value. There were no
gains or losses recorded by the Company in connection with these exchanges.
The Company determined that the transactions described above do not
constitute a business combination as defined in ASC 805,
Business Combinations
.
The Company determined that the Joint Venture is a
Variable Interest Entity as defined in ASC 810,
Consolidation
. The Company consolidated the financial results of the Joint Venture based on its determination that, the 50% voting interest of each party notwithstanding, for
accounting purposes it holds a controlling financial interest in, and is the primary beneficiary of, the Joint Venture. This determination was based on (i) the Companys role as Joint Venture manager and its right to a management fee equal to a
percentage of the Joint Ventures collected gross revenue; (ii) the Company engineering, design, installation, service and maintenance expertise in the telecom industry and its existing relationships and presence in the Alaska telecom
market are expected to be significant factors in the successful operation of the Joint Venture; and (iii) the Companys expected future utilization of certain assets of the Joint Venture in the operation of the Companys business. There
was no gain or loss recorded by the Company on the initial consolidation of the Joint Venture. The Company has accounted for and reported QHLs 50% ownership interest in the Joint Venture as a noncontrolling interest.
The table below provides certain financial information about the Joint Venture included on the Companys consolidated balance sheet at December 31,
2015. Cash may only be utilized to settle obligations of the Joint Venture. Because the Joint Venture is an LLC, its creditors do not have recourse to the general credit of the Company.
|
|
|
|
|
|
|
December 31,
2015
|
|
Cash
|
|
$
|
359
|
|
Fiber and IRUs, net of accumulated depreciation of $26
|
|
$
|
2,278
|
|
The operating results and cash flows of the Joint Venture in the twelve month period of 2015 were not material to the
Companys consolidated financial results.
Accounts receivable, non-affiliates, net consists of the following at
December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Retail customers
|
|
$
|
17,291
|
|
|
$
|
20,070
|
|
Wholesale carriers
|
|
|
3,086
|
|
|
|
3,867
|
|
Other
|
|
|
6,541
|
|
|
|
9,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,918
|
|
|
|
33,238
|
|
Less: allowance for doubtful accounts
|
|
|
(1,693
|
)
|
|
|
(2,338
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, non-affiliates net
|
|
$
|
25,225
|
|
|
$
|
30,900
|
|
|
|
|
|
|
|
|
|
|
F-21
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
4.
|
ACCOUNTS RECEIVABLE (Continued)
|
Allowance for doubtful accounts consists of the following at December 31, 2015, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Balance at January 1
|
|
$
|
2,338
|
|
|
$
|
6,193
|
|
|
$
|
6,231
|
|
Provision for uncollectible accounts
|
|
|
1,258
|
|
|
|
3,329
|
|
|
|
1,847
|
|
Charged to other accounts
|
|
|
8
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Deductions
|
|
|
(1,911
|
)
|
|
|
(7,182
|
)
|
|
|
(1,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,693
|
|
|
$
|
2,338
|
|
|
$
|
6,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued and other current liabilities, non-affiliates consist of
the following at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Accrued payroll, benefits, and related liabilities
|
|
$
|
17,362
|
|
|
$
|
18,086
|
|
Accounts payable - trade
|
|
|
16,057
|
|
|
|
25,672
|
|
Note payable, non-interest bearing, due 2016
|
|
|
5,500
|
|
|
|
|
|
Other
|
|
|
12,356
|
|
|
|
10,615
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,275
|
|
|
$
|
54,373
|
|
|
|
|
|
|
|
|
|
|
Advance billings and customer deposits consist of the following at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Advance billings
|
|
$
|
4,482
|
|
|
$
|
4,449
|
|
Customer deposits
|
|
|
31
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,513
|
|
|
$
|
4,490
|
|
|
|
|
|
|
|
|
|
|
6.
|
EQUITY METHOD INVESTMENTS
|
The Company had no equity method investments at December 31, 2015. See
Note 2
Sale of Wireless Operations
for information about the Companys sale of its ownership interest in AWN on February 2, 2015. The following table provides the Companys ownership interest and investment in AWN
and TekMate at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
|
Investment In
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
TekMate, LLC
|
|
|
0.00
|
%
|
|
|
100.00
|
%
|
|
$
|
|
|
|
$
|
|
|
Alaska Wireless Network, LLC
|
|
|
0.00
|
%
|
|
|
33.33
|
%
|
|
$
|
|
|
|
$
|
252,067
|
|
TekMate
On
August 31, 2010, the Company acquired a 49% interest in TekMate for $2,060. On January 31, 2014, the Company purchased the remaining 51% interest in TekMate for $1,573, of which $894 was paid in 2014 and $679 was paid in 2015.
The Company accounted for the purchase of the remaining 51% interest in TekMate at fair value using the acquisition method. On January 31, 2014, the
Company ceased to report TekMate as an equity method investment and consolidated its operations into Alaska Communications Systems Group, Inc.
F-22
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
6.
|
EQUITY METHOD INVESTMENTS (Continued)
|
The following table represents the fair value of the assets acquired and liabilities assumed on
January 31, 2014:
|
|
|
|
|
Current assets
|
|
$
|
1,020
|
|
Non-current assets
|
|
$
|
370
|
|
Current liabilities
|
|
$
|
467
|
|
Non-current liabilities
|
|
$
|
247
|
|
Net assets acquired and liabilities assumed
|
|
$
|
676
|
|
Goodwill on the acquisition, which is 100% deductible for tax purposes, was as follows:
|
|
|
|
|
Consideration provided (including fair value of contingent consideration)
|
|
$
|
1,181
|
|
Fair value of equity method investment
|
|
|
831
|
|
|
|
|
|
|
Total consideration
|
|
|
2,012
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
1,390
|
|
Fair value of liabilities assumed
|
|
|
(714
|
)
|
|
|
|
|
|
Total net assets
|
|
|
676
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,336
|
|
|
|
|
|
|
In the period January 1, 2014 to January 31, 2014 TekMates net income was $12 and it made cash distributions
of $33 to the Company. At January 31, 2014, undistributed earnings of TekMate were $0.
Pro forma financial information has been omitted because the
acquisition was not material to the Companys historical consolidated financial statements.
AWN FORMATION
On February 2, 2015, the Company sold its one-third interest in AWN to GCI. See Note 2
Sale of Wireless Operations
for additional
information.
On July 22, 2013, the Company and GCI completed the transactions contemplated by the June 4, 2012 Asset Purchase and Contribution
Agreement for the purpose of combining their wireless networks into AWN.
Pursuant to the Contribution Agreement, Alaska Communications sold certain
wireless assets to GCI for a cash payment of $100,000. GCI then contributed these assets, together with GCIs wireless assets, to AWN in exchange for a two-thirds membership interest in AWN. The Alaska Communications Member contributed the
Companys wireless assets that were not sold to GCI to AWN in exchange for a one-third membership interest in AWN.
At the closing, the parties
entered into the First Amended and Restated Operating Agreement of The Alaska Wireless Network, LLC (the Operating Agreement) and other related agreements which governed the ongoing relationship among the parties. Under the terms of the
Operating Agreement, AWN was managed by its majority owner, GCI, subject to certain protective rights retained by the Company and representation of one of three seats on AWNs Board. Accordingly, Alaska Communications had the ability to
exercise significant influence over AWN and accounted for its investment under the equity method in accordance with ASC 323,
Investments
-
Equity Method and Joint Ventures
.
The Operating Agreement provided that Alaska Communications was entitled to a cumulative preferred cash
distribution of up to $12,500 of Adjusted Free Cash Flow, as defined in the agreement, in each of the first eight quarters after closing and $11,250 in each of the eight quarters thereafter (Alaska Communications preference period).
A national valuation firm was engaged by the parties to assist in the determination of the fair value of AWN including the preferred distribution and the
allocation of the purchase price to the assets and liabilities. This valuation was completed in the second quarter of 2014 and assigned a valuation to the AWN Equity Investment
F-23
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
6.
|
EQUITY METHOD INVESTMENTS (Continued)
|
of $266,000 and to the Deferred AWN Capacity Revenue of $64,627. The effects of the final valuation were applied retrospectively and, accordingly, the previously reported December 31, 2013
amounts were revised to reflect the amounts that would have been reported if the final valuation had been completed at the July 23, 2013 acquisition date. See the Companys 2014 second quarter filing on Form 10-Q for a summary of these
revised amounts. The carrying value of the AWN Equity Investment and Deferred AWN Capacity Revenue at December 31, 2014 were $252,067 and $59,964, respectively.
The
Deferred AWN capacity revenue
was amortized on a straight-line basis to revenue in the Consolidated Statements of Comprehensive Income
(Loss) over the 20 year period for which the Company had contracted to provide service. The Company amortized $292 and $3,151 to revenue in the twelve months ended December 31, 2015 and 2014, respectively, and $1,511 in the period July 23,
2013 to December 31, 2013.
In the second quarter of 2014, the Company received the final valuation report and as a result trued up the value of its
capacity contribution to AWN and its pre-tax gain of $210,873.
The following table represents the calculation of the gain:
|
|
|
|
|
Consideration received:
|
|
|
|
|
Investment
|
|
$
|
266,000
|
|
Cash
|
|
|
100,000
|
|
|
|
|
|
|
Total consideration received
|
|
|
366,000
|
|
|
|
|
|
|
Consideration provided:
|
|
|
|
|
Net intangible and tangible assets
|
|
|
90,500
|
|
Deferred AWN capacity revenue
|
|
|
64,627
|
|
|
|
|
|
|
Total consideration provided
|
|
|
155,127
|
|
|
|
|
|
|
Gain on disposal of assets
|
|
$
|
210,873
|
|
|
|
|
|
|
In the period January 1 through February 2, 2015, the Companys share of AWNs adjusted free cash flow was
$764 which was received in the first quarter of 2015. In the twelve-month period ended December 31, 2014, the Companys share of AWNs adjusted free cash flow was $50,000, of which $45,833 was received during the period and $4,167 was
paid within the subsequent 12-day contractual period. In the period July 23, 2013 through December 31, 2013, the Companys share of AWNs adjusted free cash flow was $22,011, of which $17,844 was received during the period and
$4,167 was paid within the subsequent 12-day contractual period. The Companys equity in the earnings of AWN for the twelve months ended December 31, 2015 and 2014 and from July 23, 2013 to December 31, 2013 were $3,056, $35,948
and $17,963, respectively.
F-24
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
6.
|
EQUITY METHOD INVESTMENTS (Continued)
|
Summarized financial information on AWN is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Current assets
|
|
$
|
|
|
|
$
|
139,237
|
|
Non-current assets
|
|
$
|
|
|
|
$
|
554,608
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
91,247
|
|
Non-current liabilities
|
|
$
|
|
|
|
$
|
21,505
|
|
Equity
|
|
$
|
|
|
|
$
|
581,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
through
February 2,
2015
|
|
|
Twelve
Months Ended
December 31,
2014
|
|
|
Inception to
December 31,
2013
|
|
Operating revenues
|
|
$
|
21,457
|
|
|
$
|
252,864
|
|
|
$
|
118,918
|
|
Gross profit
|
|
$
|
15,745
|
|
|
$
|
179,243
|
|
|
$
|
86,201
|
|
Operating income
|
|
$
|
9,757
|
|
|
$
|
113,772
|
|
|
$
|
56,543
|
|
Net income
|
|
$
|
9,722
|
|
|
$
|
113,404
|
|
|
$
|
56,342
|
|
Adjusted free cash flow
(1)
|
|
$
|
10,805
|
|
|
$
|
106,937
|
|
|
$
|
53,978
|
|
(1)
|
Adjusted free cash flow is defined in the Operating Agreement.
|
The excess of Alaska Communications investment in AWN over the Companys share of net assets in AWN was estimated to be $13,810 at
December 31, 2014. This difference represented the increase in basis of the GCI Members contribution to AWN, as AWN accounted for the GCI members contribution at carryover basis and Alaska Communications was accounting for it at
estimated fair value.
AWN was organized as a limited liability corporation and was a flow-through entity for income tax purposes.
The following table provides a reconciliation AWNs total equity and Alaska Communications equity method investment as of December 31, 2014:
|
|
|
|
|
AWN total equity as reported
|
|
$
|
581,093
|
|
Less amount attributed to GCI
|
|
|
(342,836
|
)
|
|
|
|
|
|
Amount attributed to ACS
|
|
|
238,257
|
|
Plus:
|
|
|
|
|
Step-up in basis of GCI contribution, net
|
|
|
30,702
|
|
Cumulative differences in distributions
|
|
|
4,167
|
|
Less:
|
|
|
|
|
Cumulative differences in income allocation method
|
|
|
(21,059
|
)
|
|
|
|
|
|
Alaska Communications investment in AWN
|
|
$
|
252,067
|
|
|
|
|
|
|
7.
|
FAIR VALUE MEASUREMENTS
|
The Company has developed valuation techniques based upon observable and
unobservable inputs to calculate the fair value of non-current monetary assets and liabilities. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect internal market assumptions. These two types of
inputs create the following fair value hierarchy:
|
|
|
Level 1- Quoted prices for identical instruments in active markets.
|
F-25
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
7.
|
FAIR VALUE MEASUREMENTS (Continued)
|
|
|
|
Level 2- Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
|
|
|
|
Level 3- Significant inputs to the valuation model are unobservable.
|
Financial assets and liabilities are
classified within the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurements. The Companys assessment of the significance of a particular input to the fair value
measurements requires judgment and may affect the valuation of the assets and liabilities being measured, as well as their level within the fair value hierarchy.
The fair values of cash equivalents, restricted cash, other short-term monetary assets and liabilities and capital leases approximate carrying values due to
their nature. The fair value of the Companys 6.25% Notes of $97,769 at December 31, 2015, was estimated based on quoted market prices for identical instruments on dates different from the market trade date value (Level 2). The carrying
value of the 6.25% Notes at December 31, 2015 was $99,359. The carrying values of the Companys 2015 Senior Credit Facilities and other long-term obligations of $93,746 at December 31, 2015 approximate fair value primarily as a result
of the stated interest rates of the 2015 Senior Credit Facilities approximating current market rates (Level 2). The fair value of the Companys 2010 Senior Credit Facility, convertible notes and other long-term obligations of $430,729 at
December 31, 2014, were estimated based primarily on quoted market prices (Level 1). The carrying values of these liabilities totaled $436,362 at December 31, 2014.
Fair Value Measurements on a Recurring Basis
The
following table presents the liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014 at each hierarchical level. There were no transfers into or out of Levels 1 and 2 during 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(79
|
)
|
|
$
|
|
|
|
$
|
(79
|
)
|
|
$
|
|
|
|
$
|
(1,416
|
)
|
|
$
|
|
|
|
$
|
(1,416
|
)
|
|
$
|
|
|
Derivative Financial Instruments
The Company, from time to time, uses interest rate swaps to manage variable interest rate risk. At low LIBOR rates, payments under the swaps increase the
Companys cash interest expense.
The outstanding amount of the swaps as of a period end are reported on the balance sheet at fair value, represented
by the estimated amount the Company would receive or pay to terminate the swaps. They are valued using models based on readily observable market parameters for all substantial terms of the contracts and are classified within Level 2 of the fair
value hierarchy.
As a component of the Companys cash flow hedging strategy and to comply with the terms of the 2015 Senior Credit Facilities, on
November 27, 2015, the Company entered into a pay-fixed, receive-floating interest rate swap in the notional amount of $44,827 with an interest rate of 5.833%, inclusive of a 4.5% LIBOR spread, and a maturity date of December 31, 2017.
Hedge designation for this swap was established on December 18, 2015. The change in fair value between the swaps acquisition date and designation date of $83 was charged to interest expense. Changes in fair value subsequent to the
designation date were recorded to accumulated other comprehensive income (loss).
In connection with the Companys 2010 Senior Credit Facility, swaps
in the notional amounts of $115,500 and $77,000 with interest rates of 7.220% and 7.225%, inclusive of a 4.75% LIBOR spread, began on June 30, 2012 and expired on September 30, 2015. On December 4, 2014, upon the announcement of the sale
of its wireless operations, $240,472 of the Companys 2010 Senior Credit Facility was expected to be repaid. Hedge accounting treatment on the interest rate swap in the notional amount of $115,500 was discontinued because it became
possible that the interest payments on which the swap were intended to hedge would not occur. At February 2, 2015, 95.5% or $110,268 of the $115,500 swap was deemed ineffective and, therefore, changes in fair value through the
swaps expiration on September 30, 2015 were recorded to interest expense. Through December 31, 2015, $820 was credited to interest expense for the ineffective portion of these swaps.
F-26
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
7.
|
FAIR VALUE MEASUREMENTS (Continued)
|
The following table presents information about the Companys interest rate swaps, which are included in
Other long-term liabilities on the balance sheet, as of and for the twelve-month periods ending December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Balance at January 1
|
|
$
|
1,416
|
|
|
$
|
3,234
|
|
Reclassified from other long-term liabilities to accumulated other comprehensive loss
|
|
|
(600
|
)
|
|
|
(1,545
|
)
|
Change in fair value credited to interest expense
|
|
|
(737
|
)
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
79
|
|
|
$
|
1,416
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Non-recurring Basis
Deferred Capacity Revenue
As discussed in Note 2
Sale of Wireless Operations,
the Company entered into an agreement to provide wholesale services to GCI on February 2, 2015. A national valuation firm was engaged to assist management in the determination of the fair value of
the obligation which was determined to be $41,287 at February 2, 2015. The obligation is amortized to revenue on a straight line basis over the contract lives of 10 to 30 years. The service obligation had a carrying value of $39,409 at
December 31, 2015, and is included in Other long-term liabilities, net of current portion and Accounts payable, accrued and other current liabilities, non-affiliates on the Consolidated Balance Sheet.
The following table describes the valuation techniques used to measure the fair value of the service obligation at February 2, 2015 and the significant
unobservable inputs and values for those inputs:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Estimated
Fair Value
|
|
|
Valuation
Technique
|
|
Level 3
Unobservable Inputs
|
|
Significant
Input Values
|
Deferred Capacity Revenue
|
|
$
|
41,287
|
|
|
Cost/Replacement
Value and
Discounted Cash
Flow
|
|
Weighted Average Cost of Capital
|
|
11.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost trend factor
|
|
1%
-
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated % used by GCI
|
|
1%
-
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical cost of underlying assets
|
|
Actual cost
|
Other Items
As discussed
in Note 3
Joint Venture
, the Company entered into agreements with CPAI and QHL. These transactions included the exchange of certain assets and liabilities, all of which were established at fair value on the date of the
transactions.
The following table provides the fair value and describes the valuation techniques used to measure the fair value of the assets and
liabilities recorded by the Company as of April 2, 2015, including those recognized through consolidation of the Joint Venture, and the significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Estimated
Fair Value
|
|
|
Valuation
Technique
|
|
Level 3
Unobservable Inputs
|
|
IRU Assets
|
|
$
|
2,304
|
|
|
Cost
|
|
|
Historical cost of underlying assets
|
|
IRU Obligations
|
|
$
|
4,153
|
|
|
Cost
|
|
|
Historical cost of underlying assets
|
|
The carrying value of these items at December 31, 2015 was as follows:
|
|
|
|
|
IRU Assets
|
|
$
|
2,278
|
|
IRU Obligations
|
|
$
|
4,112
|
|
Other than as described below and in Note 9
Goodwill and Other Intangible Assets,
no impairment of
long-lived assets was recognized during 2015, 2014 or 2013. In 2014, the Company recorded a charge of $435 to adjust its inventory held-for-sale at December 31, 2014 to fair value using Level 2 inputs.
F-27
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
7.
|
FAIR VALUE MEASUREMENTS (Continued)
|
TekMate Impairment
The Company recorded an impairment charge of $1,267 on its equity method investment in TekMate in the fourth quarter of 2013 which is included in the caption
Loss on impairment of equity investment
in the Consolidated Statements of Comprehensive Income (Loss).
8.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consist of the following at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Useful Lives
|
Land, buildings and support assets*
|
|
$
|
198,485
|
|
|
$
|
209,349
|
|
|
3 - 42
|
Central office switching and transmission
|
|
|
381,511
|
|
|
|
385,016
|
|
|
4 - 12
|
Outside plant cable and wire facilities
|
|
|
722,582
|
|
|
|
674,914
|
|
|
16 - 50
|
Other
|
|
|
5,207
|
|
|
|
3,606
|
|
|
3 - 5
|
Construction work in progress
|
|
|
29,313
|
|
|
|
60,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337,098
|
|
|
|
1,333,134
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(967,776
|
)
|
|
|
(976,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
369,322
|
|
|
$
|
356,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
No depreciation charges are recorded for land.
|
Capitalized interest associated with construction in progress
for the years ended December 31, 2015, 2014, and 2013 was $1,558, $2,810, and $1,926, respectively. The capitalization rate used was based on a weighted average of the Companys long term debt outstanding and for the years ended
December 31, 2015, 2014, and 2013 was 6.78%, 8.28%, and 8.07%, respectively.
The following is a summary of property, including leasehold
improvements, held under capital leases included in the above property, plant and equipment at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Land, buildings and support assets
|
|
$
|
14,694
|
|
|
$
|
15,426
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,674
|
)
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
|
|
|
Property held under capital leases, net
|
|
$
|
8,020
|
|
|
$
|
8,728
|
|
|
|
|
|
|
|
|
|
|
Amortization of assets under capital leases included in depreciation expense for the years ended December 31, 2015, 2014,
and 2013 was $1,316, $1,832 and $1,827, respectively. Future minimum lease payments, including interest, under these leases for the next five years and thereafter are as follows:
|
|
|
|
|
2016
|
|
$
|
1,028
|
|
2017
|
|
|
634
|
|
2018
|
|
|
525
|
|
2019
|
|
|
310
|
|
2020
|
|
|
318
|
|
Thereafter
|
|
|
4,835
|
|
|
|
|
|
|
|
|
|
7,650
|
|
Interest
|
|
|
(3,654
|
)
|
|
|
|
|
|
|
|
$
|
3,996
|
|
|
|
|
|
|
The Company leases various land, buildings, right-of-ways and personal property under operating lease agreements. Rental
expense under operating leases for the years ended December 31, 2015, 2014 and 2013 was $11,439, $8,782 and $9,785, respectively. Rental expense in 2015 included termination charges of $3,966 for leases terminated in connection with the
Companys sale of its Wireless operations. See Note 2
Sale of Wireless Operations
.
F-28
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
8. PROPERTY, PLANT AND EQUIPMENT (Continued)
Future minimum payments under these leases, including month to month rentals which are probable of renewal,
for the next five years and thereafter are as follows:
|
|
|
|
|
2016
|
|
$
|
7,134
|
|
2017
|
|
|
6,383
|
|
2018
|
|
|
5,744
|
|
2019
|
|
|
5,308
|
|
2020
|
|
|
4,728
|
|
Thereafter
|
|
|
31,431
|
|
|
|
|
|
|
|
|
$
|
60,728
|
|
|
|
|
|
|
9.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. In the
fourth quarter of 2014 the Company conducted two assessments of goodwill its annual assessment and an assessment upon the announcement of its sale of Wireless operations which constituted a triggering event.
The Company utilized reports from third party valuation experts to determine the estimated fair value of its reporting unit. These reports utilized many
methodologies, but primarily relied on a discounted cash flow valuation technique. Significant estimates used in the valuation included estimates of future cash flows, both future short-term and long-term growth rates and the estimated cost of
capital for purposes of determining a discount factor. The Company compared the results of the estimated fair value to other market approaches and comparable public and private company analysis and found the estimated fair value to be reasonable.
The Company also performed a reconciliation of its estimated fair value to its market capitalization, based on its recently publically traded stock
price. This analysis indicated a potential impairment as the calculated value was less than the book value. For accounting purposes the Company utilized the fair value indicated by market capitalization, thereby resulting in the conclusion that the
carrying value of its single reporting unit exceeded its fair value. Accordingly, the Company performed step two of the goodwill impairment analysis. After measuring the fair value of the reporting units assets and liabilities, the implied
fair value of goodwill was determined to be zero. Consequently, the Company determined that the goodwill was fully impaired and recorded an impairment charge of $5,986 for the year ended December 31, 2014.
In the first quarter of 2014, the Company purchased the remaining 51% interest in TekMate and recorded $1,336 of goodwill.
In the third quarter of 2013 as part of the AWN transaction the Company performed an assessment of its goodwill and bifurcated the balance between the
business being sold to AWN and the business being retained resulting in the retirement of $4,200 in goodwill.
As part of the AWN transaction in 2013, all
of the Companys other intangible assets were sold or contributed to AWN. The Company no longer holds any indefinite-lived intangible assets. The Companys wireless spectrum licenses had contract terms of ten years, and were renewable
indefinitely through a routine process involving a nominal fee. These fees were expensed as incurred.
F-29
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
9.
|
GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
|
The original carrying value and accumulated impairment of the Companys goodwill at December 31,
2015, 2014 and 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Original carrying value
|
|
$
|
|
|
|
$
|
38,403
|
|
|
$
|
38,403
|
|
Accumulated impairment
|
|
|
|
|
|
|
(29,553
|
)
|
|
|
(29,553
|
)
|
Retirement due to AWN transaction
|
|
|
|
|
|
|
(4,200
|
)
|
|
|
(4,200
|
)
|
TekMate acquisition
|
|
|
|
|
|
|
1,336
|
|
|
|
|
|
Current year impairment
|
|
|
|
|
|
|
(5,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
ASSET RETIREMENT OBLIGATIONS
|
The Companys asset retirement obligation is included in Other long-term liabilities on the Consolidated Balance Sheets and
represents the estimated obligation related to the removal and disposal of certain property and equipment in both leased and owned properties.
The
following table provides the changes in the asset retirement obligation:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Balance at January 1
|
|
$
|
4,055
|
|
|
$
|
3,657
|
|
Asset retirement obligation
|
|
|
254
|
|
|
|
369
|
|
Accretion expense
|
|
|
179
|
|
|
|
328
|
|
Settlement of obligations
|
|
|
(106
|
)
|
|
|
(299
|
)
|
Revisions in estimated cash flows
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
3,429
|
|
|
$
|
4,055
|
|
|
|
|
|
|
|
|
|
|
11.
|
LONG-TERM OBLIGATIONS
|
Long-term obligations consist of the following at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
2015 senior secured credit facilities due 2018
|
|
$
|
89,750
|
|
|
$
|
|
|
Debt issuance costs
|
|
|
(3,406
|
)
|
|
|
|
|
2010 senior credit facility term loan due 2016
|
|
|
|
|
|
|
322,700
|
|
Debt discount
|
|
|
|
|
|
|
(1,014
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(2,810
|
)
|
6.25% convertible notes due 2018
|
|
|
104,000
|
|
|
|
114,000
|
|
Debt discount
|
|
|
(4,641
|
)
|
|
|
(7,242
|
)
|
Debt issuance costs
|
|
|
(1,010
|
)
|
|
|
(1,659
|
)
|
Revolving credit facility loan
|
|
|
|
|
|
|
|
|
Capital leases and other long-term obligations
|
|
|
3,996
|
|
|
|
5,524
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
188,689
|
|
|
|
429,499
|
|
Less current portion
|
|
|
(3,671
|
)
|
|
|
(15,521
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion
|
|
$
|
185,018
|
|
|
$
|
413,978
|
|
|
|
|
|
|
|
|
|
|
The above table reflects the Companys refinancing activities described below and adoption of ASU 2015-03 in 2015. ASU
2015-03 requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt. Unamortized debt issuance costs totaling $4,469 at December 31, 2014
were reclassified from Assets to Long-term obligations, net of current portion, to conform to the current presentation as required by the update.
F-30
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
11.
|
LONG TERM OBLIGATIONS (Continued)
|
The aggregate maturities of long-term obligations for each of the next five years and thereafter, at
December 31, 2015, are as follows:
|
|
|
|
|
2016
|
|
$
|
3,671
|
|
2017
|
|
|
4,323
|
|
2018
|
|
|
186,986
|
|
2019
|
|
|
39
|
|
2020
|
|
|
52
|
|
Thereafter
|
|
|
2,675
|
|
|
|
|
|
|
|
|
$
|
197,746
|
|
|
|
|
|
|
2015 Senior Credit Facilities
On September 14, 2015 (the Closing Date), the Company entered into a combined $100,000 of senior secured financing, including term loans
totaling $90,000 and a $10,000 revolving credit facility (the 2015 Senior Credit Facilities). The facilities consist of a $65,000 first lien term loan and a $10,000 revolving credit facility (the First Lien Facility) and a
$25,000 second lien term loan (the Second Lien Facility) (together the 2015 Senior Credit Agreements or Agreements). The Company utilized proceeds from the 2015 Senior Credit Facilities and cash on hand to repay
in full its 2010 Senior Credit Facility, repurchase a portion of its 6.25% Convertible Notes due 2018 (the 6.25% Notes) and fund transaction fees and expenses associated with the 2015 Senior Credit Facilities totaling $3,907, which were
deferred and will be charged to interest expense over the terms of the Agreements.
The term loan component of the First Lien Facility bears interest at
LIBOR plus 4.5% per annum, with a LIBOR minimum of 1.0%. Draws on the revolving credit component of the First Lien Facility bear interest at LIBOR plus 4.5%, with a LIBOR minimum of 1.0% and a commitment fee of 0.25% on the average daily unused
portion. The revolving credit component of the First Lien Facility was undrawn as of December 31, 2015. The Second Lien Facility bears interest at LIBOR plus 8.5% per annum, with a LIBOR minimum of 1.0%. At current LIBOR rates, the weighted
interest rate on the term loan components of the 2015 Senior Credit Facilities is 6.64%.
Unless extended as described below, quarterly principal payments
on the term loan component of the First Lien Facility were $250 in the fourth quarter of 2015, and are $750 in each quarter of 2016, and $1,000 in each quarter of 2017. The remaining principal balance, including any amounts outstanding under the
revolving credit facility, is due in its entirety on January 2, 2018. Unless extended as described below, the Second Lien Facility is due in its entirety on March 3, 2018, and may be prepaid in whole or in part at the Companys option
prior to maturity.
The First Lien Facility may be extended to June 30, 2020 and the Second Lien Facility may be extended to September 30, 2020
if the Company (i) has refinanced or repurchased its 6.25% Notes such that no more than $30,000 of principal amount is outstanding (with cash available for their repayment at maturity) and any replacement notes have a maturity date not earlier than
December 31, 2020, (ii) has achieved certain liquidity requirements, and (iii) is otherwise compliant with the terms of the 2015 Senior Credit Facilities. In the event the 2015 Senior Credit Facilities are extended, the quarterly principal
payments on the term loan component of the First Lien Facility subsequent to 2017 would be $1,250 in each quarter of 2018, and $1,500 in each quarter of 2019 and the first quarter of 2020. The remaining principal balance, including any amounts
outstanding under the revolving credit facility, would be due in its entirety on June 30, 2020. The Second Lien Facility would be due in its entirety on September 30, 2020, and may be prepaid in whole or in part at the Companys
option prior to maturity.
F-31
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
11.
|
LONG TERM OBLIGATIONS (Continued)
|
The obligations under the 2015 Senior Credit Facilities are secured by perfected first and second line
priority security interests in substantially all of the Companys and its direct and indirect subsidiarys tangible and intangible assets, subject to certain agreed exceptions.
The 2015 Senior Credit Facilities contain customary representations, warranties and covenants, including covenants limiting the incurrence of debt and the
payment of dividends. Financial covenants (i) impose maximum net total leverage and senior leverage to annual Consolidated EBITDA ratios, and (ii) require a minimum annual Consolidated EBITDA to debt service coverage obligations ratio. All terms are
defined in the Agreements. Payment of cash dividends and repurchase of the Companys common stock is not permitted until such time that the Companys net total leverage ratio is not greater than 2.75 to 1.00. As of December 31, 2015,
the Companys net total leverage ratio was higher than 2.75 to 1.00.
The 2015 Senior Credit Facilities provide for events of default customary for
credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy. Upon the occurrence of an event of default, and
for so long as it continues, the Administrative Agent upon request of the Required Lenders (both as defined in the Agreements) may increase the interest rate then in effect on all outstanding obligations by 2.0%. Upon an event of default relating to
insolvency, bankruptcy or receivership, the amounts outstanding under the 2015 Senior Credit Facilities will become immediately due and payable. Upon the occurrence and continuation of any other event of default, the Administrative Agent, upon
request of the Required Lenders, may accelerate payment of all obligations.
As a component of the Companys cash flow hedging strategy and to comply
with the terms of the 2015 Senior Credit Facilities, on November 27, 2015, the Company entered into a pay-fixed, receive-floating interest rate swap in the notional amount of $44,827 with an interest rate of 5.833%, inclusive of a 4.5% LIBOR
spread, and a maturity date of December 31, 2017. Hedge designation for this swap was established on December 18, 2015. The change in fair value between the swaps acquisition date and designation date of $83 was charged to interest
expense. Changes in fair value subsequent to the designation date were recorded to accumulated other comprehensive income (loss). See Note 7
Fair Value Measurements
for additional information.
2010 Senior Secured Credit Facility
In the third
quarter of 2015, the Company utilized proceeds from its 2015 Senior Credit Facilities described above and cash on hand to repay, in full, its 2010 Senior Credit Facility, including accrued interest and fees, of $81,526. The Company recorded a loss
of $1,312 on the extinguishment of debt associated with the repayment of the 2010 Senior Credit Facility. The loss included the write off of unamortized discounts and debt issuance costs, and third-party fees. The 2010 Senior Credit Facility was due
in 2016.
In the fourth quarter of 2010, the Company completed a transaction whereby it entered into its $470,000, 2010 Senior Credit Facility. The 2010
Senior Credit Facility was amended effective November 1, 2012. As discussed below, certain terms of the amendment were effective immediately and certain terms were effective upon consummation of the AWN Transaction.
The $440,000 term loan outstanding under the 2010 Senior Credit Facility was recorded net of a 1.0% discount, or $4,400, of the debt issuance. Quarterly
principal payments equal to 0.25% of the original principal balance, or $1,100, were due beginning in the first quarter of 2011. Quarterly principal payments increased to $1,825, $3,300 and $3,675 in the quarters beginning January 1, 2013, 2014
and 2015, respectively, and were scheduled to decrease to $3,300 in the quarter beginning January 1, 2016.
The 2010 Senior Credit Facility also
included a $30,000 revolving credit agreement, which was undrawn as of December 31, 2014 and at the date of extinguishment. Outstanding letters of credit totaling $2,212 were committed against this amount as of December 31, 2014.
In accordance with the November 1, 2012 amendment, the interest rates of LIBOR plus 4.0% increased 25 basis points every other month during the period
March 31, 2013 through July 22, 2013. Upon consummation of the AWN Transaction, the Company made a $65,000 principal payment and the interest rate of the term loan and revolving credit agreement increased to LIBOR plus 4.75% with a LIBOR
floor of 1.5%.
F-32
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
11.
|
LONG TERM OBLIGATIONS (Continued)
|
The 2010 Senior Credit Facility contained a number of restrictive covenants and events of default, including
financial covenants limiting capital expenditures, incurrence of debt and payment of cash dividends. Payment of cash dividends were not permitted until such time that the Companys total leverage ratio (as defined in the 2010 Senior Credit
Facility) was not more than 3.50 to 1.00.
In connection with the 2010 Senior Credit Facility, the Company entered into forward floating-to-fixed interest
rate swaps and a buy back of the 1.5% LIBOR floor, as a component of its cash flow hedging strategy. The notional amounts of the swaps were $192,500, $115,500 and $77,000 with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a
4.0% LIBOR spread. The swaps began on June 30, 2012 and were expected to continue through September 30, 2015. On November 1, 2012, the effective date of the amendment to the Companys 2010 Senior Credit Facility, and as a result
of the incremental $65,000 AWN transaction principal payment on the term loan required by this amendment, it was determined that the swap in the notional amount of $192,500 no longer met the hedge effectiveness criteria. The $192,500 swap was
extinguished and settled on August 1, 2013 for $4,073 in cash. Unrealized losses on this swap recorded to accumulated other comprehensive loss from the swaps inception through the date hedge accounting treatment was discontinued
(November 1, 2012), and amounts associated with the variable rate interest payments underlying the accelerated $65,000 principal payment, were reclassified to interest expense. The amount of this reclassification was $707. The remaining balance
of amounts recorded to accumulated other comprehensive loss associated with this hedge was to be amortized to interest expense over the period of the remaining originally designated hedged variable rate interest payments. The notional amounts of the
two remaining swaps were $115,500 and $77,000 with interest rates of 7.220% and 7.225%, respectively, inclusive of a 4.75% LIBOR spread.
On December 4,
2014, the Company announced the sale of its wireless operations and, upon consummation of the sale on February 2, 2015, the planned significant pay down of debt. At that time hedge accounting was discontinued because it became
possible that the interest payments on which the swaps were intended to hedge would not occur. This trigger resulted in $109,800 of the $115,500 swap to become ineffective and the Company reclassified $31 in Other Comprehensive Income
(Loss) to interest expense. Future changes in fair value were charged to interest expense. On February 2, 2015 the sale closed and the 2010 Senior Credit Facility was amended, which resulted in the release of certain collateral and a principal
repayment of $240,472. Debt discount and debt issuance costs related to the repayment of the $240,472 were $721 and $1,907, respectively.
Substantially
all of the Companys assets, including those of its subsidiaries, were pledged as collateral for the 2010 Senior Credit Facility.
6.25%
Convertible Notes due 2018
On May 10, 2011, the Company closed the sale of $120,000 aggregate principal amount of its 6.25% Notes to certain
initial purchasers in a private placement. The 6.25% Notes are fully and unconditionally guaranteed (Note Guarantees), on a joint and several unsecured basis, by all of the Companys existing subsidiaries, other than its license
subsidiaries, and certain of the Companys future domestic subsidiaries (Guarantors). The 6.25% Notes pay interest semi-annually on May 1 and November 1 at a rate of 6.25% per year and will mature on May 1, 2018.
The 6.25% Notes will be convertible at an initial conversion rate of 97.2668 shares of common stock per $1,000 principal amount of the 6.25% Notes, which is
equivalent to an initial conversion price of approximately $10.28 per share of common stock. The Company may not redeem the 6.25% Notes prior to maturity.
Beginning on February 1, 2018, the 6.25% Notes will be convertible by the holder at any time until 5:00 p.m., New York City time, on the second scheduled
trading-day immediately preceding the stated maturity date. Given that the Companys current share price is well below $10.28, we do not anticipate that there will be a conversion into equity.
Prior to February 1, 2018, the holder may convert the 6.25% Notes:
|
|
|
During any fiscal quarter beginning after June 30, 2011 following any previous fiscal quarter in which the trading price of the Companys common stock equals or exceeds 130% of the conversion price of the
6.25% Notes for at least 20 trading-days during the last 30 trading-days of the previous fiscal quarter;
|
F-33
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
11.
|
LONG TERM OBLIGATIONS (Continued)
|
|
|
|
During any five business day period following any five trading-day period in which the trading price of the 6.25% Notes is less than 98% of parity value on each day of that five trading-day period; and
|
|
|
|
Upon the occurrence of certain significant corporate transactions, holders who convert their 6.25% Notes, in connection with a change of control, may be entitled to a make-whole premium in the form of an increase in the
conversion rate. In addition, upon a change in control, liquidation, dissolution or delisting, the holders of the 6.25% Notes may require the Company to repurchase for cash all or any portion of their 6.25% Notes for 100% of the principal amount
plus accrued and unpaid interest.
|
As of December 31, 2015, none of the conditions allowing holders of the 6.25% Notes to convert, or
requiring the Company to repurchase the 6.25% Notes, had been met.
Additionally, the 6.25% Notes contain events of default which, if they occur, entitle
the holders of the 6.25% Notes to declare them to be immediately due and payable. Those events of default include: (i) payment defaults on either the notes themselves or other large obligations; (ii) failure to comply with the terms of the notes;
and (iii) most bankruptcy proceedings.
The 6.25% Notes are unsecured obligations, subordinated in right of payment to the Companys obligations
under its 2015 Senior Credit Facilities as well as certain hedging agreements within the meaning of the Companys 2015 Senior Credit Facilities. The 6.25% Notes also rank equally in right of payment with all of the Companys other existing
and future senior indebtedness and are senior in right of payment to all of the Companys future subordinated obligations. The Note Guarantees are subordinated in right of payment to the Guarantors obligations under the Companys
2015 Senior Credit Facilities as well as certain hedging agreements within the meaning of the Companys 2015 Senior Credit Facilities.
Convertible
debt instruments that may be settled in cash upon conversion at the Companys option, including partial cash settlement, must be accounted for by bifurcating the liability and equity components of the instruments in a manner that reflects the
entitys non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company applied this rate to the $120,000 6.25% Notes, bifurcating the notes into the liability portion and the equity portion attributable
to the conversion feature of the notes. In doing so, the Company used the discounted cash flow approach to value the debt portion of the notes. The cash flow stream from the coupon interest payments and the final principal payment were discounted at
8.61% to arrive at the valuations. The Company used 8.61% as the appropriate discount rate after examining the interest rates for similar instruments issued in the same time frame for similar companies without the conversion feature. The equity
component of the 6.25% Notes was $8,500, net of a tax benefit of $5,931.
The Companys Board of Directors has authorized the issuance of up to 4,700
common shares for the repurchase of its convertible notes. In the third quarter of 2013, the Company delivered and issued 698 and 1,203 common shares in exchange for the retirement of $2,500 and $3,500, respectively, aggregate principal amount of
6.25% convertible notes due 2018. This Board of Directors authorization expired December 31, 2013.
In the third quarter of 2015, the Company
utilized proceeds from its 2015 Senior Credit Facilities described above and cash on hand to repurchase a portion of its 6.25% Notes in the total principal amount of $10,000. The total cash settlement of $10,572 included accrued interest,
transaction fees and premium. The Company recorded a loss of $938 on the extinguishment of this debt, including the write off of unamortized discounts and debt issuance costs, third-party fees and premium.
F-34
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
11.
|
LONG TERM OBLIGATIONS (Continued)
|
The following table includes selected data regarding the 6.25% Notes as of December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Net carrying amount of the equity component
|
|
$
|
7,099
|
|
|
$
|
7,782
|
|
Principal amount of the convertible notes
|
|
$
|
104,000
|
|
|
$
|
114,000
|
|
Unamortized debt discount
|
|
$
|
4,641
|
|
|
$
|
7,242
|
|
Amortization period remaining
|
|
|
28 months
|
|
|
|
40 months
|
|
Net carrying amount of the convertible notes
|
|
$
|
99,359
|
|
|
$
|
106,758
|
|
The following table details the interest components of the 6.25% Notes contained in the Companys Consolidated Statements
of Comprehensive Income (Loss) for the year ended December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Coupon interest expense
|
|
$
|
6,947
|
|
|
$
|
7,125
|
|
Amortization of the debt discount
|
|
|
2,601
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
Total included in interest expense
|
|
$
|
9,548
|
|
|
$
|
9,096
|
|
|
|
|
|
|
|
|
|
|
On January 29, 2016, the Company repurchased 6.25% Notes in the total principal amount of $10,000. See Note 22
Subsequent Events.
5.75% Convertible Notes Paid/Extinguished 2013
On April 8, 2008 the Company closed the sale of $125,000 aggregate principal 5.75% Notes due March 1, 2013. The 5.75% Notes were sold in a private
placement pursuant to Rule 144A under the Securities Act of 1933. The Company received net proceeds from the offering of $110,053 after underwriter fees, the convertible note hedge, proceeds from the warrant and other associated costs. In
May 2011, the Company utilized proceeds from the sale of its 6.25% Notes to repurchase $98,340 principal amount of the 5.75% Notes. The outstanding balance of the 5.75% Notes was paid in cash in the first quarter of 2013.
The following table details the interest components of the 5.75% Notes contained in the Companys Consolidated Statements of Comprehensive Income (Loss)
for the year ended December 31, 2013:
|
|
|
|
|
Coupon interest expense
|
|
$
|
122
|
|
Amortization of the debt discount
|
|
|
114
|
|
|
|
|
|
|
Total included in interest expense
|
|
$
|
236
|
|
|
|
|
|
|
Capital Leases and Other Long-term Obligations
The Company is a lessee under various capital leases and other financing agreements totaling $3,996 and $7,918 with a weighted average interest rate of 8.36%
and 8.57% at December 31, 2015 and 2014, respectively and have maturities through 2043.
Debt Issuance Costs
The Company incurred debt issuance costs totaling $3,907 associated with its 2015 Senior Credit Facilities which were deferred and will be amortized to
interest expense over the terms of the Agreements. Amortization of debt issuance costs were $3,960, $2,460 and $3,836 in the twelve month periods ended December 31, 2015, 2014 and 2013, respectively. Amortization of debt issuance costs included
$2,446 and $1,305 classified as loss on extinguishment of debt in 2015 and 2013, respectively.
Debt Discounts
Accretion of debt discounts charged to interest expense or loss on extinguishment of debt in 2015, 2014 and 2013, totaled $4,641, $2,644 and $3,096,
respectively. Accretion of debt discounts included $2,041 and $436 classified as loss on extinguishment of debt in 2015 and 2013, respectively.
F-35
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
12.
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities consist of the following at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Deferred GCI capacity revenue, net of current portion
|
|
$
|
37,338
|
|
|
$
|
|
|
Other deferred IRU capacity revenue, net of current portion
|
|
|
4,420
|
|
|
|
3,335
|
|
Other deferred revenue, net of current portion
|
|
|
14,445
|
|
|
|
9,091
|
|
Other
|
|
|
9,062
|
|
|
|
11,944
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,265
|
|
|
$
|
24,370
|
|
|
|
|
|
|
|
|
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
|
The following table summarizes the activity in accumulated other comprehensive (loss) income for the twelve months ended December 31,
2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Interest
|
|
|
|
|
|
|
Plans
|
|
|
Rate Swaps
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
$
|
(2,238
|
)
|
|
$
|
(3,371
|
)
|
|
$
|
(5,609
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(1,667
|
)
|
|
|
909
|
|
|
|
(758
|
)
|
Reclassifications from accumulated comprehensive loss to net loss
|
|
|
266
|
|
|
|
950
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive (loss) income
|
|
|
(1,401
|
)
|
|
|
1,859
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
(3,639
|
)
|
|
|
(1,512
|
)
|
|
|
(5,151
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(4
|
)
|
|
|
355
|
|
|
|
351
|
|
Reclassifications from accumulated comprehensive loss to net income
|
|
|
554
|
|
|
|
1,160
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
|
|
|
550
|
|
|
|
1,515
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(3,089
|
)
|
|
$
|
3
|
|
|
$
|
(3,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
13.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)
|
The following table summarizes the reclassifications from accumulated other comprehensive (loss) income to
net income (loss) for the twelve months ended December 31, 2015, 2014, and 2013, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Amortization of defined benefit plan pension items:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss
(3)
|
|
$
|
936
|
|
|
$
|
451
|
|
|
$
|
717
|
|
Income tax effect
|
|
|
(382
|
)
|
|
|
(185
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After tax
|
|
|
554
|
|
|
|
266
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss on ineffective interest rate swap:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to interest expense
|
|
|
1,970
|
|
|
|
1,613
|
|
|
|
2,307
|
|
Income tax effect
|
|
|
(810
|
)
|
|
|
(663
|
)
|
|
|
(949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After tax
|
|
|
1,160
|
|
|
|
950
|
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications net of income tax
|
|
$
|
1,714
|
|
|
$
|
1,216
|
|
|
$
|
1,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 14
Retirement Plans
for additional information regarding the Companys pension plans.
|
(2)
|
See Note 7
Fair Value Measurements
for additional information regarding the Companys interest rate swaps.
|
(3)
|
Included in Selling, general and administrative expense on the Companys Consolidated Statements of Comprehensive Income (Loss).
|
The estimated amount of accumulated other comprehensive loss to be reclassified to interest expense within the next twelve months is zero.
Multi-employer Defined Benefit Plan
Pension benefits for substantially all of the Companys Alaska-based employees are provided through the Alaska Electrical Pension Fund (AEPF).
The Company pays a contractual hourly amount based on employee classification or base compensation. As a multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined for, or allocated separately to, the individual
employer.
F-37
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
14.
|
RETIREMENT PLANS (Continued)
|
The following table provides additional information about the AEPF multi-employer pension plan.
|
|
|
|
|
|
|
Plan name
|
|
|
Alaska Electrical Pension Plan
|
Employer Identification Number
|
|
|
92-6005171
|
|
|
|
Pension plan number
|
|
|
001
|
|
|
|
Pension Protection Act zone status at the plans year-end:
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Green
|
|
|
|
December 31, 2014
|
|
|
Green
|
|
|
|
Plan subject to funding improvement plan
|
|
|
No
|
|
|
|
Plan subject to rehabilitation plan
|
|
|
No
|
|
|
|
Employer subject to contribution surcharge
|
|
|
No
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 5%
|
|
|
|
|
|
of Total
|
|
|
|
|
|
Contributions
|
|
|
|
|
|
to the Plan
|
Company contributions to the plan for the year ended:
|
|
|
|
|
|
|
December 31, 2015
|
|
$
|
7,968
|
|
|
Yes
|
December 31, 2014
|
|
$
|
8,626
|
|
|
Yes
|
December 31, 2013
|
|
$
|
9,174
|
|
|
Yes
|
|
|
|
Name and expiration date of collective bargaining agreements requiring contributions to the plan:
|
|
|
|
|
|
|
|
|
Collective Bargaining Agreement Between Alaska Communications Systems and Local Union 1547 IBEW
|
|
|
December 31, 2016
|
|
|
Outside Agreement Alaska Electrical Construction between Local Union 1547 IBEW and Alaska Chapter National Electrical Contractors
Association Inc.
|
|
|
September 30, 2016
|
|
|
Inside Agreement Alaska Electrical Construction between Local Union 1547 IBEW and Alaska Chapter National Electrical Contractors
Association Inc.
|
|
|
October 31, 2016
|
|
|
Special Agreement Providing for the Coverage of Certain Non-bargaining Unit Employees
|
|
|
December 31, 2016
|
The Company cannot accurately project any change in the plan status in future years given the uncertainty of economic
conditions or the effect of actuarial valuations versus actual performance in the market. Minimum required future contributions to the AEPF are subject to the number of employees in each classification and/or base compensation of employees in future
years.
Defined Contribution Plan
The Company
provides a 401(k) retirement savings plan covering substantially all of its employees. The plan allows for discretionary contributions as determined by the Board of Directors, subject to Internal Revenue Code limitations. The Company made a $187,
$213 and $174 matching contribution in 2015, 2014 and 2013 respectively.
Defined Benefit Plan
The Company has a separate defined benefit plan that covers certain employees previously employed by Century Telephone Enterprise, Inc. (CenturyTel
Plan). This plan was transferred to the Company in connection with the acquisition of CenturyTels Alaska properties, whereby assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan (Plan) on
September 1, 1999. Accrued benefits under the Plan were determined in accordance with the provisions of the CenturyTel Plan and upon completion of the transfer,
F-38
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
14.
|
RETIREMENT PLANS (Continued)
|
covered employees ceased to accrue benefits under the CenturyTel Plan. On November 1, 2000, the Plan was
amended to conform early retirement reduction factors and various other terms to those provided by the AEPF. The Company uses the traditional unit credit method for the determination of pension cost for financial reporting and funding purposes and
complies with the funding requirements under the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Company uses a December 31 measurement date for the Plan. The Plan is not adequately funded under ERISA at
December 31, 2015. The Company contributed $779 to the Plan in 2015, $898 in 2014 and $360 in 2013. The Company plans to contribute approximately $782 to the Plan in 2016 and management is also estimating what additional contributions the
Company may be required to make in subsequent years in the event the value of the Plans assets remain volatile or decline.
The following is a
calculation of the funded status of the ACS Retirement Plan using beginning and ending balances for 2015 and 2014 for the projected benefit obligation and the plan assets:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
17,234
|
|
|
$
|
15,284
|
|
Interest cost
|
|
|
666
|
|
|
|
674
|
|
Actuarial (gain) loss
|
|
|
(754
|
)
|
|
|
2,283
|
|
Benefits paid
|
|
|
(1,052
|
)
|
|
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
16,094
|
|
|
|
17,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
11,570
|
|
|
|
11,548
|
|
Actual return on plan assets
|
|
|
(95
|
)
|
|
|
131
|
|
Employer contribution
|
|
|
779
|
|
|
|
898
|
|
Benefits paid
|
|
|
(1,052
|
)
|
|
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
11,202
|
|
|
|
11,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(4,892
|
)
|
|
$
|
(5,664
|
)
|
|
|
|
|
|
|
|
|
|
The Plans projected benefit obligation equals its accumulated benefit obligation. The 2015 and 2014 liability balance of
$4,892 and $5,664 respectively, is recorded on the Consolidated Balance Sheets in Other long-term liabilities.
The following table presents
the net periodic pension expense for the Plan for 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Interest cost
|
|
$
|
666
|
|
|
$
|
664
|
|
|
$
|
635
|
|
Expected return on plan assets
|
|
|
(659
|
)
|
|
|
(749
|
)
|
|
|
(706
|
)
|
Amortization of loss
|
|
|
929
|
|
|
|
536
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
936
|
|
|
$
|
451
|
|
|
$
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2016, the Company expects amortization of net gains and losses of $921.
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Loss recognized as a component of accumulated other comprehensive loss:
|
|
$
|
5,249
|
|
|
$
|
6,178
|
|
F-39
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
14.
|
RETIREMENT PLANS (Continued)
|
The assumptions used to account for the Plan as of December 31, 2015 and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Discount rate for benefit obligation
|
|
|
4.30
|
%
|
|
|
3.97
|
%
|
Discount rate for pension expense
|
|
|
3.97
|
%
|
|
|
4.49
|
%
|
Expected long-term rate of return on assets
|
|
|
6.53
|
%
|
|
|
6.53
|
%
|
Rate of compensation increase
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The discount rate for December 31, 2015 and 2014 was calculated using a proprietary yield curve based on above median AA
rated corporate bonds. The expected long-term rate-of-return on assets rate is the best estimate of future expected return for the asset pool, given the expected returns and allocation targets for the various classes of assets.
Based on risk and return history for capital markets along with asset allocation risk and return projections, the following asset allocation guidelines were
developed for the Plan:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Maximum
|
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
50
|
%
|
|
|
80
|
%
|
Fixed income
|
|
|
20
|
%
|
|
|
50
|
%
|
Cash equivalents
|
|
|
0
|
%
|
|
|
5
|
%
|
The Plans asset allocations at December 31, 2015 and 2014 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities*
|
|
|
64
|
%
|
|
|
65
|
%
|
Debt securities*
|
|
|
34
|
%
|
|
|
34
|
%
|
Other/Cash
|
|
|
2
|
%
|
|
|
1
|
%
|
*
|
May include mutual funds comprised of both stocks and bonds.
|
The fundamental investment objective of the Plan
is to generate a consistent total investment return sufficient to pay Plan benefits to retired employees while minimizing the long-term cost to the Company. The long-term (10 years and beyond) Plan asset growth objective is to achieve a rate of
return that exceeds the actuarial interest assumption after fees and expenses.
Because of the Companys long-term investment objectives, the Plan
administrator is directed to resist being reactive to short-term capital market developments and to maintain an asset mix that is continuously rebalanced to adhere to the plan investment mix guidelines. The Plans investment goal is to protect
the assets long-term purchasing power. The Plans assets are managed in a manner that emphasizes a higher exposure to equity markets versus other asset classes. It is expected that such a strategy will provide a higher probability of
meeting the plans actuarial rate of return assumption over time.
F-40
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
14.
|
RETIREMENT PLANS (Continued)
|
The following table presents major categories of plan assets as of December 31, 2015, and inputs and
valuation techniques used to measure the fair value of plan assets regarding the ACS Retirement Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
|
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
|
Significant
Unobservable
Inputs
Level 3
|
|
|
|
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market/cash
|
|
$
|
220
|
|
|
$
|
220
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
Equity securities (Investment Funds)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International growth
|
|
|
1,709
|
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
U.S. small cap
|
|
|
1,458
|
|
|
|
1,458
|
|
|
|
|
|
|
|
|
|
U.S. medium cap
|
|
|
1,134
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
2,867
|
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
Debt securities (Investment Funds)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
|
1,738
|
|
|
|
1,738
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
2,076
|
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,202
|
|
|
$
|
11,202
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
May include mutual funds comprised of both stocks and bonds.
|
The benefits expected to be paid in each of the
next five years and in the aggregate for the five fiscal years thereafter are as follows:
|
|
|
2016
|
|
$1,046
|
2017
|
|
1,089
|
2018
|
|
1,106
|
2019
|
|
1,077
|
2020
|
|
1,088
|
2021-2025
|
|
5,364
|
Post-retirement Health Benefit Plan
The Company has a separate executive post-retirement health benefit plan. On December 31, 2015, the plan was underfunded by $167 with plan assets of $119.
The net periodic post-retirement cost for 2015 and 2014 was $9 and $7, respectively.
Earnings per share are based on the weighted average number of shares of common stock and dilutive potential common shares equivalents
outstanding. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution of securities that could share in the earnings of the Company. The Company includes dilutive stock options based on the treasury stock method. Due to the Companys reported net loss for the year ended
December 31, 2014, 2,345 potential common share equivalents outstanding, which consisted of restricted stock and deferred shares granted to directors, were anti dilutive. Excluded from the calculations for the year ended December 31, 2013
were options and SSARs totaling 24 which were out-of-the-money and therefore anti-dilutive. Also excluded
F-41
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
15.
|
EARNINGS PER SHARE (Continued)
|
from the calculations were shares related to the Companys 5.75% Notes which were anti-dilutive for the twelve month period ended December 31, 2013 and shares related to the
Companys 6.25% Notes which were anti-dilutive for the twelve month period ended December 31, 2014.
While it is the Companys intent to
settle the principal portion of its 6.25% Notes in cash, the Company used the if converted method in calculating the diluted earnings per share effect of the assumed conversion of the contingently convertible debt through
December 31, 2014. Under the if converted method, the after tax effect of interest expense related to the convertible securities is added back to net income and the convertible debt is assumed to have been converted into common
stock at the earlier of the debt issuance date or the beginning of the period. The Companys 6.25% Notes were anti-dilutive for the twelve month period ended December 31, 2014 and were dilutive and included in the computation of dilutive
EPS for the twelve months ended December 31, 2013.
Effective in 2015, the Company discontinued use of the if converted method in
calculating the diluted earnings per share in connection with the contingently convertible debt. The Companys 6.25% Notes are convertible by the holder beginning February 1, 2018 at an initial conversion rate of 97.2668 shares of common
stock per one thousand dollars principal amount of the 6.25% Notes. This is equivalent to an initial conversion price of approximately $10.28 per share of common stock. Given that the Companys current share price is well below $10.28, the
Company does not anticipate that there will be a conversion of the 6.25% Notes into equity. Effective in the first quarter of 2015, the Company determined that it has the intent and ability to settle the principal and interest payments on its 6.25%
Notes in cash over time. This determination was based on (i) the Companys improved liquidity position subsequent to the Wireless Sale, including its performance against the financial ratios defined under the terms of its then in effect 2010
Senior Credit Facility, reduced levels of debt and increased availability under its revolving credit facility; (ii) its intention to refinance its term loan facility to provide additional borrowing flexibility; and (iii) its expectations of future
operating performance. In the third quarter of 2015, the Company successfully completed the aforementioned refinancing transactions which resulted in a reduction in total borrowings and provided for maturities on the Companys term loan
facilities in 2018 compared with 2016 under the 2010 Senior Credit Facility. See Note 11
Long-Term Obligations.
Accordingly, 10,809 shares related to the 6.25% Notes have been excluded from the calculation of diluted earnings per
share for the twelve month period ended December 31, 2015.
The following table sets forth the computation of basic and diluted earnings per share
for the years ended December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Net income (loss) attributable to Alaska Communications
|
|
$
|
12,954
|
|
|
$
|
(2,780
|
)
|
|
$
|
158,471
|
|
Tax-effected interest expense attributable to convertible notes
|
|
|
|
|
|
|
|
|
|
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ACS assuming dilution
|
|
$
|
12,954
|
|
|
$
|
(2,780
|
)
|
|
$
|
164,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
50,247
|
|
|
|
49,334
|
|
|
|
47,092
|
|
Effect of stock-based compensation
|
|
|
1,121
|
|
|
|
|
|
|
|
530
|
|
Effect of 6.25% convertible notes
|
|
|
|
|
|
|
|
|
|
|
11,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
51,368
|
|
|
|
49,334
|
|
|
|
59,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share attributable to Alaska Communications:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
(0.06
|
)
|
|
$
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
(0.06
|
)
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
Consolidated income (loss) before income tax was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income (loss) before income tax
|
|
$
|
23,085
|
|
|
$
|
(4,567
|
)
|
|
$
|
214,841
|
|
The income tax provision for the years ended December 31, 2015, 2014 and 2013 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax
|
|
$
|
4,320
|
|
|
$
|
217
|
|
|
$
|
|
|
State income tax
|
|
|
693
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
5,013
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal, excluding operating loss carry forwards
|
|
|
69,774
|
|
|
|
(1,620
|
)
|
|
|
43,301
|
|
State, excluding operating loss carry forwards
|
|
|
19,725
|
|
|
|
(427
|
)
|
|
|
14,969
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(1,900
|
)
|
Tax benefit of operating loss carry forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(66,285
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(18,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
5,187
|
|
|
|
(2,047
|
)
|
|
|
56,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
10,200
|
|
|
$
|
(1,787
|
)
|
|
$
|
56,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the Federal statutory tax at 35% to the recorded tax expense (benefit) for
the years ended December 31, 2015, 2014 and 2013, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Computed federal income taxes at the statutory rate
|
|
$
|
8,080
|
|
|
$
|
(1,598
|
)
|
|
$
|
75,194
|
|
Expense (benefit) in tax resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes (net of Federal benefit)
|
|
|
1,408
|
|
|
|
(278
|
)
|
|
|
13,104
|
|
Other
|
|
|
263
|
|
|
|
58
|
|
|
|
(178
|
)
|
Stock-based compensation
|
|
|
449
|
|
|
|
31
|
|
|
|
44
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(1,900
|
)
|
Crest examination settlement
|
|
|
|
|
|
|
|
|
|
|
(29,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
10,200
|
|
|
$
|
(1,787
|
)
|
|
$
|
56,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for income taxes under the asset-liability method. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are provided when it is more likely than not that the
benefits of existing deferred tax assets will not be realized in a future period. At December 31, 2015, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
Therefore, no valuation allowance is necessary.
F-43
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
16.
|
INCOME TAXES (Continued)
|
Significant components of the Companys deferred tax assets and liabilities as of December 31, 2015
and 2014, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
16,863
|
|
|
$
|
94,435
|
|
Deferred capacity revenue
|
|
|
22,654
|
|
|
|
|
|
Reserves and accruals
|
|
|
6,522
|
|
|
|
8,158
|
|
Intangibles and goodwill
|
|
|
1,765
|
|
|
|
6,694
|
|
Fair value on interest rate swaps
|
|
|
|
|
|
|
1,055
|
|
Pension liability
|
|
|
2,010
|
|
|
|
2,304
|
|
Allowance for doubtful accounts
|
|
|
696
|
|
|
|
1,164
|
|
Alternative minimum tax carry forward
|
|
|
9,668
|
|
|
|
5,308
|
|
Other
|
|
|
277
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets after valuation allowance
|
|
|
60,455
|
|
|
|
120,150
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(1,907
|
)
|
|
|
(2,596
|
)
|
Property, plant and equipment
|
|
|
(41,886
|
)
|
|
|
(23,999
|
)
|
AWN investment
|
|
|
|
|
|
|
(70,577
|
)
|
Fair value on interest rate swaps
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(43,795
|
)
|
|
|
(97,172
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
16,660
|
|
|
$
|
22,978
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of ASU 2015-17 in 2015. ASU 2015-17 requires that all deferred tax assets and liabilities
be classified as non-current on the balance sheet. In accordance with ASU 2015-17, the Companys balance sheet at December 31, 2014 reflects the reclassification of current deferred tax assets of $104,245 and non-current deferred tax
liabilities of $81,267 to non-current deferred tax assets.
As of December 31, 2015, the Company has available Federal and state alternative minimum
tax credits of $8,932 and $1,132, respectively. As of December 31, 2015, the Company has available Federal and state net operating loss carry forwards of $45,122 and $17,533, respectively, which have various expiration dates beginning in 2031
through 2035.
In 2008, the Company acquired Crest. In June 2009, the IRS commenced an audit of Crests tax returns for the years ended
December 31, 2006, December 31, 2007 and October 30, 2008. In April and November of 2010, the IRS issued Notices of Proposed Adjustment (NOPAs) with respect to the 2006, 2007 and 2008 taxable years of Crest. The NOPAs
assess the Company for additional taxable income on cancellation of debt and related attribute reduction, for accuracy related penalties and for adjustments to the tax treatment of optical cables, fibers and related conduit. In accordance with the
guidance in ASC 740 in the second quarter of 2010, the Company recorded $29,678 in additional income tax expense and $2,781 receivable pending resolution of the matter. The Company did not recognize any interest or penalties on the deferred tax
liability. During June 2013, the Company received a no change letter from the IRS covering all of the issues and tax years of Crest. As a result, the Company reversed the prior recorded items and recognized a tax benefit of $29,894
during the quarter ending June 30, 2013.
The Company files consolidated income tax returns for Federal and state purposes in addition to separate
tax returns of certain subsidiaries in multiple state jurisdictions. As of December 31, 2015, the Company is not under examination by any income tax jurisdiction. The Company is no longer subject to examination for years prior to 2012.
The Company accounts for income tax uncertainties using a threshold of more-likely-than-not in accordance with the provisions of ASC Topic
740,
Income Taxes
(ASC 740). As of December 31, 2015, the Company has reviewed all of its tax filings and positions taken on its returns and has not identified any material current or
F-44
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
16.
|
INCOME TAXES (Continued)
|
future effect on its consolidated results of operations, cash flows or financial position. As such, the Company has not recorded any tax, penalties or interest on tax uncertainties. It is Company
policy to record any interest on tax uncertainties as a component of income tax expense.
17.
|
STOCK INCENTIVE PLANS
|
Under the Companys stock incentive plan, Alaska Communications, through the
Compensation and Personnel Committee of its Board of Directors, may grant stock options, restricted stock, stock appreciation rights and other awards to officers, employees, consultants, and non-employee directors. Upon the effective date of the
Alaska Communications Systems Group, Inc. 2011 Incentive Award Plan, as amended and restated on June 30, 2014, (2011 Incentive Award Plan), the Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan and the ACS Group,
Inc. 1999 Non-Employee Director Stock Compensation Plan, (together the Prior Plans) were retired. All future awards will be granted from the 2011 Incentive Award Plan. The Alaska Communications Systems Group, Inc. 2012 Employee Stock
Purchase Plan (2012 ESPP) was approved by the Companys shareholders in June 2012 and the ACS 1999 Employee Stock Purchase Plan (1999 ESPP) was retired on June 30, 2012. References to stock incentive
plans include, as applicable, the 2011 Incentive Award Plan, the 2012 ESPP, the 1999 ESPP and the Prior Plans. An aggregate of 19,210 shares of the Companys common stock have been authorized for issuance under its stock incentive plans.
Stock-based compensation expense is charged to Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income (Loss).
2011 Incentive Award Plan
On June 10, 2011,
Alaska Communications shareholders approved the 2011 Incentive Award Plan, which was amended and restated on June 30, 2014 and which terminates in 2021. Following termination, all shares granted under this plan, prior to termination, will
continue to vest under the terms of the grant when awarded. All remaining unencumbered shares of common stock previously allocated to the Prior Plans were transferred to the 2011 Incentive Award Plan. In addition, to the extent that any outstanding
awards under the Prior Plans are forfeited or expire or such awards are settled in cash, such shares will again be available for future grants under the 2011 Incentive Award Plan. The Company grants Restricted Stock Units and Performance Stock Units
as the primary equity based incentive for executive and certain non-union represented employees.
Stock-Settled Stock Appreciation Rights and Stock
Options (SSARs)
SSARs were issued to certain former named executive officers in 2008 and 2009. The SSARs vested ratably through April 2011 and
had a term of five years. All SSARs have fully vested and have been exercised or expired as of December 2013. No SSARs have been issued since 2009 and no stock options have been granted to employees since 2005. All remaining SSARs and options
have expired and the Company had no option or SSAR grants outstanding at December 31, 2015.
Restricted Stock Units, Long-term Incentive Awards
and Non-employee Director Stock Compensation
Restricted Stock Units (RSU) issued prior to December 31, 2010 vest ratably over three,
four or five years, RSUs issued in 2011 vest ratably over three years, and RSUs granted in 2012 vest in one year or ratably over three years. Long-term incentive awards (LTIP) were granted to executive management annually through 2010.
The LTIP awards cliff vest in five years with accelerated vesting in three years if cumulative three year profitability criteria are met. Since January 2008, the Company has maintained a policy which requires that non-employee directors receive
a portion of their annual retainer in the form of Alaska Communications stock. Non-employee director stock compensation vests when granted. The directors make an annual election on whether to have the stock issued or to have it deferred.
F-45
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
17.
|
STOCK INCENTIVE PLANS (Continued)
|
The following table summarizes the RSU, LTIP and non-employee director stock compensation activity for the
year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Nonvested at December 31, 2014
|
|
|
1,299
|
|
|
$
|
2.30
|
|
Granted
|
|
|
1,224
|
|
|
|
1.84
|
|
Vested
|
|
|
(704
|
)
|
|
|
2.66
|
|
Canceled or expired
|
|
|
(633
|
)
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2015
|
|
|
1,186
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
Performance Based Units
PSUs vest ratably over three years beginning at the grant date, subject to certain Company financial targets being met and approval of the Compensation and
Personnel Committee of the Board of Directors.
The following table summarizes PSU activity for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Nonvested at December 31, 2014
|
|
|
790
|
|
|
$
|
1.78
|
|
Granted
|
|
|
1,118
|
|
|
|
1.80
|
|
Vested
|
|
|
(257
|
)
|
|
|
1.70
|
|
Canceled or expired
|
|
|
(667
|
)
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2015
|
|
|
984
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions
Assumptions used for valuation of equity instruments awarded during the twelve months ended December 31, 2015, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
2013
|
Restricted stock:
|
|
|
|
|
|
|
Risk free rate
|
|
0%
|
|
0.0% - 0.23%
|
|
0.03% - 0.18%
|
Quarterly dividend
|
|
$
|
|
$
|
|
$
|
Expected, per annum, forfeiture rate
|
|
9%
|
|
9%
|
|
0% - 9%
|
F-46
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
17.
|
STOCK INCENTIVE PLANS (Continued)
|
Selected Information on Equity Instruments and Share-Based Compensation
Selected information on equity instruments and share-based compensation under the plan for the years ended December 31, 2015, 2014 and 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Total compensation cost for share-based payments
|
|
$
|
2,008
|
|
|
$
|
2,511
|
|
|
$
|
2,860
|
|
Weighted average grant-date fair value of equity instruments granted
|
|
$
|
1.82
|
|
|
$
|
1.87
|
|
|
$
|
1.77
|
|
Total fair value of shares vested during the period
|
|
$
|
2,615
|
|
|
$
|
2,935
|
|
|
$
|
5,011
|
|
Unamortized share-based payments
|
|
$
|
1,421
|
|
|
$
|
1,392
|
|
|
$
|
1,748
|
|
Weighted average period in years to be recognized as expense
|
|
|
1.39
|
|
|
|
1.45
|
|
|
|
1.75
|
|
Share-based compensation expense is classified as Selling, general and administrative expense in the
Companys Consolidated Statements of Comprehensive Income (Loss).
The Company purchases, from shares authorized under the 2011 Incentive Award Plan,
sufficient vested shares to cover minimum employee payroll tax withholding requirements upon the vesting of restricted stock. From time to time the Company also purchases sufficient vested shares to cover minimum employee payroll tax withholding
requirements. The Company expects to repurchase approximately 286 shares in 2016. This amount is based upon an estimation of the number of shares of restricted stock awards expected to vest during 2016.
Alaska Communications Systems Group, Inc. 2012 Employee Stock Purchase Plan
The Alaska Communications Systems Group, Inc. 2012 Employee Stock Purchase Plan was approved by the Companys shareholders in June 2012 and replaced
the Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan, as amended. The 2012 ESPP will terminate upon the earlier of (i) the last exercise date prior to the tenth anniversary of the adoption date, unless sooner terminated in
accordance with the 2012 ESPP; or (ii) the date on which all purchase rights are exercised in connection with a change in ownership of the Company. The terms of the 2012 ESPP are similar to those of the 1999 ESPP. Under the terms of the 2012 ESPP,
all Alaska Communications employees and all employees of designated subsidiaries generally will be eligible to participate in the 2012 ESPP, other than employees whose customary employment is not more than 20 hours per week and five months in a
calendar year, or who are ineligible to participate due to restrictions under the Internal Revenue Code. A participant in the 2012 ESPP will be granted a purchase right to acquire shares of common stock at six-month intervals on an ongoing basis,
subject to the continuing availability of shares under the 2012 ESPP. Each participant may authorize periodic payroll deductions in any multiple of 1% (up to a maximum of 15%) of eligible compensation to be applied to the acquisition of common stock
at semiannual intervals. The 2012 ESPP imposes certain limitations upon a participants rights to acquire common stock, including (i) purchase rights granted to a participant may not permit the individual to purchase more than $25 worth of
common stock for each calendar year in which those purchase rights are outstanding at any time; (ii) purchase rights may not be granted to any individual if the individual would, immediately after the grant, own or hold outstanding options or other
rights to purchase, stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its subsidiaries; and (iii) no participant may purchase more than 10 shares of common stock during any six
month offering period. The offering dates are January 1 and July 1 and the purchase dates are June 30 and December 31. The initial purchase date under the 2012 ESPP was December 31, 2012. Shares are purchased on the open
market or issued from authorized but unissued shares on behalf of the participant on the purchase date. No participant will have any shareholder rights with respect to the shares covered by their purchase rights until the shares are actually
purchased on the participants behalf. No adjustments will be made for dividends, distributions or other rights for which the record date is prior to the date of the actual purchase.
The Company reserved 1,500 shares of its common stock for issuance under the 2012 ESPP, which were also available for issuance for the January 1, 2012
through June 30, 2012 offering period under the 1999 ESPP. Any shares issued to employees in respect to the January 1, 2012 through June 30, 2012 offering period under the
F-47
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
17.
|
STOCK INCENTIVE PLANS (Continued)
|
1999 ESPP reduced (on a one for one basis) the aggregate number of shares available for issuance thereafter under the 2012 ESPP. The fair value of each purchase right under the 2012 ESPP is
charged to compensation expense over the offering period to which the right pertains, and is reflected in total compensation cost for share-based payments in the above table.
18.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
The following table presents supplemental non-cash transaction and
nonmonetary exchange information for the years ended December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Supplemental Non-cash Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred but not paid at December 31
|
|
$
|
11,600
|
|
|
$
|
6,678
|
|
|
$
|
8,612
|
|
Property acquired under capital leases
|
|
$
|
20
|
|
|
$
|
1,877
|
|
|
$
|
171
|
|
Additions to ARO asset
|
|
$
|
254
|
|
|
$
|
369
|
|
|
$
|
229
|
|
Accrued acquisition purchase price
|
|
$
|
|
|
|
$
|
291
|
|
|
$
|
|
|
Exchange of debt with common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,000
|
|
Non-cash acquisition, net of cash received
|
|
$
|
|
|
|
$
|
956
|
|
|
$
|
|
|
Assets contributed to joint venture by noncontrolling interest
|
|
$
|
922
|
|
|
$
|
|
|
|
$
|
|
|
Note receivable on sale of asset
|
|
$
|
2,650
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Nonmonetary Exchanges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
710
|
|
|
$
|
|
|
|
$
|
|
|
Deferred revenue
|
|
$
|
(2,310
|
)
|
|
$
|
|
|
|
$
|
|
|
Prepaid expenses
|
|
$
|
1,600
|
|
|
$
|
|
|
|
$
|
|
|
IRUs received
|
|
$
|
2,765
|
|
|
$
|
|
|
|
$
|
|
|
IRUs relinquished
|
|
$
|
(2,765
|
)
|
|
$
|
|
|
|
$
|
|
|
The Company operates its business under a single reportable segment. The
Companys chief operating decision maker assesses the financial performance of the business as follows: (i) revenues are managed on the basis of specific customers and customer groups; (ii) costs are managed and assessed by function and
generally support the organization across all customer groups or revenue streams; (iii) profitability is assessed at the consolidated level; and (iv) investment decisions and the assessment of existing assets are based on the support they provide to
all revenue streams.
F-48
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
19.
|
BUSINESS SEGMENTS (Continued)
|
The following table presents service and product revenues from external customers for the years ended
December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Service Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Business and wholesale customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
21,969
|
|
|
$
|
22,499
|
|
|
$
|
22,947
|
|
Broadband
|
|
|
50,007
|
|
|
|
43,783
|
|
|
|
40,027
|
|
Managed IT services
|
|
|
3,316
|
|
|
|
3,492
|
|
|
|
|
|
Other
|
|
|
8,089
|
|
|
|
7,104
|
|
|
|
7,659
|
|
Wholesale
|
|
|
36,792
|
|
|
|
33,043
|
|
|
|
30,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business and wholesale service revenue
|
|
|
120,173
|
|
|
|
109,921
|
|
|
|
100,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
|
13,530
|
|
|
|
14,932
|
|
|
|
16,818
|
|
Broadband
|
|
|
25,050
|
|
|
|
24,841
|
|
|
|
22,108
|
|
Other
|
|
|
1,341
|
|
|
|
1,563
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer service revenue
|
|
|
39,921
|
|
|
|
41,336
|
|
|
|
40,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Service Revenue
|
|
|
160,094
|
|
|
|
151,257
|
|
|
|
141,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in Service Revenue
|
|
|
5.8
|
%
|
|
|
7.0
|
%
|
|
|
|
|
Growth in Broadband Service Revenue
|
|
|
9.4
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales and installations
|
|
|
6,382
|
|
|
|
5,321
|
|
|
|
2,083
|
|
Access
|
|
|
33,644
|
|
|
|
35,323
|
|
|
|
37,033
|
|
High cost support
|
|
|
19,682
|
|
|
|
23,192
|
|
|
|
18,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Service and Other Revenue
|
|
|
219,802
|
|
|
|
215,093
|
|
|
|
199,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in service and other revenue
|
|
|
2.2
|
%
|
|
|
8.0
|
%
|
|
|
|
|
Growth excluding equipment sales
|
|
|
1.7
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
Wireless and AWN related Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue, equipment sales and other
|
|
|
6,300
|
|
|
|
77,054
|
|
|
|
81,093
|
|
Foreign roaming and wireless backhaul
|
|
|
|
|
|
|
|
|
|
|
46,064
|
|
Transition services
|
|
|
4,769
|
|
|
|
|
|
|
|
|
|
CETC
|
|
|
1,654
|
|
|
|
19,565
|
|
|
|
21,019
|
|
Amortization of deferred AWN capacity revenue
|
|
|
292
|
|
|
|
3,151
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wireless and AWN Related Revenue
|
|
|
13,015
|
|
|
|
99,770
|
|
|
|
149,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
232,817
|
|
|
$
|
314,863
|
|
|
$
|
348,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys revenues are derived entirely from external customers in the United States and its long-lived assets are
held entirely in the United States.
20.
|
COMMITMENTS AND CONTINGENCIES
|
The Company enters into purchase commitments with vendors in the ordinary
course of business, including minimum purchase agreements. The Company also has long-term purchase contracts with vendors to support
F-49
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Amounts)
20.
|
COMMITMENTS AND CONTINGENCIES (Continued)
|
the on-going needs of its business. These purchase commitments and contracts have varying terms and in certain cases may require the Company to buy goods and services in the future at
predetermined volumes and at fixed prices.
The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary
course of business and has recorded a liability for estimated litigation costs of $647 at December 31, 2015 against certain current claims and legal actions. The Company also faces contingencies that are reasonably possible to occur, however,
they cannot currently be estimated. The Company believes that the disposition of these matters will not have a material adverse effect on the Companys consolidated financial position, comprehensive income or cash flows. It is the
Companys policy to expense costs associated with loss contingencies, including any related legal fees, as they are incurred.
21.
|
SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited See accompanying accountants report)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
65,786
|
|
|
$
|
55,665
|
|
|
$
|
54,735
|
|
|
$
|
56,631
|
|
|
$
|
232,817
|
|
Gross profit
|
|
|
34,520
|
|
|
|
25,587
|
|
|
|
30,062
|
|
|
|
30,525
|
|
|
|
120,694
|
|
Operating income (loss)
|
|
|
39,313
|
|
|
|
(4,375
|
)
|
|
|
8,178
|
|
|
|
4,630
|
|
|
|
47,746
|
|
Net income (loss)
|
|
|
16,217
|
|
|
|
(4,860
|
)
|
|
|
1,202
|
|
|
|
326
|
|
|
|
12,885
|
|
Net income (loss) attributable to Alaska Communications
|
|
|
16,217
|
|
|
|
(4,841
|
)
|
|
|
1,239
|
|
|
|
339
|
|
|
|
12,954
|
|
Net income (loss) per share attributable to Alaska Communications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.32
|
|
|
|
(0.10
|
)
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.26
|
|
Diluted
|
|
|
0.32
|
|
|
|
(0.10
|
)
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.25
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
78,331
|
|
|
$
|
80,558
|
|
|
$
|
78,465
|
|
|
$
|
77,509
|
|
|
$
|
314,863
|
|
Gross profit
|
|
|
33,513
|
|
|
|
35,757
|
|
|
|
33,515
|
|
|
|
31,108
|
|
|
|
133,893
|
|
Operating income (loss)
|
|
|
8,250
|
|
|
|
10,726
|
|
|
|
11,668
|
|
|
|
(884
|
)
|
|
|
29,760
|
|
Net (loss) income
|
|
|
(385
|
)
|
|
|
1,085
|
|
|
|
1,878
|
|
|
|
(5,358
|
)
|
|
|
(2,780
|
)
|
Net (loss) income attributable Alaska Communications
|
|
|
(385
|
)
|
|
|
1,085
|
|
|
|
1,878
|
|
|
|
(5,358
|
)
|
|
|
(2,780
|
)
|
Net (loss) income per share attributable to Alaska Communications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01
|
)
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
(0.11
|
)
|
|
|
(0.06
|
)
|
Diluted
|
|
|
(0.01
|
)
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
(0.11
|
)
|
|
|
(0.06
|
)
|
Operating income (loss), net income (loss), net income (loss) attributable to Alaska Communications and per share amounts in
2015 reflect the gain before income taxes on the Wireless Sale of $39,719, $1,421, $7,092 and $48,232 in the first quarter, second quarter, third quarter and total year, respectively.
On January 29, 2016, the Company repurchased a portion of its 6.25% Notes in the
total principal amount of $10,000 for cash consideration of $9,750. The net cash settlement of $10,053 included accrued interest and transaction fees totaling $303. The Company recorded a loss on extinguishment of debt of $374, including the write
off of unamortized discounts, the equity component, debt issuance costs and the payment of third-party fees, net of the $250 discount.
F-50
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
Financial Statements
December 31, 2014 and 2013
(With Report of Independent Registered Public Accounting Firm)
F-51
|
|
|
|
|
Grant Thornton LLP
|
|
|
1029 W. Third Ave., Suite 280
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
Anchorage, AK, 99501
|
|
|
|
|
T 907.754.9200
|
|
|
F 907.754.9222
|
|
|
www.GrantThornton.com
|
|
|
Board of Directors and Members
|
|
|
The Alaska Wireless Network, LLC
|
|
|
We have audited the accompanying balance sheets of The Alaska Wireless Network, LLC (a Delaware Limited Liability Company)
(the Company) as of December 31, 2014 and 2013, and the related statements of income, changes in members equity, and cash flows for the year ended December 31, 2014 and for the period from July 23, 2013 through
December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Alaska Wireless Network,
LLC as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the year ended December 31, 2014 and for the period from July 23, 2013 through December 31, 2013, in conformity with accounting
principles generally accepted in the United States of America.
Anchorage, Alaska
March 3, 2015
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
F-52
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
BALANCE SHEETS
December 31, 2014 and 2013
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,371
|
|
|
|
3,527
|
|
Receivables from related parties
|
|
|
124,281
|
|
|
|
100,549
|
|
Receivables from non-related parties, net
|
|
|
12,235
|
|
|
|
14,225
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
136,516
|
|
|
|
114,774
|
|
Prepaid expenses
|
|
|
1,126
|
|
|
|
1,309
|
|
Other current assets
|
|
|
224
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
139,237
|
|
|
|
119,681
|
|
Property and equipment in service, net of depreciation
|
|
|
188,752
|
|
|
|
191,805
|
|
Construction in progress
|
|
|
44,614
|
|
|
|
32,959
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
233,366
|
|
|
|
224,764
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
164,312
|
|
|
|
155,445
|
|
Wireless licenses
|
|
|
86,347
|
|
|
|
91,400
|
|
Rights to use capacity, net of amortization of $3,470 and $1,221 at December 31, 2014 and 2013, respectively
|
|
|
44,812
|
|
|
|
54,185
|
|
Future capacity
|
|
|
16,343
|
|
|
|
15,313
|
|
Software licenses, net of amortization of $11,769 and $8,474 at December 31, 2014 and 2013, respectively
|
|
|
8,670
|
|
|
|
7,877
|
|
Other assets
|
|
|
758
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
321,242
|
|
|
|
325,149
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
693,845
|
|
|
|
669,594
|
|
|
|
|
|
|
|
|
|
|
(Continued)
The
accompanying notes are an integral part of these financial statements.
F-53
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
BALANCE SHEETS
December 31, 2014 and 2013
(Amounts in thousands)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
LIABILITIES AND MEMBERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable to related parties
|
|
$
|
67,970
|
|
|
|
62,155
|
|
Accounts payable to non-related parties
|
|
|
20,745
|
|
|
|
7,862
|
|
Deferred revenues
|
|
|
2,314
|
|
|
|
1,996
|
|
Accrued liabilities
|
|
|
218
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
91,247
|
|
|
|
72,242
|
|
Line of credit from GCI Holdings, Inc.
|
|
|
2,116
|
|
|
|
3,874
|
|
Asset retirement obligations
|
|
|
15,674
|
|
|
|
14,792
|
|
Other liabilities
|
|
|
3,715
|
|
|
|
1,904
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
112,752
|
|
|
|
92,812
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
581,093
|
|
|
|
576,782
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
693,845
|
|
|
|
669,594
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-54
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
INCOME STATEMENTS
For the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
139,069
|
|
|
|
71,732
|
|
Non-related parties
|
|
|
113,795
|
|
|
|
47,186
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
252,864
|
|
|
|
118,918
|
|
Cost of goods sold (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
8,103
|
|
|
|
3,867
|
|
Non-related parties
|
|
|
65,518
|
|
|
|
28,850
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
73,621
|
|
|
|
32,717
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
17,224
|
|
|
|
8,100
|
|
Non-related parties
|
|
|
4,410
|
|
|
|
2,380
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
|
21,634
|
|
|
|
10,480
|
|
Depreciation and amortization expense
|
|
|
43,837
|
|
|
|
19,178
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
113,772
|
|
|
|
56,543
|
|
Interest expense to related party (including amortization of deferred loan fees)
|
|
|
368
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,404
|
|
|
|
56,342
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-55
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
STATEMENTS OF MEMBERS EQUITY
For the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members Capital
Accounts
|
|
|
Allocable
Earnings
|
|
|
Total
|
|
Balances at July 23, 2013
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
56,342
|
|
|
|
56,342
|
|
Contributions from members
|
|
|
574,418
|
|
|
|
|
|
|
|
574,418
|
|
Distributions to members
|
|
|
|
|
|
|
(53,978
|
)
|
|
|
(53,978
|
)
|
Allocation to members of income in excess of distributions
|
|
|
2,364
|
|
|
|
(2,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013
|
|
$
|
576,782
|
|
|
|
|
|
|
|
576,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
113,404
|
|
|
|
113,404
|
|
Distributions to members
|
|
|
|
|
|
|
(106,962
|
)
|
|
|
(106,962
|
)
|
Allocation to members of income in excess of distributions
|
|
|
6,442
|
|
|
|
(6,442
|
)
|
|
|
|
|
Final valuation contribution adjustment
|
|
|
(2,131
|
)
|
|
|
|
|
|
|
(2,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2014
|
|
$
|
581,093
|
|
|
|
|
|
|
|
581,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-56
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
STATEMENTS OF CASH FLOWS
For the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,404
|
|
|
|
56,342
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
43,837
|
|
|
|
19,178
|
|
Other noncash income and expense items
|
|
|
1,299
|
|
|
|
425
|
|
Changes in operating assets and liabilities, net of amounts acquired:
|
|
|
|
|
|
|
|
|
Receivables from non-related parties
|
|
|
1,492
|
|
|
|
(14,225
|
)
|
Receivables from related parties
|
|
|
(39,218
|
)
|
|
|
(57,335
|
)
|
Prepaid expenses
|
|
|
183
|
|
|
|
(1,309
|
)
|
Other current assets
|
|
|
(142
|
)
|
|
|
(71
|
)
|
Other assets
|
|
|
25
|
|
|
|
95
|
|
Accounts payable to non-related parties
|
|
|
(3,400
|
)
|
|
|
5,989
|
|
Accounts payable to related parties
|
|
|
1,307
|
|
|
|
26,060
|
|
Accrued liabilities
|
|
|
(11
|
)
|
|
|
229
|
|
Deferred revenues
|
|
|
100
|
|
|
|
1,996
|
|
Other liabilities
|
|
|
1,792
|
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
120,668
|
|
|
|
38,566
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(30,198
|
)
|
|
|
(18,533
|
)
|
Purchases of software licenses and other assets
|
|
|
(4,207
|
)
|
|
|
(1,662
|
)
|
Grant proceeds
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(33,689
|
)
|
|
|
(20,195
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distribution to members
|
|
|
(86,968
|
)
|
|
|
(17,844
|
)
|
Payments to GCI Holdings, Inc. on line of credit
|
|
|
(14,167
|
)
|
|
|
|
|
Borrowings from GCI Holdings, Inc. on line of credit
|
|
|
12,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(89,135
|
)
|
|
|
(14,844
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(2,156
|
)
|
|
|
3,527
|
|
Cash at beginning of period
|
|
|
3,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,371
|
|
|
|
3,527
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow data:
|
|
|
|
|
|
|
|
|
Interest paid including capitalized interest
|
|
$
|
534
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Net assets and liabilities transferred from members
|
|
$
|
|
|
|
|
574,418
|
|
Asset retirement obligation additions to property and equipment
|
|
$
|
168
|
|
|
|
116
|
|
Non-cash additions of property and equipment
|
|
$
|
18,156
|
|
|
|
1,873
|
|
Distributions accrued, not yet paid
|
|
$
|
40,642
|
|
|
|
36,134
|
|
Non-cash settlement of receivables from and payables to related parties
|
|
$
|
15,486
|
|
|
|
|
|
Net assets adjusted due to AWN purchase price allocation true-up
|
|
$
|
2,131
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-57
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
(1)
|
Business and Summary of Significant Accounting Principles
|
In the following discussion, The Alaska Wireless Network, LLC (AWN) is referred to as we,
us and our.
|
(a)
|
Description of the Business
|
AWN was formed June 5, 2012 as a Delaware limited liability
company, and as a majority owned subsidiary of GCI Wireless Holdings, LLC (a wholly owned subsidiary of General Communication, Inc. (GCI)). As a result of the acquisition described below, GCI Wireless Holdings, LLC owns two-thirds and
Alaska Communications Systems Group, Inc. (ACS) owns one-third of AWN.
We began operations on July 23, 2013, and offer
the following services:
|
|
|
Wholesale wireless services to GCI and ACS
|
|
|
|
Wireless roaming for other wireless carriers
|
|
|
|
Backhaul for other wireless carriers
|
Effective July 23, 2013, we closed the transactions under the Asset
Purchase and Contribution Agreement (Wireless Agreement) entered into on June 4, 2012 by and among ACS, GCI, ACS Wireless, Inc., a wholly owned subsidiary of ACS, GCI Wireless Holdings, LLC, a wholly owned subsidiary of GCI, and AWN,
pursuant to which the parties agreed to contribute the respective wireless network assets of GCI, ACS and their affiliates to AWN. AWN provides wholesale services to GCI and ACS. GCI and ACS use the AWN network to sell services to their respective
retail customers. GCI and ACS continue to compete against each other and other wireless providers in the retail wireless market.
Under the
terms of the Wireless Agreement, GCI contributed $291.4 million in net assets consisting of its wireless network assets and certain rights to use capacity to AWN. Additionally, ACS contributed its wireless network assets and certain rights to use
capacity to AWN. As consideration for the contributed business assets and liabilities, ACS received $100.0 million in cash from GCI, a one-third ownership interest in AWN and entitlements to receive preferential cash distributions totaling $190.0
million over the first four years of AWNs operations (Preference Period) contingent on the future cash flows of AWN. The preferential cash distribution is cumulative and may be paid beyond the Preference Period until the entire
$190.0 million is paid. We believe ACSs preferential cash distributions are expected to be higher than that which they would receive from their one-third interest. GCI received a two-third ownership interest in AWN, as well as entitlements to
receive all remaining cash distributions after ACSs preferential cash distributions during the Preference Period. The distributions to each member are subject to adjustment based on the number of ACS and GCI wireless subscribers, with the
aggregate adjustment capped at $21.8 million for each member over the Preference Period.
During the Preference Period net income is
allocated to GCI and ACS based on their proportion of distributions up to the total distributions, as defined by AWN, during the period. Net income greater than the total distributions is allocated based on each members proportional
ownership interests. Following the Preference Period, GCI and ACS will receive distributions proportional to their ownership interests.
We accounted for the assets and liabilities contributed by ACS at estimated fair values as of July 23, 2013, using the acquisition method
of accounting in accordance with Accounting Standards Codification (ASC) 850,
Business Combinations
. We used a combination of the discounted cash flows and market method to value the wireless licenses. We used the cost
approach to value the acquired fixed assets and rights to use capacity assets. We used a discounted cash flow method to determine the fair value of ACSs member equity. The assets and liabilities contributed to us by GCI were measured
at their carrying amount immediately prior to the contribution as GCI is maintaining control over the assets and liabilities. GCIs initial member equity is the carrying amount of GCIs contributed assets and liabilities.
F-58
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
The following table summarizes the final purchase price and the estimated fair value of
ACSs assets acquired and liabilities assumed, effective July 23, 2013 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
Reported
|
|
|
Adjustments
|
|
|
Final Purchase
Price Allocation
|
|
Purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Fair value of the one-third ownership interest of AWN
|
|
|
267,642
|
|
|
|
(2,131
|
)
|
|
|
265,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
367,642
|
|
|
|
(2,131
|
)
|
|
|
365,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
16,952
|
|
|
|
11
|
|
|
|
16,963
|
|
Property and equipment, including construction in progress
|
|
|
82,473
|
|
|
|
138
|
|
|
|
82,611
|
|
Goodwill
|
|
|
140,081
|
|
|
|
8,867
|
|
|
|
148,948
|
|
Wireless licenses
|
|
|
65,433
|
|
|
|
(5,053
|
)
|
|
|
60,380
|
|
Rights to use capacity
|
|
|
52,636
|
|
|
|
(7,298
|
)
|
|
|
45,338
|
|
Future capacity
|
|
|
15,313
|
|
|
|
1,204
|
|
|
|
16,517
|
|
Other assets
|
|
|
765
|
|
|
|
|
|
|
|
765
|
|
Fair value of liabilities assumed
|
|
|
(6,011
|
)
|
|
|
|
|
|
|
(6,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of assets acquired and liabilities assumed
|
|
$
|
367,642
|
|
|
|
(2,131
|
)
|
|
|
365,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We modified the initial preliminary AWN purchase price allocation during 2014 as noted in the table above due
to additional information received from ACS related to the allocation of ACS network contributed to AWN that impacted the estimated fair value.
As of December 31, 2014, goodwill in the amount of $164.3 million was recorded as a result of the acquisition including $15.4 million in
goodwill contributed by GCI. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually
identified and separately recognized. The goodwill is primarily the result of synergies expected from the combination.
|
(c)
|
Accounts Receivable from Non-related Parties and Allowance for Doubtful Receivables
|
Accounts receivable from non-related parties are recorded at the reported amount and do not bear interest. The allowance for doubtful
receivables is our best estimate of the amount of probable credit losses in our existing accounts receivable from non-related parties. We base our estimates on the aging of our accounts receivable balances, financial health of customers, regional
economic data, changes in our collections process and regulatory requirements. We review our allowance for doubtful receivables methodology at least annually.
Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to our customers.
|
(d)
|
Property and Equipment
|
Property and equipment is stated at cost. Construction costs of
facilities are capitalized. Construction in progress represents transmission equipment and support equipment and systems not placed in service on December 31, 2014, that management intends to place in service during 2015.
F-59
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
Depreciation is computed using the straight-line method in the following ranges:
|
|
|
|
|
Asset Category
|
|
Asset Lives
|
|
Telephony transmission equipment and distribution facilities
|
|
|
5-20 years
|
|
Support equipment and systems
|
|
|
3-20 years
|
|
Buildings
|
|
|
25 years
|
|
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and
betterments are capitalized. Accumulated depreciation is removed and gains or losses are recognized at the time of sales or other dispositions of property and equipment.
|
(e)
|
Intangible Assets and Goodwill
|
Goodwill and wireless licenses are not amortized.
Wireless licenses represent the right to utilize certain radio frequency spectrum to provide wireless communications services. Goodwill represents the excess of cost over fair value of net assets acquired in connection with a business acquisition.
Under the terms of the Wireless Agreement, we acquired from ACS rights to use its network capacity and the associated maintenance on this
network capacity for 20 years. We are amortizing this intangible asset over 20 years using the straight-line method. We also acquired from ACS the rights to use additional network capacity which we may draw down in the future. The applicable portion
of the future capacity asset will be reclassified to the rights to use capacity asset when the capacity is placed into service and amortized using the
straight-line
method over the remaining 20 year period.
Software licenses are recognized at cost and are being amortized over a 5 year period using the
straight-line
method.
|
(f)
|
Impairment of Intangibles, Goodwill, and Long-lived Assets
|
Wireless license assets are
treated as indefinite-lived intangible assets and are tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. We are allowed to assess qualitative factors (Step Zero) in
our annual test over our
indefinite-lived
intangible assets other than goodwill.
Our goodwill is
tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. In our annual test of goodwill, we are allowed to use Step Zero to determine whether it is more
likely than not that goodwill is impaired.
We completed our annual review of wireless license assets and goodwill as of October 31,
2014 and 2013. No impairment charge was recorded for the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013.
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of an asset group to be held and used is measured by a comparison of the carrying amount of an asset group to
estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset group exceeds the fair value of the asset group.
|
(g)
|
Asset Retirement Obligations
|
We record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred on the Balance Sheet if the fair value of the liability can be reasonably estimated. When the liability is initially recorded, we capitalize a cost by increasing the carrying amount of the
related
long-lived
asset. In periods subsequent to initial measurement,
period-to-period
changes in the liability for an asset
retirement
F-60
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
obligation resulting from revisions to either the timing or the amount of the original estimate of undiscounted cash flows are recognized. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we either settle the obligation for its recorded amount or incur a gain or loss upon settlement.
The majority of our asset retirement obligations are the estimated cost to remove telephony transmission equipment and support equipment from
leased property. Following is a reconciliation of the beginning and ending aggregate carrying amounts of our liability for asset retirement obligations (amounts in thousands):
|
|
|
|
|
Balance at July 23, 2013
|
|
$
|
14,408
|
|
Liability incurred
|
|
|
116
|
|
Accretion expense
|
|
|
270
|
|
Liability settled
|
|
|
(2
|
)
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
14,792
|
|
Liability incurred
|
|
|
168
|
|
Accretion expense
|
|
|
733
|
|
Liability settled
|
|
|
(19
|
)
|
|
|
|
|
|
Balance at December 31 2014
|
|
$
|
15,674
|
|
|
|
|
|
|
During year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013, we
recorded additional capitalized costs of $0.2 million and $0.1 million, respectively in Property and Equipment in Service, Net of Depreciation.
All revenues are recognized when the earnings process is complete.
If requested by GCI and ACS, we pay cash incentives to them when wireless handsets are sold to their respective retail customers. During the period July 23, 2013 to March 31, 2014, and in accordance with the Facilities and Network Use
Agreement dated as of July 22, 2013 by and among AWN, ACS, GCI, ACS Wireless, Inc., and GCI Wireless Holdings, LLC (FNUA), GCI waived the right to request a cash incentive for wireless handsets sold to their retail customers. During
the year ended December 31, 2014 and the period July 23, 2013 to December 2013, we recorded incentives of $26.4 million and $6.4 million, respectively, as an offset to RevenuesRelated Parties.
Revenues generated from wireless service usage and plan fees are recognized when the services are provided. Plan fees and usage are
self-reported to us by our carriers, GCI and ACS, and we recognize carrier plan fees as set out in agreements with GCI and ACS.
As
Eligible Telecommunications Carriers (ETCs), GCI and ACS receive high cost support from the Universal Service Fund (USF) to support the provision of wireless service in high cost areas, and this support is passed through to
us. In 2011 the Federal Communications Commission (FCC) published a final rule to reform the methodology for, among others, distributing USF high cost support for voice and broadband services (High Cost Order).
Remote High Cost Support
Remote high cost support is based upon the 2011 support disbursed to Competitive Eligible Telecommunications Carriers (CETCs)
(Statewide Support Cap) providing supported services in Remote Alaska, except AT&T. On January 1, 2012, the per-line rates paid in the Remote areas were frozen by the USF and cannot exceed $250 per line per month on a study area
basis. Line count growth that causes support to exceed the Statewide Support Cap triggers a pro rata support payment reduction to all subject Alaska CETCs until the support is reduced to the Statewide Support Cap amount.
F-61
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
We accrue estimated program revenue based on current line counts and the frozen per-line
rates, reduced as needed by our estimate of the impact of the Statewide Support Cap. When determining the estimated program revenue accrual, we also consider our assessment of the impact of current FCC regulations and of the potential outcome
of FCC proceedings. Our estimated accrued revenue is subject to our judgment regarding the outcome of many variables and is subject to upward or downward adjustment in subsequent periods.
Additionally, the FCC determined that Remote support will continue to be based on line counts (subject to the Statewide Support Cap) until the
last full month prior to the implementation of a successor funding mechanism. A further rulemaking to consider successor funding mechanisms is underway.
Urban High Cost Support
The High Cost Order mandated that Urban high cost support payments were frozen at the monthly average of the subject CETCs 2011 annual
support and are not dependent upon line counts. A 20% annual phase down commenced July 1, 2012. The phase down has been capped at 60% and the subject CETCs will continue to receive annual support payments at the 60% level until a successor
funding mechanism is implemented. A further rulemaking to consider successor funding mechanisms is underway and once a new funding mechanism is in place, the phase down should restart the annual 20% decrease until no support is paid.
We apply the proportional performance revenue recognition method to account for the impact of the declining payments while our level of service
provided and associated costs remain constant. Included in the calculation are the scheduled Urban high cost support payments from October 2011 through July 2017. An equal amount of this result is recognized as Urban support revenue
each period.
For both Remote and Urban high cost support revenue, our ability to collect our accrued USF support is contingent upon
continuation of the USF program and upon GCIs and ACSs eligibility to participate in that program, which is subject to change by future regulatory, legislative or judicial actions. We adjust revenue and the account receivable in the
period the FCC makes a program change, or we assess the likelihood that such a change has increased or decreased revenue. We do not recognize revenue related to a particular service area until GCIs and ACSs ETC status has been
approved by the Regulatory Commission of Alaska.
We recorded high cost support revenue under the USF program of $53.9 million and $23.9
million for the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013, respectively. At December 31, 2014, we have $42.1 million in high cost support accounts receivable.
Scheduled operating lease rent increases are amortized over the expected lease
term on a straight-line basis. Rent holidays are recognized on a straight-line basis over the operating lease term (including any rent holiday period).
Leasehold improvements are amortized over the shorter of their economic lives or the lease term. We may amortize a leasehold improvement
over a term that includes assumption of a lease renewal if the renewal is reasonably assured. Leasehold improvements that are placed in service significantly after and are not contemplated at or near the beginning of the lease term are
amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Leasehold improvements made
by us and funded by landlord incentives or allowances under an operating lease are recorded as deferred rent and amortized as reductions to lease expense over the lease term.
F-62
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
Total comprehensive income was equal to net income during the year
ended December 31, 2014 and the period from July 23, 2013 to December 31, 2013.
Material interest costs incurred during the construction period of
capital projects are capitalized. Interest is capitalized in the period commencing with the first expenditure for a qualifying capital project and ending when the capital project is substantially complete and ready for its intended use. We
capitalized interest costs of $197,000 and $49,000 during the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013, respectively.
We are organized as a limited liability corporation; therefore, all items
of income, deduction, gain and loss pass through to our members. Accordingly, no provision for current or deferred income taxes has been made in the financial statements.
We account for uncertain tax positions under the provisions of ASC 740,
Income Taxes
, which requires us to recognize the financial
statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We had no unrecognized tax benefits, penalties, or interest as of December 31,
2014 and 2013. The tax years 2014 and 2013 remain open to examination by major taxing jurisdictions to which we are subject.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the allowance for doubtful receivables, unbilled revenues, accrual of the USF
high cost Remote area program support, depreciable and amortizable lives of assets, the carrying value of long-lived assets including goodwill and wireless licenses, purchase price allocations, deferred lease expense, asset retirement obligations,
the accrual of cost of goods sold (exclusive of depreciation and amortization expense), depreciation and the accrual of contingencies and litigation. Actual results could differ from those estimates.
|
(n)
|
Concentrations of Risk
|
Financial instruments that potentially subject us to
concentrations of risk are primarily cash and accounts receivable. Excess cash is invested in high quality short-term liquid money instruments. At December 31, 2014, substantially all of our cash were invested in short-term liquid money
instruments. At December 31, 2014 and 2013 cash balances were in excess of Federal Deposit Insurance Corporation insured limits.
We
have the following major customers:
|
|
|
|
|
Customer
|
|
Percent of Total
Revenues
|
|
Verizon
|
|
|
31
|
%
|
GCI
|
|
|
33
|
%
|
ACS
|
|
|
22
|
%
|
F-63
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
ACS and GCI are both members of AWN and are contractually required to purchase our wholesale
wireless services for their customers. We provide roaming services for Verizon. Verizon has been developing their Alaskan Long Term Evolution network and the service provided over their network is limited to data only.
We also depend on a limited number of suppliers for roaming services outside Alaska. Our operating results could be adversely affected if
these suppliers experience financial or credit difficulties, service interruptions, or other problems.
All
services provided by us are in Alaska. Because of this geographic concentration, our growth and operations depend upon economic conditions in Alaska.
Certain of our customers have guaranteed levels of service. If an
interruption in service occurs we do not recognize revenue that will be refunded to the customer or not billed to the customer due to these service level agreements.
|
(p)
|
Recently Issued Accounting Pronouncements
|
In May 2014, the Financial Accounting
Standards Board issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers,
or ASU 2014-09. This new standard provides guidance for the recognition, measurement and disclosure of revenue
resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. The standard is effective for the first interim period within annual reporting periods beginning after
December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of the provisions of this new standard on
our financial position and results of operations.
(2)
|
Net Property and Equipment in Service
|
Net property and equipment in service consists of the following at December 31, 2014 and 2013 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Land and buildings
|
|
$
|
544
|
|
|
|
521
|
|
Telephony transmission equipment and distribution facilities
|
|
|
290,083
|
|
|
|
255,991
|
|
Support equipment and systems
|
|
|
8,051
|
|
|
|
7,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298,678
|
|
|
|
263,572
|
|
Less accumulated depreciation
|
|
|
109,926
|
|
|
|
71,767
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment in service
|
|
$
|
188,752
|
|
|
|
191,805
|
|
|
|
|
|
|
|
|
|
|
GCI and ACS contributed wireless facilities that may be redundant; therefore, we expect to complete an analysis
of our wireless facilities to rationalize our combined network and have recorded a $7.6 million reserve against our telephony transmission equipment and distribution facilities.
(3)
|
Intangible Assets and Goodwill
|
As of October 31, 2014, wireless licenses and goodwill were tested for impairment and the fair values were greater than
the carrying amounts; therefore, these intangible assets were determined not to be impaired at December 31, 2014. The remaining useful lives of our wireless licenses and goodwill were evaluated as of October 31, 2014, and events and
circumstances continue to support an indefinite useful life.
There are no indicators of impairment of our rights to use capacity asset or
software licenses as of December 31, 2014.
F-64
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
Changes in intangible assets are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Software
Licenses
|
|
|
Rights
to Use
|
|
|
Future
Capacity
|
|
Balances at July 23, 2013
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions from AWN acquisition
|
|
|
155,445
|
|
|
|
7,464
|
|
|
|
55,406
|
|
|
|
15,313
|
|
Asset additions
|
|
|
|
|
|
|
1,708
|
|
|
|
|
|
|
|
|
|
Less amortization expense
|
|
|
|
|
|
|
(1,295
|
)
|
|
|
(1,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013
|
|
$
|
155,445
|
|
|
|
7,877
|
|
|
|
54,185
|
|
|
|
15,313
|
|
Purchase price adjustment
|
|
|
8,867
|
|
|
|
|
|
|
|
(7,298
|
)
|
|
|
1,204
|
|
Capacity placed in service
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
(174
|
)
|
Asset additions
|
|
|
|
|
|
|
4,207
|
|
|
|
|
|
|
|
|
|
Less amortization expense
|
|
|
|
|
|
|
(3,414
|
)
|
|
|
(2,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2014
|
|
$
|
164,312
|
|
|
|
8,670
|
|
|
|
44,812
|
|
|
|
16,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for our rights to use capacity asset and software licenses for each of the five
succeeding fiscal years is estimated to be (amounts in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2015
|
|
$
|
5,576
|
|
2016
|
|
|
4,695
|
|
2017
|
|
|
3,507
|
|
2018
|
|
|
3,012
|
|
2019
|
|
|
2,668
|
|
We have a $50.0 million line of credit from GCI Holdings, Inc., a wholly owned subsidiary of GCI, with an outstanding
balance of $2.1 million and $3.9 million at December 31, 2014 and 2013, respectively. Outstanding obligations are due starting July 22, 2017 with the full balance due on July 22, 2021. The line of credit bears an interest
rate of London Interbank Offered Rate plus the per annum interest rate margin being paid by GCI Holdings, Inc. As of December 31, 2014, the interest rate was 3.0%. Interest on the line of credit increases the outstanding obligation.
Maturities of the line of credit as of December 31, 2014 are as follows (amounts in thousands):
|
|
|
|
|
Years ending December 31,
|
|
|
|
2015
|
|
$
|
|
|
2016
|
|
|
|
|
2017
|
|
|
265
|
|
2018
|
|
|
529
|
|
2019
|
|
|
529
|
|
2020 and thereafter
|
|
|
793
|
|
|
|
|
|
|
Total line of credit from GCI Holdings, Inc.
|
|
$
|
2,116
|
|
|
|
|
|
|
(5)
|
Financial Instruments
|
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing
parties. At December 31, 2014 and 2013, the fair values of cash, net receivables, accounts payable, deferred revenues and accrued liabilities approximate their carrying values due to the short-term nature of these financial instruments.
F-65
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
Our line of credit of $2.1 million outstanding with GCI Holdings, Inc. is estimated to
approximate the carrying value because this instrument is subject to variable interest rates (Level 2).
(6)
|
Related Party Transactions
|
We have significant transactions with our two members, GCI and ACS. We provide wholesale services to GCI and ACS who
use our network to sell services to their respective retail customers, receive from GCI and ACS their high cost support from USF and provide cash incentives, when requested, to GCI and ACS when wireless handsets are sold to their respective retail
customers. During the period July 23, 2013 to March 31, 2014, and in accordance with the FNUA, GCI waived the right to request a cash incentive for wireless handsets sold to their retail customers. We share with GCI certain
capacity provided by third party vendors for which we reimburse GCI and receive services from GCI. The following table summarizes the amounts received from and paid to related parties for the year ended December 31, 2014 and the period
July 23, 2013 to December 31, 2013 including amounts reimbursed by AWN to its members for services rendered by third parties, and the amounts receivable from and payable to related parties as of December 31, 2014 and 2013 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
GCI
|
|
|
ACS
|
|
|
GCI
|
|
|
ACS
|
|
Paid to
|
|
$
|
52,517
|
|
|
|
53,427
|
|
|
$
|
16,195
|
|
|
|
19,795
|
|
Received in payments
|
|
|
28,099
|
|
|
|
48,387
|
|
|
|
8,817
|
|
|
|
21,167
|
|
Payable to
|
|
|
61,684
|
|
|
|
6,286
|
|
|
|
51,756
|
|
|
|
10,399
|
|
Receivable from
|
|
|
97,064
|
|
|
|
27,217
|
|
|
|
72,782
|
|
|
|
27,767
|
|
There is one class of membership interest in AWN. Under the terms of the First Amended and Restated Operating Agreement
signed by ACS, GCI, ACS Wireless, and GCI Wireless Holdings, LLC (Operating Agreement), no member of AWN is liable for any of its debt, obligations or liabilities, except as provided for by law or in the Operating Agreement. A
member cannot, unless otherwise provided for in the Operating Agreement, transfer all or any portion of its membership interest. No additional contributions beyond initial contributions are required of the members per the Operating
Agreement.
During the Preference Period net income is allocated to GCI and ACS based on their proportion of distributions up to the total
distributions, as defined by AWN, during the period. Net income greater than the total distributions is allocated based on each members proportional ownership interests. Following the Preference Period, GCI and ACS will receive
distributions proportional to their ownership interests.
(8)
|
Commitments and Contingencies
|
Operating Leases
We primarily lease land for cell towers, space on cell towers, and urban rooftop space for cell sites. Many of our leases are for multiple
years and contain renewal options. Rental costs under such arrangements amounted to $7.4 million and $2.9 million for the year ended December 31, 2014 and the period July 23, 2013 to December 31, 2013, respectively.
F-66
The Alaska Wireless Network, LLC
(A Majority Owned Subsidiary of GCI Wireless Holdings, LLC)
NOTES TO FINANCIAL STATEMENTS
A summary of future minimum lease payments follows (amounts in thousands):
|
|
|
|
|
Years ending December 31:
|
|
Operating
|
|
2015
|
|
$
|
4,897
|
|
2016
|
|
|
4,214
|
|
2017
|
|
|
3,373
|
|
2018
|
|
|
2,664
|
|
2019
|
|
|
1,973
|
|
2020 and thereafter
|
|
|
21,038
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
38,159
|
|
|
|
|
|
|
The leases generally provide that we pay the taxes related to the leased assets. Several of our leases
include renewal options, escalation clauses and immaterial amounts of contingent rent expense. We expect that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties.
On February 2, 2015, GCI purchased ACS Wireless interest in AWN and substantially all the assets of ACS and its
affiliates related to ACSs wireless business (the Acquired Assets) for a cash payment of $293.2 million. The Acquired Assets included all of ACS Wireless equity interest in AWN, substantially all of ACSs wireless
subscriber assets, including subscriber contracts, and certain of ACSs CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. GCI did not acquire certain excluded
assets specified in the agreement. GCI assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by GCI and liabilities with respect to the ownership by ACS Wireless of its equity interest in AWN to the extent
accruing and related to the period after closing. All other liabilities were retained by ACS and its affiliates.
For the current reporting
period, subsequent events were evaluated through March 3, 2015, which represents the date the financial statements were available to be issued.
F-67