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Table of Contents          



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                to                                

 

Commission File Number: 001-38341

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-2126573

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization) 

 

Identification No.)

 

600 Telephone Avenue, Anchorage, Alaska 99503-6091

(Address of principal executive offices) (Zip Code)

(907) 297-3000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class 

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.01 per share

ALSK

The Nasdaq Stock Market LLC

                         

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 ☒                  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒                  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐      Accelerated filer ☒      Non-accelerated filer ☐   Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes                   No ☒

As of April 30, 2021, there were outstanding 54,273,804 shares of Common Stock, $.01 par value, of the registrant.

 



 

1

 

 

TABLE OF CONTENTS

 

   

Page

   

Number

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements:

 
     
  Condensed Consolidated Balance Sheets (Unaudited) As of March 31, 2021 and December 31, 2020 

3

  Condensed Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2021 and 2020

4

 

Condensed Consolidated Statements of Stockholders Equity (Unaudited) For the Three Months Ended March 31, 2021 and 2020

5

  Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2021 and 2020

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

25

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

     

Item 4.

Controls and Procedures

48

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

48
     

Item 1A.

Risk Factors

48
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49
     

Item 3.

Defaults Upon Senior Securities

49
     

Item 4.

Mine Safety Disclosures

49
     

Item 5.

Other Information

49
     

Item 6.

Exhibits

49
     

SIGNATURES

50

 

2

 

 

PART I.           FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Balance Sheets

(Unaudited, In Thousands Except Per Share Amounts)

 

  

March 31,

  

December 31,

 

 

 

2021

  

2020

 
Assets        

Current assets:

        

Cash and cash equivalents

 $22,114  $19,644 

Restricted cash

  1,326   1,326 

Short-term investments

  434   434 

Accounts receivable, net of allowance of $4,290 and $4,060

  40,284   41,893 

Materials and supplies

  9,093   7,624 

Prepayments and other current assets

  7,217   6,404 

Total current assets

  80,468   77,325 
         

Property, plant and equipment

  1,457,458   1,452,943 

Less: accumulated depreciation and amortization

  (1,070,449)  (1,062,027)

Property, plant and equipment, net

  387,009   390,916 
         

Operating lease right of use assets

  88,135   89,821 

Other assets

  11,873   11,370 

Total assets

 $567,485  $569,432 
         
Liabilities and Stockholders' Equity        

Current liabilities:

        

Current portion of long-term obligations

 $9,071  $9,067 

Accounts payable, accrued and other current liabilities

  51,355   49,700 

Operating lease liabilities - current

  3,276   3,392 

Total current liabilities

  63,702   62,159 
         

Long-term obligations, net of current portion

  157,630   159,641 

Deferred income taxes

  6,109   5,846 

Operating lease liabilities - noncurrent

  79,631   81,103 

Other long-term liabilities, net of current portion

  93,821   94,764 

Total liabilities

  400,893   403,513 

Commitments and contingencies

          

Alaska Communications stockholders' equity:

        

Common stock, $.01 par value; 145,000 authorized; 55,274 issued and 54,274 outstanding at March 31, 2021; 54,875 issued and 53,875 outstanding at December 31, 2020

  553   549 

Treasury stock, 1,000 shares at cost

  (1,812)  (1,812)

Additional paid in capital

  163,038   163,317 

Retained earnings

  10,048   9,442 

Accumulated other comprehensive loss

  (5,976)  (6,340)

Total Alaska Communications stockholders' equity

  165,851   165,156 

Noncontrolling interest

  741   763 

Total stockholders' equity

  166,592   165,919 

Total liabilities and stockholders' equity

 $567,485  $569,432 

 

See Notes to Condensed Consolidated Financial Statements

 

3

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In Thousands Except Per Share Amounts)

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 
                 
                 

Operating revenues

  $ 60,668     $ 58,266  
                 

Operating expenses:

               

Cost of services and sales (excluding depreciation and amortization)

    27,366       27,114  

Selling, general and administrative

    18,289       15,394  

Transaction and termination costs

    923       -  

Depreciation and amortization

    11,048       9,840  

Loss on disposal of assets, net

    84       86  

Total operating expenses

    57,710       52,434  
                 

Operating income

    2,958       5,832  
                 

Other income and (expense):

               

Interest expense

    (2,652 )     (2,959 )

Interest income

    3       75  

Other income, net

    393       381  

Total other income and (expense)

    (2,256 )     (2,503 )
                 

Income before income tax expense

    702       3,329  
                 

Income tax expense

    (118 )     (960 )
                 

Net income

    584       2,369  
                 

Less net loss attributable to noncontrolling interest

    (22 )     (18 )
                 

Net income attributable to Alaska Communications

    606       2,387  
                 

Other comprehensive income (loss):

               

Minimum pension liability adjustment

    65       68  

Income tax effect

    (18 )     (19 )

Amortization of defined benefit plan loss

    (26 )     (33 )

Income tax effect

    7       9  

Interest rate swap marked to fair value

    (27 )     (2,878 )

Income tax effect

    8       818  

Reclassification to interest expense

    496       -  

Income tax effect

    (141 )     -  

Total other comprehensive income (loss)

    364       (2,035 )
                 

Total comprehensive income attributable to Alaska Communications

    970       352  
                 

Net loss attributable to noncontrolling interest

    (22 )     (18 )

Total other comprehensive income attributable to noncontrolling interest

    -       -  

Total comprehensive loss attributable to noncontrolling interest

    (22 )     (18 )
                 

Total comprehensive income

  $ 948     $ 334  
                 

Net income per share attributable to Alaska Communications:

               

Basic

  $ 0.01     $ 0.04  

Diluted

  $ 0.01     $ 0.04  
                 

Weighted average shares outstanding:

               

Basic

    54,145       53,186  

Diluted

    54,872       54,237  

 

See Notes to Condensed Consolidated Financial Statements

 

4

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Stockholders Equity

(Unaudited, In Thousands Except Per Share Amounts)

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
         

Number of Common Shares Issued and Outstanding

        

Balance at beginning of period

  53,875   53,085 

Issuance of common stock pursuant to stock plans, $.01 par

  399   476 

Balance at end of period

  54,274   53,561 
         

Total Stockholders' Equity - Beginning Balance

 $165,919  $173,509 
         

Common Stock

        

Balance at beginning of period

  549   541 

Issuance of common stock pursuant to stock plans, $.01 par

  4   5 

Balance at end of period

  553   546 
         

Treasury Stock

        

Balance at beginning and end of period

  (1,812)  (1,812)
         

Additional Paid In Capital

        

Balance at beginning of period

  163,317   161,844 

Stock-based compensation

  389   309 

Surrender of shares to cover minimum withholding taxes on stock-based compensation

  (664)  (439)

Issuance of common stock pursuant to stock plans, $.01 par

  (4)  (5)

Balance at end of period

  163,038   161,709 
         

Retained Earnings

        

Balance at beginning of period

  9,442   15,367 

Net income attributable to Alaska Communications

  606   2,387 

Cash dividends declared, $0.09 per common share

  -   (4,852)

Balance at end of period

  10,048   12,902 
         

Accumulated Other Comprehensive Loss

        

Balance at beginning of period

  (6,340)  (3,277)

Other comprehensive income (loss)

  364   (2,035)

Balance at end of period

  (5,976)  (5,312)
         

Noncontrolling Interest

        

Balance at beginning of period

  763   846 

Net loss attributable to noncontrolling interest

  (22)  (18)

Balance at end of period

  741   828 
         

Total Stockholders' Equity - Ending Balance

 $166,592  $168,861 

 

See Notes to Condensed Consolidated Financial Statements

 

5

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In Thousands)

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Cash Flows from Operating Activities:

               

Net income

  $ 584     $ 2,369  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    11,048       9,840  

Loss on disposal of assets, net

    84       86  

Amortization of debt issuance costs and debt discount

    258       350  

Amortization of deferred capacity revenue

    (1,741 )     (1,360 )

Stock-based compensation

    389       309  

Deferred income tax expense

    118       954  

Charge (credit) for uncollectible accounts

    396       (229 )

Amortization of right-of-use assets

    836       578  

Other non-cash income, net

    (27 )     (33 )

Changes in operating assets and liabilities

    4,765       9,498  

Net cash provided by operating activities

    16,710       22,362  
                 

Cash Flows from Investing Activities:

               

Capital expenditures

    (6,902 )     (7,463 )

Capitalized interest

    (161 )     (316 )

Change in unsettled capital expenditures

    (4,248 )     (3,759 )

Net cash used by investing activities

    (11,311 )     (11,538 )
                 

Cash Flows from Financing Activities:

               

Repayments of long-term debt

    (2,265 )     (3,240 )

Payment of withholding taxes on stock-based compensation

    (664 )     (439 )

Net cash used by financing activities

    (2,929 )     (3,679 )
                 

Change in cash, cash equivalents and restricted cash

    2,470       7,145  

Cash, cash equivalents and restricted cash, beginning of period

    20,970       27,993  
                 

Cash, cash equivalents and restricted cash, end of period

  $ 23,440     $ 35,138  
                 

Supplemental Cash Flow Data:

               

Interest paid

  $ 2,544     $ 2,919  

Income taxes refunded

  $ (349 )   $ -  

 

See Notes to Condensed Consolidated Financial Statements

 

6

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Alaska Communications Systems Group, Inc. (“we”, “our”, “us”, the “Company” and “Alaska Communications”), a Delaware corporation, through its operating subsidiaries, provides broadband telecommunication and managed information technology (“IT”) services to customers in the State of Alaska and beyond using its statewide and interstate telecommunications network.

 

The accompanying unaudited condensed consolidated financial statements represent the consolidated financial position, comprehensive income, stockholders’ equity and cash flows of Alaska Communications Systems Group, Inc. and the following wholly-owned subsidiaries.

 

Alaska Communications Systems Holdings, Inc. ("ACS Holdings")

Crest Communications Corporation

ACS of Alaska, LLC (“ACSAK”)

WCI Cable, Inc.

ACS of the Northland, LLC (“ACSN”)

WCIC Hillsboro, LLC

ACS of Fairbanks, LLC (“ACSF”)

Alaska Northstar Communications, LLC

ACS of Anchorage, LLC (“ACSA”)

WCI LightPoint, LLC

ACS Wireless, Inc. ("ACSW")

WorldNet Communications, Inc.

ACS Long Distance, LLC

Alaska Fiber Star, LLC

Alaska Communications Internet, LLC (“ACSI”)

TekMate, LLC

ACS Messaging, Inc.

  

ACS Cable Systems, LLC (“ACSC”)

  

 

In addition to the wholly-owned subsidiaries, the Company has a fifty percent controlling interest in ACS-Quintillion JV, LLC (“AQ-JV”), a joint venture formed by its wholly-owned subsidiary ACSC and Quintillion Holdings, LLC (“QHL”) in connection with the North Slope fiber optic network. See Note 17Joint Venture” for additional information.

 

Merger Agreement

 

On December 31, 2020, the Company entered into a definitive agreement to be acquired by a newly formed entity owned by ATN International, Inc. and Freedom 3 Investments IV, LP, a fund advised by Freedom 3 Capital, LLC. See Note 2Merger Agreement.

 

Basis of Presentation         

 

The accompanying unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes the disclosures made are adequate to make the information presented not misleading.

 

The Company consolidates the financial results of the AQ-JV 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 QHL’s fifty percent ownership interest in the joint venture as a noncontrolling interest.

 

Other than as described in the notes to the consolidated financial statements, as of the date of the accompanying consolidated financial statements, the COVID-19 pandemic has not had a material effect on the Company’s accounting policies, financial statements and disclosures.

 

7

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the consolidated financial position, comprehensive income, stockholders’ equity and cash flows for all periods presented. Comprehensive income for the three-month period ended March 31, 2021, is not necessarily indicative of comprehensive income which might be expected for the entire year or any other interim periods. The balance sheet at December 31, 2020 has been derived from the audited financial statements as of that date but does not include all information and notes required by GAAP for complete financial statements. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes, including estimates of operating revenues, probable losses and expenses. Actual results could differ materially from those estimates.

 

Recently Adopted Accounting Pronouncements

 

Effective in 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2019-12,Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) on a prospective basis. The amendments in ASU 2019-12 remove certain exceptions to the general principals of Topic 740 and improve and simplify other areas of Topic 740. Adoption of ASU 2019-12 did not have a material effect on the Company’s financial statements and related disclosures.

 

Accounting Pronouncements Issued Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13,Financial Instruments Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The amendments in ASU 2016-13, and subsequent amendments, introduce a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for the Company’s 2023 fiscal year and early adoption is permitted. Adoption on a modified-retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption is required. The Company is evaluating the effect ASU 2016-13 and subsequent updates will have on its financial statements and related disclosures.

 

 

2.

MERGER AGREEMENT

 

On December 31, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Project 8 Buyer, LLC (“Parent”), and Project 8 MergerSub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which the Company will be acquired by ATN International, Inc. and Freedom 3 Investments IV, LP, a fund advised by Freedom 3 Capital, LLC. On December 31, 2020, the Company also terminated the previously announced merger agreement pursuant to which the Company would be acquired by an affiliate of Macquarie Capital (USA) and GCM Grosvenor through its Labor Impact Fund (the “Terminated Agreement”).

 

On the terms, and subject to the conditions, of the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation (the “Surviving Corporation”) and a wholly-owned subsidiary of Parent. As a result of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by (i) the Company (or a wholly-owned subsidiary that is disregarded for tax purposes), Parent or Merger Sub and (ii) stockholders of the Company who have validly exercised and perfected their appraisal rights under Delaware law) will be converted at the Effective Time into the right to receive $3.40 in cash, without interest, subject to any applicable withholding taxes (the “Merger Consideration”).

 

Consummation of the Merger is subject to certain closing conditions, including, without limitation, (i) approval of the Merger by the Company’s stockholders, (ii) absence of certain legal impediments, (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and (iv) receipt of regulatory approvals from the Federal Communications Commission (the “FCC”) (and, if required as a precondition for FCC approval, the Committee for the Assessment of Foreign Participation in the U.S. Telecommunications Services Sector) and from the Regulatory Commission of Alaska (the “RCA”).

 

8

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The status of certain closing conditions to consummation of the Merger is summarized as follows. At a special meeting of stockholders held on March 12, 2021, the Company’s stockholders approved the Merger. The waiting period under the HSR Act expired on February 16, 2021 at 11:59 p.m. Eastern Time. Filings with each of the FCC and the RCA were made on January 20, 2021. The RCA gave public notice of the application and requested any public comments by February 12, 2021. On February 8, 2021, the RCA issued an order stating that it had determined that Parent’s application to acquire the Company was complete as filed on January 20, 2021. The order states that the RCA will issue a final order no later than July 19, 2021.

 

The Merger is currently expected to close in the third quarter of 2021, although there can be no assurance that it will occur by such time. The transaction will result in the Company becoming a consolidated, majority-owned subsidiary of ATN International, Inc.

 

In the first quarter of 2021, the Company incurred costs totaling $923 associated with the Merger Agreement consisting of attorney, financial advisory and other fees. The Company incurred costs totaling $9,550 in fiscal year 2020 associated with the Merger Agreement and the Terminated Agreement. These costs consisted of attorney, financial advisory and other fees of $2,750, and a termination fee of $6,800 paid upon termination of the Terminated Agreement. The costs are reported as “Transaction and termination costs” in the Consolidated Statements of Comprehensive Income.

 

 

3.

REVENUE

 

Revenue Recognition Policies

 

Revenue Accounted for in Accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606)

 

At contract inception, the Company assesses the goods and services promised to the customer and identifies the performance obligation for each promise to transfer a good or service that is capable of being distinct and is distinct within the context of the contract. The Company considers all performance obligations whether they are explicitly stated in the contract or are implied by customary business practices.

 

Beginning late in the first quarter of 2020, in response to the COVID-19 pandemic, the Company offered certain customers free or upgraded service, and suspended service termination and termination fees for late payment. These actions have not had a material impact on the Company’s existing contracts with its customers, the associated contract assets and liabilities and future performance obligations.

 

Revenue is not recorded for the Company’s provision of free or upgraded service in connection with the COVID-19 pandemic because cash will not be collected, the arrangements do not include an associated transaction price, or the contract with the customer has not been modified, as required under ASC 606.

 

The Company’s broadband and voice revenue includes service, installation and equipment charges. Managed IT revenues include the sale, configuration and installation of equipment and the subsequent provision of ongoing IT services. The Company enters into contracts with its rural health care customers and is subject to various regulatory requirements associated with the provision of these services. Revenues associated with rural health care customers are recognized based on the amount the Company expects to collect as evidenced in its contract with the customer and the Company’s and customer’s agreement with the Federal Communications Commission (“FCC”) as the relevant service is provided. Regulatory access revenue includes (i) special access, which is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services; and (ii) cellular access, which is the transport of tariffed local network services between switches for cellular companies based on individually negotiated contracts. Regulatory access revenue is recognized as the service is provided to the customer.

 

9

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Revenue Accounted for in Accordance with Other Guidance

 

Deferred revenue capacity liabilities are established for indefeasible rights of use (“IRUs”) on the Company’s network provided to third parties and are typically accounted for as operating leases. Regulatory access revenue includes interstate and intrastate switched access, consisting of services based primarily on originating and terminating access minutes from other carriers. High-cost support revenue consists of interstate revenue streams structured by federal regulatory agencies that allow the Company to recover its cost of providing universal service in Alaska.

 

Disaggregation of Revenue

 

The following tables provide the Company’s revenue disaggregated on the basis of its primary markets, customers, products and services for the three-month periods ended March 31, 2021 and 2020.

 

   

Three Months Ended

   

Three Months Ended

 
   

March 31, 2021

   

March 31, 2020

 
   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

   

Accounted

for Under

ASC 606

   

Accounted

for Under

Other

Guidance

   

Total

Revenue

 

Business and Wholesale Revenue

                                               

Business broadband

  $ 15,681     $ -     $ 15,681     $ 15,353     $ -     $ 15,353  

Business voice and other

    6,697       -       6,697       6,857       -       6,857  

Managed IT services

    1,217       -       1,217       1,227       -       1,227  

Equipment sales and installations

    2,618       -       2,618       1,414       -       1,414  

Wholesale broadband

    10,818       -       10,818       10,253       -       10,253  

Wholesale voice and other

    1,121       -       1,121       1,288       -       1,288  

Operating leases and other deferred revenue

    -       2,819       2,819       -       2,391       2,391  
                                                 

Total Business and Wholesale Revenue

    38,152       2,819       40,971       36,392       2,391       38,783  
                                                 

Consumer Revenue

                                               

Broadband

    6,945       -       6,945       6,692       -       6,692  

Voice and other

    2,230       -       2,230       2,449       -       2,449  
                                                 

Total Consumer Revenue

    9,175       -       9,175       9,141       -       9,141  
                                                 

Regulatory Revenue

                                               

Access (1)

    4,926       -       4,926       4,691       -       4,691  

Access (2)

    -       673       673       -       727       727  

High-cost support

    -       4,923       4,923       -       4,924       4,924  
                                                 

Total Regulatory Revenue

    4,926       5,596       10,522       4,691       5,651       10,342  
                                                 

Total Revenue

  $ 52,253     $ 8,415     $ 60,668     $ 50,224     $ 8,042     $ 58,266  

 

(1)

Includes customer ordered service and special access.

(2)

Includes Essential Network Support (“ENS”).

 

Business broadband revenue includes revenue associated with rural health care customers. Consumer voice and other revenue includes revenue associated with the FCC’s Lifeline program.

 

10

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Timing of Revenue Recognition

 

Revenue accounted for in accordance with ASC 606 consisted of the following for the three-month periods ended March 31, 2021 and 2020.

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 
                 

Services transferred over time

  $ 44,709     $ 44,119  

Goods transferred at a point in time

    2,618       1,414  

Regulatory access revenue (1)

    4,926       4,691  
                 

Total revenue

  $ 52,253     $ 50,224  

 

(1)

Includes customer ordered service and special access.

 

Transaction Price Allocated to Remaining Performance Obligations

 

The aggregate amount of the transaction price allocated to the remaining performance obligations for contracts with customers that are unsatisfied, or partially unsatisfied, accounted for in accordance with ASC 606 was approximately $71,358 at March 31, 2021. Revenue will be recognized as the Company satisfies the associated performance obligations. For equipment delivery, installation and configuration, and certain managed IT services, which comprise approximately $1,928 of the total, the performance obligation is currently expected to be satisfied during the next twelve months. For business broadband, voice and other managed IT services, which comprise approximately $69,430 of the total, the performance obligation will be satisfied as the service is provided over the terms of the contracts, which range from one to ten years. The Company’s agreements with its consumer customers are typically on a month-to-month basis. Therefore, the Company’s provision of future service to these customers is not reflected in the above discussion of future performance obligations.

 

Contract Assets and Liabilities

 

The Company incurs certain incremental costs to obtain contracts that it expects to recover. These costs consist primarily of sales commissions and other directly related incentive compensation payments (reported as contract additions in the table below) which are dependent upon, and paid upon, successfully entering into individual customer contracts.

 

The table below provides a reconciliation of the contract assets associated with contracts with customers accounted for in accordance with ASC 606 for the three-month period ended March 31, 2021. Contract modifications did not have a material effect on contract assets in the three-month period ended March 31, 2021. Contract assets are classified as “Other assets” on the consolidated balance sheet.

 

   

2021

 
         

Balance at January 1

  $ 6,568  

Contract additions

    732  

Amortization

    (862 )

Balance at March 31

  $ 6,438  

 

The Company recorded a charge for uncollectible accounts receivable of $396 in the three-month period ended March 31, 2021 associated with its contracts with customers. See Note 4Accounts Receivable.”

 

11

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The table below provides a reconciliation of the contract liabilities associated with contracts with customers accounted for in accordance with ASC 606 for the three-month period ended March 31, 2021. Contract liabilities consist of deferred revenue and are included in “Accounts payable, accrued and other current liabilities” and “Other long-term liabilities, net of current portion” on the consolidated balance sheet.

 

   

2021

 
         

Balance at January 1

  $ 3,971  

Contract additions

    1,082  

Revenue recognized

    (505 )

Balance at March 31

  $ 4,548  

 

 

4.

ACCOUNTS RECEIVABLE

 

Accounts receivable, net, consists of the following at March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 

Retail customers

  $ 27,834     $ 29,815  

Wholesale carriers

    8,441       8,402  

Other

    8,299       7,736  
      44,574       45,953  

Less: allowance for doubtful accounts

    (4,290 )     (4,060 )

Accounts receivable, net

  $ 40,284     $ 41,893  

 

The following table presents the activity in the allowance for doubtful accounts for the three-month period ended March 31, 2021, which is associated entirely with the Company’s contracts with customers.

 

   

2021

 

Balance at January 1

  $ 4,060  

Provision for uncollectible accounts

    396  

Charged to other accounts

    -  

Deductions

    (166 )

Asset at March 31

  $ 4,290  

 

The provision for uncollectible accounts is derived through an analysis of account aging profiles and a review of historical recovery experience. Accounts receivable are charged off against the allowance when management confirms it is probable amounts will not be collected. The COVID-19 pandemic has not required a revision of this policy. However, to the extent aging profiles, recovery experience and specific customer accounts have been affected by the COVID-19 pandemic, such affects are included in the allowance for doubtful accounts.

 

In January 2021, the FCC approved the Company’s cost-based rural rates for Funding Year 2020 ( July 1, 2020 through June 30, 2021) and USAC began issuing funding commitment letters in March 2021. Accounts receivable, net, associated with rural health care customers was $8,625 and $7,829 at March 31, 2021 and December 31, 2020, respectively. Rural health care accounts are a component of the Retail Customers category in the above table. See Note 3,Revenue Recognition” for additional information.

 

In the first quarter of 2021, the Company and the Municipality of Anchorage entered into an agreement under which utility relief will be made available to certain of the Company’s residential and small business customers located in Anchorage. The program is supported by a grant from the Municipality of Anchorage. Funding totaling $725 was received by the Company in the first quarter and will be applied to the accounts of customers who have experienced financial hardship related to the COVID-19 pandemic and meet other requirements, subject to certain terms and conditions. In the first quarter of 2021, a credit of $128 was recorded to the provision for doubtful accounts to reverse charges recorded in 2020 associated with customer accounts which are expected to qualify for relief under this program. The Company is accounting for this grant in accordance with International Accounting Standards 20,Accounting for Government Grants and Disclosure of Government Assistance.”

 

12

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

5.

OTHER CURRENT ASSETS

 

Prepayments and other current assets consist of the following at March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 

Prepaid expense

  $ 3,890     $ 2,619  

Income tax receivable

    3       353  

Other

    3,324       3,432  

Total prepayments and other current assets

  $ 7,217     $ 6,404  

 

 

6.

CURRENT LIABILITIES

 

Accounts payable, accrued and other current liabilities consist of the following at March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 

Accounts payable - trade

  $ 13,758     $ 18,375  

Accrued payroll, benefits, and related liabilities

    17,312       14,587  

Deferred capacity and other revenue

    9,773       8,781  

Advance billings

    3,622       3,340  

Other

    6,890       4,617  

Total accounts payable, accrued and other current liabilities

  $ 51,355     $ 49,700  

 

 

7.

LONG-TERM OBLIGATIONS

 

Long-term obligations consist of the following at March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 

2019 senior secured credit facility due 2024

  $ 166,646     $ 168,896  

Debt discount

    (1,384 )     (1,523 )

Debt issuance costs

    (1,222 )     (1,341 )

Finance leases and other long-term obligations

    2,661       2,676  

Total long-term obligations

    166,701       168,708  

Less current portion

    (9,071 )     (9,067 )

Long-term obligations, net of current portion

  $ 157,630     $ 159,641  

 

As of March 31, 2021, the aggregate maturities of long-term obligations were as follows.

 

2021 (April 1 - December 31)

  $ 6,802  

2022 (January 1 - December 31)

    11,333  

2023 (January 1 - December 31)

    15,851  

2024 (January 1 - December 31)

    133,018  

2025 (January 1 - December 31)

    145  

Thereafter

    2,158  

Total maturities of long-term obligations

  $ 169,307  

 

2019 Senior Credit Facility

 

The Company’s 2019 Senior Credit Facility consists of an Initial Term A Facility in the amount of $180,000, a Revolving Facility in an amount not to exceed $20,000, a Delayed-Draw Term A Facility in an amount not to exceed $25,000, and Incremental Term A Loans up to an aggregate principal amount of the greater of $60,000 and trailing twelve month EBITDA, as defined in the agreement.

 

13

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Amounts outstanding under the Initial Term A Facility, Revolving Facility, Delayed-Draw Facility and Incremental Term A Loans bear interest at LIBOR plus 4.5% per annum. The Company may, at its discretion and subject to certain limitations as defined in the agreement, select an alternate base rate at a margin that is 1.0% lower than the counterpart LIBOR margin. The weighted average interest rate on the 2019 Senior Credit Facility was 5.80% at March 31, 2021.

 

Principal payments on the Initial Term A Facility, Delayed-Draw A Facility and any amounts outstanding under the Incremental Term A Loans were due commencing in the third quarter of 2019 as follows: the third quarter of 2019 through the second quarter of 2020 – $1,125 per quarter; the third quarter of 2020 through the second quarter of 2022 – $2,250 per quarter; the third quarter of 2022 through the second quarter of 2023 – $3,375 per quarter; and the third quarter of 2023 through the fourth quarter of 2023 – $4,500 per quarter. The remaining outstanding principal balance, including any amounts outstanding under the Revolving Facility, is due on January 15, 2024. This schedule is subject to mandatory prepayments under certain conditions, including the Company’s generation of excess cash flow as defined in the agreement. As a result of the generation of excess cash flow in 2019, a prepayment of principal in the amount of $2,104 was required in the first quarter of 2020.

 

There were no amounts outstanding under the Revolving Facility, Delayed-Draw Term A Facility and Incremental Term A Loans at March 31, 2021.

 

The obligations under the 2019 Senior Credit Facility are secured by substantially all the personal property and real property of the Company, subject to certain agreed exceptions.

 

The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company’s common stock.

 

The 2019 Senior Credit Facility provides 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.

 

Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the initial notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties.

 

 

8.

OTHER LONG-TERM LIABILITIES

 

Other long-term liabilities consist of the following at March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 

Other deferred IRU capacity revenue, net of current portion

  $ 49,463     $ 49,739  

Deferred GCI capacity revenue, net of current portion

    26,454       26,965  

Other deferred revenue, net of current portion

    5,472       4,837  

Other

    12,432       13,223  

Total other long-term liabilities

  $ 93,821     $ 94,764  

 

Amortization of deferred revenue included in the Consolidated Statements of Comprehensive Income was $2,783 and $2,357 in the three-month periods ended March 31, 2021 and 2020, respectively.

 

14

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

9.

LEASES

 

Lease Agreements Under Which the Company is the Lessee

 

The Company enters into agreements for land, land easements, access rights, IRUs, co-located data centers, buildings, equipment, pole attachments and personal property. These assets are utilized in the provision of broadband and telecommunications services to the Company’s customers. Operating leases are included in operating lease right of use assets and current and noncurrent operating lease liabilities on the consolidated balance sheet. Finance leases are included in property, plant and equipment and current portion of long-term obligations and long-term obligations on the consolidated balance sheet.

 

Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. Early terminations recorded in the three-month period ended March 31, 2021 were not material.

 

The Company entered into additional operating lease commitments that had not yet commenced as of March 31, 2021 with a present value totaling approximately $10,246 and terms of 7 to 30 years. These leases consist primarily of an agreement with another carrier to lease dark fiber, a portion of which will be leased by the Company to another carrier. This lease is expected to commence in the second quarter of 2021 and has a term of 20 years. They also include agreements associated with the Company’s Connect America Fund (“CAF”) Phase II services.

 

Short-term and variable lease cost recorded during the three-month periods ended March 31, 2021 and 2020 were not material.

 

The Company did not enter into any sale and leaseback transactions during the three-month period ended March 31, 2021.

 

The following table presents lease costs for agreements under which the Company is the lessee for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 
                 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 47     $ 47  

Interest on lease liabilities

    66       67  

Operating lease costs

    2,264       1,968  

Total lease cost

  $ 2,377     $ 2,082  

 

The following table provides information included on the consolidated balance sheet for agreements under which the Company is the lessee as of March 31, 2021 and December 31, 2020.

 

   

2021

   

2020

 
                 

Operating leases:

               

Right of use assets

  $ 88,135     $ 89,821  
                 
                 

Liabilities - current

  $ 3,276     $ 3,392  

Liabilities - noncurrent

    79,631       81,103  

Total liabilities

  $ 82,907     $ 84,495  
                 

Finance leases:

               

Property, plant and equipment

  $ 5,800     $ 5,800  

Accumulated depreciation and amortization

    (3,934 )     (3,887 )

Property, plant and equipment, net

  $ 1,866     $ 1,913  
                 

Current portion of long-term obligations

  $ 71     $ 67  

Long-term obligations, net of current portion

    2,590       2,609  

Total finance lease liabilities

  $ 2,661     $ 2,676  

 

15

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table provides the maturities of the Company’s lease liabilities as of March 31, 2021.

 

   

Operating

   

Financing

 
   

Leases

   

Leases

 
                 

2021 (excluding the three months ended March 31, 2021)

  $ 5,926     $ 246  

2022

    7,911       336  

2023

    7,589       345  

2024

    7,397       355  

2025

    7,323       364  

Thereafter

    157,529       3,108  

Total lease payments

    193,675       4,754  

Less imputed interest

    (111,747 )     (2,093 )

Total present value of lease obligations

    81,928       2,661  

Present value of current obligations

    (2,297 )     (71 )

Present value of long-term obligations

  $ 79,631     $ 2,590  

 

The following table presents other information about agreements under which the Company is the lessee as of and for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 
                 

Cash paid for amounts included in the measurement of lease liabilities:

               

Operating cash flows from finance leases

  $ 66     $ 67  

Operating cash flows from operating leases

    2,106       1,826  

Financing cash flows from finance leases

    15       12  
                 

Right-of-use assets obtained in exchange for operating lease liabilities

    627       -  
                 

Weighted-average remaining lease term (in years):

               

Finance leases

    12       13  

Operating leases

    28       29  

Weighted-average discount rate:

               

Finance leases

    9.8 %     9.8 %

Operating leases

    6.9 %     6.9 %

 

Lease Agreements Under Which the Company is the Lessor

 

The Company’s agreements under which it is the lessor are primarily associated with the use of its network assets, including IRUs for fiber optic cable, colocation and buildings.

 

Certain leases include a provision for early termination, typically in return for an agreed amount of consideration. Early terminations recorded in the three-month period ended March 31, 2021 were not material.

 

The Company does not have material sublease arrangements as the lessor or lease arrangements with related parties.

 

The Company did not have sales-type leases or direct financing leases as of March 31, 2021.

 

The underlying assets associated with the Company’s operating leases are accounted for under ASC 360,Property, Plant and Equipment.” The assets are depreciated on a straight-line basis over their estimated useful life, including any periods in which the Company expects to utilize the asset subsequent to termination of the lease.

 

16

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents lease income for agreements under which the Company is the lessor for the three-month periods ended March 31, 2021 and 2020. Lease income is classified as revenue on the Statement of Comprehensive Income. The carrying value of the underlying leased assets is not material.

 

   

2021

   

2020

 
                 

Total lease income

  $ 1,620     $ 1,171  

 

The following table presents the maturities of future undiscounted lease payments at March 31, 2021 for the periods indicated.

 

2021 (excluding the three months ended March 31, 2021)

  $ 1,224  

2022

    917  

2023

    877  

2024

    873  

2025

    836  

Thereafter

    4,350  

Total future undiscounted lease payments

  $ 9,077  

 

 

10.

EMPLOYEE TERMINATION BENEFITS

 

In 2020, the Company offered a one-time cash incentive to employees who volunteered to retire or otherwise terminate their employment, subject to management approval. A charge of $210 was recorded in the third quarter of 2020, and payments totaling $210 were made in the third and fourth quarters of 2020. This charge was accounted for as a special termination benefit in accordance with ASC 712,Compensation - Nonretirement Postemployment Benefits” (“ASC 712”).

 

In 2019, the Company recorded a charge of $1,715 associated with cash-based termination benefits paid or to be paid to is former Chief Executive Officer who separated from the Company effective June 30, 2019. These benefits consist of special termination benefits as defined in ASC 712, and included the continuation of salary and certain benefits through December 31, 2019, and the payment of annual cash incentive and long-term cash awards, subject to certain conditions. Payments totaling $46, $24 and $1,390 were made in the first quarter of 2021 and in 2020 and 2019, respectively. The balance of approximately $255 will be paid in the second quarter of 2021.

 

 

11.

RETIREMENT PLANS

 

Multi-employer Defined Benefit Plan

 

Pension benefits for substantially all of the Company’s 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 to the AEPF. As a multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined for, or allocated separately to, the individual employer. This plan was not in endangered or critical status during the plan year.

 

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 CenturyTel, Inc.’s Alaska properties, whereby assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan (the “Plan”) on September 1, 1999. As of March 31, 2021, the Plan is not fully funded under the Employee Retirement Income Security Act of 1974, as amended.

 

17

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents the net periodic pension expense for the ACS Retirement Plan for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 

Interest cost

  $ 119     $ 117  

Expected return on plan assets

    (184 )     (185 )

Amortization of loss

    39       35  

Net periodic pension expense

  $ (26 )   $ (33 )

 

Net periodic pension expense is included in the line item “Other income, net” in the Statements of Comprehensive Income.

 

 

 

12.

STOCK INCENTIVE PLANS

 

Under the Company’s stock incentive plan, stock options, restricted stock, stock-settled stock appreciation rights, performance share units and other awards may be granted to officers, employees, consultants, and non-employee directors. The following disclosures do not consider the effect of the potential consummation of the Merger on the Company’s stock incentive plan.

 

In the first quarter of 2021, long-term cash awards were issued to the Company’s officers and certain other employees in lieu of equity awards. These awards consist of (i) time-based fixed cash awards, vesting of which is subject to the continued service of the recipient over consecutive three one-year periods, and (ii) long-term performance cash awards, vesting of which is subject to the achievement of a cumulative Company financial performance metric over a three-year period and the continued service of the recipient.

 

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 June 25, 2018, and 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 any prior plans were transferred to the 2011 Incentive Award Plan. In addition, to the extent that any outstanding awards under 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 (“RSUs”) and Performance Stock Units (“PSUs”) as the primary equity-based incentive for executive and certain non union-represented employees. The disclosures below are primarily associated with RSU and PSU grants awarded in 2018, 2019 and 2020.

 

Restricted Stock Units

 

The Company measures the fair value of RSUs based on the number of shares granted and the quoted closing market price of the Company’s common stock on the date of grant. Expense associated with RSUs is recognized utilizing the graded vesting methodology.

 

18

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table summarizes the RSU, long-term incentive plan and non-employee director stock compensation activity for the three-month period ended March 31, 2021.

 

           

Weighted

 
           

Average

 
           

Grant Date

 
   

Number

   

Fair

 
   

of Units

   

Value

 

Nonvested at December 31, 2020

    876     $ 2.20  

Granted

    -       -  

Vested

    (244 )     1.68  

Canceled or expired

    (3 )     2.61  

Nonvested at March 31, 2021

    629     $ 2.40  

 

Performance Stock Units

 

Vesting of a portion of the PSUs issued in the second quarter of 2020 is subject to the Company’s achievement of a three-year cumulative performance target for the years 2020, 2021 and 2022, subject to approval by the Compensation and Personnel Committee of the Board of Directors. As of March 31, 2021, achievement of the Company performance target was deemed to be probable.

 

PSUs granted in the third quarter of 2019 will vest at the end of the three-year period ending in March 2022 subject to the achievement of a cumulative Company performance target. As of March 31, 2021, achievement of the Company performance target was deemed to be probable. Achievement above a specified level will be settled in cash in lieu of shares of Company stock. This portion of the PSUs granted in 2019 is accounted for as a variable cash award based on the market price of the Company’s common stock. A charge of $151 was recorded in the first quarter of 2021 to adjust the associated liability to the award’s market value at March 31, 2021, $133 of which was attributable to changes in the market price in 2019 and 2020.

 

The following table summarizes the PSU activity for the three-month period ended March 31, 2021.

 

           

Weighted

 
           

Average

 
           

Grant Date

 
   

Number

   

Fair

 
   

of Units

   

Value

 

Nonvested at December 31, 2020

    1,174     $ 1.50  

Granted

    -       -  

Vested

    (356 )     0.35  

Canceled or expired

    -       -  

Nonvested at March 31, 2021

    818     $ 2.00  

 

The following table provides selected information about the Company’s share-based compensation as of and for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 

Total compensation cost for share-based payments

  $ 389     $ 309  

Weighted average grant-date fair value of equity instruments granted (per share)

  $ -     $ -  

Total fair value of shares vested during the period

  $ 605     $ 1,248  
                 

At March 31:

               

Unamortized share-based payments

  $ 1,589     $ 799  

Weighted average period (in years) to be recognized as expense

    1.5       1.8  

 

19

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

Alaska Communications Systems Group, Inc. 2012 Employee Stock Purchase Plan

 

On June 16, 2020, the Company’s shareholders approved the Amended 2012 Employee Stock Purchase Plan (the “Amended 2012 ESPP”). The amendments extended the term of the plan to December 31, 2030 and increased the number of shares of common stock reserved for future issuance under the plan by 600 shares.

 

On July 24, 2020, the Company registered an additional 600 shares under the Amended 2012 ESPP.

 

Effective December 31, 2020, the Amended 2012 ESPP was frozen in connection with the Merger Agreement.

 

 

13.

FAIR VALUE MEASUREMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

 

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 and 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.

 

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 Company’s 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 finance leases approximate carrying values due to their nature. The carrying values of the Company’s senior credit facilities and other long-term obligations of $167,923 and $170,049 at March 31, 2021 and December 31, 2020, respectively, approximate fair value primarily as a result of the stated interest rates of the 2019 Senior Credit Facility approximating current market rates (Level 2).

 

The following table presents the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, at each hierarchical level.

 

   

March 31, 2021

   

December 31, 2020

 
   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

 

Other long-term liabilities:

                                                               

Interest rate swaps

  $ 2,314     $ -     $ 2,314     $ -     $ 2,784     $ -     $ 2,784     $ -  

 

Derivative Financial Instruments

 

The Company currently uses interest rate swaps to manage variable interest rate risk. At low LIBOR rates, payments under the swaps increase the Company’s cash interest expense, and at high LIBOR rates, they have the opposite effect.

 

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.

 

Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the initial notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties. Changes in fair value of interest rate swaps are recorded to accumulated other comprehensive loss and reclassified to interest expense when the hedged transaction is recognized in earnings. Cash payments and receipts associated with interest rate swaps are classified as cash flows from operating activities. See Note 7Long-Term Obligations” and Note 15Accumulated Other Comprehensive Loss.

 

20

 

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents the notional amount, fair value and balance sheet classification of the Company’s derivative financial instruments designated as cash flow hedges as of March 31, 2021 and December 31, 2020.

 

 

     

Notional

   

Fair

 
 

Balance Sheet Location

 

Amount

   

Value

 

At March 31 2021:

                 

Interest rate swaps

Other long-term liabilities

  $ 126,563     $ 2,314  
                   

At December 31, 2020:

                 

Interest rate swaps

Other long-term liabilities

  $ 128,250     $ 2,784  

 

The following table presents gains and losses before income taxes on the Company’s interest rate swaps designated as a cash flow hedge for the three-month periods ending March 31, 2021 and 2020.

 

   

2021

   

2020

 

Loss recognized in accumulated other comprehensive loss

  $ (27 )   $ (2,878 )

Loss reclassified from accumulated other comprehensive loss to income

    (496 )     -  

 

The following table presents the effect of cash flow hedge accounting on the Company’s Statements of Comprehensive Income for the three-month periods ending March 31, 2021 and 2020.

 

   

2021

   

2020

 

Recorded as Interest Expense:

               

Hedged interest payments

  $ (1,483 )   $ (2,081 )

Loss on interest rate swap

    (496 )     -  

 

 

14.

EARNINGS PER SHARE

 

Earnings per share are based on the weighted average number of shares of common stock and dilutive potential common share equivalents outstanding. Basic earnings per share assumes no dilution and is computed by dividing net income attributable to Alaska Communications by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution of securities that could share in the earnings of the Company.

 

The calculation of basic and diluted earnings per share for the three-month periods ended March 31, 2021 and 2020 are as follows.

 

  

2021

  

2020

 
         

Net income attributable to Alaska Communications

 $606  $2,387 
         

Weighted average common shares outstanding:

        

Basic shares

  54,145   53,186 

Effect of stock-based compensation

  727   1,051 

Diluted shares

  54,872   54,237 
         

Net income per share attributable to Alaska Communications:

 

Basic

 $0.01  $0.04 

Diluted

 $0.01  $0.04 

 

21

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

15.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table summarizes the activity in accumulated other comprehensive loss for the three-month period ended March 31, 2021.

 

   

Defined

                 
   

Benefit

                 
   

Pension

   

Interest

         
   

Plan

   

Rate Swaps

   

Total

 

Balance at December 31, 2020

  $ (4,347 )   $ (1,993 )   $ (6,340 )

Other comprehensive income (loss) before reclassifications

    47       (19 )     28  

Reclassifications from accumulated comprehensive loss to net income

    (19 )     355       336  

Net other comprehensive income

    28       336       364  

Balance at March 31, 2021

  $ (4,319 )   $ (1,657 )   $ (5,976 )

 

The following table summarizes the reclassifications from accumulated other comprehensive loss to net income for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 

Amortization of defined benefit plan pension items:

               

Amortization of loss

  $ (26 )   $ (33 )

Income tax effect

    7       9  

After tax

    (19 )     (24 )
                 

Amortization of gain on interest rate swap:

               

Reclassification to interest expense

    496       -  

Income tax effect

    (141 )     -  

After tax

    355       -  

Total reclassifications, net of income tax

  $ 336     $ (24 )

 

Amounts reclassified to net income from our defined benefit pension plan and interest rate swaps have been presented within “Other income, net” and “Interest expense,” respectively, in the Statements of Comprehensive Income. The estimated amount to be reclassified from accumulated other comprehensive loss as an increase in interest expense during the next twelve months is $1,899. See Note 13Fair Value Measurements and Derivative Financial Instruments.”

 

22

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

 

16.

STOCKHOLDERS EQUITY

 

Treasury Stock

 

The Company does not currently have an authorized share repurchase program. Common stock repurchased under prior authorizations were accounted for as treasury stock.

 

Dividends

 

The Company’s dividend policy is set by the Company’s Board of Directors and is subject to the terms of its credit facilities and the continued current and future performance and liquidity needs of the Company. Dividends on the Company’s common stock are not cumulative to the extent they are declared. On March 9, 2020, the Company’s Board of Directors declared a one-time cash dividend of $0.09 per share of common stock to be paid on June 18, 2020 to shareholders of record as of the close of business on April 20, 2020. The dividend totaled $4,852 of which $4,836 was paid in the second and third quarters of 2020. The remaining $16 is associated with deferred Board of Directors compensation and will be paid in future periods.

 

 

17.

JOINT VENTURE

 

The table below provides certain financial information about the AQ-JV included on the Company’s consolidated balance sheet at March 31, 2021 and December 31, 2020. Cash may be utilized only to settle obligations of the joint venture. Because the joint venture is an LLC, and the Company has not guaranteed its operations, the joint venture’s creditors do not have recourse to the general credit of the Company.

 

   

2021

   

2020

 

Cash

  $ 270     $ 270  

Property, plant and equipment, net of accumulated depreciation of $531 and $506

  $ 1,610     $ 1,635  

 

The operating results and cash flows of the joint venture in the three-month periods of 2021 and 2020 were not material to the Company’s consolidated financial results.

 

 

18.

SUPPLEMENTAL CASH FLOW INFORMATION

 

Restricted cash of $1,326 at March 31, 2021 consisted of certificates of deposit of $1,300 required under the terms of certain contracts to which the Company is a party and other restricted cash of $26. Restricted cash of $1,326 at December 31, 2020 consisted of certificates of deposit of $1,300 required under the terms of certain contracts to which the Company is a party and other restricted cash of $26.

 

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the statement of financial position at March 31, 2021 and 2020 that sum to the total of these items reported in the statement of cash flows.

 

   

2021

   

2020

 

Cash and cash equivalents

  $ 22,114     $ 33,818  

Restricted cash

    1,326       1,320  

Total cash, cash equivalents and restricted cash

  $ 23,440     $ 35,138  

 

23

 

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, In Thousands Except Per Share Amounts)

 

The following table presents supplemental non-cash transaction information for the three-month periods ended March 31, 2021 and 2020.

 

   

2021

   

2020

 

Supplemental Non-cash Transactions:

               

Capital expenditures incurred but not paid at March 31

  $ 1,389     $ 2,215  

Dividends payable at March 31

  $ 16     $ 4,852  

Additions to ARO asset

  $ 10     $ 70  

Operating lease right-of-use assets obtained in exchange for operating lease liabilities

  $ 627     $ -  

 

 

19.

BUSINESS SEGMENTS

 

The Company operates its business under a single reportable segment. The Company’s 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.

 

 

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 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.

 

In February 2020, the Company received a draft audit report from USAC in connection with USAC’s inquiry into the Company’s funding requests under the Rural Health Care program for certain customers for funding years 2012 through 2016 ( July 2012 through June 2017). The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company intends to vigorously defend against the conclusions of the draft audit report and, if necessary, appeal the final audit findings. Based on these draft findings, the Company has determined that it is probable that resolution of these matters will result in the recognition of a contingent liability and charge to expense. The Company does not currently have sufficient information to reasonably estimate the amount, or a range, of the potential charge.

 

The Company is involved in various other claims, legal actions and regulatory proceedings arising in the ordinary course of business and establishes an accrual when a specific contingency is probable and estimable. The Company recorded litigation accruals totaling $2,123 at March 31, 2021 against certain current claims and legal actions. The Company also faces contingencies that are reasonably possible to occur that cannot currently be estimated. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, comprehensive income or cash flows. It is the Company’s policy to expense costs associated with loss contingencies, including any related legal fees, as they are incurred.

 

 

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ITEM 2.          MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND ANALYSTS REPORTS

 

This Form 10-Q and our future filings 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 (“Exchange Act”), as amended. We intend such 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. Such forward-looking statements may be contained in this Form 10-Q under Item 2. Management’s 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):

 

 

Our ability to successfully consummate the Merger Agreement with affiliates of ATN International, Inc. and Freedom 3 Investments IV, LP, a fund advised by Freedom 3 Capital, LLC, and the potential disruption the merger could cause to our operations

 

our ability to obtain and appropriately allocate capital and other resources to support our growth objectives

 

our ability to keep pace with rapid technological developments and changing standards in the telecommunications industry, including on-going capital expenditures needed to upgrade our network to industry competitive speeds, particularly in light of expected 5G deployments by mobile wireless carriers

 

our ability to invest sufficiently in our underlying physical infrastructure, including buildings, fleet and related equipment

 

governmental and public policy changes and audits and investigations, including on-going changes in our revenues, or obligations for current and prior periods related to these programs, resulting from regulatory actions affecting on-going support for state programs such as Essential Network Support, and federal programs such as the rural health care universal service support mechanism, including ascertainment of the “urban rate” and “rural rate” used to determine federal support payments for services we provide to our rural health care customers for current and prior periods, some of which are currently under audit or subject to an inquiry

 

our ability to comply with the regulatory requirements to contribute to the Universal Service Fund and receive support payments from that fund

 

our ability to continue to develop and fund attractive, integrated products and services to evolving industry standards, and meet the pressure from competition to offer these services at lower prices

 

our size, because we are a smaller sized competitor in the markets we serve, and we compete against large competitors with substantially greater resources

 

our ability to maintain our cost structure as a focused broadband and managed IT services company, which could impact both cash flow from operating activities and our overall financial condition

 

the Alaskan economy, which has been impacted by continued low crude oil prices which are creating a significant impact on both the level of spending by the State of Alaska and the level of investment in resource development projects by natural resource exploration and development companies in Alaska, together with the ongoing cuts to the state of Alaska budget and resulting spending reductions, all of which may impact the economy in the markets we serve and impact our future financial performance

 

our ability to maintain successful arrangements with our represented employees

 

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disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber-attacks or security breaches of the physical infrastructure, operating systems or devices that our customers use to access our products and services; due to the COVID-19 pandemic, many of our employees are temporarily working remotely, which may pose additional data security risks

 

a maintenance or other failure of our network or data centers

 

a failure of information technology systems

 

our ability to attract, recruit, retain and develop our workforce, and implement succession planning necessary for achieving our business plan

 

the successful completion of our project for the development and installation of certain critical new IT systems associated with sales and opportunities, customer service delivery, operational support, customer billing and collection, analytics, and other applications; and our ability to adequately invest in the maintenance and upgrade of our networks and other information technology systems in the future

 

unforeseen challenges when entering new markets and our ability to recognize and react to actions, products or services of competitors that threaten our competitive advantage in the marketplace

 

the success of the Company’s expansion into managed IT services, including the execution of those services for customers

 

structural declines for voice and other legacy services within the telecommunications industry

 

a major public health issue, such as an epidemic or pandemic, and including the current COVID-19 pandemic, could adversely affect global, national, state and local economies, the operations and financial stability of our customers and vendors, and our operations, financial performance and liquidity

 

 

geologic or other natural disturbances relevant to the location of our operations

 

unanticipated damage to one or more of our undersea fiber optic cables resulting from construction or digging mishaps, fishing boats or other reasons

 

our ability to meet the terms of our financing agreements and to draw down additional funds under the facility to meet our liquidity needs

 

the cost and availability of future financing, at the terms, and subject to the conditions necessary, to support our business and pursue growth opportunities; our debt could also have negative consequences for our business; for example, it could increase our vulnerability to general adverse economic and industry conditions, or limit our flexibility in planning for, or reacting to, changes in our business and the telecommunications industry; in addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities; if we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness

 

the success or failure of any future acquisitions or other major transactions

 

a third-party claim that the Company is infringing upon their intellectual property, resulting in litigation or licensing expenses, or the loss of our ability to sell or support certain products

 

unanticipated costs required to fund our post-retirement benefit plans, or contingent liabilities associated with our participation in a multi-employer pension plan

 

delays in the receipt of equipment and other materials due to disruptions in the supply chain

 

our success in providing broadband solutions to the North Slope and western Alaska

 

our internal control over financial reporting may not be effective, which could cause our financial reporting to be unreliable

 

the matters described under Item 1A. Risk Factors in our Annual Report on Forms 10-K and 10-K/A for the year ended December 31, 2020.

 

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-Q 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 10-Q.

 

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.

 

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OVERVIEW

 

On December 31, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Project 8 Buyer, LLC (“Parent”) and Project 8 MergerSub, Inc. (“Merger Sub”), two newly-formed entities owned by ATN International, Inc. and Freedom 3 Investments IV, LP, a fund advised by Freedom 3 Capital, LLC. On December 31, 2020, the Company terminated the previously announced merger agreement under which the Company would be acquired by an affiliate of Macquarie Capital (USA) and GCM Grosvenor through its Labor Impact Fund.

 

On the terms, and subject to the conditions, of the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent. As a result of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by (i) the Company (or a wholly-owned subsidiary that is disregarded for tax purposes), Parent or Merger Sub and (ii) stockholders of the Company who have validly exercised and perfected their appraisal rights under Delaware law) will be converted at the Effective Time into the right to receive $3.40 in cash, without interest, subject to any applicable withholding taxes (the “Merger Consideration”).

 

 

Consummation of the Merger is subject to certain closing conditions, including, without limitation, (i) approval of the Merger by the Company’s stockholders, (ii) absence of certain legal impediments, (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); and (iv) receipt of regulatory approvals from the Federal Communications Commissions (the “FCC”) (and, if required as a precondition for FCC approval, the Committee for the Assessment of Foreign Participation in the U.S. Telecommunications Services Sector (“Team Telecom Committee”)) and from the Regulatory Commission of Alaska (the “RCA”). The waiting period under the HSR Act expired on February 16, 2021 at 11:59 p.m. Eastern Time. Filings with each of the FCC and the RCA were made on January 20, 2021. The RCA gave public notice of the application and requested any public comments by February 12, 2021. On February 8, 2021, the RCA issued an order stating that it had determined that Parent’s application to acquire the Company was complete as filed on January 20, 2021. The order states that the RCA will issue a final order no later than July 19, 2021. The Company’s stockholders approved the Merger at a special meeting of stockholders held on March 12, 2021.

 

Refer to the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated December 31, 2020 and filed with the SEC on January 4, 2021, which is incorporated in its entirety herein by reference to this Quarterly Report on Form 10-Q.

 

We are a fiber broadband and managed IT services provider, offering technology and service enabled customer solutions to business and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers in the most populated communities throughout the state. Our facilities-based communications network extends through the economically significant portions of Alaska and connects to the contiguous states via our two diverse undersea fiber optic cable systems. Our network is among the most expansive in Alaska and forms the foundation of service to our customers. We operate in a largely two-player terrestrial wireline market and we estimate our market share to be less than 25% statewide. A third-party market study conducted in the fourth quarter of 2018 indicates that we have a market share of close to 40% for “near net” opportunities, that is, within one mile of our fiber network.

 

The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practical. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources.

 

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Operating Initiatives

 

We are focused on being a customer centric fiber broadband and managed IT company. Everything we do is focused around our customer, meeting and exceeding their needs through the application of technology. We are focused on delivering an exceptional customer experience throughout the customer lifecycle. This forms the foundation of our sustained differentiation, creating unique value for our customers to grow our market share, expand business with existing customers while minimizing churn.

 

Our future investments and subsequent initiatives are focused on building and strengthening the business in three areas:

 

 

Enhance and Augment our Network and Capabilities: This is what we do and is the basis of our offers, to lead the competition through innovation and leverage the latest technologies to meet our customer’s needs. Activities include investments to grow our fiber footprint, augmented with high speed fixed wireless technologies, as well as expanding our product capabilities that fully leverage our existing and growing fiber footprint.

 

Drive Operational Excellence: Invest in operational systems that fundamentally change the way we deliver services that both enhance the customer experience as well as increase efficiency and productivity, redefining processes throughout the entire customer lifecycle to create new operating models and efficiencies. Investments that update our operational support and billing systems provide the foundational platform to further leverage digital technologies and expand with investments in analytics and artificial intelligence.

 

Accelerate the Growth of Managed IT Services: This is a fragmented market without a leader, a significant market size and a set of services that are both adjacent and synergistic with communications and networking services. We continue to invest in winning share and expanding our capabilities, enabling and accelerating our customers’ transition to cloud services.

 

These investment areas are not standalone and, in fact, are synergistic. We look to maximize each of these with any initiative for the highest return.

 

We recognize that everything we do is only possible through our people. Our employees are enablers that make any and all initiatives happen to serve our customers and earn their business. We focus on and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.

 

We will continue to evaluate strategic opportunities that address scale, geographic diversification, and return value to our shareholders.

 

The Alaska Economy

 

We operate in a geographically diverse state with unique characteristics. We monitor the state of the economy in general. In doing so, we compare Alaska economic activity with broader economic conditions. In general, we believe that the Alaska telecommunications market, as well as general economic activity in Alaska, is affected by certain economic factors, which include:

 

 

investment activity in the oil and gas markets and the price of crude oil

 

tourism levels

 

governmental spending and activity of military personnel

 

the price and price trends of bandwidth

 

the growth in demand for bandwidth

 

decline in demand for voice and other legacy services

 

local customer preferences

 

unemployment levels

 

housing activity and development patterns

 

We have observed variances in the factors affecting the Alaska economy as compared to the U.S. as a whole. Some factors, particularly the price of oil and gas, have a greater direct impact on the Alaska economy compared to other macro-economic trends impacting the U.S. economy as a whole. The COVID-19 pandemic negatively impacted the Alaska economy beginning in the first quarter of 2020. Certain of these impacts are discussed below. The duration of the pandemic and ultimate impact on the Alaska and U.S. economy is uncertain.

 

Historically, the Alaska economy has benefited from a stable employment base, including a growing tourism industry. The Alaskan economy entered a moderate recession beginning in the second half of 2015 and certain areas of the economy showed improvement beginning in 2018. Employment levels declined approximately 1.3% and 0.3% in 2017 and 2018, respectively, and increased approximately 0.6% in 2019. The increase in 2019 was driven by growth in leisure and hospitality, oil and gas, health care, professional and business services and construction, offset by declines in state government and retail. The COVID-19 pandemic has negatively impacted the leisure and hospitality, retail and transportation segments of the Alaskan economy and the economy at large. Beginning in March 2020, unemployment claims increased significantly, primarily as a result of the COVID-19 pandemic. By December 2020, the state’s unemployment rate had improved to 6.0% which is more in line with historic levels. However, in March 2021, the state’s unemployment rate increased to 6.6%.

 

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Our objective is to continue generating sector leading revenue growth in the broadband market through investments in sales, service, marketing and product development while expanding our broadband network capabilities through higher efficiencies, automation, new technology and expanded service areas. We intend to continue our growth in the managed IT services market by providing these services to our broadband customers and leveraging our position as the premier Cloud Enabler for business in the state of Alaska. We also seek to continuously improve our customer service and utilize the Net Promoter Score (“NPS”) framework to track the feedback of our customers for virtually all customer interactions. We believe that higher NPS scores will allow us to increasingly provide a differentiated service experience for our customers, which will support our growth. We are focused on expanding our margins, and we utilize the LEAN framework to eliminate waste and simplify how we do business.

 

COVID-19 Pandemic

 

The COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global supply chains and created significant volatility and disruptions to financial markets. The COVID-19 pandemic has also impacted the Company’s customers, suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. In response to economic pressures impacting the Company’s customers and the community at large as a result of the COVID-19 pandemic, we implemented various actions in 2020 and 2021 including the following:

 

 

Working to increase bandwidth, as needed, for participants in the rural health care program at no charge to the customer. Timing is subject to FCC guidance and its waiver of certain rules.

 

Offered kindergarten through grade 12, university students and teachers who do not have internet service, unlimited internet service at no charge through the end of the spring semester of the 2019-2020 school year.

 

Not terminating service to residential and small business customers in the event they are unable to pay us for services due to disruptions caused by the COVID-19 pandemic.

 

Waiving late fees incurred by residential and small business customers resulting from their economic circumstances related to the COVID-19 pandemic.

 

Waiving long distance overage fees, as appropriate, related to the COVID-19 pandemic.

 

Extension of technical support hours.

 

Proactively monitoring our network and prioritizing the augmentation of network links.

 

Working with local and state utilities, governments and educational institutions to ensure they have the necessary resources.

 

Established remote working arrangements, including work-from-home, for most of our administrative employees.

 

Implementation of travel restrictions.

 

Established appropriate arrangements for our customer service representatives and customers.

 

Proactively assessing and managing facilities and other costs.

 

Certain of the above actions have been relaxed or reduced beginning in the first quarter of 2021 as disruptions caused by the pandemic have been eliminated or mitigated.

 

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The COVID-19 pandemic did not have a direct material effect on the Company’s revenue, operating expenses and cash flow in the first quarter of 2021 Additional current and potential financial impacts include the following:

 

 

The estimated fair value of service or upgraded service provided to customers without charge was $0.3 million in the first quarter of 2021. These services were not recorded as revenue because no cash was expected to be collected from the customer. The Company’s incremental cost of providing this service was not significant.

 

Certain customers have delayed orders for the provision of service.

 

As a result of the customer accommodations noted above, collection of accounts receivable from certain customers has been delayed.

 

Disruption of certain of our business and wholesale customers’ operations.

 

Disruption of the Alaska economy, including crude oil prices and the leisure and hospitality industries, could negatively impact demand for our products and services.

 

Reductions in consumer spending.

 

Government imposed travel restrictions and other actions could reduce the efficiency of our operations and result in higher costs.

 

Declines in revenue and cash flows could require that we further reduce operating cost and capital spending.

 

Delays, cancellation and other disruptions in the provision of products and services by our vendors.

 

Disruption to the financial markets could limit our access to financing and other sources of capital.

 

In February 2021, the Company and the Municipality of Anchorage entered into an agreement under which utility relief will be made available to certain of the Company’s residential and small business customers located in Anchorage. The program is supported by a grant from the Municipality of Anchorage. Funding totaling $0.7 million was received by the Company in the first quarter and will be applied to the accounts of customers who have experienced financial hardship related to the COVID-19 pandemic and meet other requirements, subject to certain terms and conditions. In the first quarter of 2021, a credit of $0.1 million was recorded to the provision for doubtful accounts to reverse charges recorded in 2020 associated with customer accounts which are expected to qualify for relief under this program.

 

We are continuing to assess the potential future impact of the COVID-19 pandemic. The situation continues to evolve, and while the impact on the local and national economy has been mitigated in recent months, we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on the demand for our products and services, operations, financial condition, results of operations or cash flows, which could be material. We will continue to closely monitor the situation and make the appropriate adjustments to our operations as required and appropriate.

 

Regulatory Update

 

The items reported under Part I, Item 1. Business – Regulation in our Annual Report on Form 10-K for the year ended December 31, 2020, are updated as follows. This section should be read in conjunction with the corresponding items previously disclosed in our Annual Report.

 

US Federal Regulatory Matters

 

Interconnection with Local Telephone Companies and Access to Other Facilities

 

The Communications Act imposes a number of requirements on local exchange carriers (“LECs”). Generally, a LEC must: interconnect with other telecommunications carriers; 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.

 

All of our LEC subsidiaries are considered incumbent LECs (“ILECs”) and have additional obligations under the Communications Act, including obligations to unbundle certain elements of their networks for purchase by competitive LECs.

 

In general, in recent years, the FCC has granted forbearance providing incremental relief from some of the obligations the Communications Act imposes uniquely on ILECs. Most recently, on October 28, 2020, the FCC released an Order relieving ILECs from most obligations to unbundle local loops (DS-3, DS-1, DS-0, and narrowband voice-grade), as well as Operations Support Systems and dark fiber transport, in markets the FCC deems competitive subject to transition periods ranging between two and eight years. Previously, on August 2, 2019, the FCC relieved ILECs from the requirement to unbundle two-wire and four-wire analog voice-grade copper loops, as well as from the obligation to offer a wholesale discount on its telecommunications services sold to competitive entrants for resale. While the obligation to offer telecommunications services for resale remains in effect (as it does for all local exchange carriers, incumbent and competitive entrants alike), we will no longer be obligated to offer any particular wholesale discount on those services. Both of those 2019 grants of forbearance are subject to a two-part transition period. First, for a six-month period that began on August 2, 2019, we were required to continue to accept new orders for analog voice-grade copper loops and discounted wholesale services, in accordance with the previous rules. Second, we must continue to honor existing arrangements, including those put in place during that initial six-month period, for a three-year period that also began on August 2, 2019, in order to permit customers sufficient time to undertake a transition to alternative arrangements.

 

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USF Contributions

 

Under the Communications Act of 1934, as amended (the “Communications Act”) and FCC rules, telecommunications carriers and certain providers of telecommunications must contribute to the federal Universal Service Fund, which is the source of funding for the four support mechanisms described above. These contributions are based on end-user revenues from assessable interstate and international services. For the first calendar quarter of 2021, we were required to pay an amount equal to 31.8 percent of our interstate and international end-user telecommunications revenue towards the federal Universal Service Fund, and amount that increased to 33.4 percent for the second calendar quarter of 2021. The contribution rate changes every calendar quarter, and has increased sharply in recent years, both because of increases in demand for universal service support payments, and because the assessable revenue base has shrunk considerably over the past two decades. In the long term, the current contribution mechanism is likely to be unsustainable, and collapse of the Universal Service Fund would have a significant impact throughout our industry.

 

Rural Health Care (RHC) Universal Service Support Program

 

We received FCC approval for our Funding Year 2020 rates in January 2021, more than halfway through the funding year to which those rates relate (July 1, 2020 – June 30, 2021). USAC began issuing funding commitment letters in March 2021 and we are working with our healthcare provider customers to prepare and submit additional forms and documentation required to receive payment.

 

On March 27, 2020, the President signed into law the “Coronavirus Aid, Relief, and Economic Security Act,” which, among other things, appropriates $200 million for the FCC to help health care providers provide connected care services to patients at their homes or mobile locations in response to the COVID-19 pandemic. Over the ensuing three months, the FCC used these funds to create the “COVID-19 Telehealth Program,” and made over 500 awards, comprising the entire sum, to health care providers in the lower 48 contiguous states, the District of Columbia, and Guam, but none to health care providers in Alaska. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, appropriated a further $250 million for the COVID-19 Telehealth Program, and directed that, to the extent feasible, at least one applicant in every state should receive an award of funding under the program.

 

At the same time, the FCC created the “Connected Care Pilot Program,” which makes an additional $100 million in universal service funding available over three years to study how the FCC can help support the trend towards connected care services, particularly for low-income Americans and veterans. The Connected Care Pilot Program will provide healthcare providers support for 85 percent of the cost of eligible services and network equipment, which include: (1) patient broadband internet access services, (2) health care provider broadband data connections, (3) other connected care information services, and (4) certain network equipment (e.g., equipment necessary to make a supported broadband service function such as routers). The FCC accepted applications for Connected Care Pilot Program support between November 6 and December 7, 2020. On January 15, 2021, the FCC announced its initial set of awards to healthcare providers in 12 states, but none in Alaska. While it is too soon to assess the ultimate impact, if any, of the Connected Care Pilot Program on our business, programs of this type that make the telehealth and telemedicine services more affordable could stimulate greater demand for those services in Alaska.

 

On August 1, 2019, the FCC adopted an order making comprehensive changes to the rules governing the competitive bidding process and the method for determining the urban and rural rates used to calculate the amount of RHC Telecommunications Program support payments for which a health care provider is eligible. The changes to the urban and rural rate rules take effect for Funding Year 2021, which will begin July 1, 2021, and rural healthcare providers were permitted to solicit bids for services to be supported in Funding Year 2021 beginning on July 1, 2020. Among other things, the FCC’s Order directed USAC to develop and publish a database by July 1, 2020, containing available rural rates and rate medians that will cap the amount of RHC support eligible healthcare providers may receive for a given service in a particular geographic zone. The FCC’s Order divided Alaska into four geographic zones, with the rural rate in each zone capped at the median of the rural rates for similar services offered in that zone, as identified by USAC. USAC published that rate database on July 1, 2020, following receipt of a June 30, 2020 letter providing significant guidance and directives from the FCC’s Wireline Competition Bureau (the “Bureau”). Among those directions, the Bureau directed USAC to provide an additional two months, until August 31, 2020, for interested parties to supplement the database with additional relevant rates. USAC announced on October 1, 2020 that it had incorporated those additional rates into the database.

 

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On October 21, 2019, an appeal challenging the new method of setting rates for supported services was filed in the United States Court of Appeals for the District of Columbia Circuit, adding further uncertainty to the ultimate outcome of this proceeding. Similarly, the Company and several other parties have filed Petitions for Reconsideration of the FCC’s August 2019 Report and Order, asking the FCC to reconsider some of its changes to the rural healthcare rate-setting process. Among other changes, we asked the FCC to give the Bureau instead of USAC responsibility for creating the database; to provide more detailed guidance directing the Bureau to differentiate among broadband services based on additional service level, security, reliability, and other factors when creating the rural rate database; to make the rate database applicable only in cases where the rural health care provider received fewer than two competitive bids; and to set the rural rate cap, where applicable, based on the average rate, not the median, in the database. Both the action in the D.C. Circuit Court of Appeals and the Petitions for Reconsideration filed with the FCC remain pending.

 

We believe that USAC’s rural rate database, as currently constituted, is likely to have an adverse impact on our economic ability to continue to serve some of our rural healthcare customers. In particular, the rates established by the database would negatively impact our ability to continue to offer our full range of telecommunications services to rural healthcare providers supported by the Telecommunications Program in the more remote, higher-cost areas of the state. We have requested that the full FCC review USAC’s effort and associated guidance from the Bureau concerning the database, delay the effectiveness of the new rural rates, and direct the Bureau to implement the changes we requested in our Petition for Reconsideration. In two orders issued on January 19, 2021 and April 8, 2021, the FCC suspended the use of the urban and rural rate databases for Funding Years 2021 and 2022. In lieu of the database, while the waiver remains in effect, the Order authorizes support based on the most recent rural rate that the FCC has approved for the same service at the same healthcare facility within the past three funding years. In addition, we have flexibility to charge (1) a rate lower than the previously approved rate for the same or similar service to the same facility or one with the same or similar geographic characteristics or (2) the same or lower rate as previously approved but for a higher bandwidth service than in previous funding years at the same facility or one with the same or similar geographic characteristics. As an alternative, Telecommunications Program rural rates may be established under the previously applicable rate rules that were in effect through Funding Year 2020. As with the action in the D.C. Circuit Court of Appeals and the Petitions for Reconsideration, the other issues raised in our Application for Review remain pending.

 

We are unable to predict the outcome or eventual impact of the D.C. Circuit’s review of the FCC’s Order, or the FCC’s decision on our Petition for Reconsideration or our Application for Review, but these recent FCC orders offer a measure of short-term stability and predictability for our Telecommunications Program for the upcoming two funding years while those reviews continue.

 

USAC Audit of RHC Program Funding Requests

 

In addition to the prospective changes to the RHC program discussed above, the FCC and USAC have undertaken reviews of current and past funding requests. In June 2017, the Company received a letter from USAC’s auditors inquiring about past funding requests, all of which were previously approved by USAC. After clarifying the request, the Company responded to the auditors with the requested information through the remainder of 2017 and mid-way into 2018. Late in 2018, the auditors asked the Company to comment on some preliminary audit findings, and the Company responded with a letter dated December 21, 2018. After more than a year without further communication from the auditors, on February 24, 2020, the Company received a draft audit report from USAC that is described more fully in Note 20 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company was invited to comment on this draft audit report and, as of September 1, 2020, we have provided USAC with extensive comments in response. Our comments seek correction of numerous factual and legal errors that we believe are contained in that report. In addition, the Company has had conversations with USAC’s auditors to discuss these perceived errors. As a result of these conversations and comments being submitted by the Company, USAC’s auditors may revise their findings, including the amounts they recommend USAC seek to recover. USAC’s auditors are expected to issue a final audit report incorporating the Company’s responses that will be sent to USAC’s Rural Health Care Division to review and determine if corrective action would be appropriate. In the event that the Company disagrees with USAC’s final audit report, the Company can appeal that decision to USAC’s Rural Health Care Division and/or the FCC. At this time, we cannot predict the contents or timing of the final USAC audit report, the outcome of the audit or the impact on our business, financial condition, results of operations, or liquidity.

 

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FCC Inquiry into Companys RHC Program Participation

 

The Company also received a Letter of Inquiry on March 18, 2018, from the FCC Enforcement Bureau requesting historical information regarding the Company’s participation in the FCC’s Rural Health Care program. In response,