| ALASKA COMMUNICATIONS SYSTEMS GROUP INC Item 1A Risk Factors We face a variety of risks that may affect our business, financial condition, and results of operations, some of which are beyond our control |
| The risks described below are not the only ones we face and should be considered in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on ACS, our business, financial condition and results of operations could be seriously harmed |
| 20 _________________________________________________________________ [75]Table of Contents Risks related to our common stock ACS Group is a holding company and relies on dividends, interest and other payments, advances and transfer of funds from its subsidiaries to meet its debt service and pay dividends |
| ACS Group has no direct operations and no significant assets other than ownership of 100prca of the stock of ACSH Because we conduct our operations through our direct and indirect subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, including paying dividends on our common stock |
| Legal restrictions applicable to our subsidiaries and contractual restrictions in our senior credit facility, and other agreements governing current and future debt of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries |
| The earnings from, or other available assets of, our subsidiaries may not be sufficient to pay dividends on the common stock |
| Our dividend policy may limit our ability to pursue growth opportunities |
| Our board of directors has adopted a dividend policy which reflects an intention to distribute a substantial portion of the cash generated by our business in excess of operating needs, interest and principal payments on our debt and capital expenditures as regular quarterly dividends to our stockholders |
| As a result, we may not retain a sufficient amount of cash to finance a material expansion of our business, or to fund our operations consistent with past levels of funding |
| In addition, our ability to pursue any material expansion of our business, including through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing |
| Financing may not be available to us at an acceptable cost, or at all |
| You may not receive the level of dividends provided for in our dividend policy or any dividends at all |
| We are not obligated to pay dividends |
| Our board of directors may, in its absolute discretion, amend or repeal the dividend policy which may result in the decrease or discontinuation of dividends |
| Future dividends, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, any competitive or technological developments, our increased need to make capital expenditures, provisions of applicable law, and other factors that our board of directors may deem relevant |
| Additionally, Delaware law and the terms of our senior credit facility may limit or completely restrict our ability to pay dividends |
| We might not generate sufficient cash from operations in the future to pay dividends on our common stock in the intended amounts or at all |
| Our board of directors may decide not to pay dividends at any time and for any reason |
| If our cash flows from operations for future periods were to fall below our minimum expectations, we would need either to reduce or eliminate dividends or, to the extent permitted under the terms of our senior credit facility or any future agreement governing our debt, fund a portion of our dividends with borrowings or from other sources |
| If we were to use working capital or permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively affect our financial condition, results of operations, liquidity, ability to maintain or expand our business and ability to fund dividends |
| Our board is free to depart from or change our dividend policy at any time and could do so, for example, if it were to determine that we had insufficient cash to take advantage of growth opportunities |
| In addition, our senior credit facility contains limitations on our ability to pay dividends |
| The reduction or elimination of dividends may negatively affect the market price of our common stock |
| Our substantial debt could adversely affect our financial health and restrict our ability to pay dividends on our common stock and adversely affect our financing options and liquidity position |
| As of December 31, 2005 we had total long-term obligations, including current portion, of dlra445dtta6 million and a net loss for the year ended December 31, 2005 of dlra41dtta6 million |
| Our debt could have important consequences for you as a holder of our common stock |
| For example, our substantial debt could: • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, future business opportunities and other general corporate purposes; • limit our flexibility to plan, adjust or react to changing economic, market or industry conditions, reduce our ability to withstand competitive pressures, and increase our vulnerability to general adverse economic and industry conditions; 21 _________________________________________________________________ [76]Table of Contents • place us at a competitive disadvantage to many of our competitors who are less leveraged than we are; • limit our ability to borrow additional amounts for working capital, capital expenditures, future business opportunities, including strategic acquisitions and other general corporate requirements or hinder us from obtaining such financing on terms favorable to us or at all; and • limit our ability to refinance our debt |
| The terms of our senior credit facility and the terms of our other debt allows us and our subsidiaries to incur additional debt upon the satisfaction of certain conditions |
| If new debt is added, the related risks described above would intensify |
| Our debt instruments include restrictive and financial covenants that limit our operating flexibility |
| Our senior credit facility requires us to maintain certain financial ratios and adhere to other covenants that, among other things, restrict our ability to take specific actions, even if we believe such actions are in our best interest |
| These include restrictions on our ability to: • pay dividends or distributions on, redeem or repurchase our capital stock; • issue certain preferred or redeemable capital stock; • incur additional debt; • create liens; • make certain types of investments, loans, advances or other forms of payments; • issue, sell or allow distributions on capital stock of specified subsidiaries; • prepay or defease specified debt; • enter into transactions with affiliates; or • merge, consolidate or sell our assets |
| These restrictions could limit our ability to obtain financing, make acquisitions or fund capital expenditures, withstand downturns in our business or take advantage of business opportunities |
| A breach of any of these covenants, ratios or tests could result in a default under our senior credit facility |
| Upon the occurrence of an event of default under our senior credit facility, the lenders could elect to declare all amounts outstanding under our senior credit facility to be immediately due and payable |
| Such a default or acceleration may allow our other creditors to accelerate our other debt |
| If the lenders accelerate the payment of the debt under our senior credit facility, our assets may not be sufficient to repay in full this debt and our other debt |
| We will require a significant amount of cash to service our debt, pay dividends and fund our other liquidity needs |
| Our ability to generate cash depends on many factors beyond our control |
| Our ability to make payments on and to refinance our debt, including amounts borrowed under our senior credit facility, to pay dividends, and to fund planned capital expenditures and any strategic acquisitions we may make, if any, will depend on our ability to generate cash in the future |
| We cannot assure you that our business will generate sufficient cash flow from operations such that our currently anticipated growth in revenues and cash flow will be realized on schedule or that future borrowings will be available to us in an amount sufficient to enable the repayment of our debt, pay dividends or to fund our other liquidity needs |
| We may need to refinance all or a portion of our debt, including the senior credit facility, on or before maturity |
| We may not be able to refinance any of our debt on commercially reasonable terms or at all |
| If we are unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, including: • sales of certain assets to meet our debt service requirements; • sales of equity; and • negotiations with our lenders to restructure the applicable debt |
| 22 _________________________________________________________________ [77]Table of Contents If we are forced to pursue any of the above options our business and /or the value of our common stock could be adversely affected |
| Future sales, or the possibility of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock |
| Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock, and could impair our ability to raise capital through future sales of equity securities |
| If we or our existing stockholders, including affiliates of Fox Paine & Company, LLC (together, “Fox Paine”), our largest stockholders, sell substantial amounts of our common stock in the public market, or if there is a perception that these sales may occur, the market price of our common stock could decline |
| Substantially all of our shares are freely tradable in the public market without restriction or further registration under the Securities Act |
| In addition, Fox Paine has registered the sales of all of its shares of our common stock |
| See “— Our largest stockholders have registered the sale of all their shares of our common stock and their interests in selling those shares may conflict with your interests,” below |
| We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments |
| In the event any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may be significant |
| We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments |
| Possible volatility in the price of our common stock could negatively affect us and our stockholders |
| The trading price of our common stock may be volatile in response to a number of factors, many of which are beyond our control, including actual or anticipated variations in quarterly financial results, actual or anticipated variations in our dividend policy, changes in financial estimates by securities analysts, and announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments |
| In addition, our financial results or dividend payments may be below the expectations of securities analysts and investors |
| If this were to occur, the market price of our common stock could decrease, perhaps significantly |
| Additionally, historically, there has been a limited public market for our common stock |
| The limited liquidity for holders of our common stock may add to the volatility of the trading price of our common stock |
| These effects could materially adversely affect the trading market and prices for our common stock, as well as our ability to issue additional securities or to secure additional financing in the future |
| In addition, the US securities markets have experienced significant price and volume fluctuations |
| These fluctuations often have been unrelated to the operating performance of companies in these markets |
| Broad market and industry factors may negatively affect the price of our common stock, regardless of our operating performance |
| Your interests may conflict with those of our current stockholders |
| Fox Paine beneficially owns approximately 22dtta8prca of our outstanding common stock |
| As a result, Fox Paine currently has the ability to exert significant influence over the outcome of matters requiring stockholder approval, including: • the election of our directors and the directors of our subsidiaries; • the amendment of our charter or by-laws; and • the adoption or prevention of mergers, consolidations or the sale of all or substantially all of our assets or our subsidiaries’ assets |
| Our certificate of incorporation does not expressly prohibit action by written consent of stockholders |
| As a result, to the extent Fox Paine, together with other stockholders, owns more than 50prca of our total voting power, Fox Paine would be able to take any action to be taken by stockholders without the necessity of holding a stockholders’ meeting |
| Finally, Fox Paine may make significant investments in other telecommunications companies |
| Fox Paine and its affiliates are not obligated to advise us of any investment or business opportunities of which they are aware, and they are not restricted or prohibited from competing with us |
| Our largest stockholders have registered the sale of all of their shares of our common stock and their interests in selling those shares may conflict with your interests |
| Pursuant to a shelf registration statement filed by us, Fox Paine has registered the sale of all of the shares of common stock that it holds |
| If Fox Paine sells substantial amounts of our common stock, the market price of our common stock may fall, particularly given the limited liquidity of the trading market for our common stock |
| These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem 23 _________________________________________________________________ [78]Table of Contents appropriate |
| Additionally, the interests of Fox Paine in selling its shares may conflict with your interests |
| See “—Your interests may conflict with those of our current stockholders,” above The limited liquidity of the trading market for our common stock may affect the trading price of our common stock |
| The trading market for our common stock is limited and a more liquid trading market for our common stock may not develop |
| It is more likely for common stock issued in larger aggregate numbers of shares to trade more favorably than similar common stock issued in smaller aggregate numbers because of the increased liquidity created by higher trading volumes resulting from larger numbers of traded shares |
| There may not be a sufficiently liquid market for our common stock for holders to sell common stock readily |
| Limitations on usage of our net operating losses, and other factors requiring us to pay cash taxes in future periods, may affect our ability to pay dividends to you |
| The closing in 2005 of a secondary offering by Fox Paine of a substantial number of shares of our common stock held by it caused us to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code |
| Consequently, in the future we may be required to pay cash income taxes because of limitations on using our net operating losses, or because all of our net operating losses have been used or have expired |
| Any of the foregoing would have the effect of increasing our taxable income and potentially reducing our after-tax cash flow available for payment of dividends in future periods, and may require us to reduce dividend payments on our common stock in such future periods |
| Risks related to our business We provide services to our customers over access lines and if we continue to lose access lines our revenues, earnings and cash flow from operations may decrease |
| Our business generates revenue by delivering voice and data services over access lines |
| We have experienced net access line loss over the past few years, and during the year ended December 31, 2005, the number of access lines we serve declined by 7dtta78prca due to challenging economic conditions, increased competition and the introduction of digital subscriber lines, or DSL, and cable modems |
| We may continue to experience net access line loss in our markets for an unforeseen period of time |
| In addition, General Communication, Inc, the dominant cable television operator, aggressively offers competitive local telephone service in many of our largest markets |
| As a result, we have recently experienced, and expect to experience continued access line loss in areas served by this competitor, and other competitors |
| Our inability to retain access lines would adversely affect our revenues, earnings and cash flow from operations |
| Our business is subject to extensive governmental legislation and regulation |
| Applicable federal and state legislation and regulations and changes to them could adversely affect our business |
| We operate in a heavily regulated industry, and most of our revenues come from the provision of services regulated by the Federal Communications Commission, or FCC, and the Regulatory Commission of Alaska, or RCA Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts, and could be changed by legislation or regulatory orders at any time |
| Future developments or changes to the regulatory environment, or the effect of such developments or changes, may have an adverse effect on us |
| There are a number of FCC and RCA rules under review that could have a significant effect on us |
| For example, many of the FCC’s rules with regard to the provisioning of unbundled network elements, or UNEs, and other interconnection rules have been revised from time to time and are subject to further proceedings at the FCC Several parties have challenged the FCC’s current interconnection regulations in court |
| Court rulings, further FCC actions, or new legislation in this area could affect our obligation to provide UNEs and the prices we receive for our UNEs |
| Changes to intercarrier compensation or the roaming agreements between wireless operators that affect our access or roaming revenues are also likely over the next few years |
| The FCC and Congress are also looking at universal service fund contribution and disbursement rules that are likely to affect the amount and timing of our contributions to and receipt of universal service funds; our obligations may increase and/or our revenue may decline; and our competitors may receive greater payments |
| Further, most FCC and RCA telecommunications decisions are subject to substantial delay and judicial review |
| For example, the RCA’s 2004 orders arbitrating certain elements of, and approving, the interconnection agreement between General Communications Inc, or GCI, and ACS of Anchorage, or ACSA, are being challenged by GCI in federal court |
| These delays and related litigation create risk associated with uncertainty over the final direction of federal and state policies and our regulated rates |
| 24 _________________________________________________________________ [79]Table of Contents As the incumbent local exchange carrier in our service areas, we are subject to legislation and regulation that are not applicable to our competitors |
| Existing federal and state rules impose obligations and limitations on us, as the incumbent local telephone company, that are not imposed on our competitors |
| Federal obligations to share facilities, file and justify tariffs, maintain certain types of accounts, and file certain types of reports are all examples of disparate regulation |
| Similarly, state regulators impose accounting and reporting requirements and service obligations on us that do not exist for our competitors |
| In addition, state regulators have imposed greater tariffing standards and obligations on us than on our competitors |
| Some of our proposed tariffs may be suspended for six to twelve months before they go into effect, which has enabled our competitors to plan competitive responses before we are able to implement new rates, diminishing our ability to compete |
| As our business becomes increasingly competitive, the continued regulatory disparity could have a material adverse effect on our business |
| A reduction by the RCA or the FCC of the rates we charge our customers would reduce our revenues and earnings |
| The rates we charge our local telephone customers are based, in part, on a rate of return authorized by the RCA on capital invested in our networks |
| These authorized rates, as well as allowable investment and expenses, are subject to review and change by the RCA at any time |
| If the RCA orders us to reduce our rates, both our revenues and our earnings will be reduced |
| Additionally, in this competitive market, we are not sure we would be able to implement higher rates even if approved by the RCA State regulators may rebalance our planned rates or set new rates closer to our costs, and refuse to keep our sensitive business information confidential, furthering our competitive disadvantage in the marketplace |
| Our local exchange service competitors may also gain a competitive advantage as a result of the state regulators permitting our competitors to intervene in rate-setting proceedings |
| FCC regulations also affect rates that are charged to customers |
| The FCC regulates tariffs for interstate access and subscriber line charges, both of which are components of our network service revenue |
| The FCC currently is considering proposals to reduce interstate access charges for carriers like us |
| If the FCC lowers interstate access charges without adopting an adequate revenue replacement mechanism, we may be required to recover more revenue through subscriber line charges and universal service funds or forego this revenue altogether |
| This could reduce our revenue or impair our competitive position |
| The rates, terms and conditions for the leasing of facilities and resale of services in Anchorage are subject to regulatory review and may be adjusted in a manner adverse to us |
| The rates, terms and conditions for the leasing of facilities in Anchorage by our competitors, including GCI, were resolved by the RCA on December 7, 2004 after years of proceedings |
| There is risk associated with the implementation of this interconnection agreement |
| On January 7, 2005, GCI filed suit in federal district court challenging the RCA’s orders and the resulting interconnection agreement between GCI and ACSA GCI claims that the pricing methodology the RCA used to determine the rates we charge GCI under the interconnection agreement did not comply with the FCC’s pricing methodology regulations, and GCI has requested that the court direct the RCA to retroactively reduce the rates we charge GCI under this agreement, which would reduce our revenue |
| We cannot predict the duration or outcome of this matter |
| Continued litigation will likely result in an extended period of uncertainty and additional cost associated with the proceedings |
| Loss of the exemption from certain forms of competition granted to our rural local exchange carriers under the Federal Telecommunications Act of 1996 exposes us to increased competition |
| Historically, our rural local exchange carriers operated under a federal statutory exemption under which they were not required to offer UNEs and wholesale discounted resale services to competitors |
| On June 30, 1999, the Alaska Public Utilities Commission (or APUC) issued an order revoking these rural exemptions On April 18, 2004, ACSF and ACSAK entered into a settlement agreement with GCI in which ACSF and ACSAK waived their claim to the rural exemption in exchange for GCI’s agreement to pay increased UNE loop rates |
| ACS of the Northland, Inc, or ACSN, currently retains its rural exemption, but remains subject to petitions for termination or facilities-based competition at any time |
| GCI was granted, subject to certain conditions, approval to provide local exchange telephone service in ACSN’s Glacier State study area |
| New facilities-based local exchange service competition will likely reduce our revenues and return |
| Interconnection duties are governed by telecommunications rules and regulations related to the UNEs that must be provided |
| These rules and regulations remain subject to ongoing change |
| In addition, to the extent that rural exemptions are terminated, other carriers are entitled to obtain interconnection agreements with us on the same basis as GCI Finally, to the 25 _________________________________________________________________ [80]Table of Contents extent the new rates are higher than the previous rates, GCI or other competitors may provide service over their own facilities, further depriving us of revenue |
| Our results of operations could be materially harmed as GCI further develops its own network facilities and stops leasing our network elements |
| GCI commenced offering cable telephony in Anchorage during 2004 and initiated migration of its customers served using our UNEs off of our network and onto its own cable system |
| GCI announced plans to substantially increase the number of customers it migrates to cable telephony with the aim of migrating virtually all of its Anchorage customers to its own network in 2006 or 2007 |
| Significant migration of customers would result in a significant reduction of revenue for us, as GCI would no longer be leasing our facilities to serve those customers, which could materially harm our results of operations |
| The telecommunications industry is extremely competitive, and we may have difficulty competing effectively |
| The telecommunications industry is extremely competitive |
| We face competition in local voice, local high-speed data, wireless, Internet, long distance and video services |
| Competitors in the markets in which we operate: • reduce our customer base; • require us to lower rates and other prices in order to compete; • require us to invest in new facilities and capabilities; • increase marketing expenditures and require the use of discounting and promotional campaigns that would adversely affect our margins; or • otherwise lead to reduced revenues, margins, and returns |
| We face strong competition from GCI in Anchorage and other areas for integrated, facilities-based, voice, broadband and video services |
| New competitors in local services may be encouraged by FCC and RCA rules regarding interconnection agreements and universal service supports |
| We face competition from wireless service providers for local, long distance and wireless customers |
| Existing and emerging wireless technologies are increasingly competitive with local exchange services in some or all of our service areas, and the FCC is scheduled to commence auctioning 90 MHz of additional spectrum for advanced wireless services on June 29, 2006 |
| One of our competitors has deployed a new generation of wireless technologies, similar to ours, which will provide wireless data at 1xRTT speeds in addition to wireless voice services |
| Further, the FCC has ordered wireline-to-wireless and wireless-to-wireless number portability, leading to increased risk of wireless substitution for traditional local telephone services and increased competition among wireless carriers |
| In addition, new carriers offering voice over Internet Protocol, or VoIP, services may also lead to a reduction in traditional local and long distance telephone service revenues as well as our network access revenues |
| Our video services compete against cable television systems, satellite providers, and other services |
| Some of our competitors may have financial and technical resources greater than ours and may be exempt from or subject to lesser regulatory burdens |
| Revenues from our retail local telephone access lines may be reduced or lost |
| As the incumbent local exchange carrier, we face stiff competition from resellers, local providers who lease UNEs from us, and other facilities-based providers of local telephone services |
| Through December 31, 2005, we have lost approximately 37prca of our retail local telephone market share |
| In Anchorage, our largest market, since opening to competition, we have lost approximately 52prca of our retail local telephone market share |
| Similarly, in Fairbanks and Juneau we have lost approximately 33prca of our retail local telephone access lines |
| Further, our competitors may at any time bypass or remove these customers from our network completely, which would eliminate our revenue from those lines altogether |
| For example, GCI has already eliminated some revenue to us as a result of its deployment of cable telephony in Anchorage |
| We may not be successful in recovering those lost retail customers or revenues |
| Revenues from access charges may be reduced or lost |
| We received approximately 28prca of our operating revenues for the year ended December 31, 2005 from local exchange network access charges |
| The amount of revenue that we receive from these access charges is calculated in accordance with requirements set by the FCC and the RCA Any change in these requirements may reduce our revenues and earnings |
| Generally, access charges have decreased since our inception in 1999 |
| Under the regulatory rules that exist today, we receive access revenue related to the calls made by all of our retail customers as well as our competitors’ customers who are served via resale of our services |
| Access revenue related to our competitors’ retail customers that are served by UNEs or by the competitors’ own facilities flows to our competitors |
| To the extent that competitors shift the form in which they provide service away from resale our access revenue will be reduced |
| We do not receive access revenue from VoIP calls, and growth of this service will reduce our access revenues |
| 26 _________________________________________________________________ [81]Table of Contents The FCC is reviewing new mechanisms for intercarrier compensation |
| Some parties have suggested terminating all interstate access charge payments by interexchange carriers with alternative compensation methods for providers of access services |
| If such a proposal is adopted, it would likely have a material impact on our revenue and earnings |
| The FCC has stated its intent to adopt some form of access charge reform soon, which more likely than not will reduce this source of revenue |
| Similarly, the RCA has adopted regulations modifying intrastate access charges that may reduce our revenue |
| In addition, both GCI and AT&T have previously alleged that we collected excess interstate access revenue |
| While those claims have been resolved, we cannot assure you that claims alleging excess charges will not be made in the future, nor that we will be able to defeat such claims |
| A reduction in the universal service support currently received by some of our subsidiaries would reduce our revenues and earnings |
| We received approximately 7dtta8prca of our operating revenues for the year ended December 31, 2005 from the Universal Service Fund, or USF The USF was established under the direction of the FCC to compensate carriers for the high cost of providing universal telecommunications services in rural, insular, and high-cost areas |
| If the support we receive from the USF is materially reduced or discontinued, some of our rural local exchange carriers as well as wireless providers, might not be able to operate profitably |
| Also, because we provide interstate and international services, we are required to contribute to the USF a percentage of our revenue earned from such services |
| Although our rural LECs receive support from the USF, we cannot be certain of how, in the future, our contributions to the USF will compare to the support we receive from the USF Various reform proceedings are under way at the FCC to change the method of calculating the amount of contributions paid into the USF by all carriers and the amount of contributions or support rural carriers like ACSF, ACSAK and ACSN receive from the USF, as well as the amount of support received and contributions paid by our competitors |
| The FCC has imposed limits on the amount of USF distributed |
| We cannot predict when or how any change in the method of calculating contributions and support may affect our business |
| The RCA has granted Eligible Telecommunications Carrier, or ETC, status to GCI in Fairbanks and Juneau |
| Under current FCC rules, ETC status entitles GCI to the same amount of per-line USF support that we are entitled to receive regardless of GCI’s costs |
| To the extent that any competitive ETC, such as GCI, has lower costs than us, but receives the same amount of financial support, the competitor gains a competitive cost advantage over us |
| have been granted ETC status for certain areas |
| Revenues from wireless services may be reduced |
| Market prices for wireless voice and data services have declined over the last several years and may continue to decline in the future |
| We may be unable to maintain or improve our average revenue per user |
| We expect significant competition among wireless providers, which has been intensified by wireless number portability and may be spurred by additional spectrum auctions, to continue to drive service and equipment prices lower, which may lead to increased turnover of customers |
| If market prices continue to decline, our ability to grow revenue would be affected, which would have an adverse effect on our financial condition and results of operation |
| There can be no assurance that any advanced wireless services we offer will be profitable or increase average revenue per user |
| We may not be able to offer long distance and Internet services on a profitable basis |
| Our long distance operations have historically been modest in relation to the long distance businesses of our competitors |
| Our long distance operations generated operating losses of dlra1dtta8 million in 2001, dlra1dtta3 million in 2002 and dlra21dtta0 million in 2003, dlra3dtta4 million in 2004, and gain of dlra0dtta3 million for the year ended December 31, 2005 |
| Our Internet operations generated operating losses of dlra9dtta5 million in 2001, dlra21dtta5 million in 2002, dlra60dtta4 million in 2003, dlra10dtta3 million in 2004, and dlra6dtta4 million for the year ended December 31, 2005 |
| Our operating losses from long distance and Internet services may increase in the future, even after taking into account additional revenue from complementary or advanced services |
| 27 _________________________________________________________________ [82]Table of Contents If we substantially underestimate or overestimate the demand for our long distance services, our cost of providing these services would increase |
| We expect to continue to enter into resale agreements for a portion of our long distance services |
| In connection with these agreements, we must estimate future demand for our long distance service |
| If we overestimate this demand, we may be forced to pay for services we do not need, and if we underestimate this demand, we may need to lease additional capacity on a short-term basis at unfavorable prices, assuming additional capacity is available |
| If additional capacity is not available, we would not be able to meet this demand |
| We may not be able to profitably take advantage of future fiber-optic capacity that we have purchased |
| We entered into an agreement that obligated us to purchase additional fiber-optic capacity from Crest Communications, LLC, or Crest |
| Specifically, we fulfilled a commitment to Crest to provide a loan for the aggregate principal amount of dlra15dtta0 million in return for certain consideration on July 15, 2002 (the “Crest Note”) |
| In addition, we agreed to purchase capacity on Crest’s fiber optic network and Crest agreed to restore our traffic carried on another cable system |
| We satisfied its obligation to make capacity purchases in 2005 in the amount of dlra12dtta1 million on May 31, 2005 |
| We are separately obligated to purchase additional fiber optic capacity in 2006, totaling approximately dlra4dtta5 million |
| On April 19, 2005, we notified Crest of our decision to exercise our option to acquire certain of Crest’s Alaska assets |
| The assets consist of significant fiber optic transport facilities in Alaska between Whittier and Anchorage, and between Anchorage and Fairbanks |
| In February 2006, we executed definitive agreements to purchase the assets, and no additional financial consideration is due to Crest in connection with this transaction |
| We are reviewing the accounting treatment of this transaction |
| We expect increases in revenue and expense as a result of this transaction |
| We may not, however, generate sufficient revenue from the acquisition of this fiber-optic capacity to provide satisfactory returns on our investment |
| If we do not adapt to technological changes in the telecommunications industry, we could lose customers or market share |
| Our success will likely depend on our ability to adapt to rapid technological changes in the telecommunications industry |
| Our failure to adopt a new technology or our choice of one technology over another, may have an adverse effect on our ability to compete or meet the demands of our customers |
| Technological change could, among other things, reduce the barriers to entry facing our competitors providing local service in our service areas |
| The pace of technology change, and our ability to deploy new technologies may be constrained by insufficient capital and/or the need to generate sufficient cash to make interest payments on our debt and to maintain our dividend policy |
| New products and services may arise out of technological developments and our inability to keep pace with these developments may reduce the attractiveness of our services |
| If we fail to adapt successfully to technological changes or fail to obtain access to new technologies, we could lose customers and be unable to attract new customers and/or sell new services to our existing customers |
| We may be unable to successfully deliver new products and services, and we may not generate anticipated revenues from such products or services |
| New governmental regulations may impose obligations on us to upgrade our existing technology or adopt new technology that may require additional capital and we may not be able to comply timely with these new regulations |
| We cannot predict the extent the government will impose new unfunded mandates on us |
| Such mandates include those related to emergency location, providing access to hearing-impaired customers, law enforcement assistance, and local number portability |
| Each of these government mandates has imposed new requirements for capital that we could not have predicted with any precision |
| Along with these obligations, the FCC has imposed deadlines for compliance with these mandates |
| We may not be able to provide services that comply with these mandates in time to meet the imposed deadlines |
| Further, we cannot predict whether other mandates, from the FCC or other regulatory authorities, will occur in the future or the demands they may place on our capital expenditures |
| Our network capacity and customer service system may not be adequate and may not expand quickly enough to support our anticipated customer growth |
| Our financial and operational success depends on ensuring that we have adequate network capacity, sufficient infrastructure equipment and a sufficient customer support system to accommodate anticipated new customers and the commensurate increase in usage of our network |
| Our failure to expand and upgrade our networks, including obtaining and constructing additional cell sites, obtaining wireless telephones of the appropriate model and type to meet the demands and preferences of our customers, and obtaining additional spectrum to meet the increased usage, could have a material adverse effect on our business |
| Further, as a result of our dividend policy, our available cash to expand and upgrade our network may be limited |
| 28 _________________________________________________________________ [83]Table of Contents The reduction in our rate base may adversely affect our ability to price our services |
| For the last several years, our depreciation has exceeded our capital investment |
| Our service rates for our local telephone services, for example, are determined by calculating a reasonable rate of return on and to our rate base |
| Thus, a declining rate base leads to declining rates and prices for our regulated services, which may adversely affect our cash flow and results of operations |
| The successful operation and growth of our businesses depends on economic conditions in Alaska |
| Substantially all of our customers and operations are located in Alaska |
| Due to our geographical concentration, the successful operation and growth of our businesses depends on economic conditions in Alaska |
| The Alaskan economy, in turn, depends upon many factors, including: • the strength of the natural resources industries, particularly oil production; • the strength of the Alaskan tourism industry; • the level of government and military spending; and • the continued growth of services industries |
| The customer base for telecommunications services in Alaska is small and geographically concentrated |
| According to US Census Bureau estimates, the population of Alaska is approximately 664cmam000 as of July 1, 2005, over 60prca of whom live in Anchorage, Fairbanks and Juneau |
| We do not know whether Alaska’s economy will grow or even be stable |
| We depend on key members of our senior management team |
| Our success depends largely on the skills, experience and performance of key members of our senior management team, as well as our ability to attract and retain other highly qualified management and technical personnel |
| There is intense competition for qualified personnel in our industry, and we may not be able to attract and retain the personnel necessary for the development of our business |
| If we lose one or more of our key employees, our ability to successfully implement our business plan could be materially adversely affected |
| We do not maintain any “key person” insurance on any of our personnel |
| We rely on a limited number of key suppliers and vendors for timely supply of equipment and services for our network infrastructure |
| If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of the equipment and services we require to operate our business successfully |
| We depend on a limited number of suppliers and vendors for equipment and services for our network |
| If these suppliers experience interruptions, patent litigation or other problems, subscriber growth and our operating results could suffer |
| If our supplier uses its proprietary technology, including CDMA technology, as an integral component of our network, we may be effectively locked into one or few suppliers for key network components |
| As a result, we have become reliant upon a limited number of network equipment manufacturers |
| In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms on a timely basis, or at all, which could increase costs and may cause disruption in service |
| Wireless devices may pose health and safety risks, and driving while using a wireless phone may be prohibited; as a result, we may be subject to new regulations, and demand for our services may decrease |
| Media reports have suggested that, and studies have been undertaken to determine whether, certain radio frequency emissions from wireless handsets and cell sites may be linked to various health concerns, including cancer |
| Further, radio frequency emissions may interfere with various electronic medical devices, including hearing aids and pacemakers |
| In addition, lawsuits have been filed against others in the wireless industry alleging various adverse health consequences as a result of wireless phone usage |
| If consumers’ health concerns over radio frequency emission increase, they may be discouraged from using wireless handsets; regulators may impose or increase restrictions on the location and operation of cell sites or increase regulation on handsets; and wireless providers may be exposed to litigation, which, even if not successful, may be costly to defend |
| The actual or perceived risk of radio frequency emissions could adversely affect us through a reduced subscriber growth rate, a reduction in our subscribers, reduced network usage per subscriber, or reduced financing available to the wireless communications industry |
| In addition, new government regulations on the use of a wireless device while driving may adversely affect our results of operations |
| Studies have indicated that using wireless devices while driving may impair a driver’s attention |
| Many state and local legislative bodies have passed or proposed legislation to restrict the use of wireless telephones while driving motor vehicles |
| Concerns over safety and the effect of future legislation, if adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services and decrease our revenue from customers who now use their 29 _________________________________________________________________ [84]Table of Contents wireless telephones while driving |
| Further, litigation relating to accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage awards against telecommunications providers, adverse publicity and further governmental regulation |
| Any of these results could have a material adverse effect on our results of operations and financial condition |
| We are subject to environmental regulation and environmental compliance expenditures and liabilities |
| Our business is subject to many environmental laws and regulations, particularly with respect to owned or leased real property containing our network equipment and tower sites |
| Some or all of the environmental laws and regulations to which we are subject could become more stringent or more stringently enforced in the future |
| For example, the FCC is considering whether to adopt rules to reduce the incidents of migratory bird collisions with cell towers |
| Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions |
| In addition to operational standards, environmental laws also impose obligations on us to clean up contaminated properties or pay for the costs of such clean up |
| We could become liable, either contractually or by operation of law, for such clean up costs even if the contaminated property is not currently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property |
| Moreover, future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to material clean up costs |
| A failure of our system or network cables could cause significant delays or interruptions of service, which could cause us to lose customers |
| To be successful, we will need to continue to provide our customers reliable service over our network |
| In certain important cases, our systems lack redundancy, which reduces the reliability of our network |
| Our network and infrastructure are constantly at risk of physical damage to access lines by human action or natural disaster, power surges or outages, software defects, and other disruptions beyond our control |
| For example, should the primary fiber-optic cable connecting our Alaskan network to the lower 48 states become damaged or otherwise inoperable, services on our network to the lower 48 states and beyond would likely be degraded or unavailable |
| We rely heavily on our networks, network equipment, data and software and the networks of other telecommunications providers to support all of our functions and for substantially all of our revenues |
| We are able to deliver services only to the extent that we can protect our network systems against damage from power or telecommunication failures, computer viruses, natural disasters, unauthorized access and other disruptions |
| While we endeavor to provide for failures in the network by providing back-up systems and procedures, we cannot guarantee that these back-up systems and procedures will operate satisfactorily in an emergency |
| Should we experience a prolonged system failure or a significant service interruption, our customers may choose a different provider, and our reputation may be damaged |
| We cannot assure you that we will be able to successfully integrate any acquisitions we may make in the future |
| We continually explore acquisitions |
| However, any future acquisitions we make may involve some or all of the following risks: • diversion of management attention from operating matters; • unanticipated liabilities or contingencies of acquired businesses; • failure to achieve projected cost savings or cash flow from acquired businesses; • inability to retain key personnel of the acquired business or maintain relationships with its customers; • inability to successfully integrate acquired businesses with our existing businesses, including information-technology systems, personnel, products and financial, computer, payroll and other systems of the acquired businesses; • failure to obtain necessary regulatory approvals; • difficulties in enhancing our customer support resources to adequately service our existing customers and the customers of the acquired businesses; and • difficulty in maintaining uniform standards, controls, procedures, and policies |
| Further, as a result of our dividend policy and other factors which affect the availability to us of capital resources, we may not have sufficient available cash or access to sufficient capital resources necessary to complete a transaction even if such a transaction would otherwise be beneficial to us and our stockholders |