##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K (Mark One)  For the fiscal year ended December 31, 2003 OR  For the transition period
from           to Commission file number 333-82363 Alaska Communications Systems Holdings, Inc.  Delaware
    
    91-1921377(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)600 Telephone AvenueAnchorage, 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
    
    Name of each exchange on which registeredNone
 Securities registered pursuant to Section 12(g) of the Act: Title of each classNone
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
[X] No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [   ] Indicate by check mark if whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes
[   ]                No [X] State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity as of as of the last business day of the registrants most recently
completed second fiscal quarter. (Not Applicable) All of the Registrants securities are wholly owned by Alaska
Communications Systems Group, Inc. (File No. 000-28167) which files reports and
proxy materials pursuant to the Securities Exchange Act of 1934, as amended.
Alaska Communications Systems Holdings, Inc. meets the conditions set forth in
General Instruction (I) (1) (a) and (b) of Form 10-K and is therefore filing
this form with the reduced disclosure format authorized by General Instruction
I of Form 10-K. Items 4, 10, 11, 12 and 13 have been omitted in accordance with
Instruction I(2)(c). Documents Incorporated by Reference




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 PagePART IItem 1.
    
    Business
    
    
    2Item 2.
    
    Properties
    
    
    24Item 3.
    
    Legal Proceedings
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25PART IIItem 5.
    
    Market for
Registrants Common Equity and Related Stockholder Matters
    
    
    26Item 6.
    
    Selected Financial Data
    
    
    26Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 8.
    
    Financial Statements and Supplementary Data
    
    
    48Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    48Item 9A.
    
    Controls and Procedures
    
    
    48PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    49Item 11.
    
    Executive Compensation
    
    
    49Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    49Item 13.
    
    Certain Relationships and Related Transactions
    
    
    49Item 14.
    
    Principal Accountant Fees and Services
    
    
    49PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    51SIGNATURES
    
    
    54Index to
Consolidated Financial Statements
    
    
    F-1EXHIBIT 10.13EXHIBIT 10.14EXHIBIT 21.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 99.1
 1






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PART I 
 Item 1. Business Forward Looking Statements and Analysts Reports This Form 10-K and future filings by Alaska Communications Systems
Holdings, Inc. (ACS Holdings or the Company) on Forms 10-K, 10-Q and 8-K
and future oral and written statements by the Company and its management may
include certain forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995, including (without limitation)
statements with respect to anticipated future operating and financial
performance, financial position and liquidity, growth opportunities and growth
rates, pricing plans, acquisition and divestitive 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. Words
such as aims, anticipates, believes, could, estimates, expects,
hopes, intends, may, plans, projects, seeks, should, and will,
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 the Companys historical experience and its present
expectations or projections. Forward-looking statements by the Company and its
management are based on estimates, projections, beliefs and assumptions of
management and are not guarantees of future performance. The Company disclaims
any obligation to update or revise any forward-looking statement based on the
occurrence of future events, the receipt of new information, or otherwise. Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Examples of these
factors include (without limitation) rapid technological developments and
changes in the telecommunications industries; ongoing deregulation (and the
resulting likelihood of significantly increased price and product/service
competition) in the telecommunications industry as a result of the
Telecommunications Act of 1996 (the 1996 Act) and other similar federal and
state legislation and the federal and state rules and regulations enacted
pursuant to that legislation; regulatory limitations on the Companys ability
to change its pricing for communications services; the possible future
unavailability of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation,to the Companys
wireline subsidiaries; and possible changes in the demand for the Companys
products and services. In addition to these factors, actual future performance,
outcomes and results may differ materially because of other, more general,
factors including (without limitation) changes in general industry and market
conditions and growth rates; changes in interest rates or other general
national, regional or local economic conditions; governmental and public policy
changes; changes in accounting policies or practices adopted voluntarily or as
required by accounting principles generally accepted in the United States of
America; and the continued availability of financing in the amounts, at the
terms and on the conditions necessary to support the Companys future business. Investors should also be aware that while the Company does, at various
times, communicate with securities analysts, it is against the Companys policy
to disclose to them any material non-public information or other confidential
information. Accordingly, investors should not assume that the Company agrees
with any statement or report issued by an analyst irrespective of the content
of the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company. 2




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Introduction ACS Holdings is a wholly owned subsidiary of Alaska Communications Systems
Group, Inc. (ACS Group). The Company is the leading facilities-based
telecommunications services provider and largest local exchange carrier (LEC)
in Alaska and the 13th largest LEC in the United States. The Company offers
consumer and business customers throughout the state a diverse mix of
telecommunications services, including local telephone, wireless, Internet, and
long distance services using its own network, as well as video entertainment
through its partnership arrangement with DISH Network, a leading satellite
service provider. The Company offers its telecommunications services under a
single brand name, Alaska Communications Systems. The Company began operations in May 1999 when it completed the acquisition
and integration of four local telephone companies in Alaska. Each of the
businesses the Company purchased had been operating in their local markets for
over 50 years. Since 1999, the Company has invested in upgrading its network
and service capabilities. The consolidated financial statements for the Company represent the
operations principally of the following entities:  
    
    Alaska Communications Systems Holdings, Inc.  
    
    ACS of Alaska, Inc. (ACSAK)  
    
    ACS of the Northland, Inc. (ACSN)  
    
    ACS of Fairbanks, Inc. (ACSF)  
    
    ACS of Anchorage, Inc. (ACSA)  
    
    ACS Wireless, Inc. (ACSW)  
    
    ACS Internet, Inc. (ACSI)  
    
    ACS Long Distance, Inc. (ACSLD) On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in the newly formed ACS Media, LLC (the Directories Business).
Subsequently, on August 27, 2003, the Company disposed of substantially all of
its remaining interest in the Directories Business. As a result of this
transaction, the Company now owns less than 0.1% of the Directories Business.
See Note 10 Gain on Disposal of Assets in the footnotes to the financial
statements for additional information on this transaction. At various times, the Company evaluates opportunities for establishing or
acquiring other telecommunications businesses through acquisitions or otherwise
in Alaska and elsewhere in the United States, and may make investments in such
businesses in the future. The Company has focused its attention on local
telephone, wireless, Internet, and interexchange businesses. Service Offerings Local Telephone.The Company provides local telephone service to
approximately 314,000 access lines, representing over two-thirds of the local
access lines in Alaska. The Company generates local telephone revenue from
providing local telephone service to consumer and business customers and by
providing access to the Companys network and back office functions to other
telecommunications providers. At December 31, 2003, approximately 52% of the
Companys retail access lines served consumers and 48% served business
customers. Wireless.The Company provides statewide mobile and fixed voice and data
communications services to approximately 87,000 wireless subscribers throughout
Alaska. The Companys wireless network has a covered population of
approximately 480,000, representing over 70% of the states population
according to the most recent U.S. Census Bureau estimates. The Companys
wireless customers represent approximately 18.1% penetration of the Companys
covered population. Currently, the Company provides its wireless services using
a digital TDMA network and later this year the Company will deploy a next
generation CDMA 1xRTT network capable of offering advanced mobile and fixed
data services to the Companys customers. 3




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Internet.The Company provides Internet access services to approximately
46,000 subscribers, including high-speed digital subscriber line (DSL)
service to approximately 18,000 subscribers. The Company is currently able to
offer DSL service to approximately 72% of its local access lines in its four
major LEC service territories  Anchorage, Fairbanks, Juneau and the Kenai
Peninsula. The Company is also a single-source provider of advanced IP-based
private networks to large enterprise and governmental customers in Alaska. Long Distance.The Company offers long distance and interexchange
private-line services primarily as a facilities-based carrier to approximately
43,000 long distance customers in Alaska. Video Entertainment.In the third quarter of 2003 the Company began
offering customers in Alaska satellite video entertainment through a
partnership arrangement with DISH Network. Competitive Strengths The Company enjoys strong operating margins and attractive growth
prospects due to the following competitive strengths: Leading Competitive Position.The Company is the leading facilities-based
telecommunications services provider in Alaska. The Company believes its strong
brand name recognition within Alaska provides it with a solid local market
position. The Company is the incumbent local telephone company in Anchorage,
Fairbanks, Juneau, the Kenai Peninsula and more than 70 other communities. The Company is the second-largest wireless communications services
provider in Alaska and the Companys statewide wireless network covers over 70%
of the population. The Company is the second-largest provider of Internet access services and
the largest provider of DSL services in Alaska. Integrated Portfolio of Service Offerings.The Company offers a variety of
bundled service packages to its consumer and business customers, which include
local telephone services, wireless, Internet, long distance, messaging, video
entertainment and other services. The Company believes that bundled offerings
are popular with customers because they allow for a single customer service
interface and fewer billing statements, while providing greater value and
pricing benefits across a number of services. By actively marketing and selling
the Companys bundled service packages, the Company believes it can grow its
customer base, improve customer loyalty and increase its share of its
customers telecommunications purchases. Advanced Networks and Facilities.Since 1999, the Company has invested
over $356 million in the Companys telecommunications networks and facilities,
increasing the total investment in these facilities to approximately $1.0
billion. As a result of these investments, the Company believes it has
substantially built out its networks and facilities, allowing it to offer a
full range of reliable telecommunications services. For example, the Company is
able to offer DSL service to approximately 72% of its local access lines in its
four major LEC service territories. Over the next few years the Company expects
to augment its existing networks and facilities, including the completion of
the build out of its statewide CDMA 1xRTT wireless network, which will allow
the Company to expand its covered population and offer a range of wireless
voice and broadband services to its customers. Favorable Alaskan Market Conditions.The Company believes it has an
attractive and growing potential customer base. For the three year period 2000
to 2002, the median household income in Alaska was 28% higher than the average
in the rest of the United States, and Alaskans spent 33% more on communications
services than other Americans. According to the U.S. Census Bureau, over the
past 20 years, the Alaskan population has increased by more than 2% per year -
nearly triple the national average. From 2000 to 2002, federal government
expenditures in Alaska increased by a total of 38% while the national average
increased by only 21%. The Company believes these factors will continue to
contribute to its stability and growth, and 4




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provide it with an advantage relative to comparable communications
companies located in other states. The Company believes that the Alaskan
communications markets combination of large geographic size and isolated
markets featuring both major metropolitan areas and small, dense population
clusters reduces the likelihood of entry by new integrated facilities-based
service providers. Strong Management Team.The Companys management team has a proven track
record of operating and managing telecommunications companies. During the last
nine months, the Company has added a number of key individuals to its executive
management team who have a wealth of knowledge in the telecommunications
industry and understand the dynamics of the Alaskan markets and the Companys
customers. Liane Pelletier joined the Company in October 2003 as CEO and
President and also became Chairman of the Companys Board of Directors on
January 1, 2004. Before joining the Company, Ms. Pelletier worked for 17 years
at Sprint Corporation, most recently as a member of the Executive Management
Committee and as Chief Integration Officer. David Wilson, who was previously
CFO of Triumph Communications, joined the Company as its CFO. In addition to
Ms. Pelletier and Mr. Wilson, David C. Eisenberg and Sheldon Fisher recently
joined the Company from Sprint as Senior Vice President, Corporate Strategy and
Development and Senior Vice President, Sales and Product Marketing,
respectively. Andy Coon has also joined the Company as Director of Business
Sales and Services from General Communications Inc., the Companys principal
competitor, where he was Director, Major Strategic Accounts and former Vice
President of Sales. Under the leadership of the Companys senior management
team, the Company has refocused itself to better serve the needs of consumer
and business customers in Alaska. Business Strategy The Companys goal is to be the premier telecommunications services
provider in its markets and to maintain and grow its cash flow by capitalizing
on:  
    
    its ability to provide a broad array of communications services;  
    
    its extensive facilities-based network; and  
    
    its long history of meeting the communications needs of the customers of its unique state. The Company considers the following strategies to be integral to achieving
its goal:  
    
    maintaining and increasing the number of loyal
consumer, business and wholesale customers that the Company
serves and having its customers buy more of the Companys
services and regularly refer new customers to the Company;  
    
    offering the Companys customers an integrated bundle
of telecommunications services including local telephone,
wireless, Internet, long distance, messaging and video
entertainment;  
    
    capitalizing on the Companys significant existing
investment in its technologically advanced networks to provide
feature-rich, high-quality and highly reliable telecommunications
services such as DSL and broadband wireless service to its
customers;  
    
    increasing the Companys margins through ongoing
process improvements, strategic sourcing initiatives, reduced
costs and improved operating efficiencies; and  
    
    exploring profitable strategic acquisitions of other
telecommunications businesses. 5




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Products, Services and Revenue Sources The Company offers a broad portfolio of telecommunications services to
consumer, business and wholesale customers in its markets. The Company believes
that, as the communications marketplace continues to converge and competition
continues to enter the market, the ability to offer an integrated package of
communications products will provide a distinct competitive advantage, as well
as increase customer loyalty, and thereby decrease customer turnover. The
Company complements its local telephone services by actively marketing its
wireless, Internet, interexchange and other service offerings. Profit or loss and total assets for each of the Companys segments is
disclosed in Note 17 Business Segments of the Alaska Communications Systems
Holdings, Inc. Consolidated Financial Statements. The following table sets
forth the components of the Companys consolidated revenues for the years ended
December 31, 2003, 2002 and 2001 (dollars in millions). Revenue for the Year Ended December 31,2003
    
    2002
    
    2001Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    PercentRevenue by Source:Local network service
    
    $
    96.4
    
    
    
    29.8
    %
    
    $
    99.5
    
    
    
    29.3
    %
    
    $
    96.3
    
    
    
    29.3
    %Network access
    
    
    97.8
    
    
    
    30.2
    
    
    
    108.3
    
    
    
    31.8
    
    
    
    103.0
    
    
    
    31.3Deregulated and other revenue
    
    
    21.3
    
    
    
    6.6
    
    
    
    18.6
    
    
    
    5.5
    
    
    
    22.2
    
    
    
    6.7Local telephone
    
    
    215.4
    
    
    
    66.6
    
    
    
    226.4
    
    
    
    66.6
    
    
    
    221.4
    
    
    
    67.4Wireless
    
    
    46.5
    
    
    
    14.4
    
    
    
    43.2
    
    
    
    12.7
    
    
    
    41.9
    
    
    
    12.8Directory (1)
    
    
    11.6
    
    
    
    3.6
    
    
    
    33.6
    
    
    
    9.9
    
    
    
    33.9
    
    
    
    10.3Internet
    
    
    33.0
    
    
    
    10.2
    
    
    
    20.8
    
    
    
    6.1
    
    
    
    13.7
    
    
    
    4.2Interexchange
    
    
    16.7
    
    
    
    5.2
    
    
    
    16.1
    
    
    
    4.7
    
    
    
    17.6
    
    
    
    5.4Total
    
    $
    323.3
    
    
    
    100.0
    %
    
    $
    340.2
    
    
    
    100.0
    %
    
    $
    328.5
    
    
    
    100.0
    %
 (1) On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in its Directories Business. Subsequently, on August 27, 2003, the
Company disposed of substantially all of its remaining interest in the
Directories Business. As a result of these disposals, the Company owns less
than 0.1% of the Directories Business and accordingly no longer records the
revenue and expense of the Directories Business. Local Telephone The Company provides local telephone service through its four LECs. Local
telephone revenue consists of local network service, network access (including
universal service revenue), and deregulated and other revenue, each of which is
described below. Local Network Service Local network service consists of basic local network service and
competitive local network service. Basic Local Network Service. Basic local network service enables customers
to originate and receive telephone calls within a defined exchange area. The
Company provides basic local services on a retail basis to consumer and
business customers, generally for a fixed monthly charge. The maximum amount
that can be charged to a customer for basic local services is determined by
rate proceedings involving the Regulatory Commission of Alaska (RCA). The
Company charges business customers higher rates to recover a portion of the
costs of providing local service to consumer customers, as is customary in the
industry. Basic local service also includes non-recurring charges to customers
for the installation of new products and services and recurring charges for
enhanced features such as call waiting and caller identification. At December 31, 2003, approximately 52% of the Companys retail access
lines served consumer customers and 48% served business customers. Currently,
monthly charges for basic local service for residential 6




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customers range from
$9.42 to $16.30 in the Companys service areas compared to the U.S. national
average for urban areas of $14.59 for 2002. Monthly charges for business
customers range from $17.65 to $35.00 in the Companys service areas compared
to the U.S. national average for urban areas of $33.64 for 2002. See Business
 Regulation for further discussion of regulatory matters including the
Companys local network service rate proceedings. The table below sets forth the change in access lines for the Company from
December 31, 1999 to December 31, 2003. The number of access lines shown
represents all revenue producing access lines connected to both retail and
wholesale customers. As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Retail access lines
    
    
    220,818
    
    
    
    236,148
    
    
    
    261,002
    
    
    
    272,936
    
    
    
    281,726Wholesale access lines
    
    
    19,157
    
    
    
    22,148
    
    
    
    22,859
    
    
    
    17,303
    
    
    
    15,680Unbundled network elements
    
    
    74,246
    
    
    
    64,711
    
    
    
    49,062
    
    
    
    39,221
    
    
    
    28,202Total local telephone access lines
    
    
    314,221
    
    
    
    323,007
    
    
    
    332,923
    
    
    
    329,460
    
    
    
    325,608Percentage change
    
    
    -2.7
    %
    
    
    -3.0
    %
    
    
    1.1
    %
    
    
    1.2
    %
 Management believes that future access line growth is dependent on, among
other things, the economic outlook in Alaska and the United States, the impact
of technology and competition on line demand and population growth in the
Companys service areas. Competitive Local Network Service.The Company also provides
interconnection through wholesale access to its basic local service and through
leasing unbundled network elements (UNEs) to its competitors as required by
federal Telecommunications Act of 1996 (the 1996 Act). Revenues for these
services are included in local network service revenues. In November of 2001,
the Company was authorized by the RCA to implement an interim and refundable
rate increase of $1.07 per UNE loop for its Anchorage service area, increasing
the total rate to $14.92 from $13.85. The RCA awarded a competitor UNE loop
rates of $19.19 and $16.71, for Fairbanks and Juneau, respectively. However,
because of a decision by the Alaska Supreme Court, the availability of the UNEs
in Fairbanks and Juneau is limited to existing users pending the outcome of the
RCAs rural exemption remand proceedings. The Company provided 93,403 lines to
competitors in the Anchorage, Fairbanks and Juneau service areas on either a
wholesale or UNE basis as of December 31, 2003. The Company believes the UNE
rates in place in all of its markets are below its embedded and forward looking
cost and are therefore non-compensatory. See Business  Regulation for
further discussion of regulatory matters, including interconnection under the
1996 Act. While there is some seasonality in local network service, represented
primarily by reduced line demand in the Alaskan winter as tourists and seasonal
residents seek warmer climates and seasonal businesses close for the winter,
operating results for local telephone services are not materially impacted by
seasonal factors. Network Access Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than
one company in the provision of such long distance service on an end-to-end
basis. Since toll calls are generally billed to the customer originating the
call, a mechanism is required to compensate each company providing services
relating to the call. This mechanism is the access charge, which the Company
bills to each interexchange carrier for the use of its facilities to access the
customer. The Company also receives universal service revenue, which it
includes in its reported network access revenue. These components of network
access revenue are described below. Intrastate Access Charges. The Company generates intrastate access revenue
when an intrastate long distance call that involves one of the Companys LECs
and an interexchange carrier is originated and terminated within Alaska. The
interexchange carrier pays the Company an intrastate access charge for either
terminating or originating the call. The Company records the details of the
call through its carrier access billing system and 7




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receives the access payment
from the interexchange carrier. The Company also provides billing and
collection (B&C) services for interexchange carriers through negotiated B&C
agreements for certain types of toll calls placed by the Companys local
customers. ACSA, ACSAK, and ACSF are under their own stand-alone tariffs for
intrastate access. ACSN participates in a mandatory statewide tariff and access
charge pooling arrangement that is administered by the Alaska Exchange Carriers
Association (AECA). The access charges for the Companys intrastate service
are regulated by the RCA. Interstate Access Charges. The Company generates interstate access revenue
when an interstate long distance call is originated from a local calling area
in Alaska that is served by an the Companys local telephone operations and is
terminated in a local calling area in another state, and vice versa. The
Company bills interstate access charges in a manner similar to intrastate
access charges. However, interstate access charges are regulated by the Federal
Communications Commission (FCC) rather than the RCA. The Companys local
telephone companies participate in a nationwide tariff and access charge
pooling arrangement that is administered by the National Exchange Carrier
Association (NECA) for all the Companys local telephone companies, except
ACSA. ACSA participates in the NECA common line tariff, but has its own
interstate access tariff for traffic sensitive and special access services.
Common line revenues billed to the end user for the FCC-mandated interstate
Subscriber Line Charge are also categorized as interstate access revenue. Universal Service Revenue.The Company is required to contribute to the
Federal Universal Service Fund. In general, these funds are created to
subsidize telecommunications services in rural and high-cost service areas of
the United States, including Alaska. The Company currently receives federal
Universal Service revenue in certain of its local telephone service areas.
Universal service revenue supplements the amount of local service revenue the
Company receives to ensure that basic local service rates for customers in high
cost rural areas are not significantly higher than rates charged in lower cost
urban and suburban areas. The 1996 Act prescribed new standards applicable to
universal service, including mechanisms for defining the types of services to
be provided as part of a universal service program, specific goals or criteria
applicable to universal service programs, new qualifications for receipt of
universal service funding and new requirements for contributions to universal
service funding. The FCC, in conjunction with a federal-state joint board
composed of FCC and state commission members, has been working since passage of
the 1996 Act to implement these new statutory provisions. While new
cost-identification models for non-rural local carriers were adopted effective
on January 1, 2000, similar models for rural carriers were rejected by the FCC,
leaving previous Universal Service Fund (USF) calculations based on embedded
costs in place for the Federal High-Cost Fund. In accordance with the 1996
Acts requirement to eliminate implicit subsidies, the FCC has specifically
identified and renamed certain support mechanisms that had previously been
provided implicitly through access revenue. It also made all support portable
to competitive local exchange carriers (CLECs) on a per-line basis. A joint
board recently recommended to the FCC some changes to the Federal USF and the
FCC will examine modifications to the universal service funding. Interstate access, intrastate access, and universal service funding are
all influenced by both LEC cost levels and by competitive local market
penetration. Toll traffic originating or terminating on a competitors network
does not generate access billings to interexchange carriers for the Company.
Many of the underlying factors in jurisdictional cost separations studies that
allow network costs to be recovered through access charges are diminished as
competitive market penetration increases. Universal service funding may also
diminish as a result of competitive local market penetration. Under FCC rules,
when a CLEC is named an eligible telecommunications carrier as General
Communication, Inc. (GCI) has been in Anchorage, Fairbanks and Juneau,
universal service funding becomes portable to the CLEC on a per-line basis,
further eroding the incumbent local exchange carriers (ILECs) revenue. Operating results for network access services are not materially impacted
by seasonal factors. Deregulated and Other Revenue Deregulated and other revenues consist of B&C contracts, space and power
rents, pay telephone service, customer premise equipment (CPE) sales, and
other miscellaneous revenues generated by the Companys local telephone
operations. The Company seeks to capitalize on its local presence and network 8




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infrastructure by offering these additional services to customers and
interexchange carriers. Deregulated and other revenue is generally not subject
to seasonal impacts on operating results. Wireless The Company provides statewide mobile and fixed voice and data
communications services throughout Alaska under the ACS brand name.The
Companys wireless segment generates revenue through subscriber access charges,
airtime usage, toll charges, connection fees, roaming revenues, and enhanced
features, such as short messaging services and voice mail. A subscriber may
purchase services separately or may purchase rate plans that package these
services in different ways to fit different calling patterns and desired
features. The table below sets forth the annual growth in the number of wireless
subscribers served and total covered population for the Company from December
31, 1999 to December 31, 2003. As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Estimated covered population
    
    
    480,422
    
    
    
    478,413
    
    
    
    468,622
    
    
    
    462,057
    
    
    
    460,802Ending subscribers
    
    
    87,017
    
    
    
    82,220
    
    
    
    80,120
    
    
    
    75,933
    
    
    
    73,068Ending penetration
    
    
    18.1
    %
    
    
    17.2
    %
    
    
    17.1
    %
    
    
    16.4
    %
    
    
    15.9
    %
 Management believes there are opportunities to improve the penetration
rates of its wireless operations throughout Alaska, and in particular,
Southeast Alaska. Management also believes that the market for wireless
services will continue to grow with the expansion of the wireless industry as a
whole, and its planned deployment of data services on its new CDMA 1XRTT and
EVDO Network. CDMA 1xRTT will provide wireless voice and data services for the
Companys customers while EVDO will provide broadband wireless data services. The Company owns 800 megahertz B side cellular licenses that cover the
major population centers in Alaska, including Anchorage, Fairbanks, Juneau and
the Kenai Peninsula. Today, these B side frequencies support the Companys TDMA
network. The Company also owns 10 megahertz E Block PCS licenses covering the
entire state, including Anchorage, Fairbanks and Juneau and the Kenai
Peninsula. During 2002, the Company purchased 10 megahertz F Block PCS licenses
covering Fairbanks and Juneau. The Company is currently building a commercial
network using CDMA 1xRTT with plans to launch during the second quarter of
2004, which will initially be supported on the Companys PCS spectrum. Wireless revenue declines slightly in the winter months and increases in
the summer months due to Alaskas northern latitude and the wide swing in
available daylight and changes in weather patterns between summer and winter
and their effect on business, tourism and subscriber calling patterns.However,
operating results for wireless services are not materially impacted by seasonal
factors. Internet The Company provides Internet access services to approximately 46,000
customers. In order to offer Internet access, the Company provides local
dial-up telephone numbers for its customers.The Company is currently able to
offer high speed DSL service to approximately 72% of its local access lines in
its major local telephone service territories.These local dial-up numbers and
dedicated DSL connections allow customers access, through a modem connection on
their computer, to a series of computer servers The Company owns and maintains.
These servers allow customers to access their e-mail accounts and to be routed
to local access points
that connect customers to the Internet. The Company charges customers
either a flat rate for unlimited use or a usage sensitive rate. Operating
results for Internet access services are not materially impacted by seasonal
factors. 9




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Interexchange The Company currently has approximately 43,000 long distance customers
which the Company believes represents less than 5% of total interexchange
revenues in Alaska. The Company owns fiber capacity for high-speed links within
Alaska and for termination of traffic outside Alaska. The Company also resells
the services of other long distance carriers. The Company is subject to numerous conditions imposed by the RCA and, to a
lesser degree, by the FCC on the manner in which the Company conducts its long
distance operations. Among the conditions applied to the Companys long
distance affiliate are those which:  
    
    require the Company to hold all books and records,
management, employees and administrative services separate,
except that services may be provided among affiliates through
arms length affiliated interest agreements,  
    
    prohibit ACSA, ACSAK, ACSN and ACSF from bundling local
and intra-state long distance services until competition develops
in their local markets and  
    
    prevent ACSLD from joint ownership of telephone
transmission or switching facilities with the LECs and from using
the LECs assets as collateral for ACSLDs own indebtedness. Although there is some seasonal impact on customer usage patterns for long
distance, operating results are not materially impacted by seasonal factors. Video Entertainment In the third quarter of 2003, the Company began offering customers in
Alaska satellite video entertainment through a partnership arrangement with
DISH Network. Sales and Marketing The Company markets its product and service offerings under the Alaska
Communications Systems and ACS brands, subject to regulatory and strategic
business considerations. Recently, the Company has reorganized to more
effectively sell and service all of its product offerings through single points
of customer contact. Key components of the Companys sales and marketing strategy include:  
    
    establishing name recognition of the ACS brand across all product and service offerings,  
    
    making buying and using ACS products and services easier than ever,  
    
    marketing the Companys offerings to each consumer to
obtain a greater percentage of each consumers telecommunications
services expenditures,  
    
    providing convenient and valuable bundles of products and services,  
    
    centralizing marketing functions to optimize impact and efficiency,  
    
    improving quality and reliability of customer service,  
    
    developing and delivering to the market new products
and services driven by a view of total customer needs,  
    
    driving greater productivity from direct sales efforts, and  
    
    teaming sales and service for a complete and seamless customer experience. The Company believes that it can leverage its position as an integrated,
one-stop provider of telecommunications services with strong positions in local
access, wireless, Internet, and interexchange long distance and data markets.
By pursuing a marketing strategy that takes advantage of these characteristics
and that facilitates cross-selling and packaging of its products and services,
the Company believes it can increase 10




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penetration of new product offerings, improve customer retention rates,
increase its share of its customers overall telecommunications expenditures,
and achieve continued revenue and operating cash flow growth. Network Facilities As of December 31, 2003, the Company owned 65 host switches serving over
314,000 access lines. All of the Companys access lines are served by digital
switches provided predominately by Nortel Networks Corporation. The Companys
switches are linked through a combination of extensive aerial, underground and
buried cable, including 640 sheath miles of fiber optic cable and digital
microwave and satellite links. The Company has 100% single-party services (one
customer per access line), and believes substantially all of its major switches
have current generic software upgrades installed which allows for the full
range of enhanced customer features, such as call waiting, caller
identification and call forwarding. The Company has integrated numerous network elements to offer a variety of
services and applications that meet the increasingly sophisticated needs of
customers. These elements include Signal System 7 signaling networks, voice
messaging platforms, digital switching, DSL and, in some communities,
integrated service digital network access. As the telecommunications industry
experiences significant changes in technology, customer demand and competition,
the Company intends to introduce additional enhancements. Network operations and monitoring are provided by the Companys network
operating control center located in Anchorage. The network operating control
center has technicians staffed seven days a week, 24 hours a day and monitors
both wireline and wireless switching. The Company also has customer care call
center and walk in facilities in Anchorage and Fairbanks along with additional
walk in customer care facilities in Juneau, Sitka, Kenai/Soldotna, Kodiak,
North Pole and Homer.These customer care facilities sell and service all of
the Companys product lines. All of these facilities offer extended business
hours to efficiently handle customer inquiries and orders for service. The Company has enhanced its network to accommodate developing products
and technology. The Company completed its Multi-Protocol Label Switching over
Asynchronous Transfer Mode network or MPLS/ATM network in early 2002. Core
MPLS/ATM nodes were installed in Anchorage, Fairbanks, Kenai, Juneau, the
Mat-Su valley and Seattle. The Company believes the MPLS/ATM network enhances
its capability to provide a complete suite of converged telecommunications,
data and video services and achieve significant operating efficiencies. The
Company currently offers a variety of enhanced products and services and is
able to converge them all over its MPLS core network, including the following:  
    
    virtual private networks and lines,  
    
    voice over Internet Protocol (IP) services,  
    
    transparent local area networks (LAN) and proprietary
LANs and wide area networks (WAN),  
    
    high speed Internet access,  
    
    managed services and  
    
    video conferencing. The Companys wireless operations consist of four digital switches, 140
cell sites and three repeaters covering over 70% of Alaskas population and
substantially all major population centers and highway corridors in the State
plus one analog switch and cell site covering Barrow, Alaska. The Companys
switching and cell site infrastructure is linked by fiber, wireline and digital
microwave, primarily owned by the Company. The Companys TDMA wireless voice
network consists of three Ericsson digital switches, one analogue switch and
105 cell sites using the Companys 800 megahertz B side cellular licenses. The
Companys TDMA network covers the major population centers in Alaska, including
Anchorage, Fairbanks, Juneau and the Kenai Peninsula. The Company is currently
building a commercial wireless voice and data CDMA 1xRTT network with plans to
launch during the second quarter of 2004. To support this planned launch, the
Company has installed one Nortel digital CDMA switch and over 35 cell sites as
of March 2004. The Company also has
installed EVDO capabilities on this CDMA network, primarily in Anchorage,
which the Company expects to launch in the 11




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second half of 2004. Over time, the
Company plans to continue to expand its CDMA network and migrate its TDMA
customer onto its CDMA network. The Companys CDMA network will initially be
supported on the Companys 10 megahertz E and F Block PCS spectrum, but the
Company expects to eventually deploy CDMA technology over the Companys 800
megahertz B side cellular licenses and phase out TDMA service at some time in
the future. The Companys facilities based long distance network connects the major
population centers of Anchorage, Fairbanks, Juneau and the Kenai Peninsula to
each other primarily over owned fiber optic facilities or IRU capacity. The
Company also owns undersea IRU fiber optic capacity connecting Alaska to the
rest of the world via Seattle, Washington and lease undersea fiber optic
capacity over a redundant route connecting Alaska to the rest of the world via
Portland, Oregon. Customers The Company has three basic types of customers for the services of its
LECs:  
    
    consumer and business customers located in their local
service areas that pay for local phone service,  
    
    interexchange carriers that pay for access to long
distance calling customers located within the Companys local
service areas and  
    
    CLECs that pay for wholesale access to the Companys
network in order to provide competitive local service on either a
wholesale or UNE basis as prescribed under the 1996 Act. As of December 31, 2003, approximately 52% of the Companys retail access
lines served consumers, while 48% served business customers. The Company also has approximately 87,000 wireless subscribers, 46,000
Internet subscribers and 43,000 long-distance subscribers consisting
substantially of retail consumer and business customers. GCI accounted for 10% of consolidated 2003 revenues and no other customers
accounted for more than 10% of consolidated revenue. Competition Local Telephone Service ILECs may be subject to any of several types of competition:  
    
    facilities-based competition from providers with their own local service network,  
    
    resale competition from resale interconnection, or
providers who purchase local service from the ILEC at wholesale
rates and resell these services to their customers,  
    
    competition from UNE interconnection, that is,
providers who lease UNEs from the ILEC, and  
    
    alternatives to local service networks, including
wireless, IP, satellite, and cable telephony. In September 1997, GCI and AT&T Alascom, the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage. GCI competes principally through UNE interconnection with ACSA
facilities, while AT&T Alascom competes primarily by reselling ACSAs services.
Competition is based upon price and pricing plans, types of services offered,
customer service, billing services, and quality and reliability of service. GCI
has focused principally on advertising discount plans for bundled
services. AT&T Alascoms strategy has been to resell ACSAs service as
part of a package of local and long distance services. As a result, ACSA now
has approximately 49% competitive market penetration as of 12




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December 31, 2003.
The Company expects GCI and AT&T Alascom to continue to compete for local
telephone business. As of December 31, 2003, the Company estimates that it now has
approximately 76% market share in Fairbanks. GCI has competed in Fairbanks
primarily through reselling services and through UNE interconnection.Similar
trends are being experienced by ACSAK in its Juneau market where, as of
December 31, 2003, the Company have approximately 77% market share. The Company expects increasing competition from providers of various
services that provide users the means to bypass its network. Long distance
companies may construct, modify or lease facilities to transmit traffic
directly from a user to a long distance company. Cable television companies
also may be able to modify their networks to partially or completely bypass the
Companys local network. GCI, the dominant cable operator in Alaska and a CLEC,
is currently testing cable telephony service and recently announced plans to
start switching its local phone service customers in Anchorage over to its
cable system in 2004. In addition, while wireless telephone services have historically
complemented traditional LEC services, the Company anticipates that existing
and emerging wireless technologies may increasingly compete with LEC services.
For example, ACS is deploying CDMA 1xRTT and EVDO wireless services in its
markets and its principal wireless competitor, Dobson Communications, Inc., is
deploying GSM wireless services. Both CDMA and GSM technologies may serve as a
satisfactory wireless alternative to traditional LEC wireline services. At this
time it is not possible to predict the impact of the growth in wireless
networks on the Companys share of the local market. Technological developments
in wireless telephone features, digital microwave, local number portability and
other wireless technologies are expected to further permit the development of
alternatives to traditional wireline services. The FCCs requirement that
ILECs offer wireline-to-wireless number portability may increase the
competition our ILECs face from wireless carriers. Wireless Services The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in
the capacity and quality of digital technology, shorter cycles for new products
and enhancements, and changes in consumer preferences and expectations. The
Company believes that the demand for wireless telecommunications services is
likely to increase significantly as equipment costs and service rates continue
to decline and equipment becomes more convenient and functional. Competition is
based on price, quality, network coverage, packaging features and brand
reputation. There are six PCS licensees in each of the Companys wireless
service areas. The Company holds B side cellular licenses for Alaskas major
communities and PCS licenses covering the entire state, including Anchorage,
Fairbanks and Juneau and the Kenai Peninsula.The Company currently competes
with at least one other wireless provider in each of its wireless service
areas, including Dobson Communications and Alaska DigiTel. The Company believes
that the unique and vast terrain and the high cost of a PCS system buildout
make additional competitive entrance into markets outside of Anchorage
uneconomical at this time. As the market for simple wireless voice services approaches maturity,
providers are experiencing downward pressure on price.The Company is
positioning itself to offset this impact by bringing new higher margin services
to market. By developing products for targeted market segments, the Company is
leveraging the advantage in market share and geographical coverage to attract
new customers and increase monthly revenues from existing customers. The
Company continuously evaluates new service offerings in order to differentiate
it from its competitors, produce additional revenues and increase margins. The
FCCs requirement that wireless carriers implement number portability may
decrease customer loyalty and increase wireless competition. Internet Services The market for Internet access services is highly competitive in most
markets in the state. There are few significant barriers to entry, and the
Company expects that competition will intensify in the future. The Company
currently competes with a number of established online services companies,
interexchange carriers, 13




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LECs with Internet subsidiaries, satellite service
providers and cable television companies. The Company believes that its ability
to compete successfully will depend upon a number of factors, including the
reliability and security of its network infrastructure, the ease of access to
the Internet, the availability of broadband ISP access and the pricing policies
of its competitors.During 2003, the Company continued to deploy its DSL
services in Anchorage, Fairbanks, Juneau, Kenai/Soldotna, Homer and Sitka,
Alaska for both consumer and business applications. Long Distance Services The long distance telecommunications market is highly competitive.
Competition in the long distance business is based primarily on price, although
service bundling, branding, customer service, billing services and quality play
a role in customers choices to some extent. The Company currently offers long
distance service to customers located primarily in the more populous
communities within its service territory. AT&T Alascom and GCI are currently
the two major competing long distance providers in Alaska. The Company believes
it currently has less than 5% of total interexchange revenues in Alaska.The
Company provides traditional 1+ direct distance dialing (DDD), toll-free
services, calling cards and private line services for data and voice
applications.The Company has introduced flat-fee long distance programs. These
programs allow customers to purchase interstate minutes of use in blocks of
time for a single monthly fee.The Company expects to continue offering
innovative products of this nature in the future. Video Entertainment Currently the Companies only major competitor to the satellite provider,
DISH Network, in providing video entertainment is GCI. Employees As of December 31, 2003, the Company employed a total of 1,087 regular
full-time employees, 873 of whom were represented by the International
Brotherhood of Electrical Workers, Local 1547 (IBEW). Management considers
employee relations to be good with both the represented and non-represented
workforce. On November 2, 1999, the IBEW membership for the Company ratified
the terms of a master collective bargaining agreement that governs the terms
and conditions of employment for all IBEW represented employees working for the
Company in the State of Alaska.The master agreement embraces a
labor-management relationship that is founded on trust, cooperation and shared
goals. The November 1999 agreement, which expires December 31, 2006, provides
for wage increases up to 4% in specified years based on the annual increases in
the consumer price index for Anchorage as reported by the U.S. Department of
Labor CPI-U. The last wage increase under the agreement was implemented in
January 2004 and the next scheduled wage review is in November 2004. The master
agreement also limits the Companys health and welfare contributions for
represented employees to 4% annually. Non-represented employees qualify for wage increases based on individual
and Company performance, and key employees are also eligible for
performance-based incentives. The Company provides a total benefits package,
including health, welfare, and retirement components that are competitive in
the Companys market. Website Access to Reports The Company makes its periodic and current reports available, free of
charge, on its investor website, www.ALSK.com, as soon as practicable after
such material is electronically filed with, or furnished to, the SEC. 14




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##### Table of Contents



Regulation The following summary of the regulatory environment in which the Companys
business operates does not describe all present and proposed federal, state and
local legislation and regulations affecting the telecommunications industry in
Alaska. Some legislation and regulations are currently the subject of judicial
review, legislative hearings and administrative proposals which could change
the manner in which this industry operates. The Company cannot predict the
outcome of any of these matters or their potential impact on the Companys
business. Regulation in the telecommunications industry is subject to rapid
change, and any such change may have an adverse effect on the Company in the
future. Overview The telecommunications services the Company provides and from which the
Company derives a large majority of its revenue are subject to extensive
federal, state and local regulation. The Companys LEC subsidiaries are
regulated common carriers and have the right to set maximum rates at a level
that allows the Company to recover the reasonable costs incurred in the
provision of regulated telecommunications services and to earn a reasonable
rate of return on the investment required to provide these services. Because
they face competition, however, most of the Companys LEC subsidiaries may not
be able to realize their allowed rates of return. In conjunction with the recovery of costs and establishment of rates for
regulated services, the Companys LEC subsidiaries must first determine their
aggregate costs and then allocate those costs between regulated and
nonregulated services; then between state and federal jurisdictions; and
finally among their various interstate and intrastate services.This process is
referred to as separations and is governed primarily by the FCCs rules and
regulations. The FCC is considering whether to modify or eliminate the current
separations process. This decision could indirectly increase or reduce earnings
of carriers subject to separations rules by reallocating costs between the
federal and state jurisdictions.Maximum rates for regulated services and the
amount of high-cost support are set by the FCC with respect to interstate
services and by the RCA with respect to intrastate services. At the federal level, the FCC generally exercises jurisdiction over
services of telecommunications common carriers, such as the Company, used to
provide, originate or terminate interstate or international communications as
well as related facilities. The FCC does not directly regulate enhanced
services and has preempted inconsistent state regulation of enhanced services.
The Companys wireless services use FCC radio-frequency licenses and are
subject to various FCC regulations, including 911 and number portability
requirements. The RCA generally exercises jurisdiction over services used to
provide, originate or terminate communications between points in Alaska as well
as related facilities. In addition, pursuant to the 1996 Act, federal and state
regulators share responsibility for implementing and enforcing certain policies
intended to foster competition in local telecommunications services. In
particular, state regulatory agencies have substantial oversight over the
provision by ILECs of interconnection and non-discriminatory network access to
CLECs. Local governments often regulate the public rights-of-way necessary to
install and operate networks, may require communications services providers to
obtain licenses or franchises regulating their use of public rights-of-way, and
may require carriers to obtain construction permits and abide by building
codes. Federal Regulation The Company must comply with the Communications Act of 1934, as amended,
(Communications Act), and regulations promulgated there under which require,
among other things, that communications carriers offer interstate services at
just, reasonable and nondiscriminatory rates and terms. The amendments to the
Communications Act contained in the 1996 Act significantly changed and are
expected to continue to change the telecommunications industry. Among other
changes, the 1996 Act promotes competition in local telecommunications services
by removing barriers to entry and through interconnection and network access
requirements, and makes universal service support explicit and portable. The
Company must obtain FCC approval before it can transfer control of any of its
common carrier subsidiaries or its radio frequency licenses or authorizations,
make such an acquisition or discontinue an interstate service. 15




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##### Table of Contents



Interconnection with Local Telephone Companies and Access to Other
Facilities In order to ensure access to local facilities and services at reasonable
rates, the 1996 Act imposes a number of access and interconnection requirements
on LECs. Generally, a LEC must:  
    
    not prohibit or unreasonably restrict the resale of its
services;  
    
    provide for telephone number portability, so customers
may keep the same telephone number if they switch service
providers;  
    
    ensure that customers are able to route their calls to
telecommunications service providers without having to dial
additional digits;  
    
    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. Most ILECs have the following additional obligations under the 1996 Act:  
    
    negotiate in good faith with any carrier requesting interconnection;  
    
    provide interconnection for the transmission and
routing of telecommunications at any technically feasible point
in its network on just, reasonable and nondiscriminatory rates,
terms and conditions;  
    
    provide access to UNEs, such as local loops, switches
and trunks, or combinations of UNEs at nondiscriminatory,
cost-based rates;  
    
    offer retail local telephone services to resellers at
discounted wholesale rates;  
    
    provide notice of changes in information needed for
another carrier to transmit and route services using its
facilities; and  
    
    provide physical collocation, which allows a CLEC to
install and maintain its network termination equipment in an
ILECs central office, or to obtain functionally equivalent forms
of interconnection. Because the Companys ILEC subsidiaries other than ACSA qualify as rural
LECs, (RLECs), under the 1996 Act, a statutory exemption from the
interconnection requirements for those carriers applies until the Company
receive a bona fiderequest for interconnection and the RCA lifts the
exemption. The RCA must continue an exemption until it determines that
interconnection is technically feasible, not unduly economically burdensome and
consistent with universal service. Without such exemption, the Companys RLECs
may face more competition, declining revenues and higher costs. Even after
lifting the exemption for a RLEC, the RCA may suspend or modify an
interconnection requirement if it determines that such action is in the public
interest and necessary to avoid a significant adverse economic impact on users,
an undue economic burden or a technically infeasible requirement. ACSA, ACSF and ACSAK have also responded to a formal complaint brought by
GCI at the FCC. The parties have negotiated a resolution of the matter. On June 30, 1999, the Alaska Public Utilities Commission (APUC) (the
predecessor of the RCA) issued an order terminating the rural exemptions of
ACSN (as to its Glacier State Study Area), ACSAK and ACSF. On October 11, 1999,
the RCA affirmed the APUCs order. As a result, these RLECs were no longer
exempt from the interconnection requirements applicable to ILECs, and the
Companys competitors 16




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immediately requested interconnection agreements. The Alaska Superior
Court denied the Companys request to stay and subsequently upheld the RCAs
order. On December 12, 2003, the Alaska Supreme Court ruled that the
termination of ACSNs rural exemption was erroneous, and the termination of
ACSF and ACSAKs rural exemptions may be erroneous. The court reversed and
remanded the ACSF and ACSAK decisions back to the RCA for further proceedings.
A decision on these remand proceedings is expected in May 2004. During the
pendency of the remand proceedings, the obligations of ACSF and ACSAK to
provide UNEs to CLECs to support new customers have been suspended. Since
the RCA terminated the Companys rural exemptions, the
Companys discretionary capital expenditures have decreased in
Fairbanks and Juneau in light of the UNE-based competition. The
Company may need to increase its capital expenditures operating
expenses in order to continue to meet its universal service and
service quality obligations under state regulation. The UNE rates set
by the RCA have been set at below the Companys cost in
Anchorage, Fairbanks and Juneau and the Company may face similar
excessively low UNE rates set by the RCA if the Company loses its
other rural exemptions. If the RCA
continues to terminate the rural exemptions for ACSF and ACSAK, absent
compensating measures (such as rate increases or market structure reforms, like
replacing implicit subsidies by explicit support mechanisms, rate deaveraging,
or regulatory flexibility), the Companys operating results could be adversely
affected. To implement the interconnection requirements of the 1996 Act, the FCC
adopted rules requiring, among other provisions, that ILECs price UNEs based on
forward-looking economic costs using the total element long-run incremental
cost methodology, and that ILECs combine UNEs for competitors when they are
unable to do so themselves. In its Triennial Review order released in August 2003, the FCC eliminated
the obligation of ILECs to provide unbundled access to certain network
elements, including new fiber loops, high-capacity loops and transport, and
packet switches. Similarly, the FCC eliminated the requirement that
line-sharing, where a CLEC offers high-speed Internet access over certain
frequencies while the ILEC provides voice telephone services over other
frequencies using the same local loop, be available as an unbundled element for
new users. The Triennial Review order redefined the standard for determining
which services are subject to mandatory unbundling. This order also provides
state regulatory commissions with an increased role in determining which
individual elements must be unbundled as well as the UNE platform (UNE-P) in
the markets they regulate based on detailed assessments of the status of
competition. The RCA decided not to challenge the FCCs finding to eliminate
the unbundling requirement for switching for medium and large business
customers. In proceedings before the RCA pursuant to the Triennial Review
order, the Company is seeking the elimination of additional unbundling
requirements such as mass market switching, inter-office transport and
high-capacity loops. On March 2, 2004, the U.S. Court of Appeals for the D.C. Circuit, however,
vacated the FCCs nationwide determination of impairment as to mass market
switching and the FCCs delegation to state commissions of market assessments
for unbundling requirements in the FCCs Triennial Review order. The court
upheld the FCCs termination of unbundling requirements for new fiber loops,
packet switches, line sharing and high-capacity transport services. The Appeals
Court remanded the matter back to the FCC for further proceedings consistent
with its order. Several parties, however, have already expressed an intention
to seek reconsideration or appeal of the Appeals Courts decision.
Consequently, there is considerable uncertainty regarding the FCCs unbundling
rules and the RCA proceedings to implement the FCCs rules. In addition, the FCC is reexamining its pricing standard for UNEs and may
reconsider other aspects of its new rules. The FCC is seeking comment on
amending its rules to ensure that state commissions do not set UNE prices in a
manner that understates ILECs costs. The Triennial Review order clarified
that, in setting UNE prices, states should adjust their assumptions about
depreciation and cost-of-capital to reflect a competitive marketplace, and the
FCC suggested that states consider whether accelerated rather than
straight-line depreciation more accurately reflects the competitive
marketplace. Furthermore, Congress may consider legislation that may modify
some aspects of these rules. The Company cannot predict the outcome of any of
these proceedings or of any action taken by the RCA pursuant to the new rules. Interstate Access Charges The FCC regulates the prices that ILECs charge for the use of their local
telephone facilities in originating or terminating interstate transmissions.
The FCC structured these prices, or access charges, as a combination of flat
monthly charges paid by the end-users, or subscriber line charges, and usage
sensitive charges paid by long distance carriers. 17




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The Companys ILECs interstate access charges are developed by a
cost-of-service method to earn an authorized maximum rate of return. NECA
develops averaged access rates for participating ILECs based on the costs of
these carriers. All the Companys ILECs participate in NECAs tariff for
non-traffic sensitive costs, which are primarily loop costs. While ACSA files
its own traffic sensitive access tariff, which covers primarily switching
costs, the Companys other ILECs participate in NECAs traffic sensitive access
tariff. Participants in a NECA tariff charge averaged access rates, pool their
revenues, and distribute the revenues on the basis of each individual carriers
costs. The NECA tariffs reduce the cost burden on individual ILECs of filing
tariffs and also spread some of the risks of providing interstate access
services. None of the Companys ILECs has chosen the FCCs price cap method for
its interstate access charges. In 2001, the FCC adopted an order implementing certain proposals of the
Multi-Association Group (MAG) to reform the access charge system for rural
ILECs. This order governs the access charges that the Companys ILECs can
collect from long distance carriers. Among other things, the MAG plan reduces
usage sensitive access charges on long distance carriers and shifts a portion
of cost recovery to subscriber line charges. As a result, the aggregate amount
of access charges paid by long distance carriers to ILECs has decreased and may
continue to decrease. In adopting the MAG plan, the FCC determined that
rate-of-return carriers, such as the Companys ILECs, continue to be permitted
to set rates based on the authorized rate of return of 11.25%. Additionally,
the FCC initiated a rulemaking proceeding to investigate the MAGs proposed
incentive regulation plan and other means of encouraging rate-of-return
carriers to increase their efficiency and competitiveness. The MAG plan expires
in 2006 and will need to be renewed or replaced at such time. The Company
cannot predict what changes, if any, the FCC may eventually adopt. Proposals currently being debated within the industry may result in the
elimination of interstate and intrastate access charges paid by long distance
carriers, and the requirement that carriers such as ACSA, ACSF, ACSAK and ACSN
recover those interstate and intrastate costs from a combination of end-user
charges and universal service support. The FCC has indicated it expects to take
some action to reform intercarrier compensation, including access charges, in
2004 or 2005. The Company cannot predict what or when, the FCC may adopt any
changes. Federal Universal Service Support The Communications Act requires the FCC to establish a universal service
program to ensure that affordable, quality telecommunications services are
available to all Americans. The program at the federal level has several
components, including one that pays support to LECs servicing areas for which
the costs of providing basic telephone service are higher than the national
average. The 1996 Act requires the FCC to make universal service support
explicit, expand the types of communications carriers that are required to pay
universal support, and allow CLECs to be eligible for universal service
support, including where they serve customers formerly served by ILECs. In May 2001, the FCC adopted a proposal from the Rural Task Force to
reform universal service support for rural areas. As adopted, for an interim
five-year period, until no later than July 1, 2006, eligible rural carriers
will continue to receive support based on a modified embedded cost mechanism.
The FCC has indicated that, for the period thereafter, it will develop a
comprehensive plan for high-cost support mechanisms for rural and non-rural
carriers which may rely on forward-looking costs. The Company is unable to
predict whether and to what extent it would be eligible to receive any federal
high-cost support under such a plan. Universal service funds are only available to carriers that are designated
as eligible telecommunications carriers (ETCs) by a state regulatory
commission. CLECs and other providers that have been granted ETC status are
eligible to receive the same amount of universal service support per customer
as the ILEC serving the same area. The FCC is reviewing many issues related to
USF payments following recommendations from a Federal-State Joint Board on
Universal Service, including the level of support for CLECs and the effects of
payments to CLECs on support provided to ILECs. The FCC is expected to act on
some of these USF issues by the end of February 2005, and some ILECs believe
that revised rules may reduce their support to the extent that CLECs in their
service areas receive USF support for UNE-loop based service. 18




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The RCA granted GCIs request that it be designated an ETC in Anchorage,
Fairbanks, Juneau, and Fort Wainwright, all of which are currently served by
the Companys subsidiaries. The addition of a second ETC in the service areas
of the Companys properties could increase the competition the Company face by
providing additional revenues to the Companys competitors, and thereby
decrease the Companys revenues. Wireless carriers have also petitioned the RCA
for ETC status. In August 2003, the RCA granted ETC status to Alaska DigiTel,
LLC (DigiTel) for the Matanuska Telephone Association (MTA) service area.
In May 2003, ACSW applied for ETC status in this service area and Fairbanks.
Dobson Cellular Systems, Inc. (Dobson) is seeking ETC status and asked the
RCA to redefine the Companys service areas on a wire center basis. If this
petition is granted, Dobson might be allowed to receive USF support for serving
portions but not all of the Companys service areas. Additionally,
Matanuska-Kenai, Inc d/b/a MTA Wireless and Unicom, Inc. (Unicom a United
Utilities, Inc. affiliate) have petitioned for ETC status for their service
areas. The Companys operating subsidiary companies are required to contribute to
the federal USF a percentage of their revenue earned from interstate and
international services. Although the Companys rural ILECs receive payment from
the federal USF, the Company cannot be certain of how, in the future, the
Companys contributions to the fund will compare to the support they receive
from the fund. The FCC has proposed making changes to its USF contribution
methodology, and the Company cannot predict the outcome of that proceeding or
any legislation which may change the USF. Interstate Long Distance Services The FCC does not regulate the rates, terms or facilities of the Companys
interstate long distance services. However, the Company must comply with the
general requirement that its charges and terms be just, reasonable and
nondiscriminatory. Also, the Company must comply with FCC rules regarding
unauthorized switching of a customers long distance service provider, or
slamming; the FCC has recently levied substantial fines on some carriers for
slamming. In addition, ACSLD must post the rates, terms and conditions of its
service on its Internet web site and engage in other public disclosure
activities. The FCC required that ILECs that provide interstate long distance services
originating from their local exchange service territories must have long
distance affiliates which maintain separate books of account and acquire any
services from their affiliated ILECs at tariffed rates, terms and conditions. Wireless Services The FCC regulates the licensing, construction, operation, acquisition and
sale of personal communications services and cellular systems in the United
States. All cellular and personal communications services licenses have a
10-year term, at the end of which they must be renewed. Licenses may be revoked
for cause, and license renewal applications may be denied if the FCC determines
that renewal would not serve the public interest. In addition, all personal
communications services licensees must satisfy certain coverage requirements.
Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license. Federal law preempts state and local regulation of the entry of, or the
rates charged by, any provider of commercial mobile radio services (CMRS)
that includes personal communications services and cellular services. The FCC
does not regulate such rates. The FCC imposes a variety of regulatory
requirements on CMRS operators. For example, CMRS operators must be able to
transmit 911 calls from any qualified handset without credit check or
validation, are required to provide the location of the 911 caller within an
increasingly narrow geographic tolerance over time, and as of December 31,
2003, are required to provide 911 service for individuals with speech and
hearing disabilities, or TTY service. ACSW has petitioned the FCC for a limited
waiver of the 911 implementation deadlines and for an extension of the TTY
requirements; the Company cannot predict when or how the petitions will be
decided. Local number portability allows a customer to retain his or her telephone
number when changing telecommunications carriers within the same local market.
The FCC requires local number portability for CMRS carriers under rules that
distinguish between carriers operating in the largest 100 metropolitan
statistical areas and those operating outside the top 100 markets. None of the
cities in which the Company provides wireless service is among the top 100
markets. Therefore, under the FCCs rules, if ACSW receives a request to
allow an 19




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##### Table of Contents



end user to retain a telephone number while changing service
providers, ACSW must be capable of allowing this number portability by May 24,
2004 or within 6 months of a bona fide request. The FCC also requires that if a
LEC customer wants to retain a telephone number while changing to a CMRS
service provider (such as ACSW), the LEC must have the capability to allow this
wireline-to-wireless number portability by May 24, 2004 or within six months of
a bona fide request, where the requesting CMRS carriers coverage area overlaps
the geographic location of the LEC rate center to which the number is assigned
(unless the LEC can provide specific evidence demonstrating that doing so is
not technically feasible). These number portability rules are expected to
increase the level of competition among CMRS service providers, but also to
increase the ability of CMRS providers to win customers from LECs. The Company
cannot predict the net impact of these new rules on the Company. Internet Services The Company provides Internet access services as an Internet service
provider, or ISP. The FCC has classified such services as information services,
so they are not subject to various regulatory obligations that are imposed on
common carriers, such as paying access charges or contributing to USF. Also,
the FCC generally preempts state and local regulation of information services. In March 2002, the FCC held that high-speed Internet access service
delivered using cable television facilities constitutes an information
service (which is not subject to common carrier regulations). Although the
Companys provision of high-speed Internet services over its telecommunications
network is currently regulated as a telecommunications service, the FCC is
considering whether to narrow the scope of this regulation to non-dominant
status or reclassify such services as information services. The Company also
offers a retail Internet service that is an information service under the FCCs
current policies. The FCCs classification of cable modem services has been
remanded by the United States Court of Appeals for the Ninth Circuit, which
reiterated an earlier decision finding that cable modem services constituted
both a telecommunications service and an information service. The FCC is
also currently giving further consideration to its regulation of high-speed
Internet access services offered over cable facilities versus
telecommunications facilities. The FCC may decrease regulation on the Companys
broadband services or possibly subject cable modem services to certain common
carrier responsibilities. If the FCC implements such a requirement, the Company
may be able to supplement its own high-speed Internet access offerings by
obtaining access to GCIs high-speed Internet access cable lines for its own
Internet service provider. In February 2004, the FCC determined that particular entirely
Internet-based voice over Internet Protocol (VoIP) service is an information
service and exempt from such regulatory obligations. Also in February 2004, the
FCC launched a comprehensive rulemaking to determine the appropriate types of
regulation, including such matters as intercarrier compensation and
contributions to USF, to which ISPs offering or enabling different types of
services, including VoIP, should be subject. The Company cannot predict the
outcome of these proceedings or the effect of FCC decisions in this area on the
Companys business. Other Federal Regulations The Company is subject to various other federal rules and statutes,
including with regard to the use of customer proprietary network information in
marketing services, and implementing capabilities to be used by law enforcement
officials in executing court authorized electronic surveillance. Other FCC
initiatives that may impact the Companys regulated subsidiaries include access
to poles, ducts, conduits and rights-of-way, Truth-in-Billing requirements, EEO
reporting, and anti-slamming rules. These requirements may impose costs on the
Company and limit its business opportunities. State Regulation Telecommunication companies are required to obtain certificates of public
convenience and necessity from the RCA prior to operating as a public utility
in Alaska. The RCA must also approve transfers of such certificates. The RCA
regulates rates and terms for local, intrastate access and intrastate long
distance services. Also, pursuant to the 1996 Act and the FCCs rules, the RCA
decides various aspects of local network 20




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##### Table of Contents



interconnection offerings and agreements. In addition, the RCA supervises
the administration of the Alaska Universal Service Fund (AUSF) and decides on
ETC status for purposes of the federal USF. Interconnection The 1996 Act specifies that resale and UNE rates are to be negotiated
among the parties subject to approval by the state regulatory commission, or,
if the parties fail to reach an agreement, arbitrated by the state regulatory
commission. In January 1997, ACSAs predecessor, ATU, entered into an interconnection
agreement with GCI, which provided for resale and UNE interconnection, and with
AT&T Alascom, which provided for resale. Neither interconnection agreement
contained a defined term or a termination date. Near the end of 1999, the
Company notified GCI of the Companys view that the interconnection agreement
pertaining to ACSA had reached the end of a reasonable period of availability.
In January 2000, the Company filed a motion with the RCA to reopen the original
GCI arbitration proceedings involving ACSA for the purpose of establishing an
appropriate forward looking cost model and re-pricing various interconnection
services and UNEs. On October 25, 2001, the RCA granted ACSA an interim UNE
rate increase. The RCA held a formal hearing on final Anchorage UNE rates
during November 2003. The Company cannot predict when the RCA will issue a
final order in this matter or what the outcome will be. Subsequent to the RCA terminating the rural exemptions for the Fairbanks,
Juneau and ACSNs Glacier State study area markets, the Company entered into
unsuccessful negotiations for interconnection agreements with GCI.
Interconnection issues, including the pricing for UNEs, were subject to a RCA
arbitration during 2000. On September 5, 2000, the RCA issued orders largely
ratifying the findings of the arbitrator in these interconnection arbitration
proceedings. The agreements were scheduled to expire on October 5, 2003, and
have been extended pending arbitration of new agreements. GCI and the
arbitrator have agreed to defer further work on the interconnection agreements
for ACSF and ACSAK pending resolution of the rural exemption remand proceedings
and the ACSA interconnection proceeding. As part of the agreement to defer
these proceedings, GCI also agreed that new interconnection agreements for ACSF
and ACSAK will be in place no later than October 6, 2004. Any rates ultimately
agreed to or arbitrated will be effective retroactive to April 6, 2004. In
light of the pending arbitrations for new interconnection agreements for ACSF
and ACSAK, the Company dismissed the Companys federal district court actions
concerning the existing ACSF and ACSAK interconnection agreements on October
14, 2003. Since 1999, the Company has also entered into interconnection agreements
with Alaska Fiber Star, LLC, TelAlaska Long Distance, Inc., Level 3, and other
entities. Competitive Local Exchange Regulations The APUC adopted regulations to govern competition in the local exchange
marketplace. The transitional regulations provide for, among other things:  
    
    initial classification of all ILECs, including the
Companys rural properties and ACSA, as dominant carriers;  
    
    requirements that all carriers, both dominant and
nondominant, offer all retail services for resale at wholesale
rates (although the extent of the offerings depends on the
facilities and general service offerings of the carriers);  
    
    dominant carrier pricing flexibility in competitive
areas, under which carriers may reduce retail rates, offer new or
repackaged services and implement special contracts for retail
service upon 30 days notice. Only rate increases affecting
existing services are subject to full cost support showings for
ILECs in areas with local competition; and  
    
    application of such regulations limited initially to
the ACSA market, and in 2002, extended to the ACSF and ACSAK
markets. 21




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##### Table of Contents



The RCA had been investigating ACSAs new facilities construction and
connection practices, which GCI claims result in disparate treatment for its

customers. Certain RCA rulings in this case were appealed to state court in
2002. On December 8, 2003, the court remanded the case to the RCA to determine
whether provisions in the FCCs Triennial Review order on new facilities
construction preempt its ruling in the case. Based on the parties joint
motion, on January 7, 2004, the RCA vacated that portion of the order requiring
the Companys ILECs to modify their line extension tariffs to include GCI
customers. On March 15, 2004, the RCA determined that all other
pending issues in this proceeding had been resolved and terminated
its investigation. End User Local Rates The rates charged by the Companys ILECs to end-users for basic local
service are generally subject to the RCAs regulation based on a
cost-of-service method using an authorized rate of return. Local rates have
historically been set at a level that will allow recovery of embedded costs for
local service. Competition may prevent local rates from being sufficient to
recover such costs for local service. Rate cases are typically infrequent,
carrier-initiated and require the carrier to meet substantial burdens of proof. In compliance with an order of the APUC, all the Companys ILECs filed
revenue requirement studies on July 1, 2001.Based on the RCAs decision, ACSF
and ACSN will have revenue requirement reductions, likely leading to rate
decreases, while ACSAK and ACSA will have increased revenue requirements,
likely leading to rate increases. ACSF, ACSN and ACSAK have filed
cost-of-service and rate-design studies and testimony, and have submitted to
the RCA a rate settlement jointly stipulated to by all the parties. On February
20, 2004, the RCA convened a hearing to review the proposed rate settlement. A
decision is expected before or during the second quarter of 2004. ACSA will
file its cost-of-service and rate-design studies and testimony in the second
half of 2004. An ACSA rate hearing is scheduled for December 2004. The RCA also
granted a waiver petition filed on June 6, 2003, permitting ACSA to file
retail-tariff amendments for the Anchorage market on an interim basis as if it
were a non-dominant carrier, which may afford ACSA greater pricing flexibility
on an experimental basis. At this stage of the proceedings, it is not possible
to predict whether the RCA will adopt the Companys proposals. Intrastate Access Rates ILECs not yet subject to local competition participate in a pool
administered by the AECA for intrastate access charges to long distance
carriers. The AECA pools their access costs and sets a statewide average price
annually which participating ILECs charge to long distance carriers for
originating or terminating calls. Access revenues are collected in a pool and
then redistributed to the ILECs based on their actual costs. The RCA requires an ILEC to file separate, individual company access
charge tariffs when a competitor enters its service area. These tariffs are
based on the ILECs cost of service and are revised annually. The Companys
only ILEC remaining in the AECA pool as of December 31, 2003 is ACSN. The RCA
has approved draft regulations for public comment that propose to change the
current annual update process to a biennial review. The RCA recently issued a spreadsheet model developed by its staff for
comment, so that it can analyze the impacts of different methods of recovering
access costs. Subsequently, on March 1, 2004, the RCA released draft
regulations for public comment that propose to substantially restructure access
loop cost recovery. If the RCAs proposed regulations are adopted,
interexchange carriers will cease contributing any amount to intrastate loop
cost recovery at the conclusion of a five-year transition period. Following the
transition period, the RCAs proposed rules require that approximately 60% of
the loop cost be allocated to the local jurisdiction with the residual 40%
being allocated approximately equally between instate subscriber line charges
and support from the AUSF. The Company is unable to predict the ultimate
outcome of this rulemaking. Alaska Universal Service Fund To remove subsidies which had been implicit in intrastate access pricing,
the RCA established the AUSF. The AUSF serves as a complement to the federal
USF, but must meet federal statutory criteria concerning consistency with
federal rules and regulations. Currently, the AUSF supports a portion of
certain higher cost carriers switching costs, the costs of lifeline service
(which supports rates of low income 22




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##### Table of Contents



customers), and a portion of the cost of
Public Interest Pay Telephones. Recent proposals have targeted the AUSF as a
source of funding for cost shifts that are likely to occur as a result of
intrastate access charge reform.The RCA has adopted regulations which limit
high-cost switching support to local companies with access lines of 20,000 or
less. This change has eliminated the switching support that the Companys rural
ILECs received. The resulting cost recovery shift is being addressed in the
local service rate cases commenced in 2001. It is unclear the degree to which
the AUSF might be used to absorb cost shifts that result if federal universal
service support is scaled back in the future. Other State Regulations The RCA has proposed changes in its rules governing provision of statewide
directory assistance (DA) that would alter the DA market structure, the
manner of providing DA service in Alaska and carrier-to-carrier DA obligations.
The new rules would make the provision of DA more competitive and permit CLECs
to provide DA service. If the rules are adopted, the Company expects that ACSA
may remain the provider of DA service in some areas, at least for some period
of time, and that other competitors such as GCI may enter the business. Since
the RCA has not yet adopted rules, it is not possible to predict the financial
impact of these DA market changes on the Companys ILECs operating results. On November 21, 2002, the RCA sought public comment on modifying its
competitive local market regulations. Additionally, the RCA initiated a
proceeding in June 2003 in response to recently enacted legislation to review
its rules governing telecommunications rates, charges between competing
telecommunications companies and telecommunications competition. The RCAs
review must be guided by certain principles, including that the incumbent
carrier must not be placed at an unfair competitive disadvantage and that rates
charged to the public must be fair. Additionally, the Alaska state legislature
required that the RCAs regulations implement certain policies including that
there be fair payment by one carrier for the use of another carriers equipment
and facilities, and that in competitive service areas the ILEC must be subject
to the same retail tariffing standards and regulations as the new carrier. The
law contains other provisions which promote competitive goals and encourage
more businesses to enter and remain as telecommunications carriers in Alaska.
The RCA issued proposed regulations in November 2003 which do not appear to
substantially modify the existing regulatory structure. In addition, on March 10, 2004, the RCA issued proposed regulations
concerning bundling of local exchange and intrastate interexchange services.
The RCAs proposed rules fail to substantially reform existing restrictions. Environmental Regulations and Radio Emissions The Companys operations are subject to federal, state and local laws and
regulations governing the use, storage, disposal of, and exposure to hazardous
materials, the release of pollutants into the environment and the remediation
of contamination. As an owner or operator of property and a generator of
hazardous wastes, the Company could be subject to environmental laws that
impose liability for the entire cost of cleanup at contaminated sites,
regardless of fault or the lawfulness of the activity that resulted in
contamination. The Company believes, however, that its operations are in
substantial compliance with applicable environmental laws and regulations. The Companys wireless operations are also subject to regulations and
guidelines that impose a variety of operational requirements relating to radio
frequency emissions. The potential connection between radio frequency emissions
and negative health effects, including some forms of cancer, has been the
subject of substantial study by the scientific community in recent years. To
date, the results of these studies have been inconclusive. Although the Company
has not been named in any lawsuits alleging damages from radio frequency
emissions, it is possible it could be in the future, particularly if scientific
studies conclusively determine that radio frequency emissions are harmful. 23




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##### Table of Contents



Item 2. Properties At December 31, 2003, the Companys telecommunications network includes
over 640 sheath miles of fiber optic cable, over 188 switching facilities and a
statewide wireless network. In addition, the Company owns fiber capacity for
high-speed links within Alaska and for termination of traffic in the
continental United States. The Company plans to continue enhancing its network
to meet customer demand for increased bandwidth and advanced services.See
Business  Network Facilities. The Company owns approximately 334,000 square
feet of facilities in Anchorage, Alaska, which includes its corporate
headquarters. The Company also owns or leases facilities in the Companys
service areas across Alaska. The Company believes this space is sufficient for
it to conduct its business. Local Telephone.The Companys primary local telephone properties consist
of 188 switching facilities. The Company owns most of its administrative and
maintenance facilities, customer service center, central office and remote
switching platforms and transport and distribution network facilities. The
Companys local telephone assets are located in Alaska. The Companys transport and distribution network facilities include a
fiber optic backbone and copper wire distribution facilities that connect
customers to remote switch locations or to the central office and to points of
presence or interconnection with interexchange carriers. These facilities are
located on land pursuant to permits, easements, right of ways or other
agreements. Wireless.The Company has four digital switching centers, 140 cell sites
and three repeaters covering substantially all major population centers and
highway corridors in Alaska plus one analog switch and cell site covering
Barrow, Alaska. The Company leases the land or tower space on which 130 sites
are located, and owns the remaining ten sites. Internet.The Company owns or leases point of presence facilities that
permit its dial-up and DSL customers to access the Internet in over 30
communities serving the majority of Alaskas populated areas.These communities
are linked over both owned and leased facilities to the Internet at Seattle,
Washington. Interexchange. The Company is a facilities based interexchange carrier.
The Company has invested in fiber optic capacity through an indefeasible right
of use that provides bandwidth between the Companys Anchorage, Fairbanks, and
Juneau locations and Seattle, Washington.The Company also leases transport
facilities and has arrangements with other interexchange carriers to terminate
traffic in the continental United States. Substantially all of the Companys assets (including those of its
subsidiaries) are pledged as collateral for its senior obligations.See Note 6
Long-term Obligations to the Alaska Communications Systems Holdings, Inc.
Consolidated Financial Statements for further discussion. 
 Item 3. Legal Proceedings The Company is involved in various legal proceedings involving regulatory
matters described under Business  Regulation. A class action lawsuit was filed against the Company on March 14, 2001.
The litigation alleges various contract and tort claims concerning the
Companys decision to terminate its Infinite Minutes long distance plan.A
trial is scheduled for September 2004. A class of approximately 24,000
plaintiffs is expected to be certified. The Company believes this suit to be
without merit and intends to maintain a vigorous defense. On September 15, 2003, the Company received notification that the State of
Alaska was terminating the Telecommunications Services Partnering Agreement
(TPA), a contract under which the Company was
obliged to provide comprehensive telecommunications services to the State
of Alaska for a period of five years. On 24




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October 1, 2003, the Company announced
that it had entered into a voluntary settlement agreement with the State of
Alaska under which the Company made a cash payment to the State of Alaska of
approximately $3.4 million and transferred to the State of Alaska title to
certain capital equipment. The parties agreed to cooperate to complete
disentanglement by December 31, 2003. As of December 31, 2003, the Company and
the State had completed the majority of their Settlement Agreement
disentanglement obligations. All services provided by the Company under the TPA
prior to January 1, 2004 were either transitioned to other service providers at
the direction of the State or transitioned to the Companys current commercial
rates for such services. The Company completed its remaining obligations under
the Settlement Agreement during the first quarter of 2004. The Company cannot
guarantee that further disputes will not arise in connection with the
completion of the disentanglement procedures and as a result the Company cannot
currently estimate the impact that the termination, including the total costs
of disentanglement, will have on its revenues or results. GCI filed a complaint against the Company with the FCC regarding various
service ordering and provisioning issues. The parties have negotiated a
resolution of this matter. The Company has disputes with Dobson Communications concerning certain
reciprocal requirements and the ownership of a tower. The Company cannot
predict when or how these matters will be resolved. The Company was named as a defendant in an action brought by Fireweed
Communications regarding its use of the Companys Eagles Nest communications
tower. The parties have reached an agreement to settle the matter and the case
has been dismissed. The Company is involved in various other claims, legal actions and
regulatory proceedings arising in the ordinary course of business.In the
opinion of management, the ultimate disposition of these matters will not have
a material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. 
 Item 4. Submission of Matters to a Vote of Security Holders Omitted pursuant to General Instruction I (2)(c) of Form 10-K. 25




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##### Table of Contents



PART II 
 Item 5. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters The Company is a wholly owned subsidiary of ACS Group and as such has no
publicly traded equity securities. Dividends The Company paid its parent, ACS Group, dividends of $10,530,327 during
2003. ACS Holdings bank credit agreement and indentures have certain
restrictions governing its ability to pay dividends to ACS Group. 
 Item 6. Selected Financial Data SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected historical condensed consolidated
financial data of the Company. Consider the following points in connection with
the table:  
    
    Effective January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets.Upon adoption and completion of
the analysis required under SFAS No, 142, a transitional impairment
loss of $105.4 million was recognized as the cumulative effect of a
change in accounting principle in the first quarter of 2002. The
Company performed its required annual goodwill impairment test as of
October 1, 2002 and recognized an impairment loss of $64.8 million in
operating expenses for the year ended December 31, 2002.  
    
    On March 30, 2002, the Company approved a plan to sell its wireless
cable television service segment. As a result of this decision, the
operating revenue and expense of this segment has been classified as
discontinued operations for all periods presented.  
    
    On May 8, 2003, the Company completed the sale of a majority
interest (87.42%) in its Directories Business. Subsequently, on August
27, 2003, the Company disposed of substantially all of its remaining
interest in the Directories Business. As a result of this transaction,
the Company now owns less than 0.1% of the Directories Business. See
Note 10 Gain on Disposal of Assets in the footnotes to the financial
statements for additional information on this transaction.  
    
    The selected historical consolidated operating data for the year
ended December 31, 1999 represents the consolidated results of the
Company from May 15, 1999, the date the Company completed the
acquisition of four local telephone companies in Alaska, through
December 31, 1999.  
    
    Certain reclassifications have been made to the 2002, 2001, 2000
and 1999 financial statements to make them conform to the current
presentation of the Companys consolidated operations. The selected historical
consolidated financial
data below should be read
in conjunction with
Managements Discussion
and Analysis of Financial
Condition and Results of
Operations and the
audited consolidated
financial statements of
the Company and the
related notes.See Index
to Consolidated Financial
Statements and Schedule
which appears on page F-1 hereof. 26




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2003, 2002, 2001, 2000, and 1999
(dollars in thousands) 2003
    
    2002
    
    2001
    
    2000
    
    1999Operating Data:Operating revenues
    
    $
    323,548
    
    
    $
    340,144
    
    
    $
    328,525
    
    
    $
    311,366
    
    
    $
    192,663Operating expenses
    
    
    360,775
    
    
    
    360,745
    
    
    
    281,402
    
    
    
    277,598
    
    
    
    176,084Loss (gain) on disposal of assets
    
    
    (112,622
    )
    
    
    2,163
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    75,395
    
    
    
    (22,764
    )
    
    
    47,123
    
    
    
    33,768
    
    
    
    16,579Other income (expense)
    
    
    (78,230
    )
    
    
    (46,910
    )
    
    
    (54,246
    )
    
    
    (58,701
    )
    
    
    (37,275
    )Loss before income taxes, discontinued operations,
extraordinary item and cumulative effect of
change in accounting principle
    
    
    (2,835
    )
    
    
    (69,674
    )
    
    
    (7,123
    )
    
    
    (24,933
    )
    
    
    (20,696
    )Income tax expense (benefit)
    
    
    1,095
    
    
    
    
    
    
    
    (195
    )
    
    
    (197
    )
    
    
    (301
    )Loss from continuing operations
    
    
    (3,930
    )
    
    
    (69,674
    )
    
    
    (6,928
    )
    
    
    (24,736
    )
    
    
    (20,395
    )Loss from discontinued operations
    
    
    (52
    )
    
    
    (7,632
    )
    
    
    (1,718
    )
    
    
    (917
    )
    
    
    (306
    )Loss before cumulative effect of
change in accounting principle
    
    
    (3,982
    )
    
    
    (77,306
    )
    
    
    (8,646
    )
    
    
    (25,653
    )
    
    
    (20,701
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (105,350
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )
    
    $
    (25,653
    )
    
    $
    (20,701
    )Balance Sheet Data (end of period)Total assets
    
    $
    685,187
    
    
    $
    755,871
    
    
    $
    951,123
    
    
    $
    954,681
    
    
    $
    977,177Long-term debt including current portion
    
    
    535,004
    
    
    
    592,831
    
    
    
    596,603
    
    
    
    599,642
    
    
    
    598,407Stockholders equity
    
    
    18,449
    
    
    
    18,618
    
    
    
    208,678
    
    
    
    231,153
    
    
    
    266,541Other Financial Data:Cash provided (used) by operating activities
    
    $
    55,216
    
    
    $
    65,799
    
    
    $
    76,638
    
    
    $
    143,547
    
    
    $
    (50,648
    )Cash provided (used) by investing activities
    
    
    106,679
    
    
    
    (78,571
    )
    
    
    (94,483
    )
    
    
    (74,699
    )
    
    
    (774,653
    )Cash provided (used) by financing activities
    
    
    (82,662
    )
    
    
    (9,675
    )
    
    
    (3,039
    )
    
    
    (15,958
    )
    
    
    833,741Capital expenditures
    
    
    50,744
    
    
    
    71,464
    
    
    
    87,582
    
    
    
    72,253
    
    
    
    74,792
 27




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations Forward Looking Statements and Analysts Reports This Form 10-K and future filings by the Company on Forms 10-K, 10-Q and
8-K and future oral and written statements by the Company and its management
may include, certain forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995, including (without limitation)
statements with respect to anticipated future operating and financial
performance, financial position and liquidity, growth opportunities and growth
rates, pricing plans, acquisition and divestitive 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. Words
such as aims, anticipates, believes, could, estimates, expects,
hopes, intends, may, plans, projects, seeks, should, and will,
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 the Companys historical experience and its present
expectations or projections.Forward-looking statements by the Company and its
management are based on estimates, projections, beliefs and assumptions of
management and are not guarantees of future performance. The Company disclaims
any obligation to update or revise any forward-looking statement based on the
occurrence of future events, the receipt of new information, or otherwise. Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of important factors. Examples of these
factors include (without limitation)rapid technological developments and
changes in the telecommunications industries; ongoing deregulation (and the
resulting likelihood of significantly increased price and product/service
competition) in the telecommunications industry as a result of the 1996 Act and
other similar federal and state legislation and the federal and state rules and
regulations enacted pursuant to that legislation; regulatory limitations on the
Companys ability to change its pricing for communications services; the
possible future unavailability of SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation,to the Companys wireline subsidiaries; and
possible changes in the demand for the Companys products and services. In
addition to these factors, actual future performance, outcomes and results may
differ materially because of other, more general, factors including (without
limitation) changes in general industry and market conditions and growth rates;
changes in interest rates or other general national, regional or local economic
conditions; governmental and public policy changes; changes in accounting
policies or practices adopted voluntarily or as required by accounting
principles generally accepted in the United States of America; and the
continued availability of financing in the amounts, at the terms and on the
conditions necessary to support the Companys future business. Investors should also be aware that while the Company does, at various
times, communicate with securities analysts, it is against the Companys policy
to disclose to them any material non-public information or other confidential
information.Accordingly, investors should not assume that the Company agrees
with any statement or report issued by an analyst irrespective of the content
of the statement or report. To the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company. 28




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##### Table of Contents



Introduction The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and the other financial
information included elsewhere in this Form 10-K. On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in its Directories Business. Subsequently, on August 27, 2003, the
Company disposed of substantially all of its remaining interest in the
Directories Business. As a result of this transaction, the Company now owns
less than 0.1% of the Directories Business. See Note 10 Gain on Disposal of
Assets in the footnotes to the financial statements for additional information
on this transaction. During the first quarter of 2003, the Companys lenders approved an
amendment and waiver to its old senior credit facility that, among other
things, permitted the Company to sell its Directories Business and required
that 75% of proceeds would be used to repay outstanding senior credit facility
term loans. This amendment and waiver became effective on May 8, 2003, and on
May 13, 2003, the Company paid down $107 million of its outstanding term loans
under its old senior credit facility. On August 26, 2003, the Company completed
the refinancing of its old senior credit facility term loans. The Company
entered into a $250 million new senior credit facility consisting of a term
loan facility in an aggregate principal amount of $200 million and an undrawn
revolving credit facility of $50 million. The Company simultaneously issued
$182 million aggregate principal amount of 9 7/8% senior unsecured notes due
2011. From these proceeds, the Company paid off the remaining $321 million of
its old senior credit facility, thereby extinguishing it. On September 15, 2003, the Company announced the appointment of Liane
Pelletier as CEO and President and the retirement of Charles E. Robinson as
CEO. Ms. Pelletier joined the Companys Board of Directors effective October 6,
2003, after spending 17 years at Sprint Corporation, most recently as a member
of the Executive Management Committee and as Chief Integration Officer. Ms.
Pelletiers position consolidates Mr. Robinsons day-to-day responsibilities
and those of Wesley E. Carson, who left in May 2003 to be CEO of the
Directories Business. Mr. Robinson, a 45-year telecom industry veteran who
founded the Company in 1999, remained as Chairman of the Board until December
31, 2003 but retired from day-to-day management of the Company on October 6,
2003. Ms. Pelletier replaced Mr. Robinson as Chairman on January 1, 2004. On
November 6, 2003, the Company announced the appointment of David C. Eisenberg
to the position of Senior Vice President, Corporate Strategy and Development.
Mr. Eisenberg is directly responsible for strategic planning, business
development, market and competitive analysis, market research and strategy,
regulatory strategy and corporate communications. Mr. Eisenberg comes from
Sprint Corporation where he was Vice PresidentCorporate Strategy and
responsible for helping shape that corporations strategic direction. On
January 26, 2004, the Company announced the appointment of Sheldon Fisher as
Senior Vice President of Sales and Product Marketing. Mr. Fisher comes from
Sprint Corporation where he was Vice President, Broadband Direct. Mr. Fisher
focused on deploying a number of new technologies while at Sprint, and his
knowledge will be essential as the Company delivers innovative new offerings to
its customers. On March 1, 2004, the Company announced the appointment of David
Wilson to the position of Chief Financial Officer. In his previous position,
Mr. Wilson was Chief Financial Officer of Triumph Communications, a subsidiary
of Hughes Electronics. On November 19, 2003, John M. Egan joined the Companys Board of
Directors. Mr. Egan is the recently retired founder and chairman/CEO of ARRIS
Group. ARRIS is a global communications technology company specializing in the
design and engineering of broadband local access networks and a leading
developer and supplier of optical transmission, cable telephony and Internet
access for cable systems operators. On January 9, 2004, Patrick Pichette joined
the Companys Board of Directors. Mr. Pichette is Executive Vice-President at
Bell Canada. In this capacity, he is responsible for accelerating BCEs
migration to the customer service, infrastructure and support systems required
to create its new IP-based network. In December 2001, the Company entered into a Telecommunications Services
Partnering Agreement or TPA with the State of Alaska that became effective on
April 1, 2002, to provide comprehensive telecommunications services for a
period of five years. This contract obligated the
Company, among other things, to deploy and manage advanced and innovative
technologies through new 29




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##### Table of Contents



and previously untested business practices. The TPA
contained a specific completion date of April 1, 2003 for certain
implementation aspects, as the well as specific ongoing service level
agreements. Both parties to the TPA alleged breaches and failures to perform by
the other party, and on September 15, 2003, the Company received notification
from the State of Alaska that the State was terminating the TPA between the two
parties and initiating the disentanglement procedures under the contract. On
October 1, 2003, the Company announced that it had entered into a voluntary
settlement with the State of Alaska regarding the TPA. Subsequently, the
Company and the State negotiated and agreed to a definitive Settlement
Agreement and Mutual Release, or the Settlement Agreement, effective October
14, 2003. As of December 31, 2003, the Company and the State had completed the
majority of the Settlement Agreement disentanglement obligations. All services
provided by the Company under the TPA prior to January 1, 2004 were either
transitioned to other service providers at the direction of the State or
transitioned to the Companys current commercial rates for such services. The Company generates revenue primarily through:  
    
    the provision of local telephone services, including:  
    
    basic local service to retail customers within the Companys service areas,  
    
    wholesale service to CLECs,  
    
    network access services to interexchange
carriers for origination and termination of interstate and
intrastate long distance phone calls,  
    
    enhanced services,  
    
    ancillary services, such as billing and collection, and  
    
    universal service payments;  
    
    the provision of wireless services;  
    
    the provision of Internet services; and  
    
    the provision of interexchange network long-distance and data services. In addition, the Company provides video entertainment services through its
partnership with the satellite operator, Dish Network. Local Telephone The Company is the largest LEC in Alaska and the 13th
largest in the United States. Basic local service is generally provided at a
flat monthly rate and allows the user to place unlimited calls within a defined
local calling area. Access revenues are generated in part by billing
interexchange carriers for access to the LECs local network and its customers
and in part by billing the local customers themselves. Universal service
revenues are a subsidy paid to rural LECs to support the high cost of providing
service in rural markets. Other service revenue is generated from ancillary
services and enhanced services. Changes in revenue are largely attributable to changes in the number of
access lines, local service rates and minutes of use. Other factors can also
impact revenue, including:  
    
    intrastate and interstate revenue settlement methodologies,  
    
    authorized rates of return for regulated services,  
    
    whether an access line is used by a business or consumer subscriber,  
    
    intrastate and interstate calling patterns,  
    
    customers selection of various local rate plan options,  
    
    selection of enhanced calling services, such as voice mail, and  
    
    other subscriber usage characteristics. LECs have three basic tiers of customers:  
    
    consumer and business customers located in their
local service areas that pay for local phone service and a
portion of network access,
    
    interexchange carriers that pay for access to long
distance calling customers located within its local service
areas and 30




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##### Table of Contents




    
    CLECs that pay for wholesale access to the Companys
network in order to provide competitive local service on either
a wholesale or UNE basis as prescribed under the 1996 Act. LECs provide access service to numerous interexchange carriers and may
also bill and collect long distance charges from interexchange carrier
customers on behalf of the interexchange carriers. The amount of access charge
revenue associated with a particular interexchange carrier varies depending
upon long distance calling patterns and the relative market share of each long
distance carrier. The Companys local service rates for end users are authorized by the RCA.
Authorized rates are set by the FCC and the RCA for interstate and intrastate
access charges, respectively, and may change from time to time. Wireless- The Company is one of the largest statewide providers of
wireless services in Alaska, currently serving approximately 87,000
subscribers. Its wireless network covers over 480,000 residents, including all
major population centers and highway corridors. The Company operates a TDMA
digital network in substantially all of its service areas, and plans to upgrade
this network to a new generation of digital network known as CDMA 1xRTT over
the course of 2004. Internet- The Company is the second largest provider of Internet access
services in Alaska with approximately 46,000 customers. The Company offers
dial-up and dedicated DSL Internet access to its customers. The Company is a
single source provider of advanced IP based private networks in Alaska. Interexchange-The Company provides switched and dedicated long distance
services to approximately 43,000 customers in Alaska. The traffic from these
customers is carried over the Companys owned or leased facilities. Satellite Television The Company provides video entertainment services
on a resale basis through the Companys partnership with the satellite
provider, Dish Network. The Company entered into this agreement in August 2003. Critical Accounting Policies and Accounting Estimates Management is responsible for the financial statements presented elsewhere
in this 10-K and has evaluated the accounting policies used in their

preparation.Management believes these policies to be reasonable and
appropriate. The Companys significant accounting policies are described in
Note 1 in the Notes to the Consolidated Financial Statements elsewhere in this
10-K. The following discussion identifies those accounting policies that
management believes are critical in the preparation of the Companys financial
statements, the judgments and uncertainties affecting the application of those
policies, and the possibility that materially different amounts would be
reported under different conditions or using different assumptions. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of commitments and contingencies at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the significant estimates affecting
the financial statements are those related to the realizable value of accounts
receivable, long-lived assets, income taxes, network access revenue reserves
and litigation reserves. Actual results may differ from those estimates. Access revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the RCA within the intrastate
jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These
estimates are derived from interim financial
statements, available separations studies and the most recent information
available about achieved rates of return. These estimates are subject to
adjustment in future accounting periods as additional operational 31




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##### Table of Contents



information
becomes available. To the extent that disputes arise over revenue settlements,
the Companys policy is to defer revenue collected until settlement
methodologies are resolved and finalized. At December 31, 2003, the Company had
recorded liabilities of $15.2 million related to its estimate of refundable
access revenue. Actual results could vary from this estimate. The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes reflect the temporary differences
between the financial and tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse.Deferred tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that such deferred tax assets will not be
realized. If the Company thought it was more likely than not that all of its
deferred tax assets would be realized in future periods, the Companys
previously reported net losses for the three years ended December 31, 2003
would decrease by up to $92.3 million and its accumulated deficit would
decrease from $253.8 million to as much as $161.5 million. The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation.This accounting recognizes the economic effects of rate regulation
by recording cost and a return on investment as such amounts are recovered
through rates authorized by regulatory authorities. Accordingly, under SFAS No.
71, plant and equipment is depreciated over lives approved by regulators and
certain costs and obligations are deferred based upon approvals received from
regulators to permit recovery of such amounts in future years. The Company
implemented, effective January 1, 2003, higher depreciation rates for its
regulated telephone plant for the interstate jurisdiction which management
believes approximate the economically useful lives of the underlying plant. As
a result, the Company has recorded a regulatory asset under SFAS No. 71 of
$17.2 million as of December 31, 2003 related to depreciation of the regulated
telephone plant allocable to its intrastate and local jurisdictions. The
Company has also deferred as a regulatory asset $0.9 million of costs incurred
in connection with regulatory rate making proceedings, which is being amortized
over three years starting in 2003. The balance of this regulatory asset was
$0.6 million at December 31, 2003. If the Company were not following SFAS No.
71, it would have recorded additional depreciation expense of $17.2 million for
the intrastate and local jurisdictions and the deferred costs incurred in
connection with regulatory rate making proceedings would have been charged to
expense as incurred. The Company also has a regulatory liability of $50.5
million at December 31, 2003 related to accumulated removal costs. If the
Company were not following SFAS No. 71, it would have followed SFAS No. 143 for
asset retirement obligations. Non-regulated revenues and costs incurred by the
local telephone exchange operations and non-regulated operations of the Company
are not accounted for under SFAS No. 71 principles. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with the guidelines of this accounting
principle, goodwill and indefinite-lived intangible assets are no longer
amortized but will be assessed for impairment on at least an annual basis. SFAS
No. 142 requires that goodwill be tested for impairment at the reporting unit
level upon adoption and at least annually thereafter, utilizing a two-step
methodology. The initial step requires the Company to determine the fair value
of each reporting unit and compare it to the carrying value, including
goodwill, of such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be
impaired. The amount, if any, of the impairment is then measured in the second
step. The Company determined the fair value of each reporting unit for purposes
of this test primarily by using a discounted cash flow valuation technique.
Significant estimates used in the valuation include estimates of future cash
flows, both future short-term and long-term growth rates, and estimated cost of
capital for purposes of arriving at a discount factor. At December 31, 2003,
the Company had recorded goodwill of $38.4 million applicable to its local
telephone and wireless segments. The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business, and has recorded
litigation reserves of $3.9 million as of December 31, 2003 against certain
claims and legal actions. The Company believes that the disposition of these
matters will not have a material adverse effect on the Companys consolidated
financial position, results of operations or cash flows. Estimates involved in developing these
litigation reserves could change as these claims, legal actions and regulatory
proceedings are resolved. 32




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##### Table of Contents



Results of Operations The following table summarizes the Companys operations for the years
ended December 31, 2003, 2002, and 2001. Certain reclassifications have been
made to 2002 and 2001 to conform to the current presentation of the Companys
consolidated operations. Year Ended December 31,2003
    
    2002
    
    2001(in thousands)Operating revenues:Local telephone:Local network service
    
    $
    96,357
    
    
    $
    99,512
    
    
    $
    96,270Network access revenue
    
    
    97,759
    
    
    
    108,335
    
    
    
    102,977Deregulated revenue and other
    
    
    21,271
    
    
    
    18,600
    
    
    
    22,164Total local telephone
    
    
    215,387
    
    
    
    226,447
    
    
    
    221,411Wireless
    
    
    46,548
    
    
    
    43,180
    
    
    
    41,894Directory
    
    
    11,631
    
    
    
    33,604
    
    
    
    33,870Internet
    
    
    33,026
    
    
    
    20,847
    
    
    
    13,724Interexchange
    
    
    16,956
    
    
    
    16,066
    
    
    
    17,626Total
operating revenues
    
    
    323,548
    
    
    
    340,144
    
    
    
    328,525Operating expenses:Local telephone
    
    
    116,354
    
    
    
    114,582
    
    
    
    117,820Wireless
    
    
    31,064
    
    
    
    29,352
    
    
    
    27,429Directory
    
    
    5,249
    
    
    
    14,170
    
    
    
    14,684Internet
    
    
    45,523
    
    
    
    31,299
    
    
    
    16,577Interexchange
    
    
    25,542
    
    
    
    23,647
    
    
    
    25,784Contract termination and asset impairment charges
    
    
    54,858
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    82,185
    
    
    
    82,940
    
    
    
    79,108Loss (gain) on disposal of assets, net
    
    
    (112,622
    )
    
    
    2,163
    
    
    
    Goodwill impairment loss
    
    
    
    
    
    
    64,755
    
    
    
    Total
operating expenses
    
    
    248,153
    
    
    
    362,908
    
    
    
    281,402Operating income (loss)
    
    
    75,395
    
    
    
    (22,764
    )
    
    
    47,123Other income and expense:Interest expense
    
    
    (68,822
    )
    
    
    (49,113
    )
    
    
    (57,565
    )Interest income and other
    
    
    (9,408
    )
    
    
    2,203
    
    
    
    3,319Total other
income (expense)
    
    
    (78,230
    )
    
    
    (46,910
    )
    
    
    (54,246
    )Loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle
    
    
    (2,835
    )
    
    
    (69,674
    )
    
    
    (7,123
    )Income tax expense (benefit)
    
    
    1,095
    
    
    
    
    
    
    
    (195
    )Loss from continuing operations
    
    
    (3,930
    )
    
    
    (69,674
    )
    
    
    (6,928
    )Loss from discontinued operations
    
    
    (52
    )
    
    
    (7,632
    )
    
    
    (1,718
    )Loss before cumulative effect of change in accounting principle
    
    
    (3,982
    )
    
    
    (77,306
    )
    
    
    (8,646
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (105,350
    )
    
    
    Net loss
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )
 33




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##### Table of Contents



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Operating Revenues Operating revenues decreased $16.6 million, or 4.9%, for the year ended
December 31, 2003 compared to the year ended December 31, 2002. Wireless,
Internet, and interexchange revenues increased compared to the prior period,
while local telephone decreased. On May 8, 2003, the Company completed the sale
of a majority interest (87.42%) in its Directories Business. The Company did
not have any revenues from operations from the Directories Business after that
date. Local Telephone Local telephone revenues, which consist of local network service, network
access revenue, and deregulated revenues and other, decreased $11.1 million, or
4.9%, for the year ended December 31, 2003 compared to the same period in 2002. The local network service component of local telephone revenues was $96.4
million during 2003 compared with $99.5 million during 2002.Local network
service revenue decreased $3.2 million or 3.2% from the prior year, while
average access lines in service decreased 2.7% to 318,614. Substantially all of
the decrease reflects the net effect of retail market share losses offset by
increases in unbundled network element revenue. Retail access lines decreased
15,330 or 6.5% to 220,818 at December 31, 2003. The Company experienced a loss of direct retail customers during the year
as customers cancelled second lines they were not using or switched to
competing service providers. This reduction in direct retail customers was
partially offset by an increase in wholesale lines. Generally, if a retail
local network service customer of the Company switches to a competitor, the
Company continues to provide the line to the competitor on a wholesale basis at
reduced revenue per line. Management believes that the continuing loss of
market share it has experienced in certain of its markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs.
During the first quarter of 2000, the Company reopened interconnection
proceedings for its Anchorage market and during the second quarter of 2001
filed for an interim and refundable UNE rate increase of approximately $10 per
month per loop. On October 25, 2001, the RCA granted ACSA an interim UNE rate
increase of $1.07, bringing the UNE rate up from $13.85 to $14.92.The interim
and refundable rate increase was implemented in November 2001 and generated
approximately $0.8 million in additional revenue during 2003. The RCA held a
formal hearing on final Anchorage UNE rates during November 2003. The Company
cannot predict when the RCA will issue a final order in this matter or what the
outcome will be. See Business  Regulation under Item 1 of Part I of this
report for further discussion. The Company believes it is earning less than its authorized rate of return
for local network service in several of its markets and in compliance with APUC
orders related to the approval of the acquisition of the four LECs in 1999,
filed local service rate cases for all of its LEC businesses with the RCA on
July 2, 2001 aimed at making up this deficiency. The RCAs decisions on revenue
requirements will have a direct impact on the retail rates and intrastate
access rates that the Company is allowed to charge. A RCA finding of over
earnings generally leads to rate reductions while a RCA finding of under
earnings generally results in rate increases. In October 2001, the Company filed for increased interim and refundable
local service rates in its Anchorage market in order to expedite a partial
recovery of the total revenue deficiency. On November 15, 2001, the RCA
approved an interim and refundable rate increase for ACSA of 24% for certain
services.This interim and refundable rate increase was implemented in November
2001 and generated approximately $3.8 million in revenue for the year 2003. The
RCA concluded the revenue requirement phase of the hearing for ACSA by finding
ACSA to be under earning. By increasing the amount the Company is considered to
under earn, the RCA set the groundwork for increasing the rates the Company
charges so that the Company earns enough to cover investment requirements to
replace old assets. The Company expects the RCA to continue to hold rate
hearings during December 2004. 34




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On March 25, 2003, the RCA issued an order approving new revenue
requirements for ACSF, ACSAK, and ACSN. The RCA found over earnings by ACSF and
ACSN and under earnings by ACSAK. In compliance with RCA orders, ACSF, ACSAK,
ACSN have filed cost of service and rate design studies, and supporting
testimony, consistent with the RCA revenue requirements orders. On February 20,
2004, the RCA held a hearing to review a stipulated rate settlement. Final
rates are expected to be approved during the first half of 2004. Network access revenues decreased by $10.6 million, or 9.8%, from $108.3
million in 2002 to $97.8 million in 2003. During the second quarter of 2002,
the Company recognized as revenue $11.1 million of previously deferred
interstate access revenue related to a dispute on interstate access rates for
the Anchorage market based on a favorable ruling by the District of Columbia
Court of Appeals.Network access revenue is based on a regulated return on rate
base and recovery of allowable expense associated with the origination and
termination of toll calls for the Companys retail and resale customers.
Excluding the impact of the revenue recognized as a result of the favorable
ruling by the court, the increase in network access revenues of $0.5 million
compared to the corresponding period in 2002 is due primarily to updated access
studies. Management expects that network access revenues will generally be on a
declining trend for the foreseeable future. Deregulated and other revenues, which increased $2.7 million, or 14.4%
from 2002, consists principally of B&C services, space and power rents,
deregulated equipment sales, paystation revenues, regulated directory listing
revenue, and other miscellaneous telephone revenues The increase in deregulated
and other revenue was due primarily to an increase in rents and B&C revenue. Wireless Wireless revenues increased $3.4 million, or 7.8%, to $46.5 million for
the year ended December 31, 2003 compared to $43.2 million for the year ended
December 31, 2002.This increase is due primarily to growth in average
subscribers of 4.2% from 81,170 in 2002 to 84,619 in 2003. Subscriber average
minutes of use increased from 202 minutes in 2002 to 227 minutes in 2003.
Primarily as a result of increased minutes of use over plan allotments, the
monthly average revenue per unit, or ARPU, increased from $44.33 in 2002 to
$45.84 in 2003. Internet Internet revenues increased from $20.8 million in 2002 to $33.0 million in
2003  an increase of $12.2 million, or 58.4%.This increase is primarily due
to revenue associated with the Companys contract with the State of Alaska and
because approximately $1.2 million of this increase was earned in the prior
year but could not be estimated and therefore was not recorded until the
current year. Internet also experienced growth in DSL subscribers of 41.2% from
12,590 at December 31, 2002 to 17,780 at December 31, 2003. On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate a five year Telecommunications Services
Partnering Agreement with the Company and disentangle. Subsequently, the
Company and the State negotiated and agreed to a definitive Settlement
Agreement and Mutual Release effective October 14, 2003, outlining the terms of
disentanglement between the parties. The Company anticipates that revenue for
this segment will decrease in future periods as disentanglement occurs under
the agreement. State of Alaska contract revenues included in Internet were
$15.5 million and $8.0 million for the years ended December 31, 2003 and 2002,
respectively. Interexchange Interexchange revenue increased from $16.1 million in 2002 to $17.0
million in 2003  an increase of $0.9 million, or 5.5%. The increase in
interexchange revenue is due to an increase in intrastate revenue offset by a
decrease in interstate revenue. Long distance subscribers decreased from 70,000
in 2002 to 43,166 in 2003. The decrease in subscribers was substantially due to
database grooming to remove approximately 20,000 non-revenue generating
inactive subscribers from the subscriber list in connection with the conversion
of long distance billing from an outside service bureau to an in-house system
during the 35




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first and second quarters of 2003. The average revenue per unit, or ARPU,
increased to $24.97 in 2003 compared to $19.73 during 2002 and total minutes of
use decreased from 153.4 million in 2002 to 149.3 million in 2003. The decline
in minutes of use was due to increased competition in the marketplace, and the
popularity of discount long distance calling cards. The Company expects
the overall trend of declining minutes to continue. Currently, the Company has a low
penetration in this product, but the Company expects its market share to grow
as it increasingly offers attractive bundles to its customers, which
may offset declines in interexchange revenue due to the termination
of the State of Alaska contract. Operating Expenses Operating expenses decreased $114.8 million, or 31.6%, from $362.9 million
for the year ended December 31, 2002 to $248.2 million for the year ended
December 31, 2003. Included in operating expenses for 2003 is a net gain on
disposal of assets of $112.6 million and contract termination and asset
impairment charges of $54.9 million. Included in operating expenses for 2002 is
a goodwill impairment charge of $64.8 million and a net loss on disposal of
assets of $2.2 million. Excluding these charges, operating expenses increased
$9.9 million or 3.4%. On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in its Directories Business. The Company did not have any expenses
from operations from the Directories Business after this date. Depreciation and amortization associated with the operation of each of the
Companys segments has been included in total depreciation and amortization. Local Telephone The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and
property and other operating tax expense.Local telephone expense increased
from $114.6 million for the year ended December 31, 2002 to $116.4 million for
the year ended December 31, 2003  an increase of $1.8 million or 1.5%.The
increase in local telephone expense was substantially attributable to executive
recruiting and retirement costs, litigation reserves, and federal universal
service charges recorded during the third and fourth quarters of 2003. Wireless Wireless expense increased $1.7 million, or 5.8%, for the year ended
December 31, 2003 compared to the year ended December 31, 2002. This increase
is substantially due to an increase of minutes of use from 196.8 million in
2002 to 231.0 million in 2003. Internet Internet expenses increased by $14.2 million, or 45.4%. The increase in
Internet expense was due principally to transition expenses and operating costs
associated with providing services under the State of Alaska telecommunications
contract. State of Alaska contract related expense totaling $1.5 million was
incurred in the previous year but was recorded in the current year as it was
the first point in which the expense could be matched to the associated
revenue, as discussed above in Internet revenue. The Company and the State
negotiated and agreed to a definitive Settlement Agreement and Mutual Release
effective October 14, 2003, terminating the contract and outlining the terms of
disentanglement between the parties. The Company anticipates expense for this
segment to decline as it completes disentanglement under the contract. Interexchange Interexchange expenses increased by $1.9 million, or 8.0%. The majority of
this increase was caused by an increase in B&C fees, toll switching and
litigation reserves in 2003. 36




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Contract termination and asset impairment charges During the year ended December 31, 2003, the Company recorded $54.8
million in contract termination and asset impairment charges. These charges
resulted from (1) the termination of the TPA with the State of Alaska and (2)
an impairment of fiber optic indefeasible rights of use and IP network and
service center assets resulting from the termination of the TPA as well as
changes in the communications industry and the economy. The following table
itemizes the components of the contract termination and asset impairment
charges (in thousands). Contract termination charges:Contract termination payment
    
    $
    3,448Loss on disposal of assets
    
    
    5,648Accounts receivable and working capital
write-downs
    
    
    3,575Total contract termination charges
    
    
    12,671Asset impairment charges
    
    
    42,187Total contract termination and asset
impairment charges
    
    $
    54,858
 See Note 9 Contract Termination and Asset Impairment Charges in the Notes to
Consolidated Financial Statements included elsewhere in this 10-K for a
description of each element of the contract termination and asset impairment
charges. Depreciation and Amortization Depreciation and amortization expense decreased $0.8 million, or 0.9%. Loss (gain) on disposal of assets On April 28, 2003, the Company entered into an underwriting agreement to
sell a majority interest in its directory business and on April 29, 2003 filed
a final prospectus to offer this majority interest to investors through a
Canadian income fund. The transaction closed on May 8, 2003, with the Company
selling an 87.42% interest and retaining a 12.58% interest in its Directories
Business. The Company recognized a gain on disposition of this majority
interest of its Directories Business of $97.6 million on a pre-tax basis. Subsequently on August 27, 2003, the Company was released from a lockup
agreement relating to the remaining interest in the Directories Business and
the Company disposed of substantially all of its remaining interest through the
exercise of its right to convert 99.23% of its then remaining 12.58% interest
to 2.5 million units of the ACS Media Income Fund, which were then sold in an
underwritten offering. The transaction settled on September 4, 2003, generating
$17.2 million in net proceeds and a gain on disposition of $15.9 million. As a
result of this transaction, the Company now owns less than 0.1% of the
Directories Business. The Company also recorded a non-cash loss on the disposal of certain other
fixed assets of $0.9 million during 2003 and $2.2 million during 2002. Goodwill impairment loss The Company recorded a non-cash goodwill impairment charge during the
fourth quarter of 2002 of $64.8 million as a result of its annual goodwill
impairment test under SFAS No. 142, Goodwill and Intangible Assets. See Note 4
Goodwill and Other Intangible Assets in the Notes to Consolidated Financial
Statements included elsewhere in this 10-K for additional information. Interest Expense and Interest Income and Other Interest expense increased $19.7 million, or 40.1%, for the year ended
December 31, 2003 compared to the year ended December 31, 2002. As a result of
the early extinguishments of outstanding 37




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debt of $106.7 million during the
second quarter of 2003 and the refinancing of $320.7 million during the third
quarter of 2003, $13.1 million of debt issuance cost was charged to interest
expense. The Company also extinguished early its interest rate swap contract
during the fourth quarter of 2003, resulting in an additional charge of $5.1
million. During the second quarter of 2002, the Company reversed $1.7 million
of previously accrued interest expense as a result of a favorable ruling by the
District of Columbia Court of Appeals related to a dispute on interstate access
rates for the Anchorage market. In addition, the Company incurred additional
interest expense in 2003 under its new $182 million 9 7/8% senior unsecured
notes due 2011, offset by lower term loan balances and the results of market
interest rate effects on the Companys variable interest rate debt. Interest
income and other also declined by $11.6 million, due to a $15.9 million
non-operating impairment loss on a note receivable offset by the $4.3 million
gain on foreign exchange on the sale of the Directories Business. Income Taxes The Company has fully reserved the income tax benefit resulting from the
consolidated losses it has incurred since May 14, 1999  the date of the
acquisition of substantially all of its operations. During 2003, the Company
incurred $1.1 million in Alternative Minimum Tax as a result of the sale of its
Directories Business. Discontinued Operations On March 30, 2002, the Companys management approved a plan to offer for
sale its wireless cable television service segment. As a result of this
decision, the operating revenue and expense of this segment has been classified
as discontinued operations under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,for all periods presented and the assets and
liabilities of the disposal group have been written down to their fair value,
net of expected selling expense. The write down and results of operations of
this discontinued segment resulted in a charge to discontinued operations of
$52,000 and $7.6 million for the periods ended December 31, 2003 and 2002,
respectively. The Company has fully reserved in the form of a valuation
allowance the income tax benefit of this discontinuance. The Company completed
its disposal of its wireless cable television segment as of March 31, 2003. Cumulative Effect of Change in Accounting Principle During the second quarter of fiscal 2002, the Company also completed the
transitional review for goodwill impairment required under SFAS No. 142,
Goodwill and Intangible Assets. This review indicated that goodwill recorded in
the local telephone, Internet and interexchange segments was impaired as of
January 1, 2002. Accordingly, the Company measured and recognized a
transitional impairment loss of $105.4 million as a cumulative effect of a
change in accounting principle. See Note 4 Goodwill and Other Intangible
Assets in the Notes to Consolidated Financial Statements included elsewhere in
this 10-K for additional discussion of the impact of this statement on the
Companys consolidated financial statements. Net Loss The decrease in net loss is primarily a result of the factors discussed
above. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Operating Revenues Operating revenues increased $11.6 million, or 3.5%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001. Local
telephone, wireless and Internet revenues increased compared to the prior
period. 38




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Local Telephone Local telephone revenues increased $5.0 million, or 2.3%, for the year
ended December 31, 2002 compared to the same period in 2001. The local network service component of local telephone revenues was $99.5
million during 2002 compared with $96.3 million during 2001.Revenue increased
$3.2 million or 3.4% from the prior year, while average access lines in service
decreased 1.0% to 327,965. The increase in revenue is due to an increase of
approximately $2.1 million in additional feature, service order, directory
assistance and wireless access revenue and approximately $1.1 million of
additional local private line revenue. The revenue increase from approximately
$4.9 million of rate increases for both retail and UNE local service rates
implemented during the fourth quarter of 2001 at ACSA, as discussed below, was
offset in part by promotion to enhance customer loyalty and loss of direct
retail lines as customers cancelled second lines they were no longer using and
some customers switched to competing service providers. While the Company
receives revenue from competing service providers for providing access to the
Companys customers on a wholesale basis, below-cost UNE rates reduce the
Companys ability to profit from wholesale. The Company believes it is earning less than its required rate of return
for local network service in several of its markets and filed local service
rate cases for all of its LEC businesses with the RCA on July 2, 2001 aimed at
making up this deficiency. Subsequently, in October 2001, the Company filed for
interim and refundable local service rates in its Anchorage market in order to
expedite a partial recovery of the total revenue deficiency. On November 15,
2001 the RCA approved an interim and refundable rate increase for ACSA of 24%
for certain services.This interim and refundable rate increase was implemented
in November 2001 and generated approximately $4.2 million in additional revenue
in 2002. The Company expects the RCA to continue to hold hearings during 2003
and to adjudicate final local service rates during 2003 or 2004. The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau service areas during the
year. Generally, when the Company loses a retail local network service customer
to a competitor, the Company continues to provide the line to the competitor on
a wholesale basis at reduced revenue per line. Management believes that the
continuing loss of market share it has experienced in certain of its markets is
partially attributable to below cost interconnection rates mandated by the RCA
for UNEs. During the second quarter of 2001, the Company reopened
interconnection proceedings for its Anchorage market and filed for an interim
and refundable UNE rate increase of approximately $10 per month per loop. On
October 25, 2001, the RCA granted ACSA an interim and refundable UNE rate
increase of $1.07, increasing the UNE rates from $13.85 to $14.92. The interim
and refundable rate increase was implemented in November 2001 and generated
approximately $0.7 million in additional revenue during 2002. The RCA held a
formal hearing on Anchorage UNE rates during November 2003. The Company cannot
predict when the RCA will issue a final order in this matter or what the
outcome will be. See Business  Regulation under Item 1 of Part I of this
report for further discussion. Network access revenues increased by $5.4 million, or 5.2%, from $103.0
million in 2001 to $108.3 million in 2002. During the second quarter of 2002,
the Company recognized as revenue $11.1
million of previously deferred interstate access revenue related to a
dispute on interstate access rates for the Anchorage market based on a
favorable ruling by the District of Columbia Court of Appeals. Excluding the
impact of the revenue recognized as a result of the favorable ruling by the
court, the decrease in network access revenue compared to the corresponding
period in 2001 is due primarily to a shift from retail and wholesale lines to
UNEs.Management expects that network access revenue will decline as a
component of local telephone revenue for the foreseeable future. Deregulated and other revenues declined $3.6 million, or 16.1% from 2001.
The decline in deregulated and other revenue was due primarily to a decrease in
deregulated equipment sales of approximately $3.0 million. CPE sales tend to
fluctuate significantly from quarter to quarter and management believes they
have also been impacted by recent economic concerns in the marketplace and
technology alternatives. 39




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Wireless Wireless revenues increased $1.3 million, or 3.1%, to $43.2 million for
the year ended December 31, 2002 compared to $41.9 million for the year ended
December 31, 2001.This increase is due primarily to growth in average
subscribers of 4.0% from 78,027 in 2001 to 81,170 in 2002. Average revenue per
unit, or ARPU, decreased slightly from $44.74 in 2001 to $44.33 in 2002. Directory Directory revenues decreased slightly to $33.6 million in 2002 from $33.9
million in 2001. Internet Internet revenues increased from $13.7 million in 2001 to $20.8 million in
2002  an increase of $7.1 million, or 51.9%.This increase is primarily due
to revenue associated with the Companys contract with the State of Alaska and
growth in DSL subscribers of 78.8% from 7,041 in 2001 to 12,590 in 2002. Also
contributing to the increase was the additional revenues resulting from the
acquisition of MosquitoNet in July of 2001. On December 10, 2001, the Company entered into a five year contract with
the State of Alaska to provide a broad range of telecommunications services,
many of which will be provided over an IP network and supported by a service
center owned and operated by ACSI. Services under this contract began to be
implemented during the second quarter of 2002. The Company made substantial
capital investments to support the telecommunications needs of this customer,
totaling approximately $12.4 million through December 31, 2002. Interexchange Interexchange revenue decreased from $17.6 million in 2001 to $16.1
million in 2002  a decrease of $1.6 million, or 8.9%. The decrease was due to
a decline in long distance minutes of use from 219.6 million in 2001 to 153.4
million in 2002. Long distance subscribers increased from 65,705 at December
31, 2001 to 70,000 at December 31, 2002. The decline in minutes of use was due
to the Companys decision to modify and cap a previously unlimited $20 per
month interstate calling plan in May of 2001, increased competition in the
marketplace, and the popularity of discount long distance calling
cards. During the first and second quarters of 2003, approximately
20,000 non-revenue generating inactive subscribers were removed
from the subscriber lists due to database grooming. Operating Expenses Operating expenses increased $81.5 million, or 29.0%, from $281.4 million
for the year ended December 31, 2001 to $362.9 million for the year ended
December 31, 2002. Local Telephone Local telephone expense decreased from $117.8 million for the year ended
December 31, 2001 to $114.6 million for the year ended December 31, 2002  a
decrease of $3.2 million or 2.7%.As a percentage of local telephone revenue,
local telephone expense decreased from 53.2% for 2001 to 50.6% for 2002. These
results reflect continued improvements in the Companys cost structure,
including workforce reductions and benefits derived from the deployment of
information systems. Wireless Wireless expense increased $1.9 million, or 7.0%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001. This increase
is substantially due to an increase of minutes of use from 162.0 million in
2001 to 196.8 million in 2002. 40




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Directory Directory expense decreased $0.5 million from $14.7 million in 2001 to
$14.2 million in 2002. The decline in expenses is due to a decrease in costs of
goods sold in 2002. Internet Internet expenses increased by $14.7 million, or 88.8%. The increase in
Internet expense was due principally to start-up expenses associated with
commencing services under the State of Alaska telecommunications contract,
which the Company entered into on December 10, 2001. Interexchange Interexchange expenses decreased by $2.1 million, or 8.3%. The majority of
this decrease was the result of the decline in long distance minutes of use as
discussed under interexchange service revenue. Depreciation and Amortization Depreciation and amortization expense increased $3.8 million, or 4.8%, due
principally to increases in plant in service in 2002 and the adoption of
shorter depreciable lives for certain classes of assets over the corresponding
period of 2001, offset by ceasing goodwill amortization with the adoption of
SFAS No. 142, Goodwill and Intangible Assetson January 1, 2002. Depreciation
and amortization expense in 2001 included $7.7 million of goodwill
amortization. Under SFAS No. 142, goodwill is no longer amortized but is
instead subjected to an annual impairment test. Loss on disposal of assets The Company recorded a non-cash loss on disposal of assets of $2.2 million
during 2002 as a result of retiring certain assets no longer in use which were
not fully depreciated at their retirement date. Goodwill impairment loss The Company recorded a non-cash goodwill impairment charge during the
fourth quarter of 2002 of $64.8 million as a result of its annual goodwill
impairment test under SFAS No. 142, Goodwill and Intangible Assets. See Note 4
Goodwill and Other Intangible Assets in the Notes to Consolidated Financial
Statements included elsewhere in this 10-K for additional information. Interest Expense and Interest Income and other Interest expense decreased $8.5 million, or 14.7%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001, principally as
a result of market effects on the Companys variable interest rate debt.In
addition, during the second quarter of 2002, the Company reversed previously
accrued interest expense of $1.7 million as a result of a favorable ruling by
the District of Columbia Court
of Appeals related to a dispute on interstate access rates for the Anchorage
market. Interest income and other also declined by $1.1 million, or 32.2%, as a
result of a lower average invested cash balance and lower market interest rates
during 2002 compared to 2001. Income Taxes The Company has fully reserved the income tax benefit resulting from the
consolidated losses it has incurred since May 14, 1999  the date of the
acquisition of substantially all of its operations. Discontinued Operations On March 30, 2002, the Companys management approved a plan to offer for
sale its wireless cable television service segment. As a result of this
decision, the operating revenue and expense of this segment has been classified
as discontinued operations under SFAS No. 144, Accounting for the 41




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Impairment or
Disposal of Long-Lived Assets,for all periods presented and the assets and
liabilities of the disposal group have been written down to their fair value,
net of expected selling expense. The write down and results of operations of
this discontinued segment resulted in a charge to discontinued operations of
$7.6 million and $1.7 million for the periods ended December 31, 2002 and 2001,
respectively. The Company has fully reserved in the form of a valuation
allowance the income tax benefit of this discontinuance. Cumulative Effect of Change in Accounting Principle During the second quarter of fiscal 2002, the Company also completed the
transitional review for goodwill impairment required under SFAS No. 142,
Goodwill and Intangible Assets. This review indicated that goodwill recorded in
the local telephone, Internet and interexchange segments was impaired as of
January 1, 2002. Accordingly, the Company measured and recognized a
transitional impairment loss of $105.4 million as a cumulative effect of a
change in accounting principle. See Note 4 Goodwill and Other Intangible
Assets in the Notes to Consolidated Financial Statements included elsewhere in
this 10-K for additional discussion of the impact of this statement on the
Companys consolidated financial statements. Net Loss The increase in net loss is primarily a result of the factors discussed
above. Liquidity and Capital Resources The Company has satisfied its cash requirements for operations, capital
expenditures and debt service primarily through internally generated funds, the
sale of ACS Group stock and subsequent contribution of capital by ACS Group,
and debt financing. For the year ended December 31, 2003 the Companys cash
flows from operating activities were $55.2 million. At December 31, 2003, the
Company had approximately $96.3 million in net working capital, with
approximately $97.8 million represented by cash and cash equivalents and $3.6
million by restricted cash. As of December 31, 2003 the Company had $50.0
million of remaining capacity under its revolving credit facility, representing
100% of available capacity. The Company has outstanding a $200.0 million bank credit agreement
(Senior Credit Facility), $150.0 million in 9.375% senior subordinated notes
due 2009 and $182.0 million in 9.875% senior unsecured notes due, representing
substantially all of the Companys long-term debt of $535.0 million as of
December 31, 2003.In addition, $17.3 million in 13% senior discount debentures
due 2011 are recorded at ACS Group and are collateralized by substantially all
assets of the Company. Interest on the Companys senior subordinated notes and
senior unsecured notes and ACS Groups senior discount debentures is payable
semiannually.Interest on borrowings under the Senior Credit Facility is
payable monthly, bi-monthly, quarterly or semi-annually at the Companys
option. The Senior Credit Facility requires $500,000 quarterly principal
payments that commence on March 31, 2004, with the balance due in 2010. The
Senior Credit Facility contains a number of restrictive covenants and events of
default, including covenants limiting capital expenditures, incurrence of debt, and the payment of
dividends, and requires the Company to achieve certain financial ratios. The
Company is in compliance with all of its debt covenants. On July 15, 2002 the Company fulfilled a commitment to Neptune to provide
a loan for the aggregate principal amount of $15 million in return for certain
consideration. The Company has an agreement that enables it to purchase
additional fiber optic capacity in future years from Neptune, the expenditures
for which are expected to be significant and may exceed $25 million over the
next four years. While the Company has an agreement with Neptune, certain
material terms of the agreement remain subject to continued renegotiation. The
significant provisions of this agreement are: i) purchase commitments by the
Company for capacity in 2005 and 2007, the final price and quantity of which
are subject to future events, ii) Neptunes restoration of the Companys
traffic carried on another cable system, iii) interconnection arrangements
between the Company and Neptune, should the Company exercise its option to
purchase certain network assets from Neptune. The Company is currently
negotiating open elements of its agreement with Neptune and renegotiating other
terms and conditions of the agreement. It is impossible 42




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to determine the
ultimate outcome of these negotiations at this time. The loan was written down
to zero, its estimated fair value during the quarter ended September 30, 2003
as described in Note 11 Non-operating Charges of the financial statements
attached hereto. The following summarizes the Companys contractual obligations and
commitments with quantifiable payment terms as of December 31, 2003: Total
    
    2004
    
    2005-2006
    
    2007-2008
    
    ThereafterLong-term debt
    
    $
    526,144
    
    
    $
    1,466
    
    
    $
    2,753
    
    
    $
    2,470
    
    
    $
    519,455Capital leases
    
    
    7,860
    
    
    
    621
    
    
    
    1,462
    
    
    
    1,517
    
    
    
    4,260Operating leases
    
    
    7,420
    
    
    
    1,939
    
    
    
    3,009
    
    
    
    1,722
    
    
    
    750Unconditional purchase obligations
    
    
    4,774
    
    
    
    2,015
    
    
    
    2,609
    
    
    
    150
    
    
    
    Total contractual cash obligations
    
    $
    546,198
    
    
    $
    6,041
    
    
    $
    9,833
    
    
    $
    5,859
    
    
    $
    524,465
 The Company also has obligations for material cash interest payments on it
long-term debt that is not included in the table above. Approximately 36% of
the Companys debt at December 31, 2003 is variable. See Quantitative and
Qualitative Disclosures about Market Risk for more information. The local telephone network requires the timely maintenance of plant and
infrastructure. The Companys historical capital expenditures have been
significant. The construction and geographic expansion of the Companys
wireless network has required significant capital. The implementation of the
Companys interexchange network and data services strategy is also capital
intensive. Capital expenditures for 2002 were $71.5 million, including $4.2
million in capital leases, approximately $12.4 million necessary to meet its
obligations under a contract with the State of Alaska and approximately $6.2
million for the first phases of its buildout of a CDMA network based on its PCS
licenses. Capital expenditures for 2003 were $50.7 million, of which $11.5
million was expended on CDMA build out and $3.5 million was expended on the
TPA. The Company anticipates capital spending of between $50 million and $55
million for 2004. The Company intends to fund its future capital expenditures
with cash on hand, through internally generated cash flows, and if necessary,
through borrowings under the revolving credit facility. On May 8, 2003, the Company completed the sale of a majority interest in
the Directories Business for net proceeds of $110.4 million, after deducting
its underwriters fees and transaction expenses of $10.2 million. The Funds
net proceeds were used to acquire from the Company an 87.42% interest in the
Directories Business. The Company received net proceeds of $105.1 million after
deducting its fees and expenses associated with the transaction of $5.3
million. The Company entered into an arrangement with the Metropolitan Life
Insurance Company (MetLife) to provide a credit facility to its Directories
Business on May 8, 2003 immediately prior to the sale of its Directories
Business to the Fund. The Directories Business then drew $35.0 million of term
loans against the facility, using $1.5 million to pay fees and expenses related
to the debt issuance and $0.1 million to prepay an annual agency fee to
MetLife. Of the $33.4 million in net cash proceeds, $0.4 million
was deposited into the Directories Business as cash working capital and
$33.0 million was distributed to the Company as a dividend. The credit facility
is non-recourse to the Company. Subsequently, on August 27, 2003, the Company disposed of substantially
all of its remaining interest in the Directories Business through the exercise
of its right to convert 99.23% of its then remaining 12.58% interest in the
Directories Business to 2.5 million units of the Fund, which were then sold in
an underwritten offering. The transaction settled on September 4, 2003,
generating $17.1 in net proceeds. During the first quarter of 2003, the Companys lenders approved an
amendment and waiver to its Senior Credit Facility that, among other things,
permitted the Company to sell its Directories Business and required that in the
event the sale was completed, 75% of proceeds would be used to repay
outstanding Senior Credit Facility term loans. This amendment and waiver became
effective on May 8, 2003, and on May 13, 2003, the Company paid down $106.7
million of the outstanding Senior Credit Facility term loans. On August 26, 2003, the Company completed the refinancing of its Senior
Credit Facility term loans. The Company entered into a new $250.0 million
Senior Credit Facility consisting of a term loan 43




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##### Table of Contents



facility in an aggregate
principal amount of $200.0 million and an undrawn revolving credit facility in
an aggregate principal amount of $50.0 million. The Company simultaneously
issued $182.0 million aggregate principal amount of 9 7/8% senior unsecured
notes due 2011 at an issue price of approximately 96.7% for net proceeds of
$176.0 million. From these proceeds, the Company paid off $320.7 million of its
then existing credit facility. The Companys capital requirements may change due to, among other things:
impacts of regulatory decisions that affect the Companys ability to recover
its investments, changes in technology, the effects of competition, changes in
the Companys business strategy, and the Companys decision to pursue specific
acquisition opportunities. The Company believes that it will have sufficient working capital provided
by operations and available borrowing capacity under the existing revolving
credit facility to service its debt and fund its operations, capital
expenditures and other obligations over the next 12 months.The Companys
ability to service its debt and fund its operations, capital expenditures and
other obligations will be dependent upon its future financial performance,
which is, in turn, subject to future economic conditions and to financial,
business, regulatory and other factors, many of which are beyond the Companys
control. Effect of New Accounting Standards On August 15, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143,Accounting for Asset Retirement Obligations. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This standard generally
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset. Under the new accounting method, asset
retirement obligations are recognized in the period in which they are incurred
if a reasonable estimate of fair value can be made. When the liability is
initially recorded, the cost is capitalized and increases the carrying value of
the related long-lived asset. The liability is then accreted to its present
value each period and the capitalized cost is depreciated over the estimated
useful life of the related asset. At the settlement date, the obligation is
settled for its recorded amount or a gain or loss is recognized upon
settlement. In accordance with federal and state regulations, depreciation expense for
the Companys local exchange carriers regulated operations have historically
included an additional provision for cost of removal. Under SFAS No. 143, the
additional cost of removal provision would no longer be included in
depreciation expense, because it does not meet the recognition and measurement
principles of an asset retirement obligation. On December 20, 2002, the FCC
notified local exchange carriers that they should not adopt the provisions of
SFAS No. 143 unless specifically required by the FCC in the future. As a result
of the FCC ruling, the Company will continue to record depreciation expense for
cost of removal for its local exchange carrier subsidiaries that follow SFAS
No. 71. Prior to SFAS 143, asset removal costs that qualified and did not
qualify for asset retirement obligations were recorded in Accumulated
depreciation. The accumulated asset retirement removal costs for 2003 were
reclassified as regulatory liabilities in accordance with SFAS No. 143 and SFAS
No. 71. Accumulated retirement removal costs in other deferred credits and
long-term liabilities not qualifying for asset retirement obligations were
$50.5 million at December 31, 2003. For 2002, $50.9 million in asset retirement
costs have been reclassified from Accumulated depreciation to accumulated
retirement removal costs in other deferred credits and long-term liabilities. The Company applied the provisions of SFAS No. 143 to its nonregulated
subsidiaries effective January 1, 2003. The Companys wireless segment has
entered into cell site operating leases, which are subject to the provisions of
this statement. Cell site lease agreements may contain clauses requiring
restoration of the leased site at the end of the lease term, creating an asset
retirement obligation. Landlords may choose not to exercise these rights as
cell sites are considered useful improvements. The Companys initial adoption
of this statement did not have a material impact on its results of operations,
financial position or cash flows. 44




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##### Table of Contents



In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.SFAS No. 146 requires that companies
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Companys adoption of this statement did
not have a material impact on its financial position, results of operations, or
cash flows. On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not currently have plans to change to the fair value
method of accounting for its stock based compensation. The disclosure
requirements are now effective. On April 30, 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Companys adoption of this statement did not have a material impact
on its financial position, results of operations, or cash flows. On May 15, 2003, FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
new Statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 had no effect on
the Companys financial position, results of operations or cash flows.
Subsequently, the Company entered into an agreement in September 2003 with a
retiring officer to reacquire 267 shares of the Companys stock owned by the
officer in January 2004. As a result the Company has classified those shares as
shares subject to mandatory redemption within stockholders equity, as described
in Note 18 Related Party Transactions. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires
additional disclosures
by a guarantor in its interim and annual financial statements about the
obligations associated with guarantees issued. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The recognition and measurement provisions are effective on
a prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 had no effect on the Companys financial position,
results of operations or cash flows. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities(revised December 2003). FIN 46
addresses when a company should include in its financial statements the assets,
liabilities and activities of a variable interest entity. FIN 46 defines
variable interest entities as those entities with a business purpose that
either do not have any equity investors with voting rights, or have equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate, but in which
it has a significant variable interest. FIN 46 consolidation requirements are
effective for all variable interest entities created after January 31, 2003,
and to pre-existing entities in the first fiscal year or interim period ending
after December 15, 2003. Certain disclosure requirements are effective for
financial statements issued after January 31, 2003. The adoption of FIN 46 has
no effect on the Companys financial position, results of operations or cash
flows. 45




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##### Table of Contents



Outlook The Company expects that, overall, the demand for telecommunications
services in Alaska will grow, particularly as a result of:  
    
    increasing demand for private network services by
government and business on a statewide basis on either a circuit
switched or IP basis,  
    
    increasing demand for wireless voice and data
services, and  
    
    growth in demand for DSL and Internet access services
due to higher business and consumer bandwidth needs. The Company believes that it will be able to capitalize on this demand
through its diverse service offerings on its owned circuit switched and IP
facilities and new sales and marketing initiatives directed toward basic voice,
enhanced and data services. There are currently a number of regulatory proceedings underway at the
state and federal levels that could have a significant impact on the Companys
operations.The Company cannot predict with certainty the impact of current or
future regulatory developments on any of its businesses. The telecommunications industry is extremely competitive, and the Company
expects competition to intensify in the future. As an ILEC, the Company faces
competition mainly from resellers, local providers who lease its UNEs and, to a
lesser degree, from facilities-based providers of local telephone services.
Moreover, while wireless telephone services have historically complemented
traditional LEC services, the Company anticipates that existing and emerging
wireless technologies may increasingly compete with LEC services. Similarly,
local and interexchange service competition may come from cable television
providers and voice over IP providers. In wireless services, the Company
currently competes with at least one other wireless provider in each of its
wireless service areas. In the highly competitive business for Internet access
services, the Company currently competes with a number of established online
service companies, interexchange carriers and cable companies. In the
interexchange market, the Company believes it currently has less than 5% of
total revenue in Alaska and faces competition from the two major interexchange
providers. The telecommunications industry is subject to continuous technological
change. The Company expects that new technological developments in the future
will generally serve to enhance its ability to provide service to its
customers.However, these developments may also increase competition or require
the Company to make significant capital investments to maintain its leadership
position in Alaska. Impact of Inflation The effect of inflation on the Companys financial results has not been
significant in the periods presented. 46




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company has issued senior subordinated notes and senior unsecured
notes and has entered into a bank credit facility. These on-balance sheet
financial instruments, to the extent they provide for variable rates of
interest, expose the Company to interest rate risk, with the primary interest
rate risk exposure resulting from changes in LIBOR or the prime rate, which are
used to determine the interest rates that are applicable to borrowings under
the Companys bank credit facility. The Company used derivative financial instruments, specifically an
interest rate swap agreement, to partially hedge variable interest
transactions. The Company ended its interest rate swap agreement in November
2003. The Companys derivative financial instrument transaction was entered
into for hedging purposes only. The terms and characteristics of the derivative
financial instruments were matched with the underlying on-balance sheet
instrument and did not constitute speculative or leveraged positions
independent of these exposures. The table below provides information about the Companys sensitivity to
market risk associated with fluctuations in interest rates as of December 31,
2003. To the extent that the Companys financial instruments expose the Company
to interest rate risk, they are presented within each market risk category in
the table below. The table presents principal cash flows and related expected
interest rates by year of maturity for the Companys bank credit facilities,
senior subordinated notes, senior unsecured notes, and capital leases and other
long-term obligations outstanding at December 31, 2003. Weighted average
variable rates for the bank credit facilities are based on implied forward
rates in the LIBOR yield curve as of December 31, 2003. Fair values included
herein have been determined based on (i) the carrying value for the bank credit
facility at December 31, 2003, as interest rates are reset periodically; (ii)
quoted market prices for senior subordinated notes; and (iii) quoted market
prices for senior subordinated notes. Alaska Communications Systems Holdings,
Inc.s Consolidated Financial Statements contain descriptions of the credit
facility, senior subordinated notes, senior unsecured notes, and capital leases
and other long-term obligations and should be read in conjunction with the
table below. Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    ValueInterest Bearing Liabilities:Bank credit facility
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    190,000
    
    
    $
    200,000
    
    
    $
    200,000Weighted average interest rate (variable)
    
    
    4.78
    %
    
    
    6.22
    %
    
    
    7.32
    %
    
    
    7.99
    %
    
    
    8.52
    %
    
    
    8.82
    %
    
    
    8.73
    %Senior subordinated notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150000
    
    
    $
    150000
    
    
    $
    150000Average interest rate (fixed)
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %Senior unsecured notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    182000
    
    
    $
    182000
    
    
    $
    191100Average interest rate (fixed)
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %Capital leases and other long-term
    
    $
    802
    
    
    $
    884
    
    
    $
    967
    
    
    $
    1024
    
    
    $
    923
    
    
    $
    4260
    
    
    $
    8860
    
    
    $
    8860Average interest rate (fixed)
    
    
    9.73
    %
    
    
    9.78
    %
    
    
    9.84
    %
    
    
    9.93
    %
    
    
    10.09
    %
    
    
    10.66
    %
    
    
    10.25
    %
 47




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##### Table of Contents



The table below provides information about the Companys sensitivity to
market risk associated with fluctuations in interest rates as of December 31,
2002. To the extent that the Companys financial instruments expose the Company
to interest rate risk, they are presented within each market risk category in
the table below. The table presents principal cash flows and related expected
interest rates by year of maturity for the Companys bank credit facilities,
senior subordinated notes, and capital leases and other long-term obligations
outstanding at December 31, 2002. Weighted average variable rates for the bank
credit facilities are based on implied forward rates in the LIBOR yield curve
as of December 31, 2002. For the interest rate swap agreement, the table
presents the notional amount and the related reference interest rates by year
of maturity. Fair values included herein have been determined based on (i) the
carrying value for the bank credit facility at December 31, 2002, as interest
rates are reset periodically; (ii) quoted market prices for senior subordinated
notes; and (iii) quoted prices from a financial institution for the Companys
swap agreement. Alaska Communications Systems Holdings, Inc.s Consolidated
Financial Statements contain descriptions of the senior subordinated notes,
credit facility, capital leases and other long-term obligations and the
interest rate swap agreement and should be read in conjunction with the table
below. Fair2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    Total
    
    Value(dollars in thousands)Interest Bearing Liabilities:Bank credit
facility - tranche A
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    144,000
    
    
    $
    
    
    
    $
    
    
    
    $
    148,500
    
    
    $
    148,500Weighted average interest rate (variable)
    
    
    3.62
    %
    
    
    4.40
    %
    
    
    5.53
    %
    
    
    6.25
    %
    
    
    
    
    
    
    
    
    
    
    4.95
    %Bank credit
facility - tranche B
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    142,500
    
    
    $
    
    
    
    $
    148,500
    
    
    $
    148,500Weighted average interest rate (variable)
    
    
    4.37
    %
    
    
    5.15
    %
    
    
    6.28
    %
    
    
    7.03
    %
    
    
    7.52
    %
    
    
    
    
    
    
    6.07
    %Bank credit
facility - tranche C
    
    $
    1,350
    
    
    $
    1,350
    
    
    $
    1,350
    
    
    $
    1,350
    
    
    $
    1,350
    
    
    $
    126,900
    
    
    $
    133,650
    
    
    $
    133,650Weighted average interest rate (variable)
    
    
    4.62
    %
    
    
    5.40
    %
    
    
    6.53
    %
    
    
    7.28
    %
    
    
    7.80
    %
    
    
    8.11
    %
    
    
    6.62
    %Senior subordinated notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000
    
    
    $
    107,250Average interest rate (fixed)
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %Capital leases and other long-term
    
    $
    1,583
    
    
    $
    1,710
    
    
    $
    910
    
    
    $
    996
    
    
    $
    1,058
    
    
    $
    5,924
    
    
    $
    12,181
    
    
    $
    12,181Average interest rate (fixed)
    
    
    8.06
    %
    
    
    8.09
    %
    
    
    8.11
    %
    
    
    8.13
    %
    
    
    8.16
    %
    
    
    9.46
    %
    
    
    8.34
    %Interest Rate Derivatives:Variable to Fixed Interest Rate Swap
Notional amount
    
    
    
    
    
    
    
    
    
    $
    217,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,152Fixed Rate Payable
    
    
    5.99
    %
    
    
    5.99
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.99
    %Weighted average Variable
Rate Receivable
    
    
    1.37
    %
    
    
    1.61
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.49
    %
 
 Item 8. Financial Statements and Supplementary Data Consolidated financial statements of Alaska Communications Systems
Holdings, Inc. and Subsidiaries are submitted as a separate section of this
Form 10-K.See Index to Consolidated Financial Statements and Schedule, which
appears on page F-1 hereof. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 
 Item 9A. Controls and Procedures Evaluation of disclosure controls and procedures The Company carried out an evaluation of the effectiveness of the design
and operation of the Companys disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and its Chief Financial Officer. Based
upon that evaluation, the Companys Chief 48




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##### Table of Contents



Executive Officer and its Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure. Changes in internal controls There were no significant changes in the Companys internal controls or,
to its knowledge, in other factors that could significantly affect its
disclosure controls and procedures subsequent to the date the Company carried
out this evaluation. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant Omitted pursuant to General Instruction I (2)(c) of Form 10-K. 
 Item 11. Executive Compensation Omitted pursuant to General Instruction I (2)(c) of Form 10-K. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters Omitted pursuant to General Instruction I (2)(c) of Form 10-K. 
 Item 13. Certain Relationships and Related Transactions Omitted pursuant to General Instruction I (2)(c) of Form 10-K. 
 Item 14. Principal Accountant Fees and Services Audit Fees The Sarbanes-Oxley Act passed by Congress in July of 2002, requires that
the audit committee be directly responsible for the appointment, compensation,
and oversight of the independent auditor. At a meeting of the Audit Committee
held on April 23, 2003, the Committee unanimously approved the
appointment of Deloitte & Touche LLP as the Companys independent auditors for
the year ending December 31, 2003. Deloitte & Touche LLP has examined the
financial statements of the Company since 1999. 49




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##### Table of Contents



The following summarizes the fees paid to Deloitte & Touche for services
rendered during 2003 and 2002: 2003
    
    2002Audit Fees
    
    $
    684,500
    
    
    $
    450,400Audit Related Fees
    
    
    84,500
    
    
    
    24,925Tax Fees
    
    
    4,885
    
    
    
    12,794All Other Fees
    
    
    207,661
    
    
    
    61,807Total
    
    $
    981,546
    
    
    $
    549,926
 Audit Fees This category includes the audit of the Companys annual
financial statements, the reviews of the condensed financial statements
included in the Companys quarterly reports on Form 10-Q and services for SEC
filings related to the Companys debt refinancing in 2003. Audit-Related Fees This category includes the cost allocation manual
audit in 2002 and services related to correspondence with the SEC in relation
to their review of the Companys annual report on Form 10-K and quarterly
reports on Form 10-Q in 2003. Tax Fees This category includes tax compliance, tax planning, and
general tax advice. All Other Fees This category includes a special forensic audit in 2003
and a special audit of the Companys information technology network in 2002. The Audit Committee of ACS Groups Board of Directors has considered
whether Deloitte & Touches provision of services other than services rendered
in connection with the audit of the Companys annual financial statements is
compatible with maintaining Deloitte & Touches independence. In January 2003,
the Audit Committee implemented a process of pre-approval of engagements of
Deloitte & Touche for services as required by the Sarbanes-Oxley Act of 2002
and related rules issued by the United States Securities and Exchange
Commission. All services engaged after January 2003 by Deloitte & Touche were
pre-approved by the Audit Committee. 50




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (a)
    
    1. Financial StatementsThe consolidated financial statements of the Company are submitted as a
separate section of this Form 10-K. See Index to Consolidated Financial
Statements and Schedule which appears on page F-1 hereof.
2. Financial Statement ScheduleFinancial statement schedules for the Company and its subsidiaries are
submitted as a separate section of this Form 10-K. See Index to
Consolidated Financial Statements and Schedule which appears on page F-1
hereof.(b)
    
    Reports on Form 8-KNo reports on Form 8-K were filed during the quarter ended December 31,
2003. 51




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##### Table of Contents



(c)
    
    Exhibits ExhibitNo.
    
    Description2.1
    
    Purchase Agreement, dated as of August 14, 1998, as amended,
by and among ALEC Acquisition Sub Corp., CenturyTel of the
Northwest, Inc. and CenturyTel Wireless, Inc. (1)2.2
    
    Asset Purchase Agreement, dated as of October 20, 1998, by and
between Alaska Communications Systems, Inc. and the
Municipality of Anchorage (1)3.1
    
    Articles of Incorporation of the Registrant (4)3.2
    
    By-Laws of the Registrant (4)4.5
    
    Indenture, dated as of May 14, 1999, by and between Alaska
Communications Systems Holdings, Inc., the Guarantors (as
defined therein) and IBJ Whitehall Bank & Trust Company (1)4.6
    
    Purchase Agreement, dated as of May 11, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Guarantors,
Chase Securities Inc., CIBC World Markets Corp. and Credit
Suisse First Boston Corporation (1)4.7
    
    Indenture, dated as of May 14, 1999, by and between Alaska
Communications Systems Group, Inc. and The Bank of New York
(1)4.8
    
    First Amendment, dated as of October 29, 1999, to Indenture
listed as Exhibit No. 4.7 (2)4.9
    
    Form of Second Amendment dated as of November 17, 1999 to
Indenture listed as Exhibit No. 4.7 (3)4.10
    
    Purchase Agreement, dated as of May 11, 1999, by and among
Alaska Communications Systems Group, Inc., DLJ Investment
Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II,
L.P. (1)4.11
    
    Indenture, dated as of August 26, 2003, among Alaska
Communications Systems Holdings, Inc., as Issuer, the
Guarantors (as defined therein) and The Bank of New York, as
trustee. (5)10.1
    
    Exchange and Registration Rights Agreement, dated as of May
14, 1999, by and among Alaska Communications Systems Holdings,
Inc., the Guarantors, Chase Securities Inc., CIBC World
Markets Corp. and Credit Suisse First Boston Corporation (1)10.2
    
    Exchange and Registration Rights Agreement, dated as of May
14, 1999, by and among Alaska Communications Systems Group,
Inc., DLJ Investment Partners, L.P., DLJ Investment Funding,
Inc. and DLJ ESC II L.P. (1)10.3
    
    ALEC Holdings, Inc. 1999 Stock Incentive Plan (1)10.4
    
    Alaska Communications Systems Group, Inc. 1999 Stock Incentive
Plan (3)10.5
    
    Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Compensation Plan (3)10.6
    
    Alaska Communications Systems Group, Inc. 1999 Employee Stock
Purchase Plan (3)10.7
    
    Exchange and Registration Rights Agreement, dated August 26,
2003, by and among Alaska Communications Systems Holdings,
Inc., the Guarantors and J.P. Morgan Securities Inc. for
itself and on behalf of CIBC World Markets Corp., Citigroup
Global Markets Inc., Jefferies & Company, Inc. and Raymond
James & Associates, Inc. (5)10.8
    
    Credit Agreement, dated August 26, 2003, among Alaska
Communications Systems Group, Inc., Alaska Communications
Systems Holdings, Inc., as the Borrower, the Lenders Party
thereto and JPMorgan Chase Bank, as Administrative Agent and
Collateral Agent, CIBC World Markets Corp., as Syndication
Agent, and Citicorp North America, Inc., as Documentation
Agent, and J.P. Morgan Securities Inc., as Arranger. (5)10.9
    
    Retirement Agreement, dated as of September 14, 2003, between
Alaska Communications Systems Group, Inc. and Charles E.
Robinson. (5)10.10
    
    Executive Employment Agreement, dated as of September 14,
2003, between Alaska Communications Systems Group, Inc. and
Liane Pelletier. (5)10.11
    
    Settlement Agreement and Mutual Release, dated October 14,
2003, by and between the State of Alaska and Alaska
Communications Systems Group, Inc. (5)10.12
    
    Executive Employment Agreement, dated as of October 17, 2003,
between Alaska Communications Systems Group, Inc. and David C.
Eisenberg. (6)10.13
    
    Executive Employment Agreement, dated as of January 23, 2004
between Alaska Communications Systems Group, Inc. and Sheldon
Fisher.
 52




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##### Table of Contents



ExhibitNo.
    
    Description10.14
    
    Executive Employment Agreement, dated as of February 18, 2004
between Alaska Communications Systems Group, Inc. and David
Wilson.21.1
    
    Subsidiaries of the Registrant24.1
    
    Powers of Attorney (included on signature page) (5)31.1
    
    Certification of Liane Pelletier, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act if 2002.31.2
    
    Certification of David Wilson, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act if 2002.32.1
    
    Certification of Liane Pelletier, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906
of the Sarbanes-Oxley Act if 2002.32.2
    
    Certification of David Wilson, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906
of The Sarbanes-Oxley Act of 2002.99.1
    
    Amended and restated Audit Committee Charter of Alaska
Communications Systems Group, Inc. and Alaska Communications
Systems Holdings, Inc.
   (1)
    
    Filed as an exhibit to the Registrants Registration Statement on
Form S-4 file No. 333-82361 and incorporated by reference thereto.(2)
    
    Filed as an exhibit to Alaska Communications Systems Group, Inc.s
Form 8-K filed on November 5, 1999 and incorporated by reference
thereto.(3)
    
    Filed as an exhibit to Alaska Communications Systems Group, Inc.s
Registration Statement on Form S-1/A file No. 333-888753 filed on
November 17, 1999 and incorporated by reference thereto.(4)
    
    Filed as an exhibit to the Registrants Form 10-K/A filed on
October 23, 2003.(5)
    
    Filed as an exhibit to the Registrants Registration Statement on
Form S-4 file No. 333-109927 filed on October 23, 2003 and incorporated
by reference thereto.(6)
    
    Filed as an exhibit to the Registrants Registration Statement on
Form S-4/A file No. 333-109927 filed on January 21, 2004 and
incorporated by reference thereto. 53




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 2004
    Alaska Communications Systems Holdings, Inc.By:
    /s/ Liane PelletierLiane PelletierChief Executive Officer,
Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Liane Pelletier

Liane Pelletier
    
    Chief Executive Officer, Chairman of the
Board and President
    
    March 29, 2004/s/ David Wilson

David Wilson
    
    Senior Vice President and Chief
Financial Officer (Principal Accounting
Officer)
    
    March 29, 2004/s/ Kenneth L. Sprain

Kenneth L. Sprain
    
    Senior Vice President, Operations
    
    March 29, 2004/s/ David C. Eisenberg

David C. Eisenberg
    
    Senior Vice President, Corporate
Strategy and Development
    
    March 29, 2004/s/ Sheldon Fisher

Sheldon Fisher
    
    Senior Vice President, Sales and Product
Marketing
    
    March 29, 2004/s/ Kevin P. Hemenway

Kevin P. Hemenway
    
    Senior Vice President, Corporate Projects
    
    March 29, 2004/s/ Leonard A. Steinberg

Leonard A. Steinberg
    
    Vice President, General Counsel and
Corporate Secretary
    
    March 29, 2004/s/ Byron I. Mallott

Byron I. Mallott
    
    Director
    
    March 29, 2004/s/ Brian Rogers

Brian Rogers
    
    Director
    
    March 29, 2004/s/ W. Dexter Paine, III

W. Dexter Paine, III
    
    Director
    
    March 29, 2004/s/ Saul A. Fox

Saul A. Fox
    
    Director
    
    March 29, 2004/s/ Wray T. Thorn

Wray T. Thorn
    
    Director
    
    March 29, 2004/s/ Charles P. Sitkin

Charles P. Sitkin
    
    Director
    
    March 29, 2004/s/ John M. Egan

John M. Egan
    
    Director
    
    March 29, 2004/s/ Patrick Pichette

Patrick Pichette
    
    Director
    
    March 29, 2004
 54




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Independent
Auditors Report
    
    
    F-2Consolidated Balance Sheets  December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Stockholders Equity  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II  Valuation and Qualifying Accounts
    
    
    F-46
 F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT Board of Directors and Shareholders
Alaska Communications Systems Holdings, Inc.
Anchorage, Alaska We have audited the consolidated balance sheets of Alaska Communications
Systems Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2003
and 2002, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December
31, 2003. Our audits included the financial statement schedule listed in Item
15(a)2 of Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Alaska Communications Systems
Holdings, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein. As discussed in Note 4 to the consolidated financial statements, effective
January 1, 2002 the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assetsand as discussed in Note 1 to the
consolidated financial statements, effective January 1, 2003 the Company
adopted Statement of Financial Accounting Standards No. No. 143, Accounting for
Asset Retirement Obligations. /s/ DELOITTE & TOUCHE LLP Portland, Oregon
March 3, 2004 F-2




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##### Table of Contents



ALASKA COMMUNICATIONS
SYSTEMS HOLDINGS, INC. 
 Consolidated Balance Sheets
December 31, 2003 and 2002
(In Thousands Except Per Share Amounts)
 2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    97,798
    
    
    $
    18,565Restricted cash
    
    
    3,635
    
    
    
    3,440Accounts receivable-trade, net of allowance of $4,432 and $6,075
    
    
    41,718
    
    
    
    48,820Accounts receivable-affiliate
    
    
    148
    
    
    
    3,761Materials and supplies
    
    
    10,099
    
    
    
    11,203Prepayments and other current assets
    
    
    5,850
    
    
    
    6,172Assets held for sale
    
    
    
    
    
    
    261Total current assets
    
    
    159,248
    
    
    
    92,222Property, plant and equipment
    
    
    1,041,904
    
    
    
    1,090,365Less: Accumulated depreciation and amortization
    
    
    603,760
    
    
    
    574,387Property, plant and equipment, net
    
    
    438,144
    
    
    
    515,978Goodwill
    
    
    38,403
    
    
    
    77,225Intangible assets, net
    
    
    22,055
    
    
    
    23,269Debt issuance costs, net of amortization of $5,196 and $15,883
    
    
    18,587
    
    
    
    21,130Deferred charges and other assets
    
    
    8,750
    
    
    
    26,047Total assets
    
    $
    685,187
    
    
    $
    755,871Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    2,267
    
    
    $
    5,933Accounts payable-affiliates
    
    
    3,817
    
    
    
    1,319Accounts payable, accrued and other current liabilities
    
    
    46,991
    
    
    
    49,480Income taxes payable
    
    
    1,095
    
    
    
    Advance billings and customer deposits
    
    
    8,766
    
    
    
    9,804Total current liabilities
    
    
    62,936
    
    
    
    66,536Long-term obligations, net of current portion
    
    
    532,737
    
    
    
    586,898Other deferred credits and long-term liabilities
    
    
    71,065
    
    
    
    83,819Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $.01 par value; 1,000 shares authorized,
1 share issued and outstanding
    
    
    
    
    
    
    Contributed capital
    
    
    287,242
    
    
    
    287,242Accumulated deficit
    
    
    (264,250
    )
    
    
    (249,738
    )Accumulated other comprehensive loss
    
    
    (4,543
    )
    
    
    (18,886
    )Total stockholders equity
    
    
    18,449
    
    
    
    18,618Total liabilities and stockholders equity
    
    $
    685,187
    
    
    $
    755,871
 See Notes to Consolidated Financial Statements F-3




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Consolidated Statements of Operations
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts)
 2003
    
    2002
    
    2001Operating revenues:Local telephone
    
    $
    215,387
    
    
    $
    226,447
    
    
    $
    221,411Wireless
    
    
    46,548
    
    
    
    43,180
    
    
    
    41,894Directory
    
    
    11,631
    
    
    
    33,604
    
    
    
    33,870Internet
    
    
    33,026
    
    
    
    20,847
    
    
    
    13,724Interexchange
    
    
    16,956
    
    
    
    16,066
    
    
    
    17,626Total operating revenues
    
    
    323,548
    
    
    
    340,144
    
    
    
    328,525Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    116,354
    
    
    
    114,582
    
    
    
    117,820Wireless (exclusive of depreciation and amortization)
    
    
    31,064
    
    
    
    29,352
    
    
    
    27,429Directory (exclusive of depreciation and amortization)
    
    
    5,249
    
    
    
    14,170
    
    
    
    14,684Internet (exclusive of depreciation and amortization)
    
    
    45,523
    
    
    
    31,299
    
    
    
    16,577Interexchange (exclusive of depreciation and amortization)
    
    
    25,542
    
    
    
    23,647
    
    
    
    25,784Contract termination and asset impairment charges
    
    
    54,858
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    82,185
    
    
    
    82,940
    
    
    
    79,108Loss (gain) on disposal of assets, net
    
    
    (112,622
    )
    
    
    2,163
    
    
    
    Goodwill impairment loss
    
    
    
    
    
    
    64,755
    
    
    
    Total operating expenses
    
    
    248,153
    
    
    
    362,908
    
    
    
    281,402Operating income (loss)
    
    
    75,395
    
    
    
    (22,764
    )
    
    
    47,123Other income and expense:Interest expense
    
    
    (68,822
    )
    
    
    (49,113
    )
    
    
    (57,565
    )Interest income and other
    
    
    (10,191
    )
    
    
    2,203
    
    
    
    3,250Equity in income (loss) of investments
    
    
    783
    
    
    
    
    
    
    
    69Total other income (expense)
    
    
    (78,230
    )
    
    
    (46,910
    )
    
    
    (54,246
    )Loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle
    
    
    (2,835
    )
    
    
    (69,674
    )
    
    
    (7,123
    )Income tax expense (benefit)
    
    
    1,095
    
    
    
    
    
    
    
    (195
    )Loss from continuing operations
    
    
    (3,930
    )
    
    
    (69,674
    )
    
    
    (6,928
    )Loss from discontinued operations
    
    
    (52
    )
    
    
    (7,632
    )
    
    
    (1,718
    )Loss before cumulative effect of change in accounting principle
    
    
    (3,982
    )
    
    
    (77,306
    )
    
    
    (8,646
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (105,350
    )
    
    
    Net loss
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )
 See Notes to Consolidated Financial Statements F-4




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Consolidated Statements of Stockholders Equity
Years Ended December 31, 2003, 2002 and 2001
(In Thousands, Except Per Share Amounts)
 AccumulatedOtherCommon
    
    Contributed
    
    Accumulated
    
    Comprehensive
    
    StockholdersStock
    
    Capital
    
    Deficit
    
    Loss
    
    EquityBalance, December 31, 2000
    
    $
    
    
    
    $
    287,242
    
    
    $
    (56,089
    )
    
    $
    
    
    
    $
    231,153Components
of comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (8,646
    )
    
    
    
    
    
    
    (8,646
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,392
    )
    
    
    (2,392
    )Interest rate swap marked to market
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,437
    )
    
    
    (11,437
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,475
    )Balance, December 31, 2001
    
    
    
    
    
    
    287,242
    
    
    
    (64,735
    )
    
    
    (13,829
    )
    
    
    208,678Components of comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (182,656
    )
    
    
    
    
    
    
    (182,656
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,342
    )
    
    
    (2,342
    )Interest rate swap marked to market
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,715
    )
    
    
    (2,715
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187,713
    )Dividends
    
    
    
    
    
    
    
    
    
    
    (2,347
    )
    
    
    
    
    
    
    (2,347
    )Balance, December 31, 2002
    
    
    
    
    
    
    287,242
    
    
    
    (249,738
    )
    
    
    (18,886
    )
    
    
    18,618Components of comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    (3,982
    )
    
    
    
    
    
    
    (3,982
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Interest rate swap marked to market
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,152
    
    
    
    14,152Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,361Dividends
    
    
    
    
    
    
    
    
    
    
    (10,530
    )
    
    
    
    
    
    
    (10,530
    )Balance, December 31, 2003
    
    $
    
    
    
    $
    287,242
    
    
    $
    (264,250
    )
    
    $
    (4,543
    )
    
    $
    18,449
 See Notes to Consolidated Financial Statements F-5




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(In Thousands)
 2003
    
    2002
    
    2001Cash Flows from Operating Activities:Net loss
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )Adjustments to reconcile net loss to net cash provided by operating activities:Loss on discontinued operations
    
    
    52
    
    
    
    7,632
    
    
    
    1,718Cumulative effect of change in accounting principle
    
    
    
    
    
    
    105,350
    
    
    
    Depreciation and amortization
    
    
    82,185
    
    
    
    82,940
    
    
    
    79,108Loss (gain) on disposal of assets and asset impairment charges, net
    
    
    (48,863
    )
    
    
    2,163
    
    
    
    Goodwill impairment loss
    
    
    
    
    
    
    64,755
    
    
    
    Amortization of debt issuance costs, original issue discount and warrants
    
    
    16,717
    
    
    
    4,191
    
    
    
    4,312Non-cash stock based compensation expense
    
    
    900
    
    
    
    
    
    
    
    Other non-cash expenses
    
    
    4,118
    
    
    
    
    
    
    
    Capitalized interest
    
    
    (162
    )
    
    
    (1,157
    )
    
    
    (1,416
    )Other deferred credits
    
    
    1,643
    
    
    
    3,073
    
    
    
    223Changes in components of working capital:Accounts receivable and other current assets
    
    
    7,451
    
    
    
    (4,722
    )
    
    
    95Accounts receivable - affiliate
    
    
    3,613
    
    
    
    (1,286
    )
    
    
    (959
    )Accounts payable and other current liabilities
    
    
    (6,443
    )
    
    
    (12,460
    )
    
    
    5,604Other
    
    
    (1,972
    )
    
    
    (1,375
    )
    
    
    (2,386
    )Net cash used in discontinued operations
    
    
    (41
    )
    
    
    (649
    )
    
    
    (1,015
    )Net cash provided by operating activities
    
    
    55,216
    
    
    
    65,799
    
    
    
    76,638Cash Flows from Investing Activities:Construction and capital expenditures, net of capitalized interest
    
    
    (48,404
    )
    
    
    (67,277
    )
    
    
    (87,582
    )Net proceeds from sale of business unit
    
    
    155,269
    
    
    
    
    
    
    
    Release of funds from escrow
    
    
    3,539
    
    
    
    3,706
    
    
    
    Placement of funds in escrow
    
    
    (3,725
    )
    
    
    
    
    
    
    (6,932
    )Issuance of note receivable
    
    
    
    
    
    
    (15,000
    )
    
    
    Other investing activities
    
    
    
    
    
    
    
    
    
    
    31Net cash provided (used) by investing activities
    
    
    106,679
    
    
    
    (78,571
    )
    
    
    (94,483
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (434,102
    )
    
    
    (7,328
    )
    
    
    (3,039
    )Proceeds from issuance of long-term debt
    
    
    375,970
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (14,000
    )
    
    
    
    
    
    
    Dividends
    
    
    (10,530
    )
    
    
    (2,347
    )
    
    
    Net cash used by financing activities
    
    
    (82,662
    )
    
    
    (9,675
    )
    
    
    (3,039
    )Increase (decrease) in cash
    
    
    79,233
    
    
    
    (22,447
    )
    
    
    (20,884
    )Cash and cash equivalents at beginning of the year
    
    
    18,565
    
    
    
    41,012
    
    
    
    61,896Cash and cash equivalents at the end of the year
    
    $
    97,798
    
    
    $
    18,565
    
    
    $
    41,012Supplemental Cash Flow Data:Interest paid
    
    $
    49,283
    
    
    $
    45,830
    
    
    $
    49,456Income taxes paid
    
    
    
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Property acquired under capital leases and mortgages
    
    $
    2,340
    
    
    $
    4,187
    
    
    $
    Minimum pension liability adjustment
    
    
    (191
    )
    
    
    2,342
    
    
    
    2,392Interest rate swap marked to market
    
    
    (14,152
    )
    
    
    2,715
    
    
    
    11,437
 See Notes to Consolidated Financial Statements F-6




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts)
 1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Alaska Communications Systems Holdings, Inc. and Subsidiaries (the
Company or ACS Holdings), a Delaware corporation, is engaged principally in
providing local telephone, wireless, Internet, interexchange network and other
services to its retail consumer and business customers and wholesale customers
in the State of Alaska through its telecommunications subsidiaries. The Company
was formed in October of 1998 for the purpose of acquiring and operating
telecommunications properties. On May 14, 1999, the Company was acquired and
became a wholly owned subsidiary of Alaska Communications Systems Group, Inc.
(the Parent or ACS Group). The accompanying consolidated financial statements for the Company are as
of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002
and 2001 and represent the consolidated financial position, results of
operations and cash flows principally of ACS Holdings and the following wholly
owned subsidiaries:  
    
    ACS of Alaska, Inc. (ACSAK)
    
    ACS of the Northland, Inc. (ACSN)
    
    ACS of Fairbanks, Inc. (ACSF)
    
    ACS of Anchorage, Inc. (ACSA)
    
    ACS Wireless, Inc. (ACSW)
    
    ACS Long Distance, Inc. (ACSLD)
    
    ACS Internet, Inc. (ACSI) On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in the newly formed ACS Media, LLC (the Directories Business).
Subsequently, on August 27, 2003, the Company disposed of substantially all of
its remaining interest in the Directories Business. As a result of this
transaction, the Company now owns less than 0.1% of the Directories Business.
See Note 10, Gain on Disposal of Assets, for additional information on this
transaction. On July 6, 2001, the Company acquired the assets and business of Internet
Plus, L.L.C., dba MosquitoNet, a Fairbanks based Internet service provider with
approximately 5,000 customers. The acquisition has been accounted for using the
purchase method and its operating results have been included in the
consolidated statements of operations from the date of acquisition. A summary of significant accounting policies followed by the Company is
set forth below: Basis of Presentation The consolidated financial statements include all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.
Certain reclassifications have been made to the 2002 and 2001 financial
statements to make them conform to the current presentation. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of commitments and contingencies at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the significant estimates affecting
the financial statements are those related to the realizable value of accounts
receivable, materials and supplies, long-lived assets, income taxes and network
access revenue reserves. Actual results may differ from those estimates. Cash and Cash Equivalents For purposes of the consolidated balance sheets and statements of cash
flows, the Company generally considers all highly liquid investments with a
maturity at acquisition of three months or less to be cash equivalents. F-7




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Cash The Company has placed restricted cash in certificate of deposits as
required under the terms of certain contracts to which it is a party. When the
restrictions are lifted, the Company will transfer the funds back into its
operating accounts. Materials and Supplies Materials and supplies are carried in inventory at the lower of weighted
average cost or market. Property, Plant and Equipment Telephoneplant is stated substantially at original cost of construction.
Telephone plant retired in the ordinary course of business, together with the
cost of removal, less salvage, is charged to accumulated depreciation with no
gain or loss recognized. Renewals and betterments of telephone plant are
capitalized while repairs, as well as renewals of minor items, are charged to
operating expense as incurred. The Company provides for depreciation of
telephone plant on the straight-line method, using rates approved by regulatory
authorities. The composite annualized rate of depreciation for all classes of
property, plant, and equipment was 7.0%, 7.4%, and 7.0% for 2003, 2002 and
2001, respectively. Non-Telephoneplant is stated at purchased cost and, when sold or retired,
a gain or loss is recognized. Depreciation of such property is provided on the
straight-line method over its estimated service life ranging from three to 20
years. The Company is the lessee of equipment and buildings under capital leases
expiring in various years through 2019. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation and
amortization expense for 2003, 2002 and 2001. Debt Issue Costs Underwriting, legal, accounting, printing, and other fees and expenses
associated with the issuance of the Companys senior credit facility, senior
subordinated notes, senior unsecured notes and senior discount debentures are
being amortized using the straight-line method which approximates the effective
interest method, over the term of the debt. During 2003, the Company early
extinguished its old bank credit facility which resulted in a write off to
expense of $13,053 of debt issue costs. Debt issue costs amortization included
in interest expense for 2003 was $16,543, $4,191, and $4,312, respectively. Original Issue Discounts Certain debt instruments of the Company have been issued below their face
value, resulting in original issue discounts that are recorded net in long-term
debt. These original issue discounts are amortized using the effective interest
method. Original issue discount amortization included in interest expense for
2003 was $174. Revenue Recognition Substantially all recurring service revenues are billed one month in
advance and are deferred until earned. Nonrecurring and usage sensitive
revenues are billed in arrears and are recognized when earned. Additionally,
the Company establishes estimated bad debt reserves against uncollectible
revenues incurred during the period. During 2003 and 2002, one customer
accounted for 10% and 11%, respectively, of consolidated revenues and no other
customer accounted for more than 10% of consolidated revenue. During 2001, no
customer accounted for more than 10% of the consolidated revenues of the
Company. F-8




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition (Continued) In October and November 2001, under two separate regulatory orders, ACSA
was authorized to implement interim and refundable rate increases for both loop
rental rates on unbundled network elements and for local service revenue. The
Company recognized $3,753, $4,940 and $465 of revenue during 2003, 2002 and
2001, respectively, associated with these rate increase authorizations.
Management believes that it is unlikely the Company will have a refund
obligation associated with these interim rate increases upon final adjudication
of rates. Access revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the Regulatory Commission of Alaska
(RCA) within the intrastate jurisdiction and the Federal Communications
Commission (FCC) within the interstate jurisdiction. Much of the interstate
access revenue is initially recorded based on estimates. These estimates are
derived from interim financial statements, available separations studies and
the most recent information available about achieved rates of return. These
estimates are subject to adjustment in future accounting periods as additional
operational information becomes available. To the extent that disputes arise
over revenue settlements, the Companys policy is to defer revenue collected
until settlement methodologies are resolved and finalized. During the second
quarter of 2002, the Company recognized as revenue $11,066 of previously
deferred interstate access revenue and reversed $1,673 of interest expense
previously accrued thereon as a result of a favorable ruling by the District of
Columbia Court of Appeals related to a dispute on interstate access rates for
the Anchorage market. At December 31, 2003 and 2002, the Company had
liabilities of $15,212 and $20,548, respectively, related to its estimate of
refundable access revenue. Income Taxes The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes reflect the temporary differences
between the financial and tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance to the extent
that management believes it is more likely than not that such deferred tax
assets will not be realized. One of the companies acquired in May 1999 had an
unamortized regulatory liability related to investment tax credits of which the
remaining $195 was amortized against income in 2001. Regulatory Accounting and Regulation The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation.This accounting
recognizes the economic effects of rate regulation by recording cost and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is
depreciated over lives approved by regulators and certain costs and obligations
are deferred based upon approvals received from regulators to permit recovery
of such amounts in future years. The Company implemented, effective January 1, 2003, higher depreciation
rates for its regulated telephone plant for the interstate jurisdiction, which
management believes approximate the economically useful lives of the underlying
plant. As a result, the Company has recorded a regulatory asset under SFAS No.
71 of $17,231 as of December 31, 2003 related to depreciation of the regulated
telephone plant allocable to its intrastate and local jurisdictions. The
Company has also deferred as a regulatory asset $894 of costs incurred in
connection with regulatory rate making proceedings, which is being amortized
over three years starting in 2003. The balance of this regulatory asset was
$596 at December 31, 2003. If the Company were not following SFAS No. 71, these
costs would have been charged to expense as incurred. The Company also has an
regulatory liability of $50,546 at December 31, 2003 related to accumulated
removal costs. If the Company were not following SFAS No. 71, it would have
followed SFAS No. 143 for asset retirement obligations. Non-regulated revenues
and costs incurred by the local telephone exchange operations and non-regulated
operations of the Company are not accounted for under SFAS No. 71 principles. F-9




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Regulatory Accounting and Regulation (Continued) The local telephone exchange activities of the Company are subject to rate
regulation by the FCC for interstate telecommunication service and the RCA for
intrastate and local exchange telecommunication service. The Company, as
required by the FCC, accounts for such activity separately. Long distance
services of the Company are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the RCA for intrastate telecommunication services. Wireless and Internet
operations are not subject to rate regulation. Change in Accounting Estimate During the third quarter of 2002, the Company changed its estimate of the
useful lives of certain classes of assets, resulting in additional depreciation
expense of $2,206, or $0.07 per share for the year ended December 31, 2002. Comprehensive Income (Loss) Comprehensive income (loss) represents net income (loss) plus the results
of certain stockholders equity changes not reflected in the consolidated
statements of operations. For 2003, 2002 and 2001, the Company has provided an
income tax valuation allowance equal to the income tax benefit resulting from
its other comprehensive income (loss). The components of accumulated other
comprehensive loss is as of the follows at December 31, 2003 and 2002: 2003
    
    2002Accumulated other comprehensive loss:Minimum pension liability adjustment
    
    $
    4,543
    
    
    $
    4,734Interest rate swap mark to market
    
    
    
    
    
    
    14,152Accumulated other comprehensive loss
    
    $
    4,543
    
    
    $
    18,886
 Stock Incentive Plans The Companys employees participate in various plans of ACS Group. The
Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its stock incentive plans.
Accordingly, no compensation cost has been recognized for options with exercise
prices equal to or greater than fair value on the date of grant. No
compensation costs were charged to operations in 2003, 2002 or 2001. If
compensation costs had been determined consistent with SFAS No. 123, Accounting
for Stock-Based Compensation,the Companys net loss and net loss per share on
a pro forma basis for 2003, 2002 and 2001 would have been as follows: 2003

    
    2002
    
    2001Net loss:As reported
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )Pro forma
    
    
    (4,139
    )
    
    
    (184,111
    )
    
    
    (10,114
    )
 The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for grants: 2003
    
    2002
    
    2001Risk free rate
    
    
    3.39
    %
    
    
    2.88
    %
    
    
    4.45
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility factor
    
    
    55.5
    %
    
    
    60.8
    %
    
    
    55.2
    %Expected option life (years)
    
    
    6.8
    
    
    
    6.1
    
    
    
    5.9
 F-10




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements On August 15, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, Accounting for Asset Retirement Obligations. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This standard generally
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset. Under the new accounting method, asset
retirement obligations are recognized in the period in which they are incurred
if a reasonable estimate of fair value can be made. When the liability is
initially recorded, the cost is capitalized and increases the carrying value of
the related long-lived asset. The liability is then accreted to its present
value each period and the capitalized cost is depreciated over the estimated
useful life of the related asset. At the settlement date, the obligation is
settled for its recorded amount or a gain or loss is recognized upon
settlement. In accordance with federal and state regulations, depreciation expense for
the Companys local exchange carriers regulated operations have historically
included an additional provision for cost of removal. Under SFAS No. 143, the
additional cost of removal provision would no longer be included in
depreciation expense, because it does not meet the recognition and measurement
principles of an asset retirement obligation. On December 20, 2002, the FCC
notified local exchange carriers that they should not adopt the provisions of
SFAS No. 143 unless specifically required by the FCC in the future. As a result
of the FCC ruling, the Company will continue to record depreciation expense for
cost of removal for its local exchange carrier subsidiaries that follow SFAS
No. 71 accounting. Prior to SFAS 143, asset removal costs that qualified and
did not qualify for asset retirement obligations were recorded in Accumulated
depreciation. For 2002, $50,889 in asset retirement costs have been
reclassified from Accumulated depreciation to accumulated retirement removal
costs in Other deferred credits and long-term liabilities. The accumulated
asset retirement removal costs for 2003 were reclassified as regulatory
liabilities in accordance with SFAS No. 143 and SFAS No. 71. Accumulated

retirement removal costs in Other deferred credits and long-term liabilities
not qualifying for asset retirement obligations were $50,546 at December 31,
2003. The Company applied the provisions of SFAS No. 143 to its nonregulated
subsidiaries effective January 1, 2003. The Companys wireless segment has
entered into cell site operating leases, which are subject to the provisions of
this statement. Cell site lease agreements may contain clauses requiring
restoration of the leased site at the end of the lease term, creating an asset
retirement obligation. Landlords may choose not to exercise these rights as
cell sites are considered useful improvements. The Companys initial adoption
of this statement did not have a material impact on its results of operations,
financial position or cash flows. In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.SFAS No. 146 requires that companies
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Companys adoption of this statement did
not have a material impact on its financial position, results of operations, or
cash flows. On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not currently have plans to change to the fair value
method of accounting for its stock based compensation. The disclosure
requirements are now effective. On April 30, 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Companys adoption of this statement did not have a material impact
on its financial position, results of operations, or cash flows. F-11




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (Continued) On May 15, 2003, FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
new Statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 had no effect on
the Companys financial position, results of operations or cash flows. The
adoption of SFAS No. 150 had no effect on the Companys financial position,
results of operations or cash flows. In December 2003, the FASB reissued SFAS No. 132, Employers Disclosure
about Pensions and Other Postretirement Benefits.This revised statement
requires expanded disclosures with respect to pension plan assets, benefit
obligations, cash flows, benefit costs and other relevant information. However
this revised statement does not change the measurement and recognition
provisions of previous FASB statements related to pensions and other
postretirement benefits. The Company was required to adopt this revised
statement for 2003. The Companys adoption of this revised statement did not
have a material impact on its financial position, results of operations, or
cash flows. The expanded disclosures required by this statement are included in
Note 15. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires

additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are effective on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 had no effect on the
Companys financial position, results of operations or cash flows. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities(revised December 2003). FIN 46
addresses when a company should include in its financial statements the assets,
liabilities and activities of a variable interest entity. FIN 46 defines
variable interest entities as those entities with a business purpose that
either do not have any equity investors with voting rights or have equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate, but in which
it has a significant variable interest. FIN 46 consolidation requirements are
effective for all variable interest entities created after January 31, 2003,
and to pre-existing entities in the first fiscal year or interim period ending
after December 15, 2003. Certain disclosure requirements are effective for
financial statements issued after January 31, 2003. The adoption of FIN 46 has
no effect on the Companys financial position, results of operations or cash
flows. F-12




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 2. ACCOUNTS RECEIVABLE Accounts receivable - trade consists of the following at December 31, 2003
and 2002: 2003
    
    2002Accounts receivable - trade:Customers
    
    $
    31,915
    
    
    $
    37,638Connecting companies
    
    
    9,842
    
    
    
    12,032Other
    
    
    4,393
    
    
    
    5,22546,150
    
    
    
    54,895Less allowance for doubtful accounts
    
    
    4,432
    
    
    
    6,075Accounts receivable - trade, net
    
    $

    41,718
    
    
    $
    48,820
 3. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consists of the following at December 31,
2003 and 2002: 2003
    
    2002Property, plant, and equipment:Land, buildings and support assets
    
    $
    191,314
    
    
    $
    192,832Central office switching and transmission
    
    
    296,253
    
    
    
    314,316Outside plant cable and wire facilities
    
    
    466,019
    
    
    
    499,720Wireless switching and transmission systems
    
    
    54,524
    
    
    
    51,538Other
    
    
    3,490
    
    
    
    4,393Assets held for future use
    
    
    3,599
    
    
    
    3,492Construction work in progress
    
    
    26,705
    
    
    
    24,0741,041,904
    
    
    
    1,090,365Less: Accumulated depreciation and amortization
    
    
    603,760
    
    
    
    574,387Property, plant and equipment, net
    
    $
    438,144
    
    
    $
    515,978
 The following is a summary of property held under capital leases included
in the above property, plant and equipment: 2003
    
    2002Property held under capital leases:Land, buildings and support assets
    
    $
    14,624
    
    
    $
    16,930Outside plant cable and wire facilities
    
    
    2,115
    
    
    
    2,71016,739
    
    
    
    19,640Less: Accumulated depreciation and amortization
    
    
    6,090
    
    
    
    6,612Property held under capital leases, net
    
    $
    10,649
    
    
    $
    13,028
 Amortization of assets under capital leases included in depreciation
expense in 2003, 2002 and 2001 is $1,740 $2,333, and $1,202, respectively. F-13




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 3. PROPERTY, PLANT AND EQUIPMENT (Continued) The Company leases various land, buildings, right-of-ways, and personal
property under operating lease agreements. Rental expenses under operating
leases for 2003, 2002 and 2001 were $3,049, $3,733, and $3,971, respectively.
Future minimum payments under these leases for the next five years and
thereafter are as follows: 2004
    
    $
    1,9392005
    
    
    1,7272006
    
    
    1,2822007
    
    
    9542008
    
    
    768Thereafter
    
    
    750$
    7,420
 4. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with the guidelines of this accounting
principle, goodwill and indefinite-lived intangible assets are no longer
amortized but are assessed for impairment on at least an annual basis. SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values and reviewed for impairment. Goodwill amortization, which was $7,741 for the year ended December 31,
2001, ceased effective January 1, 2002. In the first quarter of 2002, pursuant
to SFAS No. 142, the Company completed its reassessment of previously
recognized intangible assets, and ceased amortization of indefinite-lived
intangible assets. Wireless and PCS licenses have terms of 10 years, but are renewable
indefinitely through a routine process involving a nominal fee. The Company has
determined that no legal, regulatory, contractual, competitive, economic or
other factors currently exist that limit the useful life of its wireless and
PCS licenses. Therefore, the Company is no longer amortizing its wireless and
PCS licenses based on the determination that these assets have indefinite
lives. In accordance with SFAS No. 142, the Company evaluates its determination
of an indefinite useful life of its wireless and PCS licenses each reporting
period. SFAS No. 142 requires that indefinite lived intangible assets be tested
for impairment at least annually by comparing the fair value of the assets to
their carrying amount. Upon adoption of SFAS No. 142 on January 1, 2002, the
Company completed an impairment test for its wireless and PCS licenses that
determined recognition of an impairment loss was not necessary, as the carrying
value of its wireless and PCS licenses did not exceed their fair value. The
Company performs its annual impairment test as of the beginning of the fourth
quarter or more frequently if events or changes in circumstance indicate
possible impairment. The Company determined the fair value of its wireless and
PCS licenses for purposes of these tests primarily by first performing a market
value comparison of similar licenses against their carrying value and then
performing a discounted cash flow valuation of the reporting unit against its
total carrying value, including these licenses. SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level upon adoption and at least annually thereafter, utilizing
a two-step methodology. The initial step requires the Company to determine the
fair value of each reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying value,
no impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be
impaired. The amount, if any, of the impairment is then measured in the second
step. The second step of the goodwill impairment test compares the implied fair
value goodwill of the reporting unit with the
carrying amount of that goodwill. The implied fair value of a reporting
units goodwill is the excess of the fair value of a reporting unit over the
amounts assigned to assets and liabilities. If the carrying value amount of
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss shall be recognized in an amount equal to that excess. F-14




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 4. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) The Company has determined that its business segments constitute reporting
units. The Company completed the initial step of impairment testing during the
second quarter of 2002 which indicated that goodwill recorded in the local
telephone, Internet, and interexchange segments was impaired as of January 1,
2002. Due to the potential impairment, the Company then completed the second
step of the test to measure the amount of the impairment. The Company
determined the fair value of each reporting unit for purposes of this test
primarily by using a discounted cash flow valuation technique. Significant
estimates used in the valuation include estimates of future cash flows, both
future short-term and long-term growth rates, and estimated cost of capital for
purposes of arriving at a discount factor. Based on that analysis, a
transitional impairment loss of $105,350 was recognized as the cumulative
effect of a change in accounting principle in the consolidated statement of
operations as of January 1, 2002. The income tax benefit of $39,540 was offset
by a valuation allowance. The Company performs its annual impairment test as of the beginning of the
fourth quarter or more frequently if events or changes in circumstance indicate
possible impairment. The Company determines the fair value of each reporting
unit for purposes of this test primarily by using a discounted cash flow
valuation technique. Significant estimates used in the valuation include
estimates of future cash flows, both future short-term and long-term growth
rates, and estimated cost of capital for purposes of arriving at a discount
factor. The annual impairment test conducted during the fourth quarter of 2003
did not indicate any impairment of goodwill. For the year ended December 31,
2002, an impairment loss of $64,755 in the local telephone segment was
recognized in the consolidated statement of operations based on comparing the
discounted cash flow model to the carrying value of the reporting units. The
Company attributes the impairment loss in the local telephone segment to
competitively biased regulatory policy. In connection with the Companys adoption of a plan to discontinue its
wireless cable television service segment during the first quarter of 2002, the
goodwill of that segment was considered impaired, and an impairment charge of
$3,165 is included with the results of discontinued operations. The changes in the carrying value of goodwill by segment for the years
ended December 31, 2003 and 2002 are as follows: LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    TotalBalance, December 31, 2001
    
    $
    191,361
    
    
    $
    8,850
    
    
    $
    8,146
    
    
    $
    151
    
    
    $
    41,987
    
    
    $
    250,495Impairment losses included in
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,165
    )
    
    
    (3,165
    )Impairment losses -
transitional
    
    
    (97,053
    )
    
    
    
    
    
    
    (8,146
    )
    
    
    (151
    )
    
    
    
    
    
    
    (105,350
    )Impairment losses - annual
test
    
    
    (64,755
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,755
    )Balance, December 31, 2002
    
    
    29,553
    
    
    
    8,850
    
    
    
    
    
    
    
    
    
    
    
    38,822
    
    
    
    77,225Sale of business unit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,822
    )
    
    
    (38,822
    )Balance, December 31, 2003
    
    $
    29,553
    
    
    $
    8,850
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38,403
 Provided below is a reconciliation of previously reported financial
statement information to adjusted amounts that reflect the elimination of
goodwill and indefinite-lived intangible amortization for the comparable year
ended December 31, Net lossReported net loss
    
    $
    (8,646
    )Add back:Goodwill amortization
    
    
    7,741Indefinite-lived intangible amortization
    
    
    528Adjusted net loss
    
    $
    (377
    )
 F-15




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 4. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) In 2003, the Company accelerated the amortization of its other intangible
assets and retired those assets. The following table provides the gross
carrying value and accumulated amortization for each major class of intangible
asset as of December 31, 2003 based on the Companys reassessment of previously
recognized intangible assets and their remaining amortization lives in
accordance with the adoption of SFAS No. 142: Gross Carrying
    
    Accumulated
    
    AmortizableAmount
    
    Amortization
    
    LifeAmortizable intangible assets:Customer lists
    
    $
    915
    
    
    $
    457
    
    
    
    5Indefinite-lived intangible assets:Cellular licenses
    
    $
    18,194PCS licenses
    
    
    3,323Domain names and trade names
    
    
    80Total indefinite-lived intangible assets
    
    $
    21,597
 For amortizable intangible assets the total intangible amortization
expense for the years ended December 31, 2003, 2002 and 2001 was $951, $708,
and $616, respectively. The estimated amortization expense for each of the next
five years ending December 31 is as follows: 2004
    
    $
    1832005
    
    
    1832006
    
    
    92Thereafter
    
    
    
 5. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES Accounts payable, accrued and other current liabilities consists of the
following at December 31, 2003 and 2002: 2003
    
    2002Accounts payable - trade
    
    $
    12,566
    
    
    $
    11,435Accrued payroll, benefits, and related liabilities
    
    
    6,077
    
    
    
    6,413Accrued personal time off
    
    
    5,031
    
    
    
    5,200Accrued interest
    
    
    8,942
    
    
    
    6,106Refundable access revenue
    
    
    2,470
    
    
    
    9,147Litigation reserves
    
    
    3,880
    
    
    
    Other
    
    
    10,892
    
    
    
    11,179Accounts payable, accrued and other current liabilities
    
    $
    49,858
    
    
    $
    49,480
 F-16




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 6. LONG-TERM OBLIGATIONS During the first quarter of 2003, the Companys lenders approved an
amendment and waiver to its old senior credit facility that, among other
things, permitted the Company to sell its Directories Business and required
that, in the event the sale was completed, 75% of proceeds would be used to
repay outstanding senior credit facility term loans. This amendment and waiver
became effective on May 8, 2003, and on May 13, 2003, the Company paid down
$106,650 of its outstanding term loans under its old senior credit facility. As
a result of this debt prepayment, the Company charged $3,356 of unamortized
debt issue costs attributable to the prepaid term loans to interest expense in
May 2003. On August 26, 2003, the Company completed the refinancing of its old
senior credit facility term loans. The Company entered into a $250,000 new
senior credit facility consisting of a term loan facility in an aggregate
principal amount of $200,000 and an undrawn revolving credit facility of
$50,000. The Company simultaneously issued $182,000 aggregate principal amount
of 9 7/8% senior unsecured notes due 2011 at an issue price of approximately
96.7% for net proceeds of $175,970. From these proceeds, the Company paid off
the remaining $320,727 of its old senior credit facility, thereby extinguishing
it. As a result of this early extinguishment of debt, the Company charged
$9,696 of unamortized debt issue costs to interest expense in August 2003. Long-term obligations consist of the following at December 31, 2003 and
2002: 2003
    
    2002Old senior credit facility term loan - tranche A
    
    $
    
    
    
    $
    148,500Old senior credit facility term loan - tranche B
    
    
    
    
    
    
    148,500Old senior credit facility term loan - tranche C
    
    
    
    
    
    
    133,650New senior credit facility term loan
    
    
    200,000
    
    
    
    9 3/8% senior subordinated notes due 2009
    
    
    150,000
    
    
    
    150,0009 7/8% senior unsecured notes due 2011
    
    
    182,000
    
    
    
    Original issue discount - 9 7/8% senior
subordinated notes due 2011
    
    
    (5,856
    )
    
    
    Capital leases and other long-term obligations
    
    
    8,860
    
    
    
    12,181535,004
    
    
    
    592,831Less current portion
    
    
    2,267
    
    
    
    5,933Long-term obligations, net of current portion
    
    $
    532,737
    
    
    $
    586,898
 The aggregate maturities of long-term obligations for each of the five
years and thereafter subsequent to December 31, 2003 are as follows: 2004
    
    $
    2,2672005
    
    
    2,2922006
    
    
    2,3122007
    
    
    2,2982008
    
    
    2,119Thereafter
    
    
    523,716$
    535,004
 Senior Credit Facility On August 26, 2003, the Company entered into a new bank credit agreement
with a syndicate of commercial banks which provide the Companys senior credit
facility. The senior credit facility provides a $200,000 term loan and a
revolving credit facility with a $50,000 line of credit. The Companys
obligations under the senior credit facility are unconditionally and
irrevocably guaranteed, joint and severally, by the Company and its
subsidiaries, and secured by collateral that includes substantially all of the
Company and its subsidiaries assets. The senior credit facility contains a
number of restrictive covenants and events of default, including covenants
limiting capital expenditures, incurrence of debt, and the payment of
dividends, and requires the Company to achieve certain financial ratios. As of
December 31, 2003 the Company was in compliance with all of the covenants of
the senior credit facility. F-17




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 6. LONG-TERM OBLIGATIONS (Continued) The term loan of $200,000 is repayable in quarterly principal payments of
$500 which commence on March 31, 2004 with the balance due on maturity. The
final maturity of the term is loan is August 26, 2010 or February 14, 2009 if
the Companys senior subordinated notes have not been refinanced. The loan
bears interest at an annual rate equal (at the Companys option) to: (1) LIBOR
plus 3.25% or (2) a rate equal to 2.25% plus the greater of the administrative
agents prime rate or the federal funds rate plus 0.50%. The rate of interest
in effect at December 31, 2003 was 4.50% and is based on the LIBOR rate option. The senior credit facility also provides a revolving credit facility in
the amount of $50,000 that is available, in part, for up to $25,000 in letters
of credit and up to $10,000 in the form of swingline loans. This revolving
facility is available through August 26, 2008 and outstanding balances
thereunder currently will bear interest at an annual rate equal (at the
Companys option) to: (1) LIBOR plus 3.00% or (2) a rate equal to 2.00% plus
the greater of the administrative agents prime rate or the federal funds rate
plus 0.50%. There were no amounts outstanding under this revolving credit
facility as of December 31, 2003. On July 24, 1999, the Company entered into an interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate
long-term debt. This agreement fixed at 5.99% the underlying variable rate on
one-half of the term loan borrowings under the old senior credit facility, or
$217,500, expiring in June 2004. The differential to be paid or received was
recorded as interest expense in the consolidated statement of operations in the
period in which it was recognized. The Company extinguished early its interest
rate swap agreement in November 2003 for $7,970, which it charged to interest
expense. Senior Subordinated Notes On May 14, 1999, the Company issued $150,000 in aggregate principal amount
of 9 3/8 % senior subordinated notes due 2009. Interest on the notes is payable
semi-annually on May 15 and November 15. The notes will mature on May 15, 2009,
and are redeemable, in whole or in part, at the option of the Company, at any
time on or after May 15, 2004 at 104.688% of the principal amount declining to
100% of the principal amount on or after May 15, 2007. The notes contain a
number of restrictive covenants, including covenants limiting incurrence of
debt and the payment of dividends. As of December 31, 2003 and 2002 the Company
was in compliance with all the covenants of the notes. Senior Unsecured Notes On August 26, 2003, the Company issued $182,000 in aggregate principal
amount of 9 7/8 % senior unsecured notes due 2011. Interest on the notes is
payable semi-annually on February 15 and August 15. The notes will mature on
August 15, 2011, and are redeemable, in whole or in part, at the option of the
Company, at any time on or after August 15, 2007 at 104.688% of the principal
amount declining to 100% of the principal amount on or after August 15, 2010.
The notes contain a number of restrictive covenants, including covenants
limiting incurrence of debt and the payment of dividends. As of December 31,
2003 the Company was in compliance with all the covenants of the notes. Capital leases and other long-term obligations The Company has entered into various capital leases and other debt
agreements totaling $8,860 and $12,181 with a weighted average interest rate of
9.71% and 8.05% at December 31, 2003 and 2002, respectively. F-18




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 7. OTHER DEFERRED CREDITS AND LONG-TERM LIABILITIES Deferred credits and other long-term liabilities consists of the following
at December 31, 2003 and 2002: 2003
    
    2002Refundable access revenue
    
    $
    12,741
    
    
    $
    11,401Interest rate swap, marked to market
    
    
    
    
    
    
    14,152Additional pension liability
    
    
    5,891
    
    
    
    6,285Other deferred credits
    
    
    1,887
    
    
    
    1,092Other long term liabilities - accumulated removal costs
    
    
    
    
    
    
    50,889Regulatory liabilities - accumulated removal costs
    
    
    50,546
    
    
    
    Total deferred credits and other long-term liabilities
    
    $
    71,065
    
    
    $
    83,819
 8. LOCAL TELEPHONE OPERATING REVENUE Local telephone operating revenues consist of the following for the years
ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Local network service
    
    $
    96,357
    
    
    $
    99,512
    
    
    $
    96,270Network access revenue
    
    
    97,759
    
    
    
    108,335
    
    
    
    102,977Deregulated revenue and other
    
    
    21,271
    
    
    
    18,600
    
    
    
    22,164Total local telephone operating revenues
    
    $
    215,387
    
    
    $
    226,447
    
    
    $
    221,411
 9. CONTRACT TERMINATION AND ASSET IMPAIRMENT CHARGES During the year ended December 31, 2003, the Company recorded $54,858 in
contract termination and asset impairment charges. These charges resulted from
(1) the early termination of a 5 year comprehensive Telecommunications
Partnering Agreement (TPA) with the State of Alaska and (2) an impairment of
fiber optic indefeasible rights of use and IP network and service center assets
resulting from the termination of the TPA and changes in the communications
industry and the economy. The following table itemizes the components of the
contract termination and asset impairment charges: Contract termination charges:Contract termination cash settlement
    
    $
    3,448Loss on disposal of assets
    
    
    5,648Accounts receivable and working capital write-downs
    
    
    3,575Total contract termination charges
    
    
    12,671Asset impairment charges
    
    
    42,187Total contract termination and asset impairment charges
    
    $
    54,858
 F-19




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 9. CONTRACT TERMINATION AND ASSET IMPAIRMENT CHARGES (Continued) Contract Termination Charges On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate the TPA with the Company and disentangle.
Subsequently, the Company and the State negotiated and agreed to a definitive
Settlement Agreement and Mutual Release (the Settlement Agreement) effective
October 14, 2003, outlining the terms of disentanglement between the parties.
Under the terms of the Settlement Agreement, the Company agreed to pay a cash
settlement to the State of Alaska of $3,448, one half of which was due upon
signing the agreement and one half of which will be due upon completion of
disentanglement. The Company also agreed to transfer to the State title to
certain assets used in providing services under the TPA which resulted in a net
loss on disposal of those assets of $5,648. Based on the terms of the
Settlement Agreement, the Company determined that certain accounts receivable
and working capital associated with the TPA will not be fully recoverable and
has written them down to their estimated net realizable value, resulting in a
charge of $3,575 during 2003. The estimated net realizable value of the working
capital and which assets are ultimately transferred to the State could change
as the Company completes disentanglement, which it expects to do in the first
half of 2004. Asset Impairment Charges The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. The Company was prompted to conduct an asset
impairment review of its fiber optic Indefeasible Rights of Use (IRUs) that
were acquired in 1999 and 2001 and certain IP network and certain service
center assets due to the termination of the TPA by the State of Alaska as
discussed above (which was a significant customer using these assets),
indications that market pricing of similar assets were significantly below the
Companys carrying value, and significant industry and economic trends
affecting the Companys ability to generate positive cash flow from these
assets in its interexchange and Internet segments. This review was conducted
under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. As a result of its review, the Company determined that
its carrying value of IRUs exceeded their fair value by $27,128 and its
carrying value of the IP network and service center assets exceeded their fair
value by $15,059. Accordingly, the Company recorded a $42,187 impairment charge
and wrote down the assets to their fair value during the third quarter of 2003. 10. GAIN ON DISPOSAL OF ASSETS On April 28, 2003, the Company entered into an underwriting agreement with
a syndicate of Canadian investment banks to complete the sale of a majority
interest in the Directories Business. The Company subsequently filed on April
29, 2003, a final prospectus with Canadian securities regulators to sell a
majority interest in its Directories Business in a public offering in Canada to
the ACS Media Income Fund (the Fund), which is a Canadian income fund. The
offering was sponsored by the Company. The transaction closed on May 8, 2003,
with the Company selling an 87.42% interest and retaining a 12.58% interest in
the Directories Business. The Companys retained 12.58% minority interest was
recorded at an initial book value of $1,077 representing the pro-rata retained
ownership at historical book value, and accounted for under the equity method. The Company also entered into an arrangement with the Metropolitan Life
Insurance Company (MetLife) to provide a credit facility to its Directories
Business on May 8, 2003 immediately prior to the sale of its Directories
Business to the Fund. The Directories Business then drew $35,000 of term loans
against the facility, using $1,468 to pay fees and expenses related to the debt
issuance and $87 to prepay an annual agency fee to MetLife. Of the $33,445 in
net cash proceeds, $413 was deposited into the Directories Business as cash
working capital and $33,032 was distributed to the Company as a dividend. The
credit facility is non-recourse to the Company. The Fund then sold 17,500 units on May 8, 2003 for net proceeds of
$110,435, after deducting its underwriters fees and transaction expenses of
$10,246. The Funds net proceeds were used to acquire from the Company an
87.42% interest in the Directories Business. The Company received net proceeds
of $105,059 after deducting its fees and expenses associated with the
Transaction of $5,376. The Company recognized a gain on disposition of $97,578
on a pre-tax basis. F-20




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 10. GAIN ON DISPOSAL OF ASSETS (Continued) The following table indicates the Companys basis in assets sold to and
liabilities assumed by the Fund and its retained interest in ACS Media LLC. Net proceeds of the Transaction
    
    $
    105,059Basis in directories business sold:Current assets
    
    
    4,213Property, plant and equipment, net
    
    
    90Goodwill
    
    
    38,822Debt issue costs
    
    
    1,468Current liabilities
    
    
    (1,035
    )Long-term debt
    
    
    (35,000
    )Basis of Directories Business
    
    
    8,558Equity in minority interest retained
    
    
    1,077Basis in net assets sold to the Fund
    
    
    7,481Gain on sale of Directories Business
    
    $
    97,578
 On August 27, 2003, the Company was released from a lockup agreement
relating to the remaining interest in the Directories Business and the Company
disposed of substantially all of its remaining interest through the exercise of
its right to convert 99.23% of its then remaining 12.58% interest to 2,500
units of the ACS Media Income Fund, which were then sold in an underwritten
offering. The transaction settled on September 4, 2003, generating $17,177 in
net proceeds after deducting transaction expenses of $100, and resulted in a
gain on disposition of $15,940 after deducting the basis of $1,237. As a result
of this transaction, the Company now owns less than 0.1% of the Directories
Business. Related to the initial sale, the Company realized a gain on foreign
exchange of $4,104 as a result of currency fluctuation from April 28, 2003, the
date the underwriting and investment agreements were executed, to May 8, 2003,
the date the offering closed and the transaction was consummated. From the
subsequent sale, the Company realized an additional gain on foreign exchange of
$157 as a result of currency fluctuation from August 27, 2003, the date the
purchase agreement for substantially all of its remaining interest in the
Directories Business was executed, to September 4, 2003, the date the
transaction closed. The foreign exchange gains are included in Interest income
and other in the Consolidated Statements of Operations. In contemplation of the sale of the Directories Business, the Company
formalized a number of agreements with ACS InfoSource, Inc. in May 2003
effective as of January 1, 2001, the day ACS InfoSource, Inc. was formed. ACS
InfoSource, Inc. subsequently assigned certain contracts, including a 50-year
directory publishing and distribution agreement and a 50-year license
agreement, to ACS Media, LLC as a part of the sale transaction. The Company
also entered into a 45-year non-competition agreement and a 10-year billing and
collection agreement directly with ACS Media, LLC. The Company has a right to
minority representation of one manager of the permitted nine managers of ACS
Media LLC so long as its long-term contracts with ACS Media LLC are in effect.
Currently, a director of the Company and employee of Fox Paine, the Companys
majority shareholder, is a manager of ACS Media, LLC. F-21




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 11. NON-OPERATING CHARGES The Company periodically evaluates the fair value of its investments and
other non-operating assets against their carrying value whenever market
conditions indicate a change in that fair value. Any changes relating to
declines in the fair value of non-operating assets are charged to non-operating
expense under the caption Interest income and other in the Consolidated
Statement of Operations. During the third quarter of 2003, the Company
undertook an assessment of the net realizable value of its note receivable from
Neptune Communications, L.L.C. (Neptune) and the option embedded in that note
receivable to purchase certain network assets from Neptune as a result of
changes in market and economic conditions and a notice the Company received
from the State of Alaska of termination of the TPA. As a result of the
analysis, the Company recorded in Interest income and other in the Consolidated
Statement of Operations a charge of $15,924 representing the estimated decline
in fair value of the note receivable from Neptune. The Company still has
purchase commitment obligations associated with this note receivable as
described in Note 21. 12. INCOME TAXES The difference between taxes calculated as if the statutory federal rate
of 34% was applied to loss from continuing operations before income tax and the
recorded tax benefit is reconciled as follows: The expense (benefit) for income taxes is summarized as follows: 2003
    
    2002
    
    2001Computed federal income taxes at the 34% statutory rate
    
    $
    (963
    )
    
    $
    (23,689
    )
    
    $
    (2,422
    )Increase (reduction) in tax resulting from:State income taxes (net federal benefit)
    
    
    (73
    )
    
    
    (4,097
    )
    
    
    (381
    )Amortization of investment tax credits
    
    
    
    
    
    
    
    
    
    
    (195
    )Prior year adjustment
    
    
    
    
    
    
    269
    
    
    
    Excess compensation not allowed
    
    
    343
    
    
    
    
    
    
    
    Other
    
    
    315
    
    
    
    453
    
    
    
    (68
    )Valuation allowance
    
    
    1,473
    
    
    
    27,064
    
    
    
    2,871Total income tax expense (benefit)
    
    $
    1,095
    
    
    $
    
    
    
    $
    (195
    )
 2003
    
    2002
    
    2001Current:Federal income tax
    
    $
    928
    
    
    $
    
    
    
    $
    State income tax
    
    
    167
    
    
    
    
    
    
    
    Total current
    
    
    1,095
    
    
    
    
    
    
    
    Deferred:Federal income tax
    
    
    
    
    
    
    
    
    
    
    State income tax
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Amortization of investment tax credits
    
    
    
    
    
    
    
    
    
    
    (195
    )Total income tax expense (benefit)
    
    $
    1,095
    
    
    $
    
    
    
    $
    (195
    )
 F-22




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 12. INCOME TAXES (Continued) The effect of significant items comprising the Companys net deferred tax
liability at 34% were as follows: 2003
    
    2002
    
    2001Deferred tax liabilities - long-term:Property, plant and equipment
    
    $
    
    
    
    $
    (20,786
    )
    
    $
    (20,380
    )Intangibles
    
    
    
    
    
    
    
    
    
    
    (13,105
    )Other
    
    
    (100
    )
    
    
    (88
    )
    
    
    Total long-term deferred tax liabilities
    
    
    (100
    )
    
    
    (20,874
    )
    
    
    (33,485
    )Deferred tax assets:Current:Accrued compensation
    
    
    4,030
    
    
    
    4,249
    
    
    
    4,081Accrued bad debts
    
    
    8,383
    
    
    
    2,827
    
    
    
    2,172Interest rate swap mark to market
    
    
    
    
    
    
    5,661
    
    
    
    4,575Minimum pension liability adjustment
    
    
    1,817
    
    
    
    1,893
    
    
    
    957Other
    
    
    368
    
    
    
    987
    
    
    
    516Total current deferred tax assets
    
    
    14,598
    
    
    
    15,617
    
    
    
    12,301Long-term:Net operating loss carryforwards from operations
    
    
    33,047
    
    
    
    57,136
    
    
    
    49,324Alternative minimum tax carryforward
    
    
    1,095
    
    
    
    
    
    
    
    Intangibles
    
    
    46,667
    
    
    
    46,734
    
    
    
    Debt issuance cost
    
    
    
    
    
    
    1,213
    
    
    
    Property, plant and equipment
    
    
    1,244
    
    
    
    
    
    
    
    Other
    
    
    81
    
    
    
    
    
    
    
    Total long-term deferred tax assets
    
    
    82,134
    
    
    
    105,083
    
    
    
    49,324Total deferred tax assets
    
    
    96,732
    
    
    
    120,700
    
    
    
    61,625Valuation allowance
    
    
    (96,632
    )
    
    
    (99,826
    )
    
    
    (28,140
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company has available at December 31, 2003 unused operating loss
carryforwards of $88,394 that may be applied against future taxable income and
that expire as shown below. Per the schedule below the total Net Operating Loss
(NOL) is made up of NOLs generated by the consolidated group and NOLs
obtained with the 2000 acquisition of Internet Alaska. The Internet Alaska NOLs
are limited by special rules known as Separate Return Limitation Year (SRLY)
rules. SRLY NOLs can only be used in years that both the Consolidated Group and
the entity that created the SRLY NOLs have taxable income. The tax benefits
derived from the utilization of the SRLY NOLs will increase retained earnings. Internet
    
    
    
    
    
    TotalYear of
    
    Alaskas
    
    Unused Operating
    
    Unused OperatingExpiration
    
    SRLY
    
    Loss Carryforwards
    
    Loss Carryforwards2017
    
    $
    27
    
    
    $
    
    
    
    $
    272018
    
    
    328
    
    
    
    
    
    
    
    3282019
    
    
    852
    
    
    
    
    
    
    
    8522020
    
    
    2,631
    
    
    
    13,944
    
    
    
    16,5752021
    
    
    
    
    
    
    47,724
    
    
    
    47,7242022
    
    
    
    
    
    
    17,112
    
    
    
    17,112$
    3,838
    
    
    $
    78,780
    
    
    $
    82,618
 F-23




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 13. DISCONTINUED OPERATIONS On March 30, 2002, the Company approved a plan to sell its wireless cable
television service segment. As a result of this decision, the operating revenue
and expense of this segment have been classified as discontinued operations
under SFAS No. 144, for all periods presented and the assets and liabilities of
the disposal group have been written down to their fair value, net of expected
selling expenses. The income tax benefit in all periods was offset by a
valuation allowance. The Company completed the disposal of its wireless cable
television segment as of March 31, 2003. The following discloses the results of
the discontinued operations for years ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Operating revenue
    
    $
    110
    
    
    $
    716
    
    
    $
    960Operating expense
    
    
    162
    
    
    
    1,255
    
    
    
    2,555Operating loss
    
    
    (52
    )
    
    
    (539
    )
    
    
    (1,595
    )Interest expense
    
    
    
    
    
    
    (33
    )
    
    
    (126
    )Other
    
    
    
    
    
    
    
    
    
    
    3Loss from operations of discontinued segment
    
    
    (52
    )
    
    
    (572
    )
    
    
    (1,718
    )Write down of net assets to fair value
    
    
    
    
    
    
    (7,060
    )
    
    
    Loss from discontinued operations
    
    $
    (52
    )
    
    $
    (7,632
    )
    
    $
    (1,718
    )
 Assets held for sale December 31, 2002 consist of the following: Accounts receivable, net of allowance of $42
    
    $
    50Other current assets
    
    
    7Property, plant and equipment
    
    
    201Intangible assets
    
    
    85Current liabilities
    
    
    (82
    )Assets held for sale
    
    $
    261
 F-24




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 14. STOCK INCENTIVE PLANS The Companys employees participate in various plans of ACS Group. The
Company may grant stock options, stock appreciation rights and other awards to
officers, employees and non-employee directors through the Compensation
Committee of ACS Groups Board of Directors. At December 31, 2003, ACS Group
has reserved a total of 6,060 shares of authorized common stock for issuance
under the plans. In general, options under the plans vest ratably over three,
four or five years and the plans terminate in approximately 10 years. On April
3, 2002, ACS Group merged the ALEC Holdings, Inc. 1999 Stock Incentive Plan
into the Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan. Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan ACS Group has reserved 4,910 shares under this plan, which was adopted by
ACS Group in November 1999. At December 31, 2003, 5,912 options have been
granted, 2,632 have been forfeited, 441 have been exercised, and 1,630 shares
are available for grant under the plan. Information on outstanding options for the years ended December 31, 2003,
2002 and 2001 is summarized as follows: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding, January 1
    
    
    3,374
    
    
    $
    7.52
    
    
    
    3,606
    
    
    $
    7.47
    
    
    
    3,998
    
    
    $
    7.55Granted
    
    
    200
    
    
    
    4.88
    
    
    
    278
    
    
    
    7.82
    
    
    
    260
    
    
    
    6.81Exercised
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    6.08
    
    
    
    (128
    )
    
    
    6.03Canceled or expired
    
    
    (735
    )
    
    
    8.04
    
    
    
    (434
    )
    
    
    7.59
    
    
    
    (524
    )
    
    
    8.08Outstanding, December 31
    
    
    2,839
    
    
    
    7.20
    
    
    
    3,374
    
    
    
    7.52
    
    
    
    3,606
    
    
    
    7.47Options exercisable at December 31
    
    
    2,226
    
    
    
    7.16
    
    
    
    2,329
    
    
    
    7.15
    
    
    
    2,206
    
    
    
    7.11Weighted average fair value of options granted
    
    
    
    
    
    
    2.84
    
    
    
    
    
    
    
    4.57
    
    
    
    
    
    
    
    3.93
 The outstanding options at December 31, 2003 have the following
characteristics: Outstanding Options
    
    Exercisable OptionsWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$  4.88
- $  7.00
    
    
    2,331
    
    
    
    5.52
    
    
    $
    5.91
    
    
    
    1,910
    
    
    $
    6.04$  8.00
    
    
    86
    
    
    
    8.16
    
    
    
    8.00
    
    
    
    11
    
    
    
    8.00$12.63 - $14.20
    
    
    422
    
    
    
    6.13
    
    
    
    14.14
    
    
    
    305
    
    
    
    14.15
 F-25




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 14. STOCK INCENTIVE PLANS (Continued) ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan The non-employee director stock compensation plan was adopted by ACS Group
in November 1999. ACS Group has reserved 150 shares under this plan. At
December 31, 2003, 110 shares have been awarded and 40 shares are available for
grant under the plan. For the years ended December 31, 2002 and 2001, directors
were required to receive not less than 25% of their annual retainer and meeting
fees in the form of ACS Groups stock and may have elected to receive up to
100% of directors compensation in the form of stock. In 2003, directors no
longer had the option of receiving stock and received their entire annual
retainer and meeting fees in cash, therefore no shares were awarded from this
plan during 2003. During the year ended December 31, 2002, 58 shares under the
plan were awarded to directors, of which 34 were elected to be deferred until
termination of service by the directors. During the year ended December 31,
2001, 26 shares under the plan were awarded to directors, of which 19 were
elected to be deferred until termination of service by the directors. Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan This plan was also adopted by ACS Group in November 1999. ACS Group has
reserved 1,000 shares under this plan. At December 31, 2003, 502 shares are
available for issuance and sale. The plan will terminate on December 31, 2009.
All ACS Group employees and all of the employees of designated subsidiaries
generally will be eligible to participate in the purchase plan, other than
employees whose customary employment is 20 hours or less per week or is for not
more than five months in a calendar year, or who are ineligible to participate
due to restrictions under the Internal Revenue Code. On December 31, 2003, 43 shares were issued under the plan. On June 30,
2003, 87 shares were issued under the plan. On December 31, 2002, 97 shares
were issued under the plan. On June 30, 2002, 53 shares were issued under the
plan. On December 31, 2001, 38 shares were issued under the plan. On June 29,
2001, 48 shares were issued under the plan. A participant in the purchase plan may authorize regular salary deductions
of a maximum of 15% and a minimum of 1% of base compensation. The fair market
value of shares which may be purchased by any employee during any calendar year
may not exceed $25. The amounts so deducted and contributed are applied to the
purchase of full shares of common stock at 85% of the lesser of the fair market
value of such shares on the date of purchase or on the offering date for such
offering period. The offering dates are January 1 and July 1 of each purchase
plan year, and each offering period will consist of one six-month purchase
period. The first offering period under the plan commenced on January 1, 2000.
Shares are purchased on the open market or issued from authorized but unissued
shares on behalf of participating employees on the last business days of June
and December for each purchase plan year and each such participant has the
rights of a stockholder with respect to such shares. During the year ended
December 31, 2003, approximately 12% of eligible employees elected to
participate in the plan. 15. RETIREMENT PLANS Pension benefits for substantially all of the Companys employees are
provided through the Alaska Electrical Pension Plan (AEPP). The Company pays
a contractual hourly amount based on employee classification or base
compensation. As a multi-employer defined contribution plan, the accumulated
benefits and plan assets are not determined for or allocated separately to the
individual employer. The Companys portion of the plans pension cost for 2003,
2002 and 2001 was $12,654, $13,390, and $11,830, respectively. The Company also provides a 401(k) retirement savings plan covering
substantially all of its employees. The plan allows for discretionary matching
contributions as determined by the Board of Directors, subject to Internal
Revenue Code limitations. There was no matching contribution for 2003, 2002 or
2001. F-26




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The Company also 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s Alaska Properties. Existing plan assets
and liabilities of the CenturyTel Plan were transferred to the ACS Retirement
Plan on September 1, 1999. Accrued benefits under the ACS Retirement Plan were
determined in accordance with the provisions of the CenturyTel Plan. Upon
completion of the transfer to the Company, covered employees ceased to accrue
benefits under the plan. On November 1, 2000, the ACS Retirement Plan was
amended to conform early retirement reduction factors and various other terms
to those provided by the AEPP. As a result of this amendment, prior service
cost of $1,992 was recorded and will be amortized over the expected service
life of the plan participants at the date of the amendment. The Company uses
the traditional unit credit method for the determination of pension cost for
financial reporting and funding purposes and complies with the funding
requirements under the Employee Retirement Income Security Act of 1974
(ERISA). Since the plan was adequately funded under ERISA, no contribution
was made in 2002 or 2001. During 2003, the Company made a voluntary
contribution of $600 to the plan. The Company uses a December 31 measurement
date for the plan. The following is a reconciliation of the beginning and ending balances for
2003 and 2002 for the projected benefit obligation and the plan assets of the
ACS Retirement Plan: 2003
    
    2002Change in projected benefit obligation:Projected benefit obligation at beginning of year
    
    $
    10,615
    
    
    $
    9,108Amortization of prior service cost
    
    
    (203
    )
    
    
    (203
    )Interest cost
    
    
    731
    
    
    
    680Actuarial loss
    
    
    1,631
    
    
    
    1,279Benefits paid
    
    
    (328
    )
    
    
    (249
    )Projected benefit obligation at end of year
    
    $
    12,446
    
    
    $
    10,615Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    7,684
    
    
    $
    8,736Return on plan assets
    
    
    1,715
    
    
    
    (803
    )Contribution by employer
    
    
    600
    
    
    
    Benefits paid
    
    
    (328
    )
    
    
    (249
    )Fair value of plan assets at end of year
    
    $
    9,671
    
    
    $
    7,684
 The following table represents the funded status of the ACS Retirement Plan at December 31, 2003 and 2002: 2003
    
    2002Projected benefit obligation
    
    $
    (12,446
    )
    
    $
    (10,615
    )Plan assets at fair value
    
    
    9,671
    
    
    
    7,684Funded Status
    
    
    (2,775
    )
    
    
    (2,931
    )Unrecognized prior service cost
    
    
    1,348
    
    
    
    1,551Unrecognized net loss
    
    
    4,543
    
    
    
    4,734Net amount recognized
    
    $
    3,116
    
    
    $
    3,354
 F-27




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The net amounts recognized in the balance sheet were classified as follows
at December 31, 2003 and 2002: 2003
    
    2002Accrued benefit liability
    
    $
    (2,775
    )
    
    $
    (2,931
    )Intangible asset
    
    
    1,348
    
    
    
    1,551Accumulated other comprehensive loss
    
    
    4,543
    
    
    
    4,734Net amount recognized
    
    $
    3,116
    
    
    $
    3,354
 The accumulated benefit obligation for the plan was $12,446 and $10,615 at
December 31, 2003 and 2002, respectively. The increase (decrease) in minimum
liability included in other comprehensive income was ($191) and $2,342 for the
years ended December 31, 2003 and 2002, respectively. The following table represents the net periodic pension expense for the
ACS Retirement Plan for 2003, 2002 and 2001: 2003
    
    2002
    
    2001Interest cost
    
    $
    731
    
    
    $
    680
    
    
    $
    627Expected return on plan assets
    
    
    (664
    )
    
    
    (723
    )
    
    
    (773
    )Amortization of loss
    
    
    568
    
    
    
    260
    
    
    
    30Amortization of prior service cost
    
    
    203
    
    
    
    203
    
    
    
    203Net periodic pension expense
    
    $
    838
    
    
    $
    420
    
    
    $
    87
 The assumptions used to account for the plan as of December 31, 2003 and
2002 are as follows: 2003
    
    2002Discount rate
    
    
    6.00
    %
    
    
    6.75
    %Expected long-term rate of return on assets
    
    
    8.00
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    0.00
    %
    
    
    0.00
    %
 The expected long-term rate of return on assets assumption of 8% was
decreased from 8.5% in the prior year to reflect the expected long-term effect
of the recent economic environment. The expected long-term rate of return on

assets rate is the best estimate of future expected return for the asset pool,
given the expected returns and allocation targets for the various classes of
assets. The plans asset allocations at December 31, 2003 and 2002, by asset
category are as follows: Asset Category
    
    2003
    
    2002Equity securities*
    
    
    73
    %
    
    
    63
    %Debt securities*
    
    
    26
    %
    
    
    36
    %Other/Cash
    
    
    1
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
  *
    
    Note that mutual funds that may contain both stock and bonds may be included in these categories. The fundamental investment objective of the plan is to generate a
consistent total investment return sufficient to pay plan benefits to retired
employees, while minimizing the long term cost to the Company. The long term
(10 year and beyond) plan asset growth objective is to achieve a rate of return
that exceeds the actuarial interest assumption after fees and expenses. Because
of the Companys long-term investment objectives, the Plan administrator is
directed to resists being reactive to short term capital market developments
and to maintain an asset mix that is continuously rebalanced to adhere to the
plan investment mix guidelines. The Plans investment goal is to protect the
assets longer term purchasing power. The Plans assets are managed in a manner
that emphasizes a higher exposure to equity markets versus other asset classes.
It is expected that such a strategy will provide a higher probability of
meeting the plans actuarial rate of return assumption over time. F-28




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) Based on risk and return history for capital markets along with asset
allocation risk and return projections, the following asset allocation
guidelines were developed for the plan: Minimum
    
    MaximumLarge US equity
    
    
    30
    %
    
    
    70
    %Small US equity
    
    
    5
    %
    
    
    15
    %Non-US equity
    
    
    5
    %
    
    
    15
    %Fixed income
    
    
    20
    %
    
    
    60
    %Cash equivalents
    
    
    0
    %
    
    
    10
    %
 Since the plan is adequately funded under ERISA, the Company does not
expect to make a contribution in 2004. The benefits expected to paid in the each of the next five years, and in
the aggregate for the five fiscal years thereafter are as follows: 2004
    
    $
    4702005
    
    
    5212006
    
    
    6022007
    
    
    6992008
    
    
    7712009-2013
    
    
    4,555
 The Company also has a separate executive post retirement health benefit
plan. The Alaska Communications Systems Executive Retiree Health Benefit Plan
(The ACS Health Plan) was adopted by the Company in November 2001 and amended
in October 2002. The ACS Health Plan covers a select group of management or
highly compensated employees. The group of eligible employees is selected by a
committee appointed by the Compensation Committee of ACS Groups Board of
Directors. Each eligible employee must complete 10 years of service and be
employed by the Company in the capacity of an executive officer for a minimum
of 36 consecutive months immediately preceding retirement. The ACS
Health Plan provides a graded subsidy for medical, dental, and vision
coverage. The amendment revised the premium subsidy, added a premium subsidy
cap and suspends retirees benefits from the ACS Health Plan during any period
the retiree has access to employer health benefits. ACS Groups Compensation
Committee of the Board of Directors decided to terminate the ACS Health Plan in
January 2004. The three people already qualified under the plan will receive
future benefits, but the plan is closed to future participants. The Company
uses the projected unit credit method for the determination of post retirement
health cost for financial reporting and funding purposes and complies with the
funding requirements under ERISA. The Company made a contribution of $128 to
the ACS Health Plan during 2001. The Company uses a December 31 measurement
date for the plan. The following is a reconciliation of the beginning and ending balances for
2003 and 2002 for the projected benefit obligation and the plan assets for the
ACS Health Plan: 2003
    
    2002Change in accumulated postretirement benefit obligation:Accumulated postretirement benefit obligation at beginning of the year:
    
    $
    268
    
    
    $
    588Plan amendment
    
    
    
    
    
    
    (440
    )Service cost
    
    
    14
    
    
    
    69Interest cost
    
    
    18
    
    
    
    40Actuarial (gain)/loss
    
    
    (35
    )
    
    
    11Accumulated postretirement benefit obligation at end of the year
    
    $
    265
    
    
    $
    268Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    127
    
    
    $
    128Return on plan assets
    
    
    11
    
    
    
    (1
    )Fair value of plan assets at end of year
    
    $
    138
    
    
    $
    127
 F-29




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The following table represents the funded status of the ACS Health Plan at
December 31, 2003 and 2002: 2003
    
    2002Accumulated postretirement benefit obligation
    
    $
    (265
    )
    
    $
    (268
    )Plan assets at fair value
    
    
    138
    
    
    
    127Funded status
    
    
    (127
    )
    
    
    (141
    )Unrecognized prior service cost
    
    
    111
    
    
    
    118Unrecognized net (gain) or loss
    
    
    (28
    )
    
    
    7Prepaid (accrued) benefit costs
    
    $
    (44
    )
    
    $
    (16
    )
 The following represents the net periodic postretirement benefit expense
for the ACS Health Plan for 2003, 2002 and 2001: 2003
    
    2002
    
    2001Service cost
    
    $
    14
    
    
    $
    69
    
    
    $
    11Interest cost
    
    
    18
    
    
    
    40
    
    
    
    6Expected return on plan assets
    
    
    (10
    )
    
    
    (11
    )
    
    
    Amortization of prior service cost
    
    
    7
    
    
    
    24
    
    
    
    4Net periodic postretirement benefit expense
    
    $
    29
    
    
    $
    122
    
    
    $
    21
 The actuarial assumptions used to account for the ACS Health Plan as of
December 31, 2003 and 2002 is an assumed discount rate of 6.00% and 6.75%,
respectively, and an expected long term rate of return on plan assets of 8.00%
and 8.50%, respectively. The expected long-term rate of return on assets
assumption of 8% was decreased from 8.5% in the prior year to reflect the
expected long-term effect of the recent economic environment. The expected
long-term rate of return on assets is the best estimate of future expected
return for the asset pool, given the expected returns and allocation targets
for the various classes of assets. For measurement purposes, the assumed annual
rates of increases in health care costs is as follows: Year
    
    Pre 65 premiums
    
    Post 65 premiums1
    
    
    10.00
    %
    
    
    7.00
    %2
    
    
    9.00
    %
    
    
    7.00
    %3
    
    
    8.00
    %
    
    
    7.00
    %4
    
    
    7.00
    %
    
    
    7.00
    %5 and thereafter
    
    
    7.00
    %
    
    
    7.00
    %
 Assumed health care cost trend rates have a significant effect on the
amounts reported for the ACS Health Plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects for 2003: +1%
    
    -1%Effect on total of service and interest cost components
    
    
    224
    
    
    
    (278
    )Effect on accumulated postretirement benefit obligation
    
    
    3,327
    
    
    
    (4,014
    )
 F-30




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The ACS Health Plans asset allocations at December 31, 2003 and 2002, by
asset category are as follows: Asset Category
    
    2003
    

    2002Equity securities*
    
    
    33
    %
    
    
    25
    %Debt securites*
    
    
    56
    %
    
    
    63
    %Other/Cash
    
    
    11
    %
    
    
    12
    %Total
    
    
    100
    %
    
    
    100
    %
  *
    
    Note that mutual funds that may contain both stock and bonds may be included in these categories. The fundamental investment objective of the plan is to realize an annual
total investment return consistent with the conservative risk tolerance plan
dictated by the Company. The investment profile of the plan emphasizes
liquidity and income, some capital stock investment and some fluctuation of
investment return. It is anticipated that the investment manager will achieve
this objective by investing the accounts assets in mutual funds. The portfolio
may hold common stock, fixed income securities, money market instruments and
U.S. Treasury obligations. Based on risk and return history for capital markets along with asset
allocation risk and return projections, the following asset allocation
guidelines were developed for the plan: TargetEquity securities
    
    
    30
    %Fixed income
    
    
    60
    %Other/cash
    
    
    10
    %
 The Company does not currently plan to make a contribution in 2004. The benefits expected to paid in the each of the next five years, and in
the aggregate for the five fiscal years thereafter are as follows: 2004
    
    $
    2005
    
    
    52006
    
    
    102007
    
    
    102008
    
    
    102009-2013
    
    
    106
 In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (2003 Medicare Act) was signed into law. The 2003
Medicare Act expanded Medicare to include, for the first time, coverage for
prescription drugs. The Company expects that the 2003 Medicare Act will
eventually reduce the costs of postretirement medical benefits. Because of
various uncertainties related to the Companys response to the 2003 Medicare
Act and the appropriate accounting for this event, the Company has elected to
defer financial recognition of this legislation until the FASB issues final
accounting guidance. 16. BUSINESS SEGMENTS The Company has four reportable segments: local telephone, wireless,
Internet and interexchange. Local telephone provides landline
telecommunications services and consists of local telephone service, network
access and deregulated and other revenue; wireless provides wireless
telecommunications service; Internet provides Internet service and advanced IP
based private networks; and interexchange provides switched and dedicated long
distance services. Each reportable segment is a strategic business under
separate management and offering different services than those offered by the
other segments. The Company evaluates the performance of its segments based on
operating income (loss). F-31




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 16. BUSINESS SEGMENTS (Continued) Previously, the Company reported its Directories Business as a separate
segment. The Company sold an 87.42% interest in its Directories Business during
the second quarter of 2003 and is no longer directly engaged in day-to-day
management of that business. Therefore, the Directories Business no longer
constitutes a reportable segment. Accordingly, the historical operating results
for the Directories Business are included in All Other in the accompanying
tables. The Company also has a wireless cable television service segment that
did not meet the criteria for a reportable segment, was previously included in
All Other and is now reported as discontinued operations. The Company also incurs interest expense, interest income, equity in
earnings of investments, goodwill amortization in 2001 on the original May 14,
1999 purchases, goodwill impairment losses and other operating and non
operating income and expense at the corporate level which are not allocated to
the business segments, nor are they evaluated by the chief operating decision
maker in analyzing the performance of the business segments. These non
operating income and expense items are provided in the accompanying table under
the caption All Other in order to assist the users of these financial
statements in reconciling the operating results and total assets of the
business segments to the consolidated financial statements. Common use assets
are held at either the Company and are allocated to the business segments based
on operating revenue. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 2003: LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    215,376
    
    
    $
    46,628
    
    
    $
    33,026
    
    
    $
    20,562
    
    
    $
    37,205
    
    
    $
    (29,249
    )
    
    $
    323,548Depreciation and amortization
    
    
    51,235
    
    
    
    6,527
    
    
    
    8,759
    
    
    
    1,068
    
    
    
    14,596
    
    
    
    
    
    
    
    82,185Operating income (loss)
    
    
    24,365
    
    
    
    3,043
    
    
    
    (60,442
    )
    
    
    (21,012
    )
    
    
    129,450
    
    
    
    (9
    )
    
    
    75,395Interest expense
    
    
    (441
    )
    
    
    (5
    )
    
    
    (67
    )
    
    
    (164
    )
    
    
    (68,145
    )
    
    
    
    
    
    
    (68,822
    )Interest income
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,719
    
    
    
    
    
    
    
    1,749Income tax provision (benefit)
    
    
    9,950
    
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    (11,362
    )
    
    
    
    
    
    
    Income (loss) from
continuing operations
    
    
    14,004
    
    
    
    1,626
    
    
    
    (60,513
    )
    
    
    (21,176
    )
    
    
    62,138
    
    
    
    (9
    )
    
    
    (3,930
    )Total assets
    
    
    508,029
    
    
    
    102,404
    
    
    
    23,296
    
    
    
    27,947
    
    
    
    23,511
    
    
    
    
    
    
    
    685,187Capital expenditures
    
    
    24,113
    
    
    
    13,018
    
    
    
    5,255
    
    
    
    98
    
    
    
    8,260
    
    
    
    
    
    
    
    50,744
 Operating revenues disclosed above include intersegment operating revenues
of $27,620 for local telephone, $1,801 for wireless, $2,482 for interexchange
and $493 for all other. In accordance with SFAS No. 71, intercompany revenues
between local telephone and non-local telephone operations are not eliminated
above. The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 2002: LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    226,447
    
    
    $
    43,233
    
    
    $
    20,848
    
    
    $
    26,350
    
    
    $
    58,411
    
    
    $
    (35,145
    )
    
    $
    340,144Depreciation and amortization
    
    
    55,498
    
    
    
    5,541
    
    
    
    6,744
    
    
    
    2,256
    
    
    
    12,901
    
    
    
    
    
    
    
    82,940Operating income (loss)
    
    
    34,700
    
    
    
    2,207
    
    
    
    (23,265
    )
    
    
    (708
    )
    
    
    (35,622
    )
    
    
    (76
    )
    
    
    (22,764
    )Interest expense
    
    
    435
    
    
    
    (5
    )
    
    
    (146
    )
    
    
    (330
    )
    
    
    (49,067
    )
    
    
    
    
    
    
    (49,113
    )Interest income
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    2,416
    
    
    
    
    
    
    
    2,424Income tax provision (benefit)
    
    
    13,214
    
    
    
    1,527
    
    
    
    
    
    
    
    
    
    
    
    (14,741
    )
    
    
    
    
    
    
    Income (loss) from
continuing operations
    
    
    19,199
    
    
    
    2,113
    
    
    
    (21,619
    )
    
    
    (1,583
    )
    
    
    (67,708
    )
    
    
    (76
    )
    
    
    (69,674
    )Total assets
    
    
    577,944
    
    
    
    84,123
    
    
    
    (26,905
    )
    
    
    6,564
    
    
    
    114,145
    
    
    
    
    
    
    
    755,871Capital expenditures
    
    
    31,186
    
    
    
    14,007
    
    
    
    16,604
    
    
    
    228
    
    
    
    9,439
    
    
    
    
    
    
    
    71,464
 Operating revenues disclosed above include intersegment operating revenues
of $22,634 for local telephone, $1,786 for wireless, $13,965 for interexchange
and $1,400 for all other. In accordance with SFAS No. 71, intercompany revenues
between local telephone and non-local telephone operations are not eliminated
above. F-32




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 16. BUSINESS SEGMENTS (Continued) The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 2001: LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    221,411
    
    
    $
    41,923
    
    
    $
    13,726
    
    
    $
    27,105
    
    
    $
    50,942
    
    
    $
    (26,582
    )
    
    $
    328,525Depreciation and amortization
    
    
    53,242
    
    
    
    5,626
    
    
    
    2,606
    
    
    
    2,284
    
    
    
    15,350
    
    
    
    
    
    
    
    79,108Operating income (loss)
    
    
    37,439
    
    
    
    3,304
    
    
    
    (10,404
    )
    
    
    (1,717
    )
    
    
    18,501
    
    
    
    
    
    
    
    47,123Interest expense
    
    
    (1,716
    )
    
    
    (36
    )
    
    
    (97
    )
    
    
    (302
    )
    
    
    (55,414
    )
    
    
    
    
    
    
    (57,565
    )Interest income
    
    
    13
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    1,963
    
    
    
    
    
    
    
    1,990Income tax provision
(benefit)
    
    
    13,534
    
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    (15,893
    )
    
    
    
    
    
    
    (195
    )Income (loss) from
continuing operations
    
    
    19,560
    
    
    
    2,966
    
    
    
    (9,591
    )
    
    
    (2,049
    )
    
    
    (17,814
    )
    
    
    
    
    
    
    (6,928
    )Total assets
    
    
    703,230
    
    
    
    108,899
    
    
    
    3,818
    
    
    
    25,574
    
    
    
    109,602
    
    
    
    
    
    
    
    951,123Capital expenditures
    
    
    33,822
    
    
    
    5,786
    
    
    
    16,319
    
    
    
    19,787
    
    
    
    11,868
    
    
    
    
    
    
    
    87,582
 Operating revenues disclosed above include intersegment operating revenues
of $21,677 for local telephone, $1,603 for wireless, $2 for Internet, $13,851
for interexchange and $1,400 for all other. In accordance with SFAS No. 71,
intercompany revenues between local telephone and non-local telephone
operations are not eliminated above. 17. RELATED PARTY TRANSACTIONS The Company has various intercompany transactions with the Parent and at
December 31, 2003 and 2002, $148 and $3,761 respectively was due from the
Parent. Fox Paine & Company, ACS Groups majority stockholder, receives an annual
management fee in the amount of 1% of the Companys net income before interest
expense, interest income, income taxes, depreciation and amortization, and
equity in loss of investments, calculated without regard to the fee. The
management fee expense for 2003, 2002 and 2001 was $930, $1,316, and $1,285,
respectively. The management fee payable at 2003 and 2002 was $950 and $1,319,
respectively. On April 17, 2001, the Company issued an interest bearing note receivable
to an officer totaling $328. The note bore interest at the Mid-Term Applicable
Federal Rate and was due on April 15, 2005. The note was secured by a pledge of
100 shares of ACS Groups stock held in the officers name. In accordance with
an addendum to the officers employment agreement dated May 3, 2001, the loan
was to be forgiven ratably over a three year period ending April 16, 2004.
Accordingly, $114 was forgiven on April 16, 2002 and recognized as compensation
expense. Upon the closing of the sale of the Companys Directories Business on
May 8, 2003 for which the officer received a fee of $840, he waived certain
rights under his employment agreement, including the forgiveness terms of this
indebtedness that would have occurred during 2003 and 2004. On May 8, 2003, the
officer paid off the note balance of $238, including accrued interest. During
2003, the Company spun off its Directory Business to ACS Media LLC
and subsequently sold 99.9% of its interest in ACS Media LLC to the
public through a Canadian income fund. As part of that transaction,
the Company entered into several long-term contracts with ACS Media
LLC, including a 50-year publishing agreement, a 50-year license
agreement, a 45-year non-compete agreement, and a 10-year billing and
collection agreement. At December 31, 2003, the Company had
recorded in accounts payable - affiliates $2,867 due to ACS
Media LLC under these contracts, primarily under the billing and
collection agreement. The Company has a right to minority
representation of one manager of the permitted nine managers of ACS
Media LLC so long as its contracts with ACS Media LLC are in effect.
Currently, Wray T. Thorn, a director of the Company and employee
of Fox Paine & Company, the Companys majority shareholder,
is a manager of ACS Media LLC. The board of directors approved the payment of a fee equal to 1% of the
gross proceeds generated from the sale of the Companys Directories Business to
Fox Paine & Company upon closing such sale, plus expenses in connection with
such transaction, including the reimbursement by the Company of the $250
consulting fee and transaction bonus paid to an officer under the agreement
described below. The Company paid Fox Paine & Company a fee of $2,095 on May 8,
2003. Fox Paine & Company entered into a consulting agreement with an officer of
the Company for services rendered for the benefit of the Company related to the
sale of the Companys Directories Business. Under this agreement, the officer
was
paid a lump sum consulting fee and transaction bonus of $250 in May 2003. As
described above, Fox Paine & Company was reimbursed for this expense. In August 2003, the board of directors also approved the payment of a fee
equal to 1% of the gross proceeds generated from the refinancing of the
Companys debt. The Company paid Fox Paine & Company $3,760 on August 28, 2003. F-33




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 17. RELATED PARTY TRANSACTIONS (Continued) On September 19, 2003, Fox Paine entered into a consulting agreement with
a now retired officer of the Company. The consulting term will begin on January
1, 2004 and continue for one year, after which either party may terminate the
arrangement. During the consulting term, the retired officer will advise Fox
Paine on and evaluate potential opportunities in the telecommunications
industry, and Fox Paine will pay the officer a monthly fee of $20 for these
services. 18. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Commencing January 1, 2001, The Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activitiesand its corresponding
amendments under SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities. SFAS No. 133 requires that an entity recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. The accounting for changes in fair
value of a derivative depends on the intended use of the derivative, and its
designation as a hedge. Derivatives that are not hedges must be adjusted to
fair value through earnings. If a derivative is a hedge, depending on the
nature of the hedge, changes in fair value of derivatives either offset the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or are recognized in other comprehensive income until the
hedged transaction is recognized in earnings. The change in a derivatives fair
value related to the ineffective portion of a hedge, if any, is immediately
recognized in earnings. The Company used derivative financial instruments, specifically an
interest rate swap agreement, to partially hedge variable interest
transactions. The Company extinguished early its interest rate swap agreement
in November 2003. As a result of adopting SFAS No. 133, the Company recognized as an asset
at January 1, 2001, a cumulative transition adjustment of $1,243 related to
marking to fair value a designated cash flow hedge in the form of a interest
rate swap. As of December 31, 2002, the fair value of the swap had declined to
a liability of $14,152 which is recorded in other deferred credits and
long-term liabilities on the Companys Consolidated Balance Sheets. The fair
value of the Companys interest rate swap agreement represents the estimated
amount the Company would receive or pay to terminate the agreement, calculated
based on the present value of expected payments or receipts based on implied
forward rates in the LIBOR yield curve at the end of the year. The realized
gains and losses of the swap and its associated hedged long-term debt are
recorded net in interest expense on the Companys Consolidated Statements of
Operations. For the years ended December 31, 2003 and 2002, realized changes in
the fair value of the cash flow hedge amounted to a charge of $15,647 and
$9,046, of which the ineffective portion was $231 and $59, respectively. Both
the realized effective and ineffective components of the cash flow hedge were
recorded as an increase to interest expense. The Company maintained an interest rate risk management strategy as a
condition of its bank credit agreement that uses derivatives to minimize
significant, unanticipated earnings and cash flow fluctuations caused by
interest rate volatility. The Companys specific goals were (1) to manage
interest rate sensitivity by modifying the repricing characteristics of certain
of its debt and (2) to lower (where possible) the cost of borrowed funds. The
Company does not enter into derivative financial instruments for speculative or
trading purposes. By using derivative financial instruments to hedge exposure to changes in
interest rates, the Company had exposed itself to credit risk and market risk.
The Company had minimized its credit risk by entering into a transaction with a
high-quality counterparty and monitoring the financial condition of that
counterparty. Market risk is managed through the setting and monitoring of
parameters that limit the types and degree of market risks that are acceptable. F-34




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of cash and cash equivalents, accounts receivable and
payable, and other short-term assets and liabilities approximate carrying
values due to their short-term nature. The Companys interest rate swap
agreement is marked to fair value, therefore its carrying value is equal to its
fair value. Company extinguished early its interest rate swap agreement in
November 2003. The fair value for the Companys senior subordinated notes and senior
unsecured notes was estimated based on quoted market prices. The fair value of
the Companys senior credit facility term debt approximates carrying values due
to the variable interest rate nature of the debt and its senior position in the
capital structure. The following table summarizes the Companys carrying values and fair
values of the debt components of its financial instruments at December 31,
2003: Carrying
    
    FairValue
    
    ValueNew senior credit facility term loan
    
    $
    200,000
    
    
    $
    200,0009 3/8% senior subordinated notes due 2009
    
    
    150,000
    
    
    
    150,0009 7/8% senior unsecured notes due 2011
    
    
    176,144
    
    
    
    191,100Capital leases and other long-term obligations
    
    
    8,860
    
    
    
    8,860$
    535,004
    
    
    $
    549,960
 The following table summarizes the Companys carrying values and fair
values of the debt components of its financial instruments at December 31,
2002: Carrying
    
    FairValue
    
    ValueSenior credit facility term debt - tranche A
    
    $
    148,500
    
    
    $
    148,500Senior credit facility term debt - tranche B
    
    
    148,500
    
    
    
    148,500Senior credit facility term debt - tranche C
    
    
    133,650
    
    
    
    133,6509 3/8% senior subordinated notes due 2009
    
    
    150,000
    
    
    
    107,250Capital leases and other long-term obligations
    
    
    12,181
    
    
    
    12,181$
    592,831
    
    
    $
    550,081
 F-35




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS ACS Holdings and its subsidiaries are guarantors of ACS Groups senior
discount debentures. Additionally, ACS Group and ACS Holdings subsidiaries are
guarantors under ACS Holdings 9 3/8 % senior subordinated notes and 9 7/8/%
senior unsecured notes. All ACS Holdings subsidiaries (the Combined
Subsidiaries) are 100% owned. The guarantees are full and unconditional. In
addition, all guarantees are joint and several. Accordingly, the interim
condensed consolidating financial statements are presented below. Condensed Consolidated Balance Sheet
December 31, 2003 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    139
    
    
    $
    97,659
    
    
    $
    
    
    
    $
    97,798Restricted cash
    
    
    
    
    
    
    3,635
    
    
    
    
    
    
    
    3,635Accounts receivable-trade, net
    
    
    13,803
    
    
    
    27,915
    
    
    
    
    
    
    
    41,718Accounts receivable-affiliates
    
    
    33,777
    
    
    
    (33,629
    )
    
    
    
    
    
    
    148Materials and supplies
    
    
    10,027
    
    
    
    72
    
    
    
    
    
    
    
    10,099Prepayments and other current assets
    
    
    2,877
    
    
    
    2,973
    
    
    
    
    
    
    
    5,850Total current assets
    
    
    60,623
    
    
    
    98,625
    
    
    
    
    
    
    
    159,248Investments
    
    
    
    
    
    
    399,384
    
    
    
    (399,384
    )
    
    
    Property, plant and equipment
    
    
    931,840
    
    
    
    110,064
    
    
    
    
    
    
    
    1,041,904Less: accumulated depreciation and amortization
    
    
    553,816
    
    
    
    49,944
    
    
    
    
    
    
    
    603,760Property, plant and equipment, net
    
    
    378,024
    
    
    
    60,120
    
    
    
    
    
    
    
    438,144Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets, net
    
    
    22,055
    
    
    
    
    
    
    
    
    
    
    
    22,055Debt issuance costs, net
    
    
    
    
    
    
    18,587
    
    
    
    
    
    
    
    18,587Deferred charges and other assets
    
    
    2,501
    
    
    
    6,249
    
    
    
    
    
    
    
    8,750Total assets
    
    $
    463,203
    
    
    $
    582,965
    
    
    $
    (360,981
    )
    
    $
    685,187Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    500
    
    
    $
    1,767
    
    
    $
    
    
    
    $
    2,267Accounts payable-affiliates
    
    
    2,867
    
    
    
    950
    
    
    
    
    
    
    
    3,817Accounts payable, accrued and other current liabilities
    
    
    15,038
    
    
    
    31,953
    
    
    
    
    
    
    
    46,991Income taxes payable
    
    
    
    
    
    
    1,095
    
    
    
    
    
    
    
    1,095Advance billings and customer deposits
    
    
    8,766
    
    
    
    
    
    
    
    
    
    
    
    8,766Total current liabilities
    
    
    27,171
    
    
    
    35,765
    
    
    
    
    
    
    
    62,936Long-term obligations, net of current portion
    
    
    4,661
    
    
    
    528,076
    
    
    
    
    
    
    
    532,737Deferred income taxes
    
    
    5,220
    
    
    
    (5,220
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    65,170
    
    
    
    5,895
    
    
    
    
    
    
    
    71,065Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Common stock
    
    
    25
    
    
    
    
    
    
    
    (25
    )
    
    
    Paid in capital in excess of par value
    
    
    501,374
    
    
    
    287,242
    
    
    
    (501,374
    )
    
    
    287,242Retained earnings (accumulated deficit)
    
    
    (140,418
    )
    
    
    (264,250
    )
    
    
    140,418
    
    
    
    (264,250
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,543
    )
    
    
    
    
    
    
    (4,543
    )Total stockholders equity
    
    
    360,981
    
    
    
    18,449
    
    
    
    (360,981
    )
    
    
    18,449Total liabilities and stockholders equity
    
    $
    463,203
    
    
    $
    582,965
    
    
    $
    (360,981
    )
    
    $
    685,187
 F-36




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Balance Sheet
December 31, 2002 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    (73
    )
    
    $
    18,638
    
    
    $
    
    
    
    $
    18,565Restricted cash
    
    
    
    
    
    
    3,440
    
    
    
    
    
    
    
    3,440Accounts receivable-trade, net
    
    
    28,713
    
    
    
    20,107
    
    
    
    
    
    
    
    48,820Accounts receivable-affiliates
    
    
    34,625
    
    
    
    (30,864
    )
    
    
    
    
    
    
    3,761Materials and supplies
    
    
    11,176
    
    
    
    27
    
    
    
    
    
    
    
    11,203Prepayments and other current assets
    
    
    2,941
    
    
    
    3,231
    
    
    
    
    
    
    
    6,172Assets held for sale
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    261Total current assets
    
    
    77,643
    
    
    
    14,579
    
    
    
    
    
    
    
    92,222Investments
    
    
    
    
    
    
    550,964
    
    
    
    (550,964
    )
    
    
    Property, plant and equipment
    
    
    987,132
    
    
    
    103,233
    
    
    
    
    
    
    
    1,090,365Less: accumulated depreciation and amortization
    
    
    537,647
    
    
    
    36,740
    
    
    
    
    
    
    
    574,387Property, plant and equipment, net
    
    
    449,485
    
    
    
    66,493
    
    
    
    
    
    
    
    515,978Goodwill
    
    
    38,821
    
    
    
    
    
    
    
    38,404
    
    
    
    77,225Intangible assets
    
    
    22,237
    
    
    
    1,032
    
    
    
    
    
    
    
    23,269Debt issuance costs, net
    
    
    
    
    
    
    21,130
    
    
    
    
    
    
    
    21,130Deferred charges and other assets
    
    
    32,278
    
    
    
    (6,231
    )
    
    
    
    
    
    
    26,047Total assets
    
    $
    620,464
    
    
    $
    647,967
    
    
    $
    (512,560
    )
    
    $
    755,871Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    1,312
    
    
    $
    4,621
    
    
    $
    
    
    
    $
    5,933Accounts payable-affiliates
    
    
    
    
    
    
    1,319
    
    
    
    
    
    
    
    1,319Accounts payable, accrued and other current liabilities
    
    
    18,834
    
    
    
    30,646
    
    
    
    
    
    
    
    49,480Advance billings and customer deposits
    
    
    9,804
    
    
    
    
    
    
    
    
    
    
    
    9,804Total current liabilities
    
    
    29,950
    
    
    
    36,586
    
    
    
    
    
    
    
    66,536Long-term obligations, net of current portion
    
    
    6,899
    
    
    
    579,999
    
    
    
    
    
    
    
    586,898Deferred income taxes
    
    
    7,673
    
    
    
    (7,673
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    63,382
    
    
    
    20,437
    
    
    
    
    
    
    
    83,819Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Common stock
    
    
    25
    
    
    
    
    
    
    
    (25
    )
    
    
    Paid in capital in excess of par value
    
    
    355,574
    
    
    
    287,242
    
    
    
    (355,574
    )
    
    
    287,242Retained earnings (accumulated deficit)
    
    
    156,961
    
    
    
    (249,738
    )
    
    
    (156,961
    )
    
    
    (249,738
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (18,886
    )
    
    
    
    
    
    
    (18,886
    )Total stockholders equity
    
    
    512,560
    
    
    
    18,618
    
    
    
    (512,560
    )
    
    
    18,618Total liabilities and stockholders equity
    
    $
    620,464
    
    
    $
    647,967
    
    
    $
    (512,560
    )
    
    $
    755,871
 F-37




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Operations
Year Ended December 31, 2003 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    215,376
    
    
    $
    25,574
    
    
    $
    (25,563
    )
    
    $
    215,387Wireless
    
    
    46,628
    
    
    
    
    
    
    
    (80
    )
    
    
    46,548Directory
    
    
    11,631
    
    
    
    
    
    
    
    
    
    
    
    11,631Internet
    
    
    33,026
    
    
    
    
    
    
    
    
    
    
    
    33,026Interexchange
    
    
    20,562

    
    
    
    
    
    
    
    (3,606
    )
    
    
    16,956Total operating revenue
    
    
    327,223
    
    
    
    25,574
    
    
    
    (29,249
    )
    
    
    323,548Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    136,561
    
    
    
    1,298
    
    
    
    (21,505
    )
    
    
    116,354Wireless (exclusive of depreciation and amortization)
    
    
    34,922
    
    
    
    
    
    
    
    (3,858
    )
    
    
    31,064Directory (exclusive of depreciation and amortization)
    
    
    5,359
    
    
    
    
    
    
    
    (110
    )
    
    
    5,249Internet (exclusive of depreciation and amortization)
    
    
    47,066
    
    
    
    
    
    
    
    (1,543
    )
    
    
    45,523Interexchange (exclusive of depreciation and amortization)
    
    
    27,766
    
    
    
    
    
    
    
    (2,224
    )
    
    
    25,542Other (exclusive of depreciation and amortization)
    
    
    9
    
    
    
    
    
    
    
    (9
    )
    
    
    Contract termination and asset impairment charges
    
    
    54,858
    
    
    
    
    
    
    
    
    
    
    
    54,858Depreciation and amortization
    
    
    67,591
    
    
    
    14,594
    
    
    
    
    
    
    
    82,185Loss (gain) on disposal of assets, net
    
    
    (112,642
    )
    
    
    20
    
    
    
    
    
    
    
    (112,622
    )Total operating expense
    
    
    261,490
    
    
    
    15,912
    
    
    
    (29,249
    )
    
    
    248,153Operating income
    
    
    65,733
    
    
    
    9,662
    
    
    
    
    
    
    
    75,395Other income (expense):Interest expense
    
    
    (677
    )
    
    
    (68,145
    )
    
    
    
    
    
    
    (68,822
    )Interest income and other
    
    
    4,287
    
    
    
    (14,478
    )
    
    
    
    
    
    
    (10,191
    )Equity in income (loss) of investments
    
    
    783
    
    
    
    7,394
    
    
    
    (7,394
    )
    
    
    783Total other income (expense)
    
    
    4,393
    
    
    
    (75,229
    )
    
    
    (7,394
    )
    
    
    (78,230
    )Income (loss) before income taxes and discontinued
operations
    
    
    70,126
    
    
    
    (65,567
    )
    
    
    (7,394
    )
    
    
    (2,835
    )Income tax expense (benefit)
    
    
    62,680
    
    
    
    (61,585
    )
    
    
    
    
    
    
    1,095Income (loss) from continuing operations
    
    
    7,446
    
    
    
    (3,982
    )
    
    
    (7,394
    )
    
    
    (3,930
    )Loss from discontinued operations
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Net income (loss)
    
    $
    7,394
    
    
    $
    (3,982
    )
    
    $
    (7,394
    )
    
    $
    (3,982
    )
 F-38




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Operations
Year Ended December 31, 2002 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    226,447
    
    
    $
    
    
    
    $
    
    
    
    $
    226,447Wireless
    
    
    43,233
    
    
    
    
    
    
    
    (53
    )
    
    
    43,180Directory
    
    
    33,604
    
    
    
    
    
    
    
    
    
    
    
    33,604Internet
    
    
    20,848
    
    
    
    
    
    
    
    (1
    )
    
    
    20,847Interexchange
    
    
    26,350
    
    
    
    
    
    
    
    (10,284
    )
    
    
    16,066Other
    
    
    716
    
    
    
    24,807
    
    
    
    (25,523
    )
    
    
    Total operating revenue
    
    
    351,198
    
    
    
    24,807
    
    
    
    (35,861
    )
    
    
    340,144Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    136,253
    
    
    
    2,188
    
    
    
    (23,859
    )
    
    
    114,582Wireless (exclusive of depreciation and amortization)
    
    
    35,380
    
    
    
    
    
    
    
    (6,028
    )
    
    
    29,352Directory (exclusive of depreciation and amortization)
    
    
    14,189
    
    
    
    
    
    
    
    (19
    )
    
    
    14,170Internet (exclusive of depreciation and amortization)
    
    
    37,344
    
    
    
    
    
    
    
    (6,045
    )
    
    
    31,299Interexchange (exclusive of depreciation and amortization)
    
    
    24,766
    
    
    
    
    
    
    
    (1,119
    )
    
    
    23,647Other (exclusive of depreciation and amortization)
    
    
    1,158
    
    
    
    
    
    
    
    (1,158
    )
    
    
    Depreciation and amortization
    
    
    70,181
    
    
    
    12,890
    
    
    
    (131
    )
    
    
    82,940Loss on disposal of assets
    
    
    204
    
    
    
    
    
    
    
    1,959
    
    
    
    2,163Goodwill impairment loss
    
    
    
    
    
    
    64,755
    
    
    
    
    
    
    
    64,755Total operating expense
    
    
    319,475
    
    
    
    79,833
    
    
    
    (36,400
    )
    
    
    362,908Operating income (loss)
    
    
    31,723
    
    
    
    (55,026
    )
    
    
    539
    
    
    
    (22,764
    )Other income (expense):Interest expense
    
    
    (79
    )
    
    
    (49,067
    )
    
    
    33
    
    
    
    (49,113
    )Interest income and other
    
    
    (37
    )
    
    
    (3,978
    )
    
    
    6,218
    
    
    
    2,203Total other expense
    
    
    (116
    )
    
    
    (53,045
    )
    
    
    6,251
    
    
    
    (46,910
    )Income (loss) before income taxes, discontinued
operations and cumulative effect of
change in accounting principle
    
    
    31,607
    
    
    
    (108,071
    )
    
    
    6,790
    
    
    
    (69,674
    )Income tax expense (benefit)
    
    
    22,718
    
    
    
    (22,718
    )
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    8,889
    
    
    
    (85,353
    )
    
    
    6,790
    
    
    
    (69,674
    )Loss from discontinued operations
    
    
    (6,810
    )
    
    
    (250
    )
    
    
    (572
    )
    
    
    (7,632
    )Income (loss) before cumulative effect
of change in accounting principle
    
    
    2,079
    
    
    
    (85,603
    )
    
    
    6,218
    
    
    
    (77,306
    )Cumulative effect of change
in accounting principle
    
    
    (8,297
    )
    
    
    (97,053
    )
    
    
    
    
    
    
    (105,350
    )Net income (loss)
    
    $
    (6,218
    )
    
    $
    (182,656
    )
    
    $
    6,218
    
    
    $
    (182,656
    )
 F-39




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Operations
Year Ended December 31, 2001 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    221,411
    
    
    $
    
    
    
    $
    
    
    
    $
    221,411Wireless
    
    
    41,923
    
    
    
    
    
    
    
    (29
    )
    
    
    41,894Directory
    
    
    33,870
    
    
    
    
    
    
    
    
    
    
    
    33,870Internet
    
    
    13,726
    
    
    
    
    
    
    
    (2
    )
    
    
    13,724Interexchange
    
    
    27,105
    
    
    
    
    
    
    
    (9,479
    )
    
    
    17,626Other
    
    
    960
    
    
    
    17,072
    
    
    
    (18,032
    )
    
    
    Total operating revenue
    
    
    338,995
    
    
    
    17,072
    
    
    
    (27,542
    )
    
    
    328,525Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    130,536
    
    
    
    2,475
    
    
    
    (15,191
    )
    
    
    117,820Wireless (exclusive of depreciation and amortization)
    
    
    32,993
    
    
    
    
    
    
    
    (5,564
    )
    
    
    27,429Directory (exclusive of depreciation and amortization)
    
    
    14,713
    
    
    
    
    
    
    
    (29
    )
    
    
    14,684Internet (exclusive of depreciation and amortization)
    
    
    21,524
    
    
    
    
    
    
    
    (4,947
    )
    
    
    16,577Interexchange (exclusive of depreciation and amortization)
    
    
    26,538
    
    
    
    
    
    
    
    (754
    )
    
    
    25,784Other (exclusive of depreciation and amortization)
    
    
    1,949
    
    
    
    
    
    
    
    (1,949
    )
    
    
    Depreciation and amortization
    
    
    64,463
    
    
    
    15,348
    
    
    
    (703
    )
    
    
    79,108Total operating expense
    
    
    292,716
    
    
    
    17,823
    
    
    
    (29,137
    )
    
    
    281,402Operating income (loss)
    
    
    46,279
    
    
    
    (751
    )
    
    
    1,595
    
    
    
    47,123Other income (expense):Interest expense
    
    
    (2,277
    )
    
    
    (55,414
    )
    
    
    126
    
    
    
    (57,565
    )Interest income and other
    
    
    47
    
    
    
    3,203
    
    
    
    
    
    
    
    3,250Equity in income (loss) of investments
    
    
    69
    
    
    
    20,457
    
    
    
    (20,457
    )
    
    
    69Total other expense
    
    
    (2,161
    )
    
    
    (31,754
    )
    
    
    (20,331
    )
    
    
    (54,246
    )Income (loss) before income taxes and
and discontinued operations
    
    
    44,118
    
    
    
    (32,505
    )
    
    
    (18,736
    )
    
    
    (7,123
    )Income tax expense (benefit)
    
    
    23,664
    
    
    
    (23,859
    )
    
    
    
    
    
    
    (195
    )Income (loss) from continuing operations
    
    
    20,454
    
    
    
    (8,646
    )
    
    
    (18,736
    )
    
    
    (6,928
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,718
    )
    
    
    (1,718
    )Net income (loss)
    
    $
    20,454
    
    
    $
    (8,646
    )
    
    $
    (20,454
    )
    
    $
    (8,646
    )
 F-40




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Cash Flows
Year Ended December 31, 2003 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    47,296
    
    
    $
    166,893
    
    
    $
    (158,973
    )
    
    $
    55,216Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (40,199
    )
    
    
    (8,205
    )
    
    
    
    
    
    
    (48,404
    )Net proceeds from sale of business
    
    
    155,269
    
    
    
    
    
    
    
    
    
    
    
    155,269Release of funds from escrow
    
    
    
    
    
    
    3,539
    
    
    
    
    
    
    
    3,539Placement of funds in restricted account
    
    
    
    
    
    
    (3,725
    )
    
    
    
    
    
    
    (3,725
    )Net cash provided (used) by investing
activities
    
    
    115,070
    
    
    
    (8,391
    )
    
    
    
    
    
    
    106,679Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (3,181
    )
    
    
    (430,921
    )
    
    
    
    
    
    
    (434,102
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    375,970
    
    
    
    
    
    
    
    375,970Debt issuance costs
    
    
    
    
    
    
    (14,000
    )
    
    
    
    
    
    
    (14,000
    )Dividends
    
    
    (158,973
    )
    
    
    (10,530
    )
    
    
    158,973
    
    
    
    (10,530
    )Net cash provided (used) by financing
activities
    
    
    (162,154
    )
    
    
    (79,481
    )
    
    
    158,973
    
    
    
    (82,662
    )Increase in cash and cash equivalents
    
    
    212
    
    
    
    79,021
    
    
    
    
    
    
    
    79,233Cash and cash equivalents, beginning of the period
    
    
    (73
    )
    
    
    18,638
    
    
    
    
    
    
    
    18,565Cash and cash equivalents, end of the period
    
    $
    139
    
    
    $
    97,659
    
    
    $
    
    
    
    $
    97,798Supplemental Cash Flow Data:Interest paid
    
    $
    685
    
    
    $
    48,598
    
    
    $
    
    
    
    $
    49,283Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Property acquired under a mortgage
    
    $
    2,340
    
    
    $
    
    
    
    $
    
    
    
    $
    2,340Minimum pension liability adjustment
    
    
    
    
    
    
    (191
    )
    
    
    
    
    
    
    (191
    )Interest rate swap marked to market
    
    
    
    
    
    
    (14,152
    )
    
    
    
    
    
    
    (14,152
    )
 F-41




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Cash Flows
Year Ended December 31, 2002 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    59,261
    
    
    $
    6,538
    
    
    $
    
    
    
    $
    65,799Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (57,838
    )
    
    
    (9,439
    )
    
    
    
    
    
    
    (67,277
    )Release of funds from escrow
    
    
    
    
    
    
    3,706
    
    
    
    
    
    
    
    3,706Issuance of note receivable
    
    
    
    
    
    
    (15,000
    )
    
    
    
    
    
    
    (15,000
    )Net cash provided by investing activities
    
    
    (57,838
    )
    
    
    (20,733
    )
    
    
    
    
    
    
    (78,571
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (2,735
    )
    
    
    (4,593
    )
    
    
    
    
    
    
    (7,328
    )Dividends
    
    
    
    
    
    
    (2,347
    )
    
    
    
    
    
    
    (2,347
    )Net cash provided (used) by financing activities
    
    
    (2,735
    )
    
    
    (6,940
    )
    
    
    
    
    
    
    (9,675
    )Decrease in cash and cash equivalents
    
    
    (1,312
    )
    
    
    (21,135
    )
    
    
    
    
    
    
    (22,447
    )Cash and cash equivalents, beginning of the period
    
    
    1,239
    
    
    
    39,773
    
    
    
    
    
    
    
    41,012Cash and cash equivalents, end of the period
    
    $
    (73
    )
    
    $
    18,638
    
    
    $
    
    
    
    $
    18,565Supplemental Cash Flow Data:Interest paid
    
    $
    86
    
    
    $
    45,744
    
    
    $
    
    
    
    $
    45,830Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Property acquired under capital leases and
mortgages
    
    $
    4,187
    
    
    $
    
    
    
    $
    
    
    
    $
    4,187Minimum pension liability adjustment
    
    
    
    
    
    
    2,342
    
    
    
    
    
    
    
    2,342Interest rate swap marked to market
    
    
    
    
    
    
    2,715
    
    
    
    
    
    
    
    2,715
 F-42




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Cash Flows
Year Ended December 31, 2001 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    88,111
    
    
    $
    (11,473
    )
    
    $
    
    
    
    $
    76,638Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (87,548
    )
    
    
    (34
    )
    
    
    
    
    
    
    (87,582
    )Placement of funds in escrow
    
    
    
    
    
    

    (6,932
    )
    
    
    
    
    
    
    (6,932
    )Other investing activities
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Net cash used by investing activities
    
    
    (87,548
    )
    
    
    (6,935
    )
    
    
    
    
    
    
    (94,483
    )Cash Flows from Financing Activities-Payments on long-term debt
    
    
    (1,337
    )
    
    
    (1,702
    )
    
    
    
    
    
    
    (3,039
    )Decrease in cash and cash equivalents
    
    
    (774
    )
    
    
    (20,110
    )
    
    
    
    
    
    
    (20,884
    )Cash and cash equivalents, beginning of the period
    
    
    2,013
    
    
    
    59,883
    
    
    
    
    
    
    
    61,896Cash and cash equivalents, end of the period
    
    $
    1,239
    
    
    $
    39,773
    
    
    $
    
    
    
    $
    41,012Supplemental Cash Flow Data:Interest paid
    
    $
    2,285
    
    
    $
    47,171
    
    
    $
    
    
    
    $
    49,456Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Minimum pension liability adjustment
    
    $
    
    
    
    $
    2,392
    
    
    $
    
    
    
    $
    2,392Interest rate swap marked to market
    
    
    
    
    
    
    11,437
    
    
    
    
    
    
    
    11,437
 F-43




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 21. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business and has recorded
litigation reserves of $3,880 against certain current claims and legal actions.
The Company believes that the disposition of these matters will not have a
material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. A class action lawsuit was filed against the Company on March 14, 2001.
The litigation alleges various contract and tort claims concerning the
Companys decision to terminate its Infinite Minutes long distance plan.
Although the Company believes this suit is without merit and intends to
vigorously defend its position, it is impossible to predict the outcome. GCI filed a complaint against the Company with the FCC alleging the
Company discriminated against it in service ordering processing and
provisioning issues. The Company is vigorously defending its position, but
cannot predict the outcome of this matter. The Company has disputes with Dobson Communications over reciprocal
payments and tower ownership. The Company cannot predict the outcome of these
disputes. On July 15, 2002 the Company fulfilled a commitment to Neptune to provide
a loan for the aggregate principal amount of $15,000 in return for certain
consideration. The Company has an agreement that enables it to purchase
additional fiber optic capacity in future years from Neptune, the expenditures
for which are expected to be significant and may exceed $25,000 over the next
four years. While the Company has an agreement with Neptune, certain material
terms of the agreement remain subject to continued renegotiation. The
significant provisions of this agreement are: i) purchase commitments by the
Company for capacity in 2005 and 2007, the final price and quantity of which
are subject to future events, ii) Neptunes restoration of the Companys
traffic carried on another cable system, iii) and specific interconnection
arrangements between the Company and Neptune, should the Company exercise its
option to purchase certain network assets from Neptune. The Company is
currently negotiating open elements of its agreement with Neptune and
renegotiating other terms and conditions of the agreement. It is impossible to
determine the ultimate outcome of these negotiations at this time. 22. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED) Quarterly Financial DataFirst
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2003Operating revenues
    
    $
    83,792
    
    
    $
    83,996
    
    
    $
    78,222
    
    
    $
    77,538Operating income
    
    
    6,600
    
    
    
    103,500
    
    
    
    (37,884
    )
    
    
    3,179Loss from continuing operations
    
    
    (5,895
    )
    
    
    93,367
    
    
    
    (74,923
    )
    
    
    (16,479
    )Loss on discontinued operations
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (5,947
    )
    
    
    93,367
    
    
    
    (74,923
    )
    
    
    (16,479
    )2002Operating revenues
    
    $
    81,179
    
    
    $
    92,059
    
    
    $
    83,498
    
    
    $
    83,408Operating income (loss)
    
    
    12,542
    
    
    
    15,173
    
    
    
    5,909
    
    
    
    (56,388
    )Income (loss) from continuing operations
    
    
    299
    
    
    
    4,746
    
    
    
    (6,257
    )
    
    
    (68,462
    )Loss on discontinued operations
    
    
    (6,872
    )
    
    
    (515
    )
    
    
    (136
    )
    
    
    (109
    )Income (loss) before cumulative effect of change in
accounting principle
    
    
    (6,573
    )
    
    
    4,231
    
    
    
    (6,393
    )
    
    
    (68,571
    )Cumulative effect of change in accounting principle
    
    
    (105,350
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (111,923
    )
    
    
    4,231
    
    
    
    (6,393
    )
    
    
    (68,571
    )
 F-44




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2003, 2002 and 2001
(In Thousands Except Per Share Amounts) 22. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED) (Continued) On March 30, 2002, the Company approved a plan to sell its wireless cable
television service segment. As a result of this decision, the operating revenue
and expense of this segment has been classified as discontinued operations for
all periods presented (see Note 13). Effective January 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assetsand a transitional
impairment loss of $105,350 was recognized as the cumulative effect of a change
in accounting principle in the consolidated statement of operations. The
Company performed its annual goodwill impairment test during the fourth quarter
of 2002 and recorded a goodwill impairment loss of $64,755 in operating
expenses of the consolidated statement of operations (see Note 4). During the
year ended December 31, 2003, the Company recorded $54,858 in contract
termination and asset impairment charges (see Note 10), recognized a gain on
disposition of assets of $113,518 on a pre-tax basis (see Note 10) and recorded
an impairment charge of $15,924 on non-operating assets (see Note 11). F-45




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Schedule II  Valuation and Qualifying Accounts
(In Thousands)
 Balance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    costs and
    
    other
    
    
    
    
    
    EndDescription
    
    of Period
    
    expenses
    
    accounts (1)
    
    Deductions (2)
    
    of Period2003 Allowance for doubtful accounts
    
    $
    6,075
    
    
    $
    839
    
    
    $
    159
    
    
    $
    2,641
    
    
    $
    4,4322002 Allowance for doubtful accounts
    
    $
    4,944
    
    
    $
    4,884
    
    
    $
    214
    
    
    $
    3,967
    
    
    $
    6,0752001 Allowance for doubtful accounts
    
    $
    9,831
    
    
    $
    4,932
    
    
    $
    1,576
    
    
    $
    11,395
    
    
    $
    4,944
  (1)
    
    Represents the reserve for accounts receivable collected on the behalf of
others.  (2)
    
    Represents credit losses. F-46