##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
  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




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Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o

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. o

Indicate by check mark if whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

o þ


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
None









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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004  
 PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    22Item 3.
    
    Legal Proceedings
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8.
    
    Financial Statements and Supplementary Data
    
    
    42Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    42Item 9A.
    
    Controls and Procedures
    
    
    42PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    44Item 11.
    
    Executive Compensation
    
    
    44Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and related Stockholder Matters
    
    
    44Item 13.
    
    Certain Relationships and Related Transactions
    
    
    44Item 14.
    
    Principal Accountant Fees and Services
    
    
    44PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    45SIGNATURES
    
    
    48Index to Consolidated Financial Statements
    
    
    F-1EXHIBIT 21.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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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. and its
consolidated subsidiaries (we, our, us the Company, and ACS Holdings) on Forms 10-K, 10-Q
and 8-K and the documents incorporated therein by reference include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these provisions. All
statements other than statements of historical fact are forward-looking statements for purposes
of federal and state securities laws, including statements about anticipated future operating and
financial performance, financial position and liquidity, growth opportunities and growth rates,
pricing plans, acquisition and divestiture opportunities, business prospects, strategic
alternatives, business strategies, regulatory and competitive outlook, investment and expenditure
plans, financing needs and availability and other similar forecasts and statements of expectation
and statements of assumptions underlying any of the foregoing. Words such as aims, anticipates,
believes, could, estimates, expects, hopes, intends, may, plans, projects,
seeks, should and variations of these words and similar expressions are intended to identify
these forward-looking statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our historical experience
and our present expectations or projections. Forward-looking statements by us are based on
estimates, projections, beliefs and assumptions of management and are not guarantees of future
performance. Such forward-looking statements may be contained in this Form 10-K under Business,
Managements discussion and analysis of financial condition and results of operations and
elsewhere in this Form 10-K and the documents incorporated by reference. Actual future performance,
outcomes and results may differ materially from those expressed in forward-looking statements made
by us as a result of a number of important factors. Examples of these factors include (without
limitation):  
    rapid technological developments and changes in the telecommunications industries;  
    our competitive environment;  
    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, or the Telecommunications Act, and
other similar federal and state legislation and the federal and state rules and
regulations enacted pursuant to that legislation;  
    changes in revenue from Universal Service Funds;  
    regulatory limitations on our ability to change our pricing for communications services;  
    the possible future unavailability of Statement of Financial Accounting
Standards, or SFAS, No. 71, Accounting for the Effects of Certain Types of
Regulation, to our wireline subsidiaries;  
    our ability to bundle our products and services;  
    changes in the demand for our products and services;  
    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;  
    our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders;  
    the continued availability of financing in the amounts, at the terms, and subject
to the conditions necessary to support our future business;  
    the success of any future acquisitions; and  
    changes in accounting policies or practices adopted voluntarily or as required by
accounting principles generally accepted in the United States. In light of these risks, uncertainties and assumptions, you should not place undue reliance on
any forward-looking statements. Additional risks that we may currently deem immaterial or that are
not presently known to us could also cause the forward-looking events discussed in this Form 10-K
not to occur. Except as otherwise required by applicable securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, changed circumstances or any other reason after the date of this Form
10-K. 3




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Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree with any statement
or report issued by an analyst irrespective of the content of the statement or report. To the
extent that reports issued by securities analysts contain any projections, forecasts or opinions,
such reports are not our responsibility. Introduction ACS Holdings is a wholly owned subsidiary of Alaska Communications Systems Group, Inc (ACS
Group). We are the leading facilities-based telecommunications services provider and the largest
local exchange carrier (LEC) in Alaska and the 13th largest LEC in the United States. We are
focused on providing leading telecommunications services to our customers under a single brand
name, Alaska Communications Systems. On a retail basis, we provide our consumer and business
customers with a complete range of telecommunications services, including local telephone,
wireless, Internet, and long distance, using our own network, as well as video entertainment
through our partnership arrangement with DISH Network, a leading satellite service provider. In
addition, we also provide selected local telephone and wireless services on a wholesale basis. We have successfully grown our retail relationships, and as of December 31, 2004 we served
396,740 retail relationships. A retail relationship refers to one service provided to one
customer and, therefore, a customer may represent more than one retail relationship. As of December
31, 2004, including both retail and wholesale customers, we served 100,657 wireless subscribers,
295,449 local telephone access lines, 47,050 long distance customers and 47,553 Internet
subscribers (including 24,711 high-speed digital subscriber line, or DSL, subscribers). We began operations in May 1999 when we completed the acquisition and integration of four
local telephone companies in Alaska. Each of the businesses we purchased had been operating in its
local markets for over 50 years. Since 1999, we have invested in upgrading our network and service
capabilities, improved our cost management in our operations, and focused on improving customer
service. As a result, our business, which has been characterized by a stable customer base and
predictable capital expenditure requirements, has generated stable revenues and cash flows since
2000, with consolidated cash flow from operations for the years ended December 31, 2004 and 2003 of
$69.2 million and $55.4 million, respectively. Our service offerings Local telephone (69.8% of operating revenues for the year ended December 31, 2004).We provide
local telephone service to over 295,000 access lines, representing approximately two-thirds of the
local access lines in Alaska. We generate local telephone revenue from providing local telephone
service to consumer and business customers and by providing access to our network and back office
functions to other telecommunications providers. At December 31, 2004, approximately 51% of our
retail access lines served consumers and 49% served business customers. Wireless (18.7% of operating revenues for the year ended December 31, 2004).We provide
statewide mobile and fixed voice and data communications services to over 100,000 wireless
subscribers throughout Alaska. Our wireless network has a covered population of over 482,000,
representing over 70% of the states population according to the most recent U.S. Census Bureau
estimates. Our wireless customers represent approximately 20.9% penetration of our covered
population. Currently, we provide our wireless services using both CDMA and TDMA digital networks.
We will continue to improve and expand our CDMA 1xRTT and EV-DO networks, capable of offering
advanced mobile and fixed data services to our customers, in 2005 and 2006. Internet (6.7% of operating revenues for the year ended December 31, 2004).We provide
Internet access services to over 47,000 subscribers, including high-speed DSL service to
approximately 25,000 subscribers. We are currently able to offer DSL service to approximately 72%
of our local access lines in our four major LEC service territoriesAnchorage, Fairbanks, Juneau
and the Kenai Peninsula. We are also a single-source provider of advanced IP-based private networks
to large enterprise and governmental customers in Alaska. Interexchange (4.8% of operating revenues for the year ended December 31, 2004).We offer long
distance and interexchange private-line services primarily as a facilities-based carrier to over
47,000 long distance customers in our state. 4




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Video entertainment.In the third quarter of 2003 we began offering customers in Alaska
satellite video entertainment through a partnership arrangement with DISH Network. Competitive strengths We enjoy stable cash flows and attractive growth prospects due to the following competitive
strengths: Leading competitive position.We are the leading facilities-based telecommunications services
provider in Alaska. We believe our strong brand name recognition within Alaska provides us with a
solid local market position.  
    We are the incumbent local telephone company in Anchorage, Fairbanks, Juneau, the
Kenai Peninsula and more than 70 other communities.  
    We are the second-largest wireless communications services provider in Alaska and
our statewide wireless network covers over 70% of the population.  
    We are the second-largest provider of Internet access services and the largest
provider of DSL services in Alaska. Integrated portfolio of service offerings.We offer a variety of bundled service packages to
our consumer and business customers, which include local telephone services, wireless, Internet,
long distance, messaging, video entertainment and other services. We believe that bundled offerings
are popular 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 our bundled service packages, we believe we can increase our
customer base, improve customer loyalty and increase our share of our customers telecommunications
purchases. Advanced networks and facilities.Since 1999, we have invested over $400 million in our
telecommunications networks and facilities, increasing the total investment in these facilities to
approximately $1.1 billion. As a result of these investments, we believe we have substantially
built out our networks and facilities, allowing us to offer a full range of reliable
telecommunications services while maintaining predictable capital expenditure requirements. We are
currently the only provider of broadband wireless services in the state of Alaska. Our wireless
network has a covered population of over 482,000, representing over 70% of the states population
according to data from the U.S. Census Bureau. Over the next few years, we expect to augment our
existing networks and facilities, including the completion of the build-out of our statewide CDMA
1xRTT and EV-DO wireless networks, which will allow us to expand our covered population and to
offer a wider range of wireless voice and broadband data services to our customers. Favorable Alaskan market conditions.We believe we have an attractive and growing potential
customer base. For the three year period from 2001 to 2003, the average median household income in
Alaska was 27% 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
20 years ending 2002, the Alaskan population has increased on average by more than 2% per year -
nearly triple the national average. Additionally, Alaska has lower-than-average wireless
penetration. We believe these factors will continue to contribute to our stability and growth, and
provide us with an advantage relative to other telecommunications markets. We believe 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.Our highly experienced senior management team has an average of
approximately 16 years of experience in the local telecommunications industry and a proven track
record of operating and managing integrated telecommunications companies. During the last fifteen
months, we have added a number of key individuals to our executive management team who have broad
experience in the telecommunications industry and understand the dynamics of the Alaskan markets
and our customers. Liane Pelletier joined us in October 2003 as CEO and President and also became
Chairperson of our board of directors on January 1, 2004. Before joining us, 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 Chief Financial Officer of
Triumph Communications and DIRECTV Broadband, has joined us as our Chief Financial Officer. In
addition to Ms. Pelletier and Mr. Wilson, David C. Eisenberg and Sheldon Fisher recently joined us
from Sprint as Senior Vice President, Corporate Strategy and Development and Senior Vice President,
Sales and Product Marketing, 5




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respectively. Under the leadership of our senior management team, we
have refocused our company to better serve the needs of consumer and business customers in Alaska. Business strategy Our goal is to be the premier telecommunications services provider in our markets and to
maintain and grow our cash flow. We consider the following strategies to be integral to achieving
our goal:  
    maintaining and increasing the number of loyal consumer, business and wholesale
customers that we serve and having our customers buy more of our services and regularly
refer new customers to us;  
    offering our customers an integrated bundle of telecommunications services including
local telephone, wireless, Internet, long distance, messaging and video entertainment;  
    capitalizing on our significant existing investment in our technologically advanced
networks to provide feature-rich, high-quality and highly reliable telecommunications
services such as DSL and broadband wireless service to our customers;  
    increasing our margins through ongoing process improvements, strategic sourcing
initiatives, reduced costs and improved operating efficiencies;  
    leveraging our advanced CDMA 1xRTT and EV-DO wireless networks and our strong
competitive position as the leading facilities-based telecommunications provider in
Alaska to further gain share in the under-penetrated and fast growing Alaska wireless
market; and  
    exploring acquisitions of other telecommunications assets and businesses that we
would expect to increase our cash flows and our ability to pay dividends to the holders
of our common stock. Products, services and revenue sources We offer a broad portfolio of telecommunications services to consumer, business and wholesale
customers in our markets. We believe 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. We complement our local telephone services by
actively marketing our wireless, Internet, long distance and other service offerings to our
customers who subscribe to only some of our services. The following table sets forth the components
of our consolidated revenues for the years ended December 31, 2004, 2003 and 2002: Revenue for the Year Ended December 31, (in millions)2004
    
    
    2003
    
    
    2002Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    PercentRevenue by Source:Local network service
    
    $
    91.7
    
    
    
    30.3
    %
    
    $
    96.3
    
    
    
    29.7
    %
    
    $
    99.5
    
    
    29.2
    %Network access
    
    
    97.5
    
    
    
    32.2
    
    
    
    97.8
    
    
    
    30.2
    
    
    
    108.3
    
    
    31.8Deregulated and other revenue
    
    
    22.0
    
    
    
    7.3
    
    
    
    21.6
    
    
    
    6.7
    
    
    
    18.9
    
    
    5.6Local telephone
    
    
    211.2
    
    
    
    69.8
    
    
    
    215.7
    
    
    
    66.6
    
    
    
    226.7
    
    
    66.6Wireless
    
    
    56.7
    
    
    
    18.7
    
    
    
    46.5
    
    
    
    14.4
    
    
    
    43.2
    
    
    12.7Directory (1)
    
    
    
    
    
    
    
    
    
    
    11.6
    
    
    
    3.6
    
    
    
    33.6
    
    
    9.9Internet
    
    
    20.2
    
    
    
    6.7
    
    
    
    33.0
    
    
    
    10.2
    
    
    
    20.8
    
    
    6.1Interexchange
    
    
    14.6
    
    
    
    4.8
    
    
    
    17.0
    
    
    
    5.3
    
    
    
    16.1
    
    
    4.7Total
    
    $
    302.7
    
    
    
    100.0
    %
    
    $
    323.8
    
    
    
    100.0
    %
    
    $
    340.4
    
    
    100.0
    %
  (1)
    On May 8, 2003, we completed the sale of a majority interest (87.42%) in our Directories
Business. Subsequently, on August 27, 2003, we disposed of substantially all of our remaining
interest in the Directories Business. As a result of these disposals, we own less than 0.1% of
the Directories Business and accordingly no longer record the revenues and expenses of the
Directories Business. 6




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Local telephone We provide local telephone service through our four local telephone companies. 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. We provide 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, or RCA. We charge business customers higher rates to
recover a portion of the costs of providing local service to consumers, 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, 2004, approximately 51% of our retail access lines served consumers and 49%
served business customers. Currently, monthly charges for basic local service for consumers range
from $11.75 to $14.50 in our service areas, compared to the U.S. national average for urban areas
of $14.57 for 2003. Monthly charges for business customers range from $18.70 to $25.75 in our
service areas, compared to the national average for urban areas of $32.92 for 2003. See Item 1.
Business  Regulation for further discussion of regulatory matters including our local network
service rate proceedings. The table below sets forth the number of access lines as of December 31, 2004, 2003, 2002,
2001 and 2000. The number of access lines shown represents all revenue producing access lines
connected to both retail and wholesale customers. As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Retail access lines
    
    
    207,905
    
    
    
    218,058
    
    
    
    236,148
    
    
    
    261,002
    
    
    
    272,936Wholesale access lines
    
    
    16,590
    
    
    
    19,159
    
    
    
    22,148
    
    
    
    22,859
    
    
    
    17,303Unbundled network elements
    
    
    70,954
    
    
    
    74,249
    
    
    
    64,711
    
    
    
    49,062
    
    
    
    39,221Total local telephone access lines
    
    
    295,449
    
    
    
    311,466
    
    
    
    323,007
    
    
    
    332,923
    
    
    
    329,460
 We believe 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 our service areas. Competitive local network service.We also provide interconnection through wholesale access
to our basic local service and through leasing unbundled network elements, or UNEs, to our
competitors as required by the federal law. Revenues for these services are included in local
network service revenues. As of November 26, 2004, we were authorized by the RCA to increase the
UNE loop rate for our Anchorage service area to $18.64 with application retroactively to June 2004.
In the Fairbanks and Juneau service areas we have an agreement to increase UNE loop rates to $23.00
and $18.00, respectively as of January 1, 2005. We provided 87,544 lines to competitors in the
Anchorage, Fairbanks and Juneau service areas on either a wholesale or UNE basis as of December 31,
2004. 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 by an interexchange carrier, a mechanism is required to compensate each 7




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LEC providing services relating to the call. This mechanism is the access charge, which LECs bill to
each interexchange carrier for the use of facilities to access the customer. We also receive
universal service revenue, which we include in our reported network access revenue. These
components of network access revenue are described below. Intrastate access charges.We generate intrastate access revenue when an intrastate long
distance call that involves an ACS LEC and an interexchange carrier is originated and terminated
within Alaska. The interexchange carrier pays us an intrastate access charge for either terminating
or originating the call. We record the details of the call through our carrier access billing
system and receive the access payment from the interexchange carrier. We also provide billing and
collection services for interexchange carriers through negotiated agreements for certain types of
toll calls placed by our local customers. ACS of Anchorage, Inc. (ACSA), ACS of Alaska, Inc.
(ACSAK) and ACS of Fairbanks, Inc. (ACSF) are under their own tariffs for intrastate access. In
non-competitive areas, ACS of the Northland, Inc. (ACSN) participates in a mandatory statewide
tariff and access charge pooling arrangement that is administered by the Alaska Exchange Carriers
Association, or the AECA. The access charges for our intrastate services are regulated by the RCA. Interstate access charges.We generate interstate access revenue when an interstate long
distance call is originated from an local calling area in Alaska that is served by our local
telephone operations and is terminated in a local calling area in another state, and vice versa. We
bill 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. Our 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 our 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 charges are also categorized
as interstate access revenue. Universal service revenue.We are required to contribute to the Federal Universal Service
Fund (USF). In general, these funds are created to subsidize telecommunications services in rural
and high-cost service areas of the United States, including Alaska. We currently receive federal
Universal Service revenue in certain of our local telephone service areas. Universal service
revenue supplements the amount of local service revenue we receive 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 Telecommunications Act of 1996 (the
Telecommunications Act), which amended the Communications Act of 1934 (the Communications 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 Telecommunications 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 USF
calculations based on embedded costs in place for the Federal High-Cost Fund. In accordance with
the Telecommunications 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 has recommended to the FCC some changes to the Federal
Universal Service Funds and the FCC will examine modifications to the universal service funding
mechanisms. 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 competitors network does not generate access billings to interexchange carriers
for us. 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 formally designated an Eligible
Telecommunications Carrier (ETC), 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 Carriers (ILEC) revenue. Operating results for network access services are not materially impacted by seasonal factors. 8




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Deregulated and other revenue Deregulated and other revenues consist of billing and collection contracts, space and power
rents, pay telephone service, customer premise equipment sales, and other miscellaneous revenues
generated by our local telephone operations. We seek to capitalize on our local presence and
network 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 We provide statewide mobile and fixed voice and data communications services throughout Alaska
under the ACS brand name.Our wireless segment generates revenue through subscriber access charges,
airtime usage, toll charges, connection fees, roaming revenues, and enhanced features, such as
short messaging services. 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. In the second half of 2004, the RCA granted us ETC status as a competitive provider of
wireless services for a significant portion of our rural wireless service area. By obtaining ETC
status, we are now eligible to receive USF support for subscribers residing in the areas covered by
this designation. Subscribers.The table below sets forth the annual growth in the number of our wireless
subscribers served and our total covered population as of December 31, 2004, 2003, 2002, 2001 and
2000. As of December 31,2004
    
    2003
    
    2002
    
    2001
    
    2000Estimated covered population
    
    
    482,251
    
    
    
    480,422
    
    
    
    478,413
    
    
    
    468,622
    
    
    
    462,057Ending subscribers
    
    
    100,657
    
    
    
    87,017
    
    
    
    82,220
    
    
    
    80,120
    
    
    
    75,933Ending penetration
    
    
    20.9
    %
    
    
    18.1
    %
    
    
    17.2
    %
    
    
    17.1
    %
    
    
    16.4
    %
 We believe there are opportunities to improve the penetration rates of our wireless operations
throughout Alaska, and in particular, southeast Alaska. We also believe that the market for
wireless services will continue to grow with expansion of the wireless industry as a whole, and our
planned deployment of data services on our new CDMA 1xRTT and EV-DO networks. CDMA 1xRTT will
provide wireless voice and data services for our customers while EV-DO will provide broadband
wireless data services. Licenses.We own 800 megahertz B side cellular licenses which cover the major population
centers in Alaska, including Anchorage, Fairbanks, Juneau and the Kenai Peninsula. Today, these B
side frequencies support our TDMA networks. We also own several 10 megahertz E Block PCS licenses
covering the entire state including Anchorage, Fairbanks and Juneau. During 2002, we purchased 10
megahertz F Block PCS licenses covering Fairbanks and Juneau. We have recently constructed and are
continuing to enhance and expand a commercial network using CDMA 1xRTT, which we launched during
May 2004 and which is currently supported on our PCS spectrum. Seasonality.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. Internet We provide Internet access services to over 47,000 customers, including high-speed DSL service
to approximately 25,000 subscribers. In order to offer Internet access, we provide local dial-up
telephone numbers for our customers.We are currently able to offer high-speed DSL service to
approximately 72% of our local access lines in our 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 we own and maintain. These servers
allow customers to access their e-mail accounts and to be routed to local access points that
connect customers to the Internet. We charge customers either 9




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a flat rate for unlimited use or a
usage sensitive rate. Operating results for Internet access services are not materially impacted by
seasonal factors. Interexchange We currently have over 47,000 long distance customers based on subscriber preferred
interexchange carrier selections. We also believe our interexchange revenue represents
approximately 5% of total interexchange revenues in Alaska. We own fiber capacity for high-speed
links within Alaska and for termination of traffic outside Alaska. We also resell the services of
other long distance carriers. Video entertainment In the third quarter of 2003, we began offering customers in Alaska satellite video
entertainment through a partnership arrangement with DISH Network. The current agreement with the
provider became effective August 2003 and either will be renegotiated or will terminate in December
2005. Sales and marketing We market our product and service offerings under the Alaska Communications Systems and
ACS brands, subject to regulatory and strategic business considerations. Recently, we reorganized
to more efficiently sell and service all of our product offerings through single points of customer
contact. Key components of our 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 all of our 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. We believe that we can leverage our position as an integrated, one-stop provider of
telecommunications services with strong positions in local access, wireless, Internet and long
distance markets.By pursuing a marketing strategy that takes advantage of these characteristics
and that facilitates cross-selling and packaging of our products and services, we believe we can
increase penetration of new product offerings, improve customer retention rates, increase our share
of our customers overall telecommunications expenditures, and achieve continued revenue and
operating cash flow growth. Network facilities As of December 31, 2004, we owned 66 host switches serving approximately 300,000 access lines.
All of our access lines are served by digital switches provided predominately by Nortel Networks
Corporation. Our 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. We have 100% single-party services, or services of one customer per access line, and believe
substantially all of our 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. We have integrated numerous network elements to offer a variety of services and applications
that meet the increasingly sophisticated needs of our 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 10




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telecommunications industry experiences significant changes in technology, customer demand and competition, we intend to
introduce additional enhancements. Network operations and monitoring are provided by our 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. We also have 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 our product lines. All of these facilities offer extended
business hours to efficiently handle customer inquiries and orders for service. We have enhanced our network to accommodate developing products and technology. We completed
our Multi-Protocol Label Switching over Asynchronous Transfer Mode network, referred to as our
MPLS/ATM networks in early 2002. Core MPLS/ATM nodes were installed in Anchorage, Fairbanks,
Juneau, the Kenai Peninsula, the Mat-Su valley and Seattle. We believe the MPLS/ATM network
enhances our capability to provide a complete suite of converged telecommunications, data and video
services and achieve significant operating efficiencies. We currently offer a variety of enhanced
products and services and are able to converge them all over our MPLS core network, including the
following:  
    virtual private networks and lines,  
    voice over Internet Protocol services,  
    transparent local area networks (LAN) and proprietary LANs and wide area networks (WAN),  
    high speed Internet access,  
    managed services and  
    video conferencing. Our wireless operations consist of four digital switching centers, 188 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.
Our switching and cell site infrastructure is linked by fiber, wireline and digital microwave,
primarily owned by us. Our TDMA wireless voice network consists of three Ericsson digital switches,
one analogue switch and 106 cell sites using our 800 megahertz B side cellular licenses. Our TDMA
network covers the major population centers in Alaska, including Anchorage, Fairbanks, Juneau and
the Kenai Peninsula. We have also constructed and are continuing to enhance and expand a commercial
wireless voice and data CDMA 1xRTT and EV-DO networks which we launched during May of 2004. To
support this launch, we have installed one Nortel digital CDMA switch and over 80 cell sites as of
December 2004. Over time, we plan to continue to expand our CDMA 1xRTT and EV-DO networks and
migrate our TDMA subscribers onto our CDMA network. Our CDMA network was initially deployed using
our 10 megahertz E and F Block PCS spectrum, but we expect to eventually deploy CDMA technology
over our 800 megahertz B side cellular licenses and phase out TDMA service at some time in the
future. Our facilities-based long distance network connects the major population center of Anchorage,
Fairbanks, Juneau and the Kenai Peninsula to each other primarily over owned fiber optic facilities
or Indefeasible Rights of Use (IRU) capacity. We also own undersea IRU fiber optic capacity
connecting Alaska to the rest of the world via Seattle, Washington and own undersea fiber optic
capacity over a redundant route connecting Alaska to the rest of the world via Portland, Oregon. Customers We have three basic types of customers for the services of our LECs:  
    consumer and business customers located in our local service areas that pay for
local phone service,  
    long distance carriers that pay for access to long distance calling customers
located within our local service areas, and  
    CLECs that pay for wholesale access to our network in order to provide
competitive local service. As of December 31, 2004, we had approximately 397,000 retail relationships. 11




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As of December 31, 2004, approximately 51% of our retail access lines served consumers while
49% served business customers. We have over 100,000 wireless subscribers, 47,000 Internet subscribers and 47,000
long-distance subscribers consisting substantially of retail consumer and business customers. GCI accounted for 12% of consolidated 2004 revenues and 17% of our local telephone revenues.
No other customers accounted for more than 10% of consolidated revenue. Competition Local telephone service Our local telephone services operations 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 us at wholesale rates and resell these services to their customers,  
    competition from UNE interconnection, that is, providers who lease UNEs from us, 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 using the facilities of our local telephone subsidiary, ACSA, and increasingly
over its own 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, in Anchorage, ACSA now has only
approximately 48% competitive market penetration as of December 31, 2004.We expect GCI and AT&T
Alascom to continue to compete with us for local telephone business in many of our markets. As of December 31, 2004, we estimate that we now have approximately 72% 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 our Juneau market where, as of
December 31, 2004, we have approximately 68% market share. We expect increasing competition from providers of various services that bypass our 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 are able to modify their networks to
partially or completely bypass our local network. GCI commenced deployment of cable telephony in
2004 and announced plans to migrate its customers served using our UNEs off of our network and onto
its own cable system over the next three years. Such a migration would result in a significant
reduction of revenue for us, as GCI would no longer be leasing our facilities to serve those
customers, which could have a material impact on our results of operations. In addition, while wireless telephone services have historically complemented traditional LEC
services, we anticipate that existing and emerging wireless technologies may increasingly compete
with LEC services. For example, we are deploying CDMA 1xRTT and EV-DO wireless services in certain
of our markets and our principal wireless competitor, Dobson 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 our share of the local market. Technological developments in wireless telephone
features, digital microwave and other wireless technologies are expected to further permit the
development of alternatives to traditional wireline services. The FCCs requirement that ILECs
offer wireline-to-wireless number portability may also increase the competition our ILECs face from
wireless carriers. 12




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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. We believe 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 our wireless
service areas. We hold B side cellular licenses for Alaskas major communities and PCS licenses
covering the entire state, including Anchorage, Fairbanks, Juneau and the Kenai Peninsula.We
currently compete with at least one other wireless provider in each of our wireless service areas,
including Dobson and Alaska DigiTel. In addition, Dobson, our main wireless competitor, also
provides some coverage on its own network outside Alaska. We believe that the unique and vast
terrain and the high cost of a PCS system build-out make additional competitive entrants 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.We are positioning ourselves to offset this impact by
bringing new higher margin services to market, by developing products for targeted market segments
and leveraging our advantage in market share and geographical coverage to attract new customers and
increase monthly revenues from existing customers. We continuously evaluate new service offerings
in order to differentiate us from our 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. Since our implementation of wireless number
portability in May 2004, seven of ten wireless number ports have chosen us. 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 we expect that competition will intensify in the
future. We primarily compete with GCI in the market for Internet access services. In addition to GCI, we currently compete with a number of established online services
companies, interexchange carriers and cable television operators. Competition is particularly
intense for broadband services. For example, the number of cable modems deployed by GCI is
approximately three times the number of DSL modems deployed by us. The expected addition of
wireless broadband to the mix of options available to consumers may reduce the demand for DSL. We
believe that our ability to compete successfully will depend upon a number of factors, including
the reliability and security of our network infrastructure, the ease of access to the Internet, the
availability of broadband ISP access and the pricing policies of our competitors.We continue to
deploy our DSL services in Anchorage, Fairbanks, Juneau, Kenai/Soldotna, Homer and Sitka, Alaska
for both consumer and business applications. Interexchange services The long distance telecommunications market is highly competitive. We believe we currently
have approximately 5% of total interexchange revenues in Alaska and our previous attempts to
increase our market share have not proved successful.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. We currently offer long distance
service to customers located primarily in the more populous communities within our service
territory. AT&T Alascom and GCI are currently the two major competing long distance providers in
Alaska. We also face competition from wireless service providers for long distance customers. In
addition, new carriers offering VoIP services may lead to a reduction in traditional long distance
telephone service customers and revenues. Another area of competition comes from the use of prepaid
calling cards which reduces the traditional reliance on long distance telephone service, while also
depriving us of revenues obtained by the use of our interexchange facilities. Expanded use of
prepaid calling cards may have an adverse effect on the demand for our long distance services. We
provide traditional 1+ direct distance dialing, toll-free services, calling cards and private
line services for data and voice applications.We have also 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.We expect to continue offering innovative products of this nature in the
future. 13




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Video entertainment ACS is a reseller of DISH Network. DISH Networks primary competitor is GCI, the cable
provider in most of Alaska with a dominant position in the video entertainment sector. The current
agreement with the provider became effective August 2003 and either will be renegotiated or will
terminate in December 2005. Employees As of December 31, 2004, we employed a total of 1,021 regular full-time employees, 804 of whom
are 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 our company ratified the terms of a Master
Collective Bargaining Agreement (Master Agreement) that governs the terms and conditions of
employment for all IBEW represented employees working for us 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 was due to expire on December 31, 2006, provided 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 2005 and the next scheduled wage increase is scheduled for
January 2006. The master agreement also limits the increases in our health and welfare
contributions for represented employees to 4% annually. On February 23, 2005, the membership of
the IBEW ratified an extension to the collective bargaining agreement through 2009 and accepted
certain modifications to the agreement, including taking CPI increases in the form of shares of our
common stock rather than cash, enabling us to be more competitive in the marketplace. Non-represented employees qualify for wage increases based on individual and company
performance, and key employees are also eligible for performance-based incentives. We provide a
total benefits package, including health, welfare, and retirement components that are competitive
in our market. Website Access to Reports Our investor website Internet address is www.alsk.com. The information on our investor
website is not incorporated by reference in this annual report on Form 10-K. We make available,
free of charge, on our investor website, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act. These reports are available as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and
Exchange Commission. Regulation The following summary of the regulatory environment in which our business operates does not
describe all present and proposed federal, state and local legislation and regulations affecting
the telecommunications industry in Alaska. Some legislation and regulations are currently the
subject of judicial review, legislative hearings and administrative proposals which could change
the manner in which this industry operates. We cannot predict the outcome of any of these matters
or their potential impact on our business. Regulation in the telecommunications industry is subject
to rapid change, and any such change may have an adverse effect on us in the future. Overview The telecommunications services we provide and from which we derive a large majority of our
revenue are subject to extensive federal, state and local regulation. Our local exchange carrier,
or LEC, subsidiaries are regulated common carriers and have the right to set maximum rates at a
level that allows us 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 our 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,
our LEC subsidiaries must first determine their aggregate costs and then allocate those costs
between regulated and nonregulated services, then between 14




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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 us, that provide, originate or terminate interstate or
international communications and related facilities. The FCC does not directly regulate enhanced
services and has preempted inconsistent state regulation of enhanced services. Our wireless
services use FCC radio-frequency licenses and are subject to various FCC regulations, including
E911 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 federal Telecommunications Act of 1996, or
Telecommunications 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 incumbent
local exchange carriers, or ILECs, of interconnection and non-discriminatory network access to
competitive local exchange carriers, or 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 We must comply with the Communications Act of 1934, as amended, or Communications Act, and
regulations promulgated thereunder 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 Telecommunications Act of 1996, as amended, or
Telecommunications Act, significantly changed and are expected to continue to change the
telecommunications industry. Among other changes, the Telecommunications 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. We must
obtain FCC approval before we transfer control of any of our common carrier subsidiaries or our
radio frequency licenses or authorizations, make such an acquisition or discontinue an interstate
service. Interconnection with local telephone companies and access to other facilities In order to ensure access to local facilities and services at reasonable rates, the
Communications 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 Communications 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 unbundled
network elements, or 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. Our ACSN ILEC subsidiary enjoys a statutory exemption as a rural carrier from the
interconnection requirements imposed on most ILECs, but not on CLECs, until we receive a bona fide
request 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. 15




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On April 18, 2004, after years of litigation related to terminating the rural exemptions for
ACSF and ACSAK, these two ILEC subsidiaries entered into a settlement agreement with GCI in which
ACSF and ACSAK waived their claim to the rural exemption in exchange for GCIs agreement to pay
increased UNE loop rates. The April 18, 2004 settlement agreement allows GCI to continue to
provide UNE-based competition and, despite some increases in local loop rates, our operating
results could be adversely affected. To implement the interconnection requirements of the Communications 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. Since their original adoption in 1997, these
rules have been repeatedly challenged and revised. In its most recent decision, adopted December 15, 2004 and released February 4, 2005, the FCC
adopted new rules for unbundling which reduce ILECs obligations to lease interoffice transport and
high-capacity loops in the largest urban centers in the U.S., and eliminate the requirement to
lease mass market local circuit switching, including the UNE platform, or UNE-P. The new rules
provide for a twelve month transition. We believe that the revised rules will have little impact on
our obligations. Further, as has occurred previously, those rules are subject to judicial review. In addition, the FCC is reexamining its pricing standard for UNEs and may reconsider other
aspects of its 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 FCC has also
initiated a proceeding to examine the appropriate regulatory framework for special access services.
Furthermore, Congress may consider legislation that may modify the Communication Act and some
aspects of these rules. We 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. Our ILECs interstate access charges are developed by a cost-of-service method to earn an
authorized maximum rate of return. The National Exchange Carrier Association, or NECA, develops
averaged access rates for participating ILECs based on the costs of these carriers. All our 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, our
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 our
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, or MAG, to reform the access charge system for rural ILECs. This order governs the access
charges that our 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 our 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. Proposals for what follows currently being considered by the FCC
and 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. In February 2005, the FCC adopted a notice of proposed rulemaking
proposing to reform intercarrier compensation, including access charges. Although several
Commissioners have indicated that the FCC should adopt new rules governing intercarrier
compensation before the end of 2005, we cannot predict what changes the FCC may adopt or when they
may adopt them. 16




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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
Communications 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. On June 28, 2004, the FCC issued an order asking the Federal-State Joint
Board on Universal Service to review the rules governing federal universal service support
mechanisms for rural carriers. The FCC requested recommendations on whether USF payments should be
calculated on the basis of a rural carriers actual embedded costs or forward-looking economic cost
estimates, whether to modify the definition of rural telephone company, and other issues. The
Federal-State Joint Board currently is reviewing these issues, but has not yet issued its
recommended decision for FCC consideration. We are unable to predict whether and to what extent we
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, or ETCs, by a state regulatory commission. State regulatory
commissions make such designations pursuant to rules set forth by the FCC. On February 28, 2005,
the FCC adopted new and more stringent guidelines concerning the designation of competitive
carriers as CETCs. Further, these new guidelines apply to both new and existing CETC designations.
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. Under current FCC regulations, the total amount of federal universal service funds available
to all ILEC ETCs is subject to a cap. In any given year, the cap may or may not be reached. In any
year where the cap is reached, the per access line rate at which ILECs can recover Universal
Service Fund payments may decrease. In each of the last few years, the cap has effectively
decreased USF payments. Moreover, some disbursements to schools and libraries from the universal
service fund were suspended to comply with the Anti-Deficiency Act. Some analysts have indicated
disbursements under the USF HC could also be suspended to comply with the Anti-Deficiency Act.
While Congress has temporarily suspended the application of the Anti-Deficiency Act to the USF, we
cannot predict the impacts on us, including on our receipts from and contributions to the universal
service fund, of any actions taken to definitively address this issue. On February 27, 2004, a Federal-State Joint Board recommended certain reforms to the FCC, such
as limiting support to just one line per customer, raising the minimum requirements for receiving
support, and limiting per line support in areas subject to competition, that could significantly
reduce USF support to us. Subsequently, Congress enacted legislation to prevent the FCC adopting a
plan to distribute USF support on the basis of a single primary connection. In addition, Congress
has indicated it might step in to remedy some of the perceived problems of USF. For example, one of
the perceived problems is that the size of the fund is growing too much and demanding too much of
the interexchange carriers and others that pay into the USF. The FCC is reviewing many issues
related to USF payments following the 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. We expect the FCC to act on some of these USF issues during the first
half of 2005. Our operating subsidiary companies are required to contribute to the federal USF a percentage
of their revenue earned from interstate and international services. Although our rural ILECs
receive payment from the federal USF, we cannot be certain of how, in the future, our 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 we cannot predict the outcome of that proceeding
or any legislation which may change the USF. 17




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Interstate long distance services FCC regulation of the rates, terms or facilities of our interstate long distance services is
relatively light. However, we must comply with the general requirement that our charges and terms
be just, reasonable and nondiscriminatory. Also, we 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. On November 19, 2004, Congress enacted a new law requiring, through 2009, the purchase and
sale of all interstate wholesale switched service at rates equivalent to the rates set forth in
AT&T Alascoms Tariff 11. This provision may impair ACS ability to compete for these types of
services. 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, or CMRS, which includes personal communications
services and cellular services. The FCC does not regulate such rates. The FCC imposes a variety of
other 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. On November 3, 2003, ACS Wireless, Inc., or ACSW,
petitioned the FCC for a limited waiver of the 911 implementation deadlines and for forbearance
from the accuracy requirements for a limited period of time. A supplemental forbearance and waiver
petition was filed on January 26, 2005. On February 14, 2005 the FCC denied the 2003 forbearance
petition, but did not decide the 2003 request for limited waiver. No decisions have been rendered
on the 2005 waiver petition and we cannot predict when or how the remaining issues will be decided.
To date, however, only the Municipality of Anchorage has notified us of its interest in receiving
E911 location data, though it does not expect to be ready to receive such data until later this
year. No other Alaska community has the capability of receiving this data at this time or in the
foreseeable future. Local number portability allows a customer to retain his or her telephone number when changing
telecommunications carriers within the same local market. ACSW implemented number portability as of
May 24, 2004 in most of our markets. However, we may not be able to fully comply with this
requirement for some limited services or in some of our smaller operating areas. Our failure to
comply with the local number portability requirements could result in fines, other penalties or
enforcement actions against us. 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. This rule has had little impact on our
LECs, but we cannot predict the net impact of these new rules on us over the long-term. 18




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Internet services We provide 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 our provision of wholesale high-speed Internet services over our
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. We also offer a retail Internet service that is an
information service under the FCCs current policies. The FCCs classification of cable modem
services was reversed 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 United States Supreme Court has accepted the FCCs
appeal and a decision is expected in 2005. 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 of our broadband services or
possibly subject cable modem services to certain common carrier responsibilities, either of which
would put the two on more equal footing. In February 2004, the FCC determined that entirely Internet-based voice over Internet
Protocol, or 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 IP services, including VoIP, should be
subject. In November 2004, the FCC decided that some VoIP services are exempt from certain state
regulations. We cannot predict the outcome of these proceedings or the effect of FCC decisions in
this area on our business. Other federal regulations We are subject to various other federal regulations and statutes, including those concerning
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 our 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 us and limit our 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 Communications Act and the FCCs rules,
the RCA decides various aspects of local network interconnection offerings and agreements. In
addition, the RCA supervises the administration of the Alaska Universal Service Fund, or AUSF, and
decides on ETC status for purposes of the federal USF. Interconnection The Communications 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. On December 7, 2004, the RCA approved a new interconnection agreement between ACS and GCI,
establishing new rates, terms and conditions effective November 26, 2004 which in part were applied
retroactively to June 2004. On January 7, 2005, GCI filed suit in federal court seeking reversal of
the RCAs 2004 order approving the interconnection agreement between GCI and ACSA. GCI claims that
the pricing methodology the RCA used to determine the rates we charge GCI under the interconnection
agreement did not comply with the FCCs pricing methodology regulations and requests the court
direct the 19




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RCA to retroactively reduce the rates we charge GCI under this agreement, which would
reduce our revenue. We intend to vigorously defend the RCAs decision. We cannot predict the
duration or outcome of this litigation. In an April 18, 2004 settlement agreement between ACS and GCI, ACSF and ACSAK agreed to extend
existing interconnection agreements through 2007, with increased local loop rates effective January
1, 2005. The RCA approved the ACSF and ACSAK extension agreement on August 16, 2004. GCI recently filed an application to expand its local service area to eleven different
communities in Alaska, including the entire Glacier State study area of ACSN. GCI has represented
that it intends to provide local service in these additional communities through a variety of
mechanisms, but primarily through cable telephony. New local exchange service competition may
reduce our revenues and return. We have also entered into interconnection agreements with TelAlaska Long Distance, Inc., Level
3, and numerous 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 our 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);
and 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. Rate increases affecting existing services are subject to full cost support
showings for ILECs in areas with local competition; but the RCA may, and has demanded cost support
even for rate reductions and new or repackaged services in competitive areas. The RCA has granted
ACSA, ACSAK and ACSF non-dominant status on a trial basis only for retail tariff purposes. The RCA has been reviewing and considering changes to these regulations to address changes in
market structure. We do not expect the RCA will enact any significant changes to the current
regulations. End user local rates The rates charged by our 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. On April 8, 2004, the RCA approved rates for ACSF, ACSAK and ACSN. This settlement generally
resulted in some lower rates for ACSF and ACSN and some higher rates for ACSAK. On December 9, 2004
and January 19, 2005, the RCA issued orders in ACSAs rate case making all interim rates permanent.
Thus, retail rates for ACSA will remain at recent levels. Intrastate access rates ILECs not yet subject to local competition participate in a pool administered by the Alaska
Exchange Carrier Association, or 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. ACSN is our only ILEC remaining in the AECA pool, but it has a stand-alone rate.
The RCA has approved regulations that change the current annual update process to a biennial
review. 20




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The RCA recently adopted new regulations reducing the access fees local carriers can
charge interexchange carriers by imposing a Network Access Fee on end-users to make up for the
reduction in fees paid by interexchange carriers. The RCA is also analyzing the effects of various
FCC intercarrier compensation proposals on Alaskan consumers and telecommunications companies. Alaska Universal Service Fund To remove subsidies which had been implicit in intrastate access pricing, the RCA established
the Alaska Universal Service Fund, or 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 customers), and a portion of the cost of
Public Interest Pay Telephones. 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 our rural ILECs received. The resulting cost recovery shift was 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. ETC Determinations 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 our subsidiaries. Further, there is a
trend toward granting ETC status to wireless carriers. On August 28, 2003, the RCA granted ETC
status to Alaska Digitel, LLC, or DigiTel, for wireless services in the Matanuska Telephone
Association (MTA) service area. In July 2004, ACSW was granted ETC status in the MTA and
Fairbanks study areas, and MTA Wireless was granted ETC status for service in the MTA area on
December 8, 2004. In addition, ACSW also was granted ETC status as a competitive provider for local
services in all but the ACS LEC Sitka study area on November 17, 2004. Dobson sought ETC status and
asked the RCA to redefine the study areas of all of our LECs as well as other Alaskan LECs
permitting the competing ETC to choose which areas to serve on a wire center basis. While Dobsons
ETC petition has been dismissed, Dobson is expected to refile a new petition. As noted above, on February 28, 2005, the FCC adopted new, more stringent guidelines for the
designation of new and existing CETCs by state regulatory commissions. While these guidelines
require a more rigorous analysis, and we cannot anticipate how they will be applied, we do not
expect any impact on the ACSW CETC designations. Other state regulations The RCA has adopted new rules governing provision of statewide directory assistance, or DA,
that alters the DA market structure, the manner of providing DA service in Alaska and
carrier-to-carrier DA obligations. The new rules make the provision of DA more competitive and
permit CLECs to provide DA service. ACSA may remain the provider of DA service in some areas, at
least for some period of time, but other competitors such as GCI may enter the business. In addition, the RCA recently adopted regulations allowing some bundling of local exchange and
intrastate interexchange services. Other RCA rules, however, result in limitations on our ability
to actually bundle our intrastate interexchange services. The RCA may also open rulemakings on issues in 2005, including USF eligibility rules,
intercarrier compensation, service quality, bundling, depreciation and/or carrier of last resort
obligations, which could impact our business. Environmental regulations and radio emissions Our 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, we 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. We believe, however, that our operations are in
substantial compliance with applicable environmental laws and regulations. 21




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Our 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 we have not been named in any lawsuits alleging
damages from radio frequency emissions, it is possible we could be in the future, particularly if
scientific studies conclusively determine that radio frequency emissions are harmful. 
 Item 2. Properties At December 31, 2004, our telecommunications network includes over 640 sheath miles of fiber
optic cable, over 200 switching facilities and a statewide wireless network. In addition, we own
fiber capacity for high-speed links within Alaska and for termination of traffic in the continental
United States. We plan to continue enhancing our network to meet customer demand for increased
bandwidth and advanced services.See Item 1. Business  Network facilities. We own approximately
334,000 square feet of facilities in Anchorage, Alaska, which includes our corporate headquarters.
We also own or lease facilities in our service areas across Alaska. We believe this space is
sufficient for us to conduct our business. Substantially all of our assets (including those of our subsidiaries) were pledged as
collateral for our 2003 senior facility and are now pledged as collateral for our new 2005 senior
credit facility. Local telephone.Our primary local telephone properties consist of 199 switching facilities.
We own most of our administrative and maintenance facilities, customer service center, central
office and remote switching platforms and transport and distribution network facilities. Our local
telephone assets are located in Alaska.Our 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.We have four digital switching centers, 185 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. We lease the land or tower space on which 168 sites are
located, and own the remaining 17 sites. Internet.We own or lease point of presence facilities that permit our dial-up and DSL
customers to access the Internet in more than 30 communities serving the majority of Alaskas
populated areas.These communities are linked to the Internet in Seattle, Washington over both
owned and leased facilities. Interexchange.We are a facilities based interexchange carrier.We have invested in fiber
optic capacity through IRUs that provides bandwidth between our Anchorage, Fairbanks, and Juneau
locations and Seattle, Washington.We also lease transport facilities and have arrangements with
other interexchange carriers to terminate traffic in the lower 48 states. 
 Item 3. Legal Proceedings We are involved in various claims, legal actions and regulatory proceedings arising in the
ordinary course of business, including various legal proceedings involving regulatory matters
described under Regulation. We have recorded litigation reserves of $4.2 million as of December
31, 2004 against certain current claims and legal actions. We believe that the disposition of these
matters will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows. A class action lawsuit was filed against us in May 2001 in the Superior Court for the State of
Alaska in Anchorage. The litigation alleges various contract and statutory claims concerning our
decision to terminate the Infinite Minutes long distance plan. In September 2004, we entered into a
settlement agreement with plaintiffs counsel. As a class action, the court granted preliminary
approval of the settlement and provided an opportunity for members of the class to review the
proposed settlement and file objections. On February 18, 2005, the court granted final approval of
the settlement agreement and dismissed the case. On July 15, 2002 we fulfilled a commitment to Crest Communications LLC (Crest) to provide a
loan for the aggregate principal amount of $15.0 million in return for certain consideration. We
have an agreement that enables us to 22




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purchase additional fiber optic capacity in future years from
Crest, the expenditures for which are expected to be significant and may exceed $20 million over
the next two years. Certain material terms of the agreement with Crest remain subject to continued
renegotiation. The significant provisions of this agreement are: (i) purchase commitments by us for
capacity in 2005 and 2007, the final price and quantity of which are subject to future events, (ii)
restoration of our traffic carried on another cable system, (iii) and specific interconnection
arrangements between us and Crest, should we exercise our option to purchase certain of their
network assets. We are currently negotiating open elements and renegotiating other terms and
conditions of the agreement. It is impossible to determine the ultimate outcome of these
negotiations at this time. 
 Item 4. Submission of Matters to a Vote of Security Holders Omitted pursuant to General Instruction I (2) (c) of form10-K. 23




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PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters We are a wholly owned subsidiary of ACS Group and as such have no publicly traded equity securities. Dividends We paid our parent, ACS Group, dividends of $19,045,120 during 2004. Our 2003 senior credit
facility and indentures for our senior unsecured notes and senior subordinated notes contain
certain restrictions governing our ability to pay dividends to ACS Group. 24




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Item 6. Selected Financial Data SELECTED HISTORICAL FINANCIAL DATA The following table sets forth our historical consolidated financial data as of December 31,
2004, 2003, 2002, 2001 and 2000 and for the fiscal years ended December 31, 2004, 2003, 2002, 2001
and 2000, which are derived from our audited financial statements for those years. The selected historical financial data set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with Managements discussion and
analysis of financial condition and results of operations and our consolidated financial
statements and related notes thereto for the years ended December 31, 2004, 2003, 2002, 2001 and
2000. ($ in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Operating Data:Operating revenues
    
    $
    302,707
    
    
    $
    323,847
    
    
    $
    340,394
    
    
    $
    328,525
    
    
    $
    311,366Operating expenses
    
    
    289,735
    
    
    
    361,074
    
    
    
    360,995
    
    
    
    281,402
    
    
    
    277,598Loss (gain) on disposal of assets
    
    
    2,854
    
    
    
    (112,622
    )
    
    
    2,163
    
    
    
    
    
    
    
    Operating income
    
    
    10,118
    
    
    
    75,395
    
    
    
    (22,764
    )
    
    
    47,123
    
    
    
    33,768Other expense
    
    
    (45,104
    )
    
    
    (79,013
    )
    
    
    (46,910
    )
    
    
    (54,315
    )
    
    
    (58,398
    )Loss before income taxes, discontinued operations and cumulative effect of
change in accounting principle
    
    
    (34,986
    )
    
    
    (3,618
    )
    
    
    (69,674
    )
    
    
    (7,192
    )
    
    
    (24,630
    )Income tax benefit (expense)
    
    
    219
    
    
    
    (1,095
    )
    
    
    
    
    
    
    195
    
    
    
    197Equity in
income (loss) of investments
    
    
    16
    
    
    
    783
    
    
    
    
    
    
    
    69
    
    
    
    (303
    )Loss from continuing operations
    
    
    (34,751
    )
    
    
    (3,930
    )
    
    
    (69,674
    )
    
    
    (6,928
    )
    
    
    (24,736
    )Loss from discontinued operations
    
    
    
    
    
    
    (52
    )
    
    
    (7,632
    )
    
    
    (1,718
    )
    
    
    (917
    )Loss before cumulative effect of
change in accounting principle
    
    
    (34,751
    )
    
    
    (3,982
    )
    
    
    (77,306
    )
    
    
    (8,646
    )
    
    
    (25,653
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (105,350
    )
    
    
    
    
    
    
    Net loss
    
    $
    (34,751
    )
    
    $
    (3,982
    )
    
    $
    (182,656
    )
    
    $
    (8,646
    )
    
    $
    (25,653
    )Balance Sheet Data (end of period)Total assets
    
    
    636,039
    
    
    
    685,187
    
    
    
    755,871
    
    
    
    951,123
    
    
    
    954,681Long-term debt including current portion
    
    
    525,889
    
    
    
    535,004
    
    
    
    592,831
    
    
    
    596,603
    
    
    
    599,642Stockholders equity (deficit)
    
    
    (35,335
    )
    
    
    18,449
    
    
    
    18,618
    
    
    
    208,678
    
    
    
    231,153Other Financial Data:Cash provided by operating activities
    
    $
    69,233
    
    
    $
    55,378
    
    
    $
    66,956
    
    
    $
    78,054
    
    
    $
    144,643Cash provided (used) by investing
activities
    
    
    (52,477
    )
    
    
    106,517
    
    
    
    (79,728
    )
    
    
    (95,899
    )
    
    
    (75,795
    )Cash used by financing activities
    
    
    (28,694
    )
    
    
    (82,662
    )
    
    
    (9,675
    )
    
    
    (3,039
    )
    
    
    (15,958
    )Capital expenditures
    
    
    51,422
    
    
    
    50,906
    
    
    
    72,621
    
    
    
    88,998
    
    
    
    73,349
 25




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations 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. Alaska Communications Systems Holdings We generate revenue primarily through:  
    The provision of local telephone services, including:  
    Basic local service to retail customers within our service areas,
    Wholesale service to Competitive Local Exchange Carriers, or 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, we provide video entertainment services through our partnership with the
satellite operator, DISH Network. Local Telephone We are the largest Local Exchange Carrier (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. 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 our 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 our local service areas and
    CLECs that pay for wholesale access to our network in order to provide
competitive local service on either a wholesale or Unbundled Network Element (UNE)
basis as prescribed under the Telecommunications 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 26




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associated with a particular interexchange carrier varies
depending upon long distance calling patterns and the relative market share of each long distance
carrier. Our local service rates for end users are authorized by the Regulatory Commission of Alaska,
or RCA. Authorized rates are set by the Federal Communications Commission, or FCC, and the RCA for
interstate and intrastate access charges, respectively, and may change from time to time. Wireless- We are the second largest statewide provider of wireless services in Alaska,
currently serving over 100,000 subscribers. Our wireless network footprint covers over 482,000
residents, including all major population centers and highway and ferry corridors. We currently
operate a TDMA digital network in substantially all of our service areas, and are rolling out a new
generation of digital network known as CDMA 1xRTT, which provides customers with improved voice
call quality, average mobile data speeds of 70-80kbps and provides a platform for the launch of
enhanced services. We began offering CDMA 1xRTT services in several of our service areas in May
2004. In June 2004 we began offering wireless broadband service based on EV-DO which enables high
speed data connectivity with speeds that burst up to 2mbps to our wireless markets in Anchorage,
Fairbanks, and Juneau. We estimate that the new CDMA service currently covers 73% of our wireless
footprint of 482,000 residents. Internet We are the second largest provider of Internet access services in Alaska with over
47,000 customers. We offer dial-up and dedicated DSL Internet access to our customers. We are a
single source provider of advanced IP based private networks in Alaska. Interexchange We provide switched and dedicated long distance services to over 47,000
customers in Alaska. The traffic from these customers is carried over our owned or leased
facilities. Video Entertainment We provide video entertainment services on a resale basis through our
partnership with the satellite provider, DISH Network. The current agreement with the provider
became effective August 2003 and will either be renegotiated or terminate in December 2005. Critical accounting policies and accounting estimates Management is responsible for the financial statements herein and has evaluated the accounting
policies used in their preparation. Management believes these policies to be reasonable and
appropriate. Our significant accounting policies are described in Note 1, Description of Company
and Summary of Significant Accounting Policies, to the Alaska Communications Systems Holdings,
Inc. Consolidated Financial Statements. The following discussion identifies those accounting
policies that management believes are critical in the preparation of our 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 (in
particular, those assets accounted for under SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation), income taxes, network access revenue reserves and litigation reserves. Actual
results may differ from those estimates. We use an allowance method to estimate the net realizable value of accounts receivable. As of
December 31, 2004, the allowance for doubtful accounts receivable was $4.9 million. Actual
collection results could vary significantly from managements estimate. Access revenue is recognized when earned. We participate in access 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 27




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information becomes available. To the extent that
disputes arise over revenue settlements, our policy is to defer revenue collected until settlement
methodologies are resolved and finalized. At December 31, 2004, we had recorded liabilities of
$18.6 million related to our estimate of refundable access revenue. Actual results could vary from
this estimate. We utilize 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. The cumulative
valuation allowance against deferred tax assets was $109.2 million as of December 31, 2004, which
represents 100% of all deferred tax assets. Our local telephone exchange operations account for costs in accordance with the accounting
principles for regulated enterprises prescribed by SFAS No. 71. 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. We implemented, effective January 1, 2003, higher depreciation rates for our regulated
telephone plant for the interstate jurisdiction which management believes approximate the
economically useful lives of the underlying plant. As a result, we have recorded a regulatory asset
under SFAS No. 71 of $35.0 million as of December 31, 2004 related to depreciation of the regulated
telephone plant allocable to its intrastate and local jurisdictions. We have 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 $0.3 million at December 31, 2004. If we were not following SFAS No. 71, we
would have recorded additional cumulative depreciation expense of $35.0 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. We also have a regulatory liability of
$54.3 million at December 31, 2004 related to accumulated removal costs. If we were not following
SFAS No. 71, we would have followed SFAS No. 143 for asset retirement obligations. Non-regulated
revenues and costs incurred by the local telephone exchange operations and our non-regulated
operations are not accounted for under SFAS No. 71 principles. Effective January 1, 2002, we 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 us 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. We 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, 2004, we had recorded goodwill of $38.4 million applicable to our local telephone and
wireless segments and intangible assets of $21.9 million related primarily to our wireless segment. We are involved in various claims, legal actions and regulatory proceedings arising in the
ordinary course of business, and have recorded litigation reserves of $4.2 million against certain
claims and legal actions as of December 31, 2004. We believe that the disposition of these matters
will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows beyond the amounts already recorded. Estimates involved in developing
these litigation reserves could change as these claims, legal actions and regulatory proceedings
are resolved. 28




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Results of Operations The following table summarizes our companys operations for the years ended December 31, 2004,
2003, and 2002. Certain reclassifications have been made to 2003 and 2002 to conform to the current
presentation of our consolidated operations. ($ in thousands)
    
    2004
    
    
    2003
    
    
    2002Operating revenues:Local telephone
    
    $
    211,187
    
    
    $
    215,686
    
    
    $
    226,697Wireless
    
    
    56,694
    
    
    
    46,548
    
    
    
    43,180Directory
    
    
    
    
    
    
    11,631
    
    
    
    33,604Internet
    
    
    20,173
    
    
    
    33,026
    
    
    
    20,847Interexchange
    
    
    14,653
    
    
    
    16,956
    
    
    
    16,066Total operating revenues
    
    
    302,707
    
    
    
    323,847
    
    
    
    340,394Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    127,918
    
    
    
    116,653
    
    
    
    114,832Wireless (exclusive of depreciation and amortization)
    
    
    37,918
    
    
    
    31,064
    
    
    
    29,352Directory (exclusive of depreciation and amortization)
    
    
    
    
    
    
    5,249
    
    
    
    14,170Internet (exclusive of depreciation and amortization)
    
    
    25,739
    
    
    
    45,523
    
    
    
    31,299Interexchange (exclusive of depreciation and amortization)
    
    
    19,773
    
    
    
    25,542
    
    
    
    23,647Contract termination and asset impairment charges
    
    
    
    
    
    
    54,858
    
    
    
    Depreciation and amortization
    
    
    78,387
    
    
    
    82,185
    
    
    
    82,940Loss (gain) on disposal of assets, net
    
    
    2,854
    
    
    
    (112,622
    )
    
    
    2,163Goodwill impairment loss
    
    
    
    
    
    
    
    
    
    
    64,755Total operating expenses
    
    
    292,589
    
    
    
    248,452
    
    
    
    363,158Operating income (loss)
    
    
    10,118
    
    
    
    75,395
    
    
    
    (22,764
    )Other income and expense:Interest expense
    
    
    (46,745
    )
    
    
    (68,822
    )
    
    
    (49,113
    )Interest income and other
    
    
    1,641
    
    
    
    (10,191
    )
    
    
    2,203Total other income (expense)
    
    
    (45,104
    )
    
    
    (79,013
    )
    
    
    (46,910
    )Loss before
income taxes, discontinued operations and cumulative effect of change in accounting principle
    

    (34,986
    )
    
    
    (3,618
    )
    
    
    (69,674
    )Income tax benefit (expense)
    
    
    219
    
    
    
    (1,095
    )
    
    
    Equity in income of investments
    
    
    16
    
    
    
    783
    
    
    
    Loss from continuing operations
    
    
    (34,751
    )
    
    
    (3,930
    )
    
    
    (69,674
    )Loss from discontinued operations
    
    
    
    
    
    
    (52
    )
    
    
    (7,632
    )Loss before cumulative effect of change in accounting principle
    
    
    (34,751
    )
    
    
    (3,982
    )
    
    
    (77,306
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (105,350
    )Net loss
    
    $
    (34,751
    )
    
    $
    (3,982
    )
    
    $
    (182,656
    )
 29




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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Operating revenues Operating revenue decreased $21.1 million, or 6.5%, for the year ended December 31, 2004
compared to the year ended December 31, 2003. Wireless revenue increased compared to the
corresponding period of 2003, while local telephone, Internet and interexchange revenue decreased
compared to the corresponding period of 2003. On May 8, 2003, we completed the sale of a majority
interest (87.42%) in our Directories Business and on August 27, 2003, we sold the majority of our
remaining interest and now own less than 0.1% of the Directories Business. We did not have any
operating revenues from the Directories Business after May 8, 2003, but had recorded $11.6 million
of revenues from this business for the year ended December 31, 2003. On September 15, 2003, we received notification from the State of Alaska that they intended to
terminate our five year Telecommunications Services Partnering Agreement (TPA). Subsequently, we
negotiated and agreed to a definitive Settlement Agreement and Mutual Release effective October 14,
2003, outlining the terms of disentanglement. Operating revenue in 2003 included $19.9 million of
revenue from the TPA contract that was nonrecurring in 2004. Local Telephone.Local telephone revenue, which consists of local network service, network
access and deregulated and other revenue, decreased $4.5 million, or 2.1%, for the year ended
December 31, 2004 compared to the year ended December 31, 2003. The following table summarizes our
consolidated local telephone revenue by category: Year Ended December 31,2004
    
    
    2003(in thousands)Local telephone revenue:Local network service
    
    $
    91,669
    
    
    $
    96,357Network access revenue
    
    
    97,536
    
    
    
    97,759Deregulated revenue and other
    
    
    21,982
    
    
    
    21,570Total local telephone revenue
    
    $
    211,187
    
    
    $
    215,686
 The following table summarizes our local telephone access lines: As of December 31,2004
    
    
    2003Retail access lines
    
    
    207,905
    
    
    
    218,058Wholesale access lines
    
    
    16,590
    
    
    
    19,159Unbundled network elements  loop (UNE-L)
    
    
    64,589
    
    
    
    68,916Unbundled network elements  platform (UNE-P)
    
    
    6,365
    
    
    
    5,333Total local telephone access lines
    
    
    295,449
    
    
    
    311,466
 Consistent with the U.S. telecommunications industry trend, we experienced a loss of network
access lines as customers migrated to broadband Internet services reducing demand for second lines,
migrated to cable telephony, or replaced landline service with wireless service. Additionally, our
primary competitor has begun to deploy cable telephony and began switching its UNE-L provisioned
subscribers over to its own network in the Anchorage market during 2004. In November 2004 we
received a final order from the RCA with respect to UNE-L rates for ACSA, retroactive to June 2004
increasing the UNE-L rate from $14.92 to $18.64. See Item 1. Business  Regulation for further
discussion. Local network service revenue decreased $4.7 million, or 4.9%, for the year ended December 31,
2004, compared to the year ended December 31, 2003, while access lines in service decreased 5.1% to
295,449. The decrease in revenue primarily reflects the net effect of retail access line losses
representing a revenue reduction of approximately $7.3 million offset by increases in UNE rates and
average UNEs in service representing a revenue increase of approximately $2.1 million. 30




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Network access revenue decreased $0.2 million, or 0.2%, for the year ended December 31, 2004
compared to the same period in 2003. The decrease in network access revenue reflects the loss of
retail access lines, offset by increases in special access revenue and ongoing true-ups to prior
years interstate access and universal service fund studies. Network access revenue is based on a
regulated return on rate base and recovery of allowable expenses associated with the origination
and termination of toll calls for our retail and resale customers. Management expects that network
access revenue will decline as a component of local telephone revenue for the foreseeable future. Deregulated and other revenue, which increased $0.4 million, or 1.9%, for the year ended
December 31, 2004, compared to the year ended December 31, 2003, consists principally of billing
and collection services, space and power rents, deregulated equipment sales, paystation revenue,
regulated directory listing revenue, and other miscellaneous telephone revenue. Wireless.Wireless revenue increased $10.1 million, or 21.8%, for the year ended December 31,
2004 compared to the year ended December 31, 2003. This increase is due primarily to the following:  
    growth in average subscribers of 10.4% for the year ended December 31, 2004 over the
prior year period;
    an increase in monthly average revenue per unit, or ARPU, of 8.6% to $44.64 for the
year ended December 31, 2004, from $41.09 for the year ended December 31, 2003,
primarily as a result of increased plan revenue, roaming, and regulatory surcharges;
and
    higher gross customer adds in the year ended December 31, 2004 resulting in $4.3
million of handset revenue compared to $2.3 million for the year ended December 31,
2003. Internet.Internet revenue decreased $12.9 million, or 38.9%, for the year ended December 31,
2004 compared to the year ended December 31, 2003. This decrease is primarily due to the loss of
$15.5 million in revenue associated with the State of Alaska TPA, which was terminated in October
2003, offset by approximately $2.6 million of revenue increases primarily as a result of growth in
DSL subscribers of 39.0% to 24,711 at December 31, 2004, from 17,784 at December 31, 2003. Interexchange.Interexchange revenue decreased $2.3 million, or 13.6%, for the year ended
December 31, 2004, compared to the year ended December 31, 2003. The decline was primarily due to
the termination of services to the State of Alaska TPA, which accounted for $4.4 million in 2003
revenue, offset by an increase in long distance subscribers of 3,884, or 9.0%, from 43,166 in 2003
to 47,050 in 2004. Total minutes of use decreased to 136.7 million for the year ended December 31,
2004, from 149.3 million for the year ended December 31, 2003. Operating expenses Operating expenses increased $44.1 million, or 17.7%, from $248.5 million for the year ended
December 31, 2003 to $292.6 million for the year ended December 31, 2004. Included in operating
expenses for 2003 is approximately $25.7 million of expenses attributable to the State of Alaska
TPA, contract termination and asset impairment charges of $54.9 million, and a net gain on disposal
of assets of $112.6 million. On May 8, 2003, we completed the sale of a majority interest (87.42%) in its Directories
Business. We did not have any expenses from operations from the Directories Business after this
date. Depreciation and amortization associated with the operation of each of our 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 $116.7 million for the year ended
December 31, 2003 to $127.9 million for the year ended December 31, 2004, an increase of $11.2
million or 9.6%.The increase in local telephone expense was substantially attributable to $6.6
million of organizational restructuring costs (including $2.5 million of consulting, $1.0 million
of hiring, recruiting and severance costs, and $3.1 million of early lease termination expense),
$2.5 million of inventory write-downs, 31




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and $1.5 million of other unusual charges. We also
implemented a contractual wage increase for our represented employees of approximately 2.3% on
January 1, 2004. Wireless.Wireless expense increased $6.9 million, or 22.1%, for the year ended December 31,
2004 compared to the year ended December 31, 2003. This increase is due primarily to a $3.0 million
increase in the cost of equipment associated with customer acquisition as we experienced 33,476
gross customer additions during 2004 compared to 23,220 in the prior year, an increase in leased
circuit and outside services costs increase of $3.1 million associated with our CDMA deployment
during 2004, and additional roaming expense. Internet.Internet expenses decreased by $19.8 million, or 43.5%. The decrease in Internet
expense was due principally to the termination of the State of Alaska TPA, which had incurred $20.4
million of expense during 2003 with no corresponding TPA expense in 2004. The elimination of
expenses associated with the TPA was partially offset by additional expenses associated with a
39.0% increase in DSL subscribers over the prior year. Interexchange.Interexchange expenses decreased by $5.8 million, or 22.6%. $5.2 million of
this decrease was attributable to costs associated with the State of Alaska TPA, which was
terminated during the fourth quarter of 2003. Additionally, minutes of use decreased 8.4% to 136.7
million for the year ended December 31, 2004, from 149.3 million for the year ended December 31,
2003. Contract termination and asset impairment charges.During the year ended December 31, 2003,
we recorded $54.9 million in contract termination and asset impairment charges for which no
corresponding charges were incurred during 2004. 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, to the Alaska Communications
Systems Holdings, Inc. Consolidated Financial Statements, for a description of each element of the
contract termination and asset impairment charges. Depreciation and amortization.Depreciation and amortization expense decreased $3.8 million,
or 4.6%, primarily as a result of a decline in net property, plant and equipment of 5.9% from
$438.1 million at December 31, 2003 to $412.3 million at December 31, 2004. Much of the decline in
net property, plant and equipment resulted from the loss on disposal and asset impairment charges
incurred during the third quarter of 2003, as described above. Loss (Gain) on disposal of assets.On April 28, 2003, we entered into an underwriting
agreement to sell a majority interest in our Directories Business and on April 29, 2003 filed a
final prospectus to offer this majority interest to investors through a Canadian income fund. The
transaction was completed on May 8, 2003, with us selling an 87.42% interest and retaining a 12.58%
interest in our Directories Business. We recognized a gain on disposition of this majority interest
of our Directories Business of $97.6 million on a pre-tax basis during 2003. Subsequently on August 27, 2003, we disposed of substantially all of our remaining interest
through the exercise of our right to convert 99.23% of our 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 32




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proceeds and a gain on disposition of $15.9 million. As a result of this transaction, we now own less than 0.1% of the
Directories Business. We recorded a non-cash loss on the disposal of certain fixed assets of $2.9 million during
2004 compared to $0.9 million during 2003, exclusive of the gain on the sale of our Directories
Business. Interest expense and interest income and other Interest expense decreased $22.1 million, or 32.1%, for the year ended December 31, 2004
compared to the year ended December 31, 2003. As a result of the early extinguishments of
outstanding 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. We also extinguished early our interest rate swap contract during the fourth
quarter of 2003. This swap contract accounted for $15.6 million of 2003 interest expense. These
reductions to 2004 interest expense were partially offset by higher interest associated with our 9
7/8% senior unsecured notes due 2011, which were in effect for the full year of 2004 compared to
approximately one quarter during 2003, and higher variable interest rates on principal outstanding
under our senior bank credit facilities experienced during 2004 compared to 2003. Interest income and other increased from a net expense of $10.2 million for 2003 to income of
$1.6 million for 2004, or a positive year-over-year variance of $11.8 million, due substantially 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, both of which were recorded during
2003. Income taxes We have fully reserved the income tax benefit resulting from the consolidated losses we have
incurred since May 14, 1999, the date of the acquisition of substantially all of our operations.
During 2004, we received a refund of prior year estimated alternative minimum taxes of $0.2
million. Loss from discontinued operations During 2003, we completed a plan we adopted on March 3, 2002 to dispose of our former wireless
television segment, which resulted in a loss on disposal of $0.1 million for 2003. Net loss The
increase in net loss is primarily a result of the factors discussed above. 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, we
completed the sale of a majority interest (87.42%) in our Directories Business and sold
substantially all remaining interest in August 2003. We did not have any operating revenues from
the Directories Business after May 8, 2003. 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. 33




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The following table summarizes our consolidated local telephone revenue by category: Year Ended December 31,2003
    
    
    2002(in thousands)Local telephone revenue:Local network service
    
    $
    96,357
    
    
    $
    99,512Network access revenue
    
    
    97,759
    
    
    
    108,335Deregulated revenue and other
    
    
    21,570
    
    
    
    18,850Total local telephone revenue
    
    $
    215,686
    
    
    $
    226,697
 The following table summarizes our local telephone access lines: As of December 31,2003
    
    

2002Retail access lines
    
    
    218,058
    
    
    
    236,148Wholesale access lines
    
    
    19,159
    
    
    
    22,148Unbundled network elements  loop (UNE-L)
    
    
    68,916
    
    
    
    62,091Unbundled network elements  platform (UNE-P)
    
    
    5,333
    
    
    
    2,620Total local telephone access lines
    
    
    311,466
    
    
    
    323,007
 The local network service component of local telephone revenues was $96.3 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 3.6% 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 18,090 or 7.7% to
218,058 at December 31, 2003. Approximately 2,800 of the decrease in retail access lines was due to
a change in the counting methodology adopted for 2003 and later periods to exclude company use of
our access lines. We 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 ours switches to a competitor, we continue 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 we have experienced in certain of our markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs. 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. See Item 1. Business  Regulation
for further discussion. 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, we 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 our 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 billing and collection services, space and power rents, deregulated equipment sales,
pay station 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 billing and collection revenue. 34




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##### Table of Contents



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 monthly 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 our
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, we received notification from the State of Alaska that it intended to
terminate a five year TPA with us and disentangle. Subsequently, we negotiated with the State and
agreed to a definitive Settlement Agreement and Mutual Release effective October 14, 2003,
outlining the terms of disentanglement between the parties. 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%. Long distance subscribers decreased from approximately
70,000 at December 31, 2002 to 43,166 at December 31, 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 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. Currently, we have a low penetration on this
product, but we expect our market share to grow as we increasingly offer attractive bundles to our
customers, which may offset declines in interexchange revenue due to the termination of the State
of Alaska contract. Operating expenses Operating expenses decreased $114.7 million, or 31.6%, from $363.2 million for the year ended
December 31, 2002 to $248.5 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 $10.0 million or 3.4%. On May 8, 2003, we completed the sale of a majority interest (87.42%) in our Directories
Business. We did not have any expenses from operations from the Directories Business after this
date. Depreciation and amortization associated with the operation of each of our 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 $114.8 million for the year ended
December 31, 2002 to $116.7 million for the year ended December 31, 2003an increase of $1.9
million or 1.7%. 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. 35




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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. We negotiated with the State 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. We anticipate expense for this segment
to decline as we complete the 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 billing and collection fees, toll switching and
litigation reserves in 2003. Contract termination and asset impairment charges.During the year ended December 31, 2003,
we recorded $54.9 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, to the Alaska Communications
Systems Holdings, Inc. Consolidated Financial Statements, 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, we entered into an underwriting
agreement to sell a majority interest in our Directories Business and on April 29, 2003 we filed a
final prospectus to offer this majority interest to investors through a Canadian income fund. The
transaction was completed on May 8, 2003, with us selling an 87.42% interest and retaining a 12.58%
interest in our Directories Business. We recognized a gain on disposition of this majority interest
of our Directories Business of $97.6 million on a pre-tax basis. Subsequently on August 27, 2003, we disposed of substantially all of our remaining interest
through the exercise of our right to convert 99.23% of our 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, we now own less than 0.1% of the
Directories Business. We recorded a non-cash loss on the disposal of certain fixed assets of $0.9 million during
2003 and $2.2 million during 2002. Goodwill impairment loss.We recorded a non-cash goodwill impairment charge during the fourth
quarter of 2002 of $64.8 million as a result of our annual goodwill impairment test under SFAS No.
142, Goodwill and Intangible Assets. See Note 4, Goodwill and Other Intangible Assets, to the
Alaska Communications Systems Holdings, Inc. Consolidated Financial Statements, for additional
information. 36




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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 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. We also extinguished early our interest rate swap contract during the fourth
quarter of 2003, resulting in a charge of $8.0 million which resulted in $5.1 million of interest
expense in excess of what would have been recorded had the swap not been terminated. During the
second quarter of 2002, we 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, we incurred additional interest
expense in 2003 under our $182 million 97¤8% senior notes due 2011,
offset by lower term loan balances and the results of market interest rate effects on our variable
interest rate debt. Interest income and other (including equity in income of investments) also declined by $12.4
million, primarily 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 We have fully reserved the income tax benefit resulting from the consolidated losses we have
incurred since May 14, 1999, the date of the acquisition of substantially all of our operations.
During 2003, we incurred $1.1 million in Alternative Minimum Tax as a result of the sale of our
Directories Business. Discontinued operations On March 30, 2002, our management approved a plan to offer for sale our 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 years ended December 31,
2003 and 2002, respectively. We have fully reserved in the form of a valuation allowance the income
tax benefit of this discontinuance. We completed our disposal of our wireless cable television
segment as of March 31, 2003. Cumulative effect of change in accounting principle During the second quarter of fiscal 2002, we 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, we 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, to the Alaska Communications Systems Holdings, Inc.
Consolidated Financial Statements, for additional discussion of the impact of this statement on our
consolidated financial statements. Net loss Net
loss decreased $178.7 million, or 97.8% for the year ended December 31, 2003, compared to
the year ended December 31, 2002, as a result of the factors discussed above. Liquidity and capital resources We have satisfied our cash requirements for operations, capital expenditures and debt service
primarily through internally generated funds, the sale of stock and debt financing. For the year
ended December 31, 2004, our cash flows from operating activities were $69.2 million. At December
31, 2004, we had approximately $69.4 million in net working capital, with approximately $85.9
million represented by cash and cash equivalents and $4.7 million by restricted cash. As of
December 31, 2004, we had $50.0 million of remaining capacity under our former revolving credit
facility, representing 100% of available capacity. 37




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As of December 31, 2004, we had outstanding a $198.0 million under a bank credit agreement,
our 2003 senior secured credit facility, $147.5 million in senior subordinated notes due 2009 and
$177.7 million in senior unsecured notes, representing substantially all of our long-term debt of
$525.9 million. Our board of directors authorized us to buy back up to $10 million of our
outstanding debt in the open market during the three months ended December 31, 2004. During the
quarter ended December 31, 2004, we repurchased $4.4 million aggregate principal amount of senior
unsecured notes and $2.5 million of senior subordinated notes in the open market. From time to time
we consider making purchases of our outstanding debt securities on the open market or in negotiated
transactions. The timing and amount of such purchases, if any, will depend upon cash needs and
market conditions, among other things. Interest on the senior subordinated notes and senior
unsecured notes is payable semiannually. Interest on borrowings under the 2003 senior credit
facility is payable monthly, bi-monthly, quarterly or semi-annually at our option. The 2003 senior
credit facility requires $0.5 million quarterly principal payments that commenced on March 31,
2004, with the balance due in 2010. The 2003 senior secured credit facility, the senior
subordinated notes and the senior unsecured notes contain a number of restrictive covenants and
events of default, including covenants limiting capital expenditures, incurrence of debt, and the
payment of dividends, and the 2003 senior credit facility requires us to achieve certain financial
ratios. We are in compliance with all of our debt covenants as of December 31, 2004. In February and March 2005, we completed refinancing transactions whereby we entered into a
new $380 million senior secured credit facility, the 2005 senior credit facility, and used the
$335.0 million of term loan borrowings under that facility, together with the $84.1 million in
gross proceeds of a simultaneous offering by ACS Group of common stock, the net proceeds of which
were contributed to us as capital, and cash on hand to:  
    repay in full and redeem the $198.0 of outstanding principal under our 2003 senior
credit facility, together with interest accrued thereon;
    repurchase $59.3 million of outstanding principal of our senior unsecured notes,
together with tender premiums and interest accrued thereon;
    repurchase $140.1 million of outstanding principal of our senior subordinated notes,
together with tender premiums and interest accrued thereon;
    call for redemption the $7.4 million of remaining principal of senior subordinated
notes; and
    pay underwriters discounts and transaction fees and expenses associated with the
equity offering and refinancing transactions. These transactions resulted in total long-term obligations outstanding of approximately $458
million as of March 3, 2005, consisting primarily of the $380.0 million 2005 senior credit facility
with a drawn term loan of $335.0 million and an undrawn revolving credit facility of $45.0 million,
and $118.3 million remaining aggregate principal amount outstanding of senior unsecured notes. The
$335.0 million term loan under the 2005 senior credit facility was drawn on February 1, 2005 and
generally bears interest at an annual rate of LIBOR plus 2.00%, with a term of seven years from the
date of closing and no scheduled principal payments before maturity. The $45.0 million undrawn
revolving credit facility, to the extent drawn in the future, will bear interest at an annual rate
of LIBOR plus 2.00% and have a term of six years from the date of closing. To the extent the $45.0
million revolving credit facility under the 2005 senior credit facility remains undrawn, we will
pay an annual commitment fee of 0.375% of the undrawn principal amount over its term. We also
entered into floating-to-fixed interest rate swaps with a total notional amount of approximately
$135.0 million that swap the floating interest rate on a portion of the term loan borrowings under
the 2005 senior credit facility for a fixed rate of 4.13% per year. Three-month LIBOR was
approximately 2.64% on February 1, 2005. See Note 22, Subsequent Events, to the Alaska
Communications Systems Holdings, Inc. Consolidated Financial Statements, for additional information
about the equity offering and refinancing transactions. On July 15, 2002, we fulfilled a commitment to Crest to provide a loan for the aggregate
principal amount of $15 million in return for certain consideration. We have an agreement that
enables us to purchase additional fiber optic capacity in future years from Crest, the expenditures
for which are expected to be significant and may exceed $20 million over the next two years. We
purchased additional capacity under this agreement for $5.6 million during 2004. While we have an
agreement with Crest, certain material terms of the agreement remain subject to continued
renegotiation. The significant provisions of this agreement are: (i) purchase commitments by us for
capacity in 2005 and 2006, the final price and quantity of which are subject to future events, (ii)
Crests restoration of our traffic carried on another cable system and (iii) specific
interconnection arrangements between us and Crest, should we exercise our option to purchase
certain network assets from Crest. We are 38




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currently renegotiating open elements of our agreement
with Crest. It is impossible to determine the ultimate outcome of these negotiations at this time.
The loan was written down to zero, its estimated fair value, during September 2003. The following summarizes our contractual obligations and commitments with quantifiable payment
terms as of December 31, 2004: ($ in thousands)
    
    Total
    
    
    2005
    
    
    2006-2007
    
    
    2008-2009
    
    
    ThereafterLong-term debt
    
    $
    517,829
    
    
    $
    1,413
    
    
    $
    2,620
    
    
    $
    149,805
    
    
    $
    363,991Capital leases
    
    
    8,060
    
    
    
    885
    
    
    
    1,984
    
    
    
    1,603
    
    
    
    3,588Operating leases
    
    
    6,779
    
    
    
    2,194
    
    
    
    2,389
    
    
    
    1,470
    
    
    
    726Unconditional purchase obligations
    
    
    10,942
    
    
    
    6,357
    
    
    
    3,565
    
    
    
    1,020
    
    
    
    Total contractual cash obligations
    
    $
    543,610
    
    
    $
    10,849
    
    
    $
    10,558
    
    
    $
    153,898
    
    
    $
    368,305
 We also have obligations for material cash interest payments on our long-term debt that are
not included in the table above. Approximately 36% of our debt at December 31, 2004 is subject
variable interest rates. See Item 7a. Quantitative and qualitative disclosure about market risk
for more information. The local telephone network requires the timely maintenance of plant and infrastructure. Our
historical capital expenditures have been significant. The construction and geographic expansion of
our wireless network has required significant capital. The implementation of our interexchange
network and data services strategy is also capital intensive. Capital expenditures for 2004 were
$51.4 million, of which $10.4 million was expended on CDMA 1xRTT build out and $5.6 million was
expended on the Crest fiber optic capacity purchases. We intend to fund future capital expenditures
with cash on hand, through internally generated cash flows, and if necessary, through borrowings
under our revolving credit facility. At December 31, 2004 we had allocated $55.0 million of our
current unrestricted cash balance of $85.9 million to fund the completion over the next two years
of our CDMA 1xRTT and EV-DO build out and to secure fiber capacity within Alaska and to the lower
48 states in the United States under the terms of our agreement with Crest. Our capital requirements may change due to impacts of regulatory decisions that affect our
ability to recover our investments, changes in technology, the effects of competition, changes in
our business strategy, and our decision to pursue specific acquisition opportunities, among other
things. ACS Group announced on October 28, 2004 the adoption of a dividend policy by our common board
of directors and declared its first quarterly dividend of $0.185 per share, payable on January 19,
2005 to holders of record on December 31, 2004. While ACS Group intends to continue to pay
quarterly dividends, ACS Groups ability to fund such payment is subject to our future operating
and financial performance, capital expenditures, working capital requirements and other factors.
Accordingly, our common board of directors may modify or revoke this policy at any time. Simultaneous with
the announcement of the dividend policy, ACS Group also announced the
withdrawal of its registration statements for a proposed initial public offering of income deposit securities, a
separate proposed offering of senior subordinated notes and the
proposed reclassification of its existing common stock into cash and
shares of new class B common stock which they had filed with the
SEC. No securities were sold under the withdrawn registration statements. Subsequent to December 31, 2004, ACS Group issued 8.8 million shares of common stock in an
equity offering that closed on February 1, 2005 and, through the partial exercise by the
underwriters of their over-allotment option, an additional 1.1 million shares that closed on March
2, 2005. As a result of these issuances, ACS Group has outstanding 40.6 million shares as of March
2, 2005. The issuance of these additional shares of ACS Group common stock will increase its
aggregate annual dividend payments by approximately $7.3 million to approximately $30.0 million
annually based on the current dividend policy of $0.74 per share per year. See Note 22, Subsequent
Events, to the Alaska Communications Systems Holdings, Inc. Consolidated Financial Statements, for
additional information about the offering of our common stock. We believe that we will have sufficient working capital provided by operations and available
borrowing capacity under our revolving credit facility to service our debt, pay ACS Groups
quarterly dividends, and to fund our operations, capital expenditures and other obligations over
the next 12 months. Our ability to meet such obligations and those of ACS Group will be dependent
upon our 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 our control. 39




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Effect of new accounting standards In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities  An Interpretation of Accounting Research
Bulletin (ARB) No. 51. In December 2003, the FASB issued FIN 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R). FIN 46R provides guidance on how to
identify variable interest entities and how to determine whether or not those entities should be
consolidated. We were required to apply FIN 46R by the end of the first reporting period after
March 15, 2004, for entities which were created before February 1, 2003. The adoption of FIN 46R
was immediate for variable interest entities created after January 31, 2003. We have evaluated the
provisions of FIN 46R and determined that we do not have any variable interest entities that
require consolidation in our financial statements. Our employees participate in various stock-based compensation plans of ACS Group. In December
2004, the FASB issued SFAS No. 123(Revised), Share-Based Payment. This statement replaces SFAS
No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 123® requires companies to apply a fair-value-based
measurement method in accounting for share-based payment transactions with employees and to record
compensation cost for all stock awards granted after the required effective date and to awards
modified, repurchased, or cancelled after that date. In addition, we are required to record
compensation expense (as previous awards continue to vest) for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. SFAS 123® will be effective for
our third quarter ending September 30, 2005. We have not yet determined the impact that SFAS 123®
will have on our financial position and results of operations, but expects that the stock incentive
plans disclosure provided in Note 1, Description of Company and Summary of Significant Accounting
Policies, to the Alaska Communications Systems Holdings, Inc. Consolidated Financial Statements,
provides a reasonable measure of the expected annual impact. Outlook We expect that, overall, the demand for telecommunications services in Alaska will grow,
particularly as a result of:  
    increasing demand for wireless voice and data services following the launch of
our CDMA 1xRTT network;
    growth in demand for DSL and Internet access services due to higher business and
consumer bandwidth needs; and
    increasing demand for private network services by government and business on a
statewide basis on either a circuit switched or IP basis. We believe that we will be able to capitalize on this demand through our diverse service
offerings on our owned circuit switched and IP facilities, new sales and marketing initiatives
directed toward basic voice, enhanced and data services, and offering customers an integrated
bundle of telecommunication services including local telephone, wireless, Internet, long distance,
messaging and video entertainment. Consistent with the U.S. telecommunications industry, we experienced a loss in network access
lines during the year as customers cancelled second lines, replaced wireline services with
wireless, and lines migrated to cable telephony. Our primary UNE customer has announced plans to
migrate most of its Anchorage area customers to its own cable telephony plant during the next three
years. Consequently, we anticipate that these trends will continue. There are currently a number of regulatory proceedings underway at the state and federal
levels that could have a significant impact on our operations. We cannot predict with certainty the
impact of current or future regulatory developments on any of our businesses. The telecommunications industry is extremely competitive, and we expect competition to
intensify in the future. As an ILEC, we face competition mainly from resellers, local providers who
lease our UNEs and from providers of local telephone services over separate facilities. Moreover,
while wireless telephone services have historically complemented traditional LEC services, we
anticipate 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, we currently compete with at least one
other wireless provider in each of our wireless service areas. In the highly 40




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competitive business
for Internet access services, we currently compete with a number of established online service
companies, interexchange carriers and cable companies. In the interexchange market, we believe we
currently have less than 5% of total revenue in Alaska and face competition from two major
interexchange providers. The telecommunications industry is subject to continuous technological change. We expect that
new technological developments in the future will generally serve to enhance our ability to provide
service to our customers. However, these developments may also increase competition or require us
to make significant capital investments to maintain our leadership position in Alaska. Impact of inflation The effect of inflation on our financial results has not been significant in the periods
presented. 
 Item 7A. Quantitative and qualitative disclosures about market risk As of December 31, 2004, we had outstanding senior subordinated notes, senior unsecured notes,
and our 2003 senior credit facility. These on-balance sheet financial instruments, to the extent
they provide for variable rates of interest, expose us 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 our 2003 senior credit
facility. Subsequent to December 31, 2004, we completed refinancing transactions that
significantly changed our capital structure and changed our exposure to interest rate and other
market risks  See Note 22, Subsequent Events, to the Alaska Communications Systems Holdings,
Inc. Consolidated Financial Statements, for further information. The table below provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2004. To the extent that our financial
instruments expose us 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 our 2003 senior credit facility, senior subordinated notes, senior unsecured
notes, and capital leases and other long-term obligations outstanding at December 31, 2004.
Weighted average variable rates for the 2003 senior credit facility are based on implied forward
rates in the LIBOR yield curve as of December 31, 2004. Fair values as of December 31, 2004
included herein have been determined based on (i) quoted market prices for the 2003 senior secured
credit facility; (ii) quoted market prices for the senior subordinated notes; and (iii) quoted
market prices for the senior unsecured notes. Our consolidated financial statements contain
descriptions of the 2003 senior 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. ($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    ValueInterest Bearing Liabilities:Bank credit facility
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    2,000
    
    
    $
    188,000
    
    
    $
    198,000
    
    
    $
    200,723Weighted average interest rate (variable)
    
    
    6.37
    %
    
    
    7.08
    %
    
    
    7.41
    %
    
    
    7.76
    %
    
    
    8.07
    %
    
    
    8.38
    %
    
    
    7.58
    %Senior subordinated notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    147,500
    
    
    $
    
    
    
    $
    147,500
    
    
    $
    152,294Average interest rate (fixed)
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %Senior unsecured notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    177,650
    
    
    $
    177,650
    
    
    $
    190,974Average interest rate (fixed)
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %
    
    
    9.88
    %Capital leases and other long-term
    
    $
    885
    
    
    $
    964
    
    
    $
    1,020
    
    
    $
    930
    
    
    $
    673
    
    
    $
    3,588
    
    
    $
    8,060
    
    
    $
    8,060Average interest rate (fixed)
    
    
    9.81
    %
    
    
    9.88
    %
    
    
    9.99
    %
    
    
    10.21
    %
    
    
    10.25
    %
    
    
    10.89
    %
    
    
    10.24
    %
 As of December 31, 2003, we had outstanding senior subordinated notes, senior unsecured notes,
senior discount debentures and our 2003 senior credit facility. These on-balance sheet financial
instruments, to the extent they provide for variable rates of interest, expose us 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 our
existing senior secured credit facility. We used derivative financial instruments, specifically an interest rate swap agreement, to
partially hedge variable interest transactions. We ended an interest rate swap agreement in
November 2003. Our derivative financial instrument 41




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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 our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2003. To the extent that our financial
instruments expose us 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 our 2003 senior credit facility, senior subordinated notes, senior unsecured
notes, senior discount debentures, and capital leases and other long-term obligations outstanding
at December 31, 2003. Weighted average variable rates for the 2003 senior credit facility are based
on implied forward rates in the LIBOR yield curve as of December 31, 2003. Fair values as of
December 31, 2003 included herein have been determined based on (i) quoted market prices for the
2003 senior secured credit facility; (ii) quoted market prices for senior subordinated notes; and
(iii) quoted market prices for senior unsecured notes. Our consolidated financial statements
contain descriptions of the 2003 senior secured credit facility, senior subordinated notes, senior
unsecured notes, senior discount debentures and capital leases and other long-term obligations and
should be read in conjunction with the table below. ($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    $
    201,500Weighted average interest rate (variable)
    
    
    4.78
    %
    
    
    6.22
    %
    
    
    7.32
    %
    
    
    7.99
    %
    
    
    8.52
    %
    
    
    8.82
    %
    
    
    8.73
    %Senior subordinated notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000
    
    
    $
    150,000Average interest rate (fixed)
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %
    
    
    9.38
    %Senior unsecured notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    182,000
    
    
    $
    182,000
    
    
    $
    191,100Average 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
    
    
    $
    1,024
    
    
    $
    923
    
    
    $
    4,260
    
    
    $
    8,860
    
    
    $
    8,860Average interest rate (fixed)
    
    
    9.73
    %
    
    
    9.78
    %
    
    
    9.84
    %
    
    
    9.93
    %
    
    
    10.09
    %
    
    
    10.66
    %
    
    
    10.25
    %
 
 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 We 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 our management, including our Chief Executive Officer and
its Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and its Chief
Financial Officer concluded that our disclosure controls and procedures are effective. 42




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##### Table of Contents



Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our 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 our internal controls or, to our knowledge, in other
factors that could significantly affect its disclosure controls and procedures subsequent to the
date we carried out this evaluation. 43




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant Omitted pursuant to General Instructions I (2) (c) of Form 10-K. 
 Item 11. Executive Compensation Omitted pursuant to General Instructions 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 Instructions I (2) (c) of Form 10-K. 
 Item 13. Certain Relationships and Related Transactions Omitted pursuant to General Instructions 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 in April 27, 2004, the Committee unanimously
approved the appointment of Deloitte & Touche LLP as our independent auditors for the year ending
December 31, 2004. Deloitte & Touche LLP has examined our financial statements since 1999. The
following summarizes the fees paid by us to Deloitte & Touche LLP, the member firms of Deloitte
Touche Tohmatsu, and their respective affiliates (collectively, Deloitte & Touche) for services
rendered during 2004 and 2003: 2004
    
    
    2003Audit Fees
    
    $
    544,000
    
    
    $
    697,131Audit Related Fees
    
    
    779,182
    
    
    
    113,215Tax Fees
    
    
    
    
    
    
    4,885All Other Fees
    
    
    
    
    
    
    207,661Total
    
    $
    1,323,182
    
    
    $
    1,022,892
 Audit Fees This category includes the audit of our annual financial statements, the reviews
of the condensed financial statements included in our quarterly reports on Form 10-Q and services
for SEC filings related to our debt refinancing in 2003. Audit-Related Fees This category includes services associated with an S-3 registration
statement in 2004 and a cost allocation manual audit and services related to correspondence with
the SEC in relation to their review of our annual report on Form 10-K and quarterly reports on Form
10-Q during 2003. Tax Fees This category includes tax compliance, tax planning, and general tax advice. All Other Fees This category includes fees associated with a special forensic audit during
2003. The Audit Committee of the Board of Directors has considered whether Deloitte & Touches
provision of services other than services rendered in connection with the audit of our 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 SEC. All
services engaged after January 2003 by Deloitte & Touche were pre-approved by the Audit Committee. 44




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##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements Our consolidated financial statements 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 Schedule Our financial 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) Exhibits Exhibit
    
    DescriptionNo.2.1
    
    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
    
    Amended and Restated Certificate of Incorporation of Alaska Communications Systems Group, Inc. (3)3.2
    
    Amended and Restated By-Laws of Alaska Communications Systems Group, Inc. (3)4.1
    
    Specimen of Common Stock Certificate (3)4.2
    
    Stockholders Agreement, dated as of May 14, 1999, by and among Alaska Communications Systems Group, Inc. and
the Investors listed on the signature pages thereto (1)4.3
    
    First Amendment to Stockholders Agreement, dated as of July 6, 1999, by and among
Alaska Communications Systems Group, Inc. and the Stockholders listed on the signature pages thereto (1)4.4
    
    Second Amendment to Stockholders Agreement, dated as of November 16, 1999 by and
among Alaska Communications Systems Group, Inc. and the Stockholders listed on the signature pages thereto (3)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.
(4)4.12
    
    Supplemental Indenture to Indenture
listed as Exhibit No. 4.11, dated January 25, 2005, among
the Alaska Communications Systems Group, Inc., Alaska Communications
Systems Holdings, Inc. the guarantors party thereto and The Bank of
New York, as trustee (6)4.13
    
    Supplemental Indenture to Indenture
listed as Exhibit No. 4.5, dated January 25, 2005, among
the Alaska Communications Systems Group, Inc., Alaska Communications
Systems Holdings, Inc., the guarantors party thereto and The Bank of
New York, as trustee (6)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. (4)
 45




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##### Table of Contents



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. (4)10.9
    
    Retirement Agreement, dated as of September 14, 2003, between Alaska Communications
Systems Group, Inc. and Charles E. Robinson. (4)10.10
    
    Executive Employment Agreement, dated as of September 14, 2003, between Alaska
Communications Systems Group, Inc. and Liane Pelletier. (4)10.11
    
    Settlement Agreement and Mutual Release, dated October 14, 2003, by and between the
State of Alaska and Alaska Communications Systems Group, Inc. (4)10.12
    
    Executive Employment Agreement, dated as of October 17, 2003, between Alaska
Communications Systems Group, Inc. and David C. Eisenberg. (5)10.13
    
    Executive Employment Agreement, dated as of January 23, 2004 between Alaska
Communications Systems Group, Inc. and Sheldon Fisher. (10)10.14
    
    Executive Employment Agreement, dated as of February 18, 2004 between Alaska
Communications Systems Group, Inc. and David Wilson. (10)10.15
    
    Credit Agreement, dated
February 1, 2005, among the Company, ACSH, the lenders named
therein and Canadian Imperial Bank of Commerce, as Administrative
Agent. (7)10.16
    
    Agreement, dated January 26,
2005, between Alaska Communications Systems Holdings, Inc. and Fox
Paine & Company, LLC. (8)10.17
    
    Master Agreement, dated
November 7, 1999, by and between Alaska Communications Systems
Holdings, Inc. and the International Brotherhood of Electrical
Workers, Local Union 1547. (9)10.18
    
    Letter Agreement, dated
March 1, 2005, by and between Alaska Communications Systems
Holdings, Inc. and the International Brotherhood of Electrical
Workers, Local Union 1547. (9)21.1
    
    Subsidiaries of the Registrant.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. (10)
   (1)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Registration Statement on Form S-4 file No.
333-82361 and incorporated by reference thereto.(2)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Form 8-K filed on November 5, 1999 and
incorporated by reference thereto.(3)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. 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 Alaska Communications Systems Holdings, Inc. Registration
Statement on Form S-4 file No. 333-109927 filed on October 23, 2003 and incorporated by
reference thereto.(5)
    
    Filed as an exhibit to Alaska Communications Systems Holdings, Inc. Registration
Statement on Form S-4/A file No. 333-109927 filed on January 21, 2004 and incorporated by
reference thereto.(6)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Form 8-K filed on January 26, 2005 and
incorporated by reference thereto.(7)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Form 8-K filed on February 2, 2005 and
incorporated by reference thereto.(8)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Form 8-K filed on January 27, 2005 and
incorporated by reference thereto.(9)
    
    Filed as an exhibit to the Alaska Communications
Systems Group, Inc. Form 8-K filed on March 7, 2005 and
incorporated by reference thereto.(10)
    
    Filed as an exhibit to Alaska Communications
Systems Group, Inc. Form 10-K filed on March 30, 2004 and
incorporated by reference thereto. 46




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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 7, 2005
    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 7, 2005/s/ David Wilson

David Wilson
    
    Senior Vice President and Chief
Financial Officer (Principal Accounting
Officer)
    
    March 7, 2005/s/ Kenneth L. Sprain

Kenneth L. Sprain
    
    Senior Vice President, Network and IT
Operations
    
    March 7, 2005/s/ David C. Eisenberg

David C. Eisenberg
    
    Senior Vice President, Corporate
Strategy and Development
    
    March 7, 2005/s/ Sheldon Fisher

Sheldon Fisher
    
    Senior Vice President, Sales and Product
Marketing
    
    March 7, 2005/s/ Kevin P. Hemenway

Kevin P. Hemenway
    
    Senior Vice President, Corporate Projects
    
    March 7, 2005/s/ Leonard A. Steinberg

Leonard A. Steinberg
    
    Vice President, General Counsel and
Corporate Secretary
    
    March 7, 2005/s/ Elizabeth E. Pierce

Elizabeth E. Pierce
    
    Vice President, Human Resources and
Facilities Services
    
    March 7, 2005/s/ Byron I. Mallott

Byron I. Mallott
    
    Director
    
    March 7, 2005/s/ Brian Rogers

Brian Rogers
    
    Director
    
    March 7, 2005/s/ W. Dexter Paine, III

W. Dexter Paine, III
    
    Director
    
    March 7, 2005/s/ Saul A. Fox

Saul A. Fox
    
    Director
    
    March 7, 2005/s/ Wray T. Thorn

Wray T. Thorn
    
    Director
    
    March 7, 2005/s/ Charles P. Sitkin

Charles P. Sitkin
    
    Director
    
    March 7, 2005/s/ John M. Egan

John M. Egan
    
    Director
    
    March 7, 2005/s/ Patrick Pichette

Patrick Pichette
    
    Director
    
    March 7, 2005/s/ Gary R. Donahee

Gary R. Donahee
    
    Director
    
    March 7, 2005
 48




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets  December 31, 2004 and 2003
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2004, 2003 and 2002
    
    F-4Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Income (Loss) Years Ended December 31, 2004, 2003 and 2002
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31, 2004, 2003 and 2002
    
    F-6Notes to Consolidated Financial Statements  Years Ended December 31, 2004, 2003 and 2002
    
    F-7Schedule II  Valuation and Qualifying Accounts
    
    F-44
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholder
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, 2004 and 2003, and the related
consolidated statements of operations, stockholders equity (deficit) and comprehensive income
(loss), and cash flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the index at Item 15. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, 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, 2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, 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
Assets. /s/ DELOITTE & TOUCHE LLP Portland, Oregon
March 7, 2005 F-2




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 2004 and 2003
(In Thousands, Except Per Share Amounts) Assets
    
    2004
    
    
    2003Current assets:Cash and cash equivalents
    
    $
    85,860
    
    
    $
    97,798Restricted cash
    
    
    4,690
    
    
    
    3,635Accounts receivable-trade, net of allowance of $4,869 and $4,865
    
    
    38,325
    
    
    
    41,866Materials and supplies
    
    
    6,623
    
    
    
    10,099Prepayments and other current assets
    
    
    3,724
    
    
    
    5,850Total current assets
    
    
    139,222
    
    
    
    159,248Property, plant and equipment
    
    
    1,061,767
    
    
    
    1,041,904Less: Accumulated depreciation and amortization
    
    
    649,455
    
    
    
    603,760Property, plant and equipment, net
    
    
    412,312
    
    
    
    438,144Goodwill
    
    
    38,403
    
    
    
    38,403Intangible assets, net
    
    
    21,871
    
    
    
    22,055Debt issuance costs, net
    
    
    15,482
    
    
    
    18,587Deferred charges and other assets
    
    
    8,749
    
    
    
    8,750Total assets
    
    $
    636,039
    
    
    $
    685,187Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    2,298
    
    
    $
    2,267Accounts payable-affiliates
    
    
    3,973
    
    
    
    3,817Accounts payable, accrued and other current liabilities
    
    
    54,648
    
    
    
    46,991Income taxes payable
    
    
    
    
    
    
    1,095Advance billings and customer deposits
    
    
    8,948
    
    
    
    8,766Total current liabilities
    
    
    69,867
    
    
    
    62,936Long-term obligations, net of current portion
    
    
    523,591
    
    
    
    532,737Other deferred credits and long-term liabilities
    
    
    77,916
    
    
    
    71,065Commitments and contingenciesStockholders equity (deficit):Common stock, $.01 par value; 1,000 shares authorized1 share issued and outstanding
    
    
    
    
    
    
    Contributed capital
    
    
    245,585
    
    
    
    264,630Accumulated deficit
    
    
    (276,389
    )
    
    
    (241,638
    )Accumulated other comprehensive loss
    
    
    (4,531
    )
    
    
    (4,543
    )Total stockholders equity (deficit)
    
    
    (35,335
    )
    
    
    18,449Total liabilities and stockholders equity (deficit)
    
    $
    636,039
    
    
    $
    685,187
 See Notes to Consolidated Financial Statements F-3




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 2004
    
    
    2003
    
    
    2002Operating revenues:Local telephone
    
    $
    211,187
    
    
    $
    215,686
    
    
    $
    226,697Wireless
    
    
    56,694
    
    
    
    46,548
    
    
    
    43,180Directory
    
    
    
    
    
    
    11,631
    
    
    
    33,604Internet
    
    
    20,173
    
    
    
    33,026
    
    
    
    20,847Interexchange
    
    
    14,653
    
    
    
    16,956
    
    
    
    16,066Total operating revenues
    
    
    302,707
    
    
    
    323,847
    
    
    
    340,394Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    127,918
    
    
    
    116,653
    
    
    
    114,832Wireless (exclusive of depreciation and amortization)
    
    
    37,918
    
    
    
    31,064
    
    
    
    29,352Directory (exclusive of depreciation and amortization)
    
    
    
    
    
    
    5,249
    
    
    
    14,170Internet (exclusive of depreciation and amortization)
    
    
    25,739
    
    
    
    45,523
    
    
    
    31,299Interexchange (exclusive of depreciation and amortization)
    
    
    19,773
    
    
    
    25,542
    
    
    
    23,647Contract termination and asset impairment charges
    
    
    
    
    
    
    54,858
    
    
    
    Depreciation and amortization
    
    
    78,387
    
    
    
    82,185
    
    
    
    82,940Loss (gain) on disposal of assets, net
    
    
    2,854
    
    
    
    (112,622
    )
    
    
    2,163Goodwill impairment loss
    
    
    
    
    
    
    
    
    
    
    64,755Total operating expenses
    
    
    292,589
    
    
    
    248,452
    
    
    
    363,158Operating income (loss)
    
    
    10,118
    
    
    
    75,395
    
    
    
    (22,764
    )Other income and expense:Interest expense
    
    
    (46,745
    )
    
    
    (68,822
    )
    
    
    (49,113
    )Interest income and other
    
    
    1,641
    
    
    
    (10,191
    )
    
    
    2,203Total other income (expense)
    
    
    (45,104
    )
    
    
    (79,013
    )
    
    
    (46,910
    )Loss before income taxes, discontinued operations and cumulative effect of change in accounting principle
    
    
    (34,986
    )
    
    
    (3,618
    )
    
    
    (69,674
    )Income tax benefit (expense)
    
    
    219
    
    
    
    (1,095
    )
    
    
    Equity in income of investments
    
    
    16
    
    
    
    783
    
    
    
    Loss from continuing operations
    
    
    (34,751
    )
    
    
    (3,930
    )
    
    
    (69,674
    )Loss from discontinued operations
    
    
    
    
    
    
    (52
    )
    
    
    (7,632
    )Loss before cumulative effect of change in accounting principle
    
    
    (34,751
    )
    
    
    (3,982
    )
    
    
    (77,306
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (105,350
    )Net loss
    
    $
    (34,751
    )
    
    $
    (3,982
    )
    
    $
    (182,656
    )
 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 (Deficit)
and Comprehensive Income (Loss)
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) AccumulatedOtherCommon
    
    
    Contributed
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholder'sStock
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Equity (Deficit)Balance, January 1, 2002
    
    $
    
    
    
    $
    277,507
    
    
    $
    (55,000
    )
    
    $
    (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
    
    
    
    
    
    
    275,160
    
    
    
    (237,656
    )
    
    
    (18,886
    )
    
    
    18,618Components of comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (3,982
    )
    
    
    
    
    
    
    (3,982
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Interest rate swap marked to market
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,152
    
    
    
    14,152Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,361Dividends
    
    
    
    
    
    
    (10,530
    )
    
    
    
    
    
    
    
    
    
    
    (10,530
    )Balance, December 31, 2003
    
    
    
    
    
    
    264,630
    
    
    
    (241,638
    )
    
    
    (4,543
    )
    
    
    18,449Components of comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (34,751
    )
    
    
    
    
    
    
    (34,751
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    12Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,739
    )Dividends
    
    
    
    
    
    
    (19,045
    )
    
    
    
    
    
    
    
    
    
    
    (19,045
    )Balance, December 31, 2004
    
    $
    
    
    
    $
    245,585
    
    
    $
    (276,389
    )
    
    $
    (4,531
    )
    
    $
    (35,335
    )
 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, 2004, 2003 and 2002
(In Thousands) 2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net loss
    
    $
    (34,751
    )
    
    $
    (3,982
    )
    
    $
    (182,656
    )Adjustments to reconcile net loss to net cash provided by operating activities:Loss on discontinued operations
    
    
    
    
    
    
    52
    
    
    
    7,632Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    105,350Depreciation and amortization
    
    
    78,387
    
    
    
    82,185
    
    
    
    82,940Loss (gain) on disposal of assets and asset impairment charges, net
    
    
    2,854
    
    
    
    (48,863
    )
    
    
    2,163Goodwill impairment loss
    
    
    
    
    
    
    
    
    
    
    64,755Amortization of debt issuance costs and original issue discount
    
    
    3,639
    
    
    
    16,717
    
    
    
    4,191Non-cash stock based compensation expense
    
    
    
    
    
    
    900
    
    
    
    Other non-cash expenses
    
    
    12
    
    
    
    4,118
    
    
    
    Other deferred credits
    
    
    3,048
    
    
    
    1,643
    
    
    
    3,073Changes in components of working capital:Accounts receivable and other current assets
    
    
    9,143
    
    
    
    11,064
    
    
    
    (6,008
    )Accounts payable and other current liabilities
    
    
    6,900
    
    
    
    (6,443
    )
    
    
    (12,460
    )Other
    
    
    1
    
    
    
    (1,972
    )
    
    
    (1,375
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (41
    )
    
    
    (649
    )Net cash provided by operating activities
    
    
    69,233
    
    
    
    55,378
    
    
    
    66,956Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (51,422
    )
    
    
    (48,566
    )
    
    
    (68,434
    )Net proceeds from sale of business unit
    
    
    
    
    
    
    155,269
    
    
    
    Release of funds from escrow
    
    
    
    
    
    
    3,539
    
    
    
    3,706Placement of funds in escrow
    
    
    (1,055
    )
    
    
    (3,725
    )
    
    
    Issuance of note receivable
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Net cash provided (used) by investing activities
    
    
    (52,477
    )
    
    
    106,517
    
    
    
    (79,728
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (9,649
    )
    
    
    (434,102
    )
    
    
    (7,328
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    375,970
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (14,000
    )
    
    
    Dividends
    
    
    (19,045
    )
    
    
    (10,530
    )
    
    
    (2,347
    )Net cash used by financing activities
    
    
    (28,694
    )
    
    
    (82,662
    )
    
    
    (9,675
    )Increase (decrease) in cash
    
    
    (11,938
    )
    
    
    79,233
    
    
    
    (22,447
    )Cash and cash equivalents at beginning of the year
    
    
    97,798
    
    
    
    18,565
    
    
    
    41,012Cash and cash equivalents at the end of the year
    
    $
    85,860
    
    
    $
    97,798
    
    
    $
    18,565Supplemental Cash Flow Data:Interest paid, net of capitalized interest
    
    $
    43,026
    
    
    $
    49,121
    
    
    $
    44,673Income taxes paid, net of refund
    
    
    876
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Property acquired under capital leases and mortgages
    
    $
    
    
    
    $
    2,340
    
    
    $
    4,187Minimum pension liability adjustment
    
    
    (12
    )
    
    
    (191
    )
    
    
    (2,342
    )Interest rate swap marked to market
    
    
    
    
    
    
    14,152
    
    
    
    (2,715
    )
 See Notes to Consolidated Financial Statements F-6




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003 and 2002
(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. ACS
Holdings is a wholly owned subsidiary of Alaska Communications Systems Group, Inc. (the Parent or
ACS Group). 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 ACS Group. The accompanying consolidated financial statements for the Company are as of December 31, 2004
and 2003 and for the years ended December 31, 2004, 2003 and 2002 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. 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 2003
and 2002 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 contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Among the significant estimates affecting the financial
statements are those related to the realizable value of accounts receivable, 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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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003 and 2002
(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 telephone property, plant, and equipment was 6.1%, 7.0%, and
7.4% for 2004, 2003 and 2002, 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 the estimated productive lives.
Amortization of assets under capital leases is included in depreciation and amortization expense
for 2004, 2003 and 2002. Debt Issuance 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
extinguished early its old bank credit facility which resulted in a write off to expense of $13,052
of debt issuance costs. Debt issuance costs amortization included in interest expense for 2004,
2003 and 2002 was $3,128, $16,543, and $4,191, 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 2004, 2003 and 2002 was $534, $174, and $0, respectively. F-8




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 2004, 2003 and 2002, one customer
accounted for 12%, 10% and 11%, respectively, of consolidated revenues, and no other customer
accounted for more than 10% of consolidated revenue. 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 and $4,940 of revenue during
2003 and 2002, respectively, associated with these rate increase authorizations. Interim and
refundable local service rates were made permanent by a Regulatory Commission of Alaska (RCA)
order during 2004 and, as a result, there is no longer a refund obligation associated with these
rates. Additionally, final Anchorage loop rates were implemented during 2004 that are in excess of
the interim and refundable loop rates approved during 2001, making any future refund obligation
unlikely. 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 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, 2004 and 2003, the Company had recorded
liabilities totaling $18,557 and $15,211, 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. 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. F-9




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Regulatory Accounting and Regulation (Continued) 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 $34,972 and $17,231 as of December 31, 2004 and 2003,
respectively, 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 remaining balance of this regulatory asset was $298 at December 31, 2004. If
the Company were not following SFAS No. 71, these costs would have been charged to expense as
incurred. The Company also has a regulatory liability of $54,349 and $50,546 at December 31, 2004
and 2003, respectively, 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 associated with
its regulated telephone plant. 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. 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. Comprehensive Income (Loss) Comprehensive income (loss) represents net income (loss) plus the results of certain
stockholders equity changes from non-owner sources not reflected in the consolidated statements of
operations. Parent Dividend Policy During the fourth quarter of 2004, ACS Group adopted a dividend policy. In accordance
with that dividend policy, ACS Group intends to pay quarterly dividends at an annual rate of $0.74
per share for the first full year following the adoption of the policy, which it expects to review
on at least an annual basis. ACS Group declared its first dividend on October 28, 2004, which was
paid on January 19, 2005 to stockholders of record at the close of business on December 31, 2004.
As of December 31, 2004, $5,694 of dividends payable was accrued based on 30,695 shares outstanding
and 79 shares of non-employee stock-based compensation deferred at the record date. Prior to
announcing this dividend ACS Group had no history of paying dividends. Dividends on ACS Groups common stock are
not cumulative. ACS Group has no operations other than those of the Company and its subsidiaries
and is dependent on the Company to fund dividends. 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 costs were recognized in operations in
2004, 2003 or 2002 related to options as all options were granted with exercise prices equal to or
greater than fair value on the date of grant. 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 2004, 2003 and 2002 would have been as follows: F-10




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock Incentive Plans (Continued) 2004
    
    
    2003
    
    
    2002Net loss:As reported
    
    $
    (34,751
    )
    
    $
    (3,982
    )
    
    $
    (182,656
    )Pro forma
    
    
    (35,838
    )
    
    
    (4,139
    )
    
    
    (184,111
    )
 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: 2004
    
    
    2003
    
    
    2002Risk free rate
    
    
    4.13
    %
    
    
    3.39
    %
    
    
    2.88
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility factor
    
    
    40.8
    %
    
    
    55.5
    %
    
    
    60.8
    %Expected option life (years)
    
    
    6.1
    
    
    
    6.8
    
    
    
    6.1
 Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities  An Interpretation of Accounting Research
Bulletin (ARB) No. 51. In December 2003, the FASB issued FIN 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R). FIN 46R provides guidance on how to
identify variable interest entities and how to determine whether or not those entities should be
consolidated. The Company was required to apply FIN 46R by the end of the first reporting period
after March 15, 2004, for entities which were created before February 1, 2003. The adoption of FIN
46R was immediate for variable interest entities created after January 31, 2003. The Company has
evaluated the provisions of FIN 46R and determined that we do not have any variable interest
entities that require consolidation in our financial statements. In December 2004, the FASB issued SFAS No. 123(Revised), Share-Based Payment. This statement
replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123® requires companies to apply a
fair-value-based measurement method in accounting for share-based payment transactions with
employees and to record compensation cost for all stock awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is
required to record compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123®
will be effective in the Companys third quarter ending September 30, 2005. Management has not yet
determined the impact that SFAS 123® will have on its financial position and results of
operations, but expects that the stock incentive plans disclosure above provides a reasonable
measure of the expected annual impact. F-11




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 2. ACCOUNTS RECEIVABLE Accounts receivable  trade consists of the following at December 31, 2004 and 2003: 2004
    
    
    2003Accounts receivable  trade:Customers
    
    $
    30,892
    
    
    $
    31,916Connecting companies
    
    
    8,579
    
    
    
    9,842Other
    
    
    3,723
    
    
    
    4,97343,194
    
    
    
    46,731Less: allowance for doubtful accounts
    
    
    4,869
    
    
    
    4,865Accounts receivable  trade, net
    
    $
    38,325
    
    
    $
    41,866
 3. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consists of the following at December 31, 2004 and 2003: 2004
    
    
    2003Property, plant and equipment:Land, buildings and support assets
    
    $
    193,073
    
    
    $
    191,314Central office switching and transmission
    
    
    300,624
    
    
    
    296,253Outside plant cable and wire facilities
    
    
    479,491
    
    
    
    466,019Wireless switching and transmission systems
    
    
    69,083
    
    
    
    54,524Other
    
    
    2,403
    
    
    
    3,490Assets held for future use
    
    
    
    
    
    
    3,599Construction work in progress
    
    
    17,093
    
    
    
    26,7051,061,767
    
    
    
    1,041,904Less: Accumulated depreciation and amortization
    
    
    649,455
    
    
    
    603,760Property, plant and equipment, net
    
    $
    412,312
    
    
    $
    438,144
 The following is a summary of property held under capital leases included in the above
property, plant and equipment: 2004
    
    
    2003Property held under capital leases:Land, buildings and support assets
    
    $
    14,627
    
    
    $
    14,624Outside plant cable and wire facilities
    
    
    2,115
    
    
    
    2,11516,742
    
    
    
    16,739Less: Accumulated depreciation and amortization
    
    
    7,136
    
    
    
    6,090Property held under capital leases, net
    
    $
    9,606
    
    
    $
    10,649
 Amortization of assets under capital leases included in depreciation expense in 2004, 2003 and
2002 was $1,046, $1,740 and $2,333, respectively. The Company leases various land, buildings, right-of-ways and personal property under
operating lease agreements. Rental expenses under operating leases for 2004, 2003 and 2002 were
$3,515, $3,049 and $3,733, respectively. F-12




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 3. PROPERTY, PLANT AND EQUIPMENT Future minimum payments under these leases for the next five years and thereafter are as
follows: 2005
    
    $
    2,1942006
    
    
    1,3942007
    
    
    9952008
    
    
    7842009
    
    
    686Thereafter
    
    
    726$
    6,779
 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. 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 of 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. Also pursuant to SFAS No. 142, the Company annually reassesses previously recognized
intangible assets and has 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 indefinite useful lives for 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. 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. F-13




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 4. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued) 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 quarters of 2004 and 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. 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. Also, $38,822 of goodwill associated with the Companys directories
business was sold during 2003. 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, 2004 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
    
    
    $
    (641
    )
    
    
    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, 2004, 2003 and 2002 was $183, $951, and $708, respectively. The estimated
remaining amortization expense as of December 31, 2004 is $183 and $91 for the years ending
December 31, 2005 and December 31, 2006, respectively. 5. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES Accounts payable, accrued and other current liabilities consist of the following at December
31, 2004 and 2003: 2004
    
    
    2003Accounts payable  trade
    
    $
    9,353
    
    
    $
    9,699Accrued interest
    
    
    8,717
    
    
    
    8,942Accrued payroll, benefits, and related liabilities
    
    
    6,094
    
    
    
    6,077Dividend payable
    
    
    5,694
    
    
    
    Accrued personal time off
    
    
    4,746
    
    
    
    5,031Litigation reserves
    
    
    4,188
    
    
    
    3,880Refundable access revenue
    
    
    2,605
    
    
    
    2,470Loss on lease terminations
    
    
    2,476
    
    
    
    Other
    
    
    10,775
    
    
    
    10,892Accounts payable, accrued and other current liabilities
    
    $
    54,648
    
    
    $
    46,991
 F-14




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 6. LONG-TERM OBLIGATIONS ACS Group completed a common stock offering and refinancing transaction during the first
quarter of 2005 which included the entering into by the Company of a new 2005 senior secured credit
facility. The proceeds of the Parent common stock offering and the Companys 2005 senior credit
facility, together with cash on hand, were used to repay in full and retire the Companys 2003
senior secured credit facility, $59,346 in principal of the outstanding 9 7/8% senior unsecured
notes due 2011, and $147,500 in principal of the senior subordinated notes due 2009 representing
100% of that issue, together with accrued interest and premiums. See Note 22, Subsequent Events. On August 26, 2003, the Company completed the refinancing of its 1999 senior credit facility
term loans. The Company entered into a $250,000 new senior credit facility, the 2003 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 1999 senior credit facility, thereby extinguishing it. As a result of this early extinguishment
of debt, the Company charged $9,696 of unamortized debt issuance costs to interest expense in
August 2003. During the first quarter of 2003, the Companys lenders approved an amendment and waiver to
its 1999 senior secured 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 1999 senior secured 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 1999 senior secured credit facility. As a result of this debt
prepayment, the Company charged $3,356 of prorata unamortized debt issuance costs attributable to
the prepaid term loans to interest expense in May 2003. Long-term obligations consist of the following at December 31, 2004 and 2003: 2004
    
    20032003 senior credit facility
    
    $
    198,000
    
    
    $
    200,0009 3/8% senior subordinated notes due 2009
    
    
    147,500
    
    
    
    150,0009 7/8% senior unsecured notes due 2011
    
    
    177,650
    
    
    
    182,000Original issue discount  9 7/8% senior
    subordinated notes due 2011
    
    
    (5,321
    )
    
    
    (5,856
    )Capital leases and other long-term obligations
    
    
    8,060
    
    
    
    8,860525,889
    
    
    
    535,004Less current portion
    
    
    2,298
    
    
    
    2,267Long-term obligations, net of current portion
    
    $
    523,591
    
    
    $
    532,737 The aggregate maturities of long-term obligations for each of the five years and thereafter
subsequent to December 31, 2004 are as follows: 2005
    
    
    $
    2,2982006
    
    
    
    2,3092007
    
    
    
    2,2952008
    
    
    
    2,1262009
    
    
    
    149,282Thereafter
    
    
    367,579$
    525,889
 As of December 31, 2004 and December 31, 2003 the Company was in compliance with all of its
debt covenants. F-15




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 6. LONG-TERM OBLIGATIONS (Continued) 2003 Senior Credit Facility The 2003 senior secured credit facility provided a $200,000 term loan and a revolving credit
facility with a $50,000 line of credit. The Companys obligations under the 2003 senior secured
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 secured 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 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, 2004 was 5.25%
and is based on the LIBOR rate option. The senior secured 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, 2004. 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 under the 1999 senior
secured credit facility. 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. 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. Capital leases and other long-term obligations The Company has entered into various capital leases and other debt agreements totaling $8,060
and $8,860 with a weighted average interest rate of 9.75% and 9.71% at December 31, 2004 and 2003,
respectively. F-16




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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,
2004 and 2003: 2004
    
    
    2003Refundable access revenue
    
    $
    15,952
    
    
    $
    12,741Additional pension liability
    
    
    5,676
    
    
    
    5,891Other deferred credits
    
    
    1,939
    
    
    
    1,887Regulatory liabilities  accumulated removal costs
    
    
    54,349
    
    
    
    50,546Deferred credits and other long-term liabilities
    
    $
    77,916
    
    
    $
    71,065
 8. LOCAL TELEPHONE OPERATING REVENUE Local telephone operating revenues consist of the following for the years ended December 31,
2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Local network service
    
    $
    91,669
    
    
    $
    96,357
    
    
    $
    99,512Network access revenue
    
    
    97,536
    
    
    
    97,759
    
    
    
    108,335Deregulated revenue and other
    
    
    21,982
    
    
    
    21,570
    
    
    
    18,850Local telephone operating revenues
    
    $
    211,187
    
    
    $
    215,686
    
    
    $
    226,697
 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
 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 was 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 wrote them down to their estimated net realizable
value, resulting in a charge of $3,575 during 2003. F-17




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 9. CONTRACT TERMINATION AND ASSET IMPAIRMENT CHARGES (continued) 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-18




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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
    
    
    (1,077
    )Basis 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 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.
Leonard Steinberg, an officer of the Company, is a manager of ACS Media LLC. 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 Crest Communications LLC (Crest) and the option
embedded in that note receivable to purchase certain network assets from Crest 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 Crest. The Company still has purchase
commitment obligations associated with this note receivable as described in Note 21. F-19




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 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 (expense) is
reconciled as follows: The income tax benefit (expense) is summarized as follows: 2004
    
    
    2003
    
    
    2002Computed federal income tax benefit at 34% statutory rate
    
    $
    13,434
    
    
    $
    1,864
    
    
    $
    24,570(Increase) reduction in tax benefit resulting from:State income taxes (net federal benefit)
    
    
    3,439
    
    
    
    280
    
    
    
    4,144Original issue discount interest
    
    
    (185
    )
    
    
    (194
    )
    
    
    (194
    )Recovery of previously paid income tax
    
    
    219
    
    
    
    
    
    
    
    (313
    )Write-off of orginal issue discount
    
    
    (713
    )
    
    
    
    
    
    
    Excess compensation not allowed
    
    
    
    
    
    
    (343
    )
    
    
    Other
    
    
    (98
    )
    
    
    (315
    )
    
    
    (495
    )Valuation allowance
    
    
    (15,877
    )
    
    
    (2,387
    )
    
    
    (27,712
    )Total income tax benefit (expense)
    
    $
    219
    
    
    $
    (1,095
    )
    
    $
    
 Current and deferred income taxes are summarized as follows: 2004
    
    
    2003
    
    
    2002Current:Federal income tax
    
    $
    185
    
    
    $
    (928
    )
    
    $
    State income tax
    
    
    34
    
    
    
    (167
    )
    
    
    Total current
    
    
    219
    
    
    
    (1,095
    )
    
    
    Deferred:Federal income tax
    
    
    
    
    
    
    
    
    
    
    State income tax
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Total income tax benefit (expense)
    
    $
    219
    
    
    $
    (1,095
    )
    
    $
    
 F-20




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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: 2004
    
    
    2003
    
    
    2002Deferred tax liabilities  long-term:Property, plant and equipment
    
    $
    
    
    
    $
    
    
    
    $
    (20,786
    )Other
    
    
    (105
    )
    
    
    (100
    )
    
    
    (88
    )Total long-term deferred tax liabilities
    
    
    (105
    )
    
    
    (100
    )
    
    
    (20,874
    )Deferred tax assets:Current:Accrued compensation
    
    
    2,537
    
    
    
    4,030
    
    
    
    4,249Accrued bad debts
    
    
    8,404
    
    
    
    8,383
    
    
    
    2,827Interest rate swap mark to market
    
    
    
    
    
    
    
    
    
    
    5,661Minimum pension liability adjustment
    
    
    1,812
    
    
    
    1,817
    
    
    
    1,893Contingent liabilities
    
    
    1,660
    
    
    
    
    
    
    
    Other
    
    
    478
    
    
    
    368
    
    
    
    987Total current deferred tax assets
    
    
    14,891
    
    
    
    14,598
    
    
    
    15,617Long-term:Net operating loss carryforwards from operations
    
    
    51,456
    
    
    
    33,047
    
    
    
    57,136Alternative minimum tax carryforward
    
    
    876
    
    
    
    1,095
    
    
    
    Intangibles
    
    
    39,937
    
    
    
    46,667
    
    
    
    46,734Debt issuance cost
    
    
    
    
    
    
    
    
    
    
    1,213Property, plant and equipment
    
    
    1,669
    
    
    
    1,244
    
    
    
    Other
    
    
    437
    
    
    
    81
    
    
    
    Total long-term deferred tax assets
    
    
    94,375
    
    
    
    82,134
    
    
    
    105,083Total deferred tax assets
    
    
    109,266
    
    
    
    96,732
    
    
    
    120,700Valuation allowance
    
    
    (109,161
    )
    
    
    (96,632
    )
    
    
    (99,826
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    
    
    $
    
 The Company has available at December 31, 2004 unused operating loss carryforwards of $128,641
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
    
    
    
    23,943
    
    
    
    26,5742021
    
    
    
    
    
    
    47,724
    
    
    
    47,7242022
    
    
    
    
    
    
    17,112
    
    
    
    17,1122024
    
    
    
    
    
    
    36,024
    
    
    
    36,024$
    3,838
    
    
    $
    124,803
    
    
    $
    128,641
 F-21




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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, 2004,
2003 and 2002: 2004
    
    
    2003
    
    
    2002Operating revenue
    
    $
    
    
    
    $
    110
    
    
    $
    716Operating expense
    
    
    
    
    
    
    162
    
    
    
    1,255Operating loss
    
    
    
    
    
    
    (52
    )
    
    
    (539
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (33
    )Loss from operations of discontinued segment
    
    
    
    
    
    
    (52
    )
    
    
    (572
    )Write down of net assets to fair value
    
    
    
    
    
    
    
    
    
    
    (7,060
    )Loss from discontinued operations
    
    $
    
    
    
    $
    (52
    )
    
    $
    (7,632
    )
 14. STOCK INCENTIVE PLANS The Companys employees participate in various plans of ACS Group. The Company, through the
Compensation Committee of the Board of Directors, may grant stock options, stock appreciation
rights and other awards to officers, employees and non-employee directors. At December 31, 2004,
ACS Group has reserved a total of 10,060 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. Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan ACS Group has reserved 7,160 shares under this plan, which was adopted by the Company in
November 1999. At December 31, 2004, 7,089 options have been granted, 2,892 have been forfeited,
2,013 have been exercised, and 2,963 shares are available for grant under the plan. Information on outstanding options under the plan for the years ended December 31, 2004, 2003
and 2002 is summarized as follows: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, January 1
    
    
    2,839
    
    
    $
    7.20
    
    
    
    3,374
    
    
    $
    7.52
    
    
    
    3,606
    
    
    $
    Granted
    
    
    1,177
    
    
    
    4.69
    
    
    
    200
    
    
    
    4.88
    
    
    
    278
    
    
    
    7.82Exercised
    
    
    (1,569
    )
    
    
    6.07
    
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    6.08Canceled or expired
    
    
    (263
    )
    
    
    11.52
    
    
    
    (735
    )
    
    
    8.04
    
    
    
    (434
    )
    
    
    7.59Outstanding, December 31
    
    
    2,184
    
    
    
    6.09
    
    
    
    2,839
    
    
    
    7.20
    
    
    
    3,374
    
    
    
    7.52Options exercisable at December 31
    
    
    1,028
    
    
    $
    8.29
    
    
    
    2,226
    
    
    $
    7.16
    
    
    
    2,329
    
    
    $
    7.15Weighted average fair value of options granted
    
    
    
    
    
    
    6.09
    
    
    
    
    
    
    
    2.84
    
    
    
    
    
    
    
    4.57
 F-22




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 14. STOCK INCENTIVE PLANS (Continued) The outstanding options at December 31, 2004 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$4.35 - $7.00
    
    
    1,888
    
    
    8.09
    
    
    $
    5.77
    
    
    538
    
    $
    5.77$8.00
    
    
    60
    
    
    7.15
    
    
    
    8.00
    
    
    53
    
    
    8.00$12.63 - $14.20
    
    
    236
    
    
    5.14
    
    
    
    14.09
    
    
    236
    
    
    14.09
 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 350 shares under this plan. At December 31, 2004, 143 shares have been
awarded and 207 shares are available for grant under the plan. For the years ended December 31,
2004 and 2002, 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. During the year ended December 31, 2004, 33 shares
under the plan were awarded to directors, of which 23 were elected to be deferred until termination
of service by the directors. In 2003, directors were not provided 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. 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 1,550 shares
under this plan. At December 31, 2004, 980 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, 2004, 32 shares were issued under the plan. On June 30, 2004, 41 shares were
issued under the plan. 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, 98 shares were issued under the
plan. On June 28, 2002, 53 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, 2004, approximately 13% of eligible employees elected to
participate in the plan. 2003 Options for Officer Inducement Grant During 2003, the Companys Board of Directors awarded 1,000 options as an inducement grant in
hiring the Companys Chief Executive Officer, all of which are currently outstanding. The options
were registered with the Securities Exchange Commission on Form S-8 during October 2004. F-23




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 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 2004, 2003 and 2002 was
$12,342, $12,654, and $13,390, 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
2004, 2003, or 2002. 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). The plan is not adequately funded under ERISA at
December 31, 2004 and management is evaluating whether to make a contribution in 2005 for the 2004
plan year. Since the plan was adequately funded under ERISA at December 31, 2003, no contribution
was made in 2004 for the 2003 plan year. During 2003, the Company made a voluntary contribution of
$600 to the plan for the 2002 plan year. The Company uses a December 31 measurement date for the
plan. The following is a reconciliation of the beginning and ending balances for 2004 and 2003 for
the projected benefit obligation and the plan assets of the ACS Retirement Plan: 2004
    
    
    2003Change in projected benefit obligation:Projected benefit obligation at beginning of year
    
    $
    12,446
    
    
    $
    10,615Amortization of prior service cost
    
    
    (203
    )
    
    
    (203
    )Interest cost
    
    
    748
    
    
    
    731Actuarial loss
    
    
    853
    
    
    
    1,631Benefits paid
    
    
    (517
    )
    
    
    (328
    )Projected benefit obligation at end of year
    
    $
    13,327
    
    
    $
    12,446Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    9,671
    
    
    $
    7,684Return on plan assets
    
    
    915
    
    
    
    1,715Contribution by employer
    
    
    
    
    
    
    600Benefits paid
    
    
    (517
    )
    
    
    (328
    )Fair value of plan assets at end of year
    
    $
    10,069
    
    
    $
    9,671
 F-24




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The following table represents the funded status of the ACS Retirement Plan at December 31,
2004 and 2003: 2004
    
    
    2003Projected benefit obligation
    
    $
    (13,327
    )
    
    $
    (12,446
    )Plan assets at fair value
    
    
    10,069
    
    
    
    9,671Funded Status
    
    
    (3,258
    )
    
    
    (2,775
    )Unrecognized prior service cost
    
    
    1,145
    
    
    
    1,348Unrecognized net loss
    
    
    4,531
    
    
    
    4,543Net amount recognized
    
    $
    2,418
    
    
    $
    3,116
 The net amounts recognized in the balance sheet were classified as follows at December 31,
2004 and 2003: 2004
    
    
    2003Accrued benefit liability
    
    $
    (3,258
    )
    
    $
    (2,775
    )Intangible asset
    
    
    1,145
    
    
    
    1,348Accumulated other comprehensive loss
    
    
    4,531
    
    
    
    4,543Net amount recognized
    
    $
    2,418
    
    
    $
    3,116
 The accumulated benefit obligation for the plan was $13,327 and $12,446 at December 31, 2004
and 2003, respectively. The decrease in minimum liability included in comprehensive loss was $12
and $191 for the years ended December 31, 2004 and 2003, respectively. The following table represents the net periodic pension expense for the ACS Retirement Plan
for 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Interest cost
    
    $
    748
    
    
    $
    731
    
    
    $
    680Expected return on plan assets
    
    
    (754
    )
    
    
    (664
    )
    
    
    (723
    )Amortization of loss
    
    
    502
    
    
    
    568
    
    
    
    260Amortization of prior service cost
    
    
    203
    
    
    
    203
    
    
    
    203Net periodic pension expense
    
    $
    699
    
    
    $
    838
    
    
    $
    420
 The assumptions used to account for the plan as of December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Discount rate for projected benefit obligation
    
    
    5.75
    %
    
    
    6.00
    %Discount rate for pension expense
    
    
    6.00
    %
    
    
    6.75
    %Expected long-term rate of return on assets
    
    
    8.00
    %
    
    
    8.00
    %Rate of compensation increase
    
    
    0.00
    %
    
    
    0.00
    %
 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. F-25




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The plans asset allocations at December 31, 2004 and 2003, by asset category are as follows: Asset Category
    
    2004
    
    
    2003Equity securities*
    
    
    72
    %
    
    
    73
    %Debt securities*
    
    
    28
    %
    
    
    26
    %Other/Cash
    
    
    0
    %
    
    
    1
    %
 * Note that mutual funds that may contain both stocks 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
resist being reactive to short term capital market developments and to maintain an asset mix that
is continuously rebalanced to adhere to the plan investment mix guidelines. The 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. 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
    %
 The benefits expected to be paid in the each of the next five years, and in the aggregate for
the five fiscal years thereafter, are as follows: 2005
    
    
    $
    5702006
    
    
    
    6082007
    
    
    
    6662008
    
    
    
    7352009
    
    
    
    791
 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 former management employees. The ACS Health Plan provides a graded subsidy for medical, dental,
and vision coverage. The Compensation Committee of the Board of Directors decided to terminate the
ACS Health Plan in January 2004. In February 2005, the Board adopted a resolution to exclude a
former employee from the plan, causing a $90 decrease in the accumulated post retirement benefit.
Three people qualified under the plan are eligible for 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 $51 to the ACS Health Plan during 2004. No
contribution was made for 2003 or 2002 and the Company does not plan to make a contribution during
2005. The Company uses a December 31 measurement date for the plan. F-26




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) The following is a reconciliation of the beginning and ending balances for 2004 and 2003 for
the projected benefit obligation and the plan assets for the ACS Health Plan: 2004
    
    
    2003Change in accumulated postretirement benefit obligation:Accumulated postretirement benefit obligation at beginning of the year
    
    $
    265
    
    
    $
    268Plan amendment
    
    
    (90
    )
    
    
    Service cost
    
    
    6
    
    
    
    14Interest cost
    
    
    16
    
    
    
    18Actuarial (gain)/loss
    
    
    2
    
    
    
    (35
    )Accumulated postretirement benefit obligation at end of the year
    
    $
    199
    
    
    $
    265Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    138
    
    
    $
    127Return on plan assets
    
    
    10
    
    
    
    11Contributions
    
    
    51
    
    
    
    Fair value of plan assets at end of year
    
    $
    199
    
    
    $
    138
 The following represents the net periodic postretirement benefit expense for the ACS Health
Plan for 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Service cost
    
    $
    6
    
    
    $
    14
    
    
    $
    69Interest cost
    
    
    16
    
    
    
    18
    
    
    
    40Expected return on plan assets
    
    
    (11
    )
    
    
    (10
    )
    
    
    (11
    )Amortization of prior service cost
    
    
    7
    
    
    
    7
    
    
    
    24Curtailment loss
    
    
    14
    
    
    
    
    
    
    
    Net periodic postretirement benefit expense
    
    $
    32
    
    
    $
    29
    
    
    $
    122
 The following table represents the funded status of the ACS Health Plan at December 31, 2004
and 2003: 2004
    
    
    2003Accumulated postretirement benefit obligation
    
    $
    (199
    )
    
    $
    (265
    )Plan assets at fair value
    
    
    199
    
    
    
    138Funded status
    
    
    
    
    
    
    (127
    )Unrecognized prior service cost
    
    
    
    
    
    
    111Unrecognized net gain
    
    
    (25
    )
    
    
    (28
    )Accrued benefit costs
    
    $
    (25
    )
    
    $
    (44
    )
 The actuarial assumptions used to account for the ACS Health Plan as of December 31, 2004 and
2003 is an assumed discount rate of 5.75% and 6.00% for projected benefit obligation and an assumed
discount rate of 6.75% and 6.00% for plan expense, respectively, and an expected long term rate of
return on plan assets of 8.00% and 8.00%, respectively. 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. F-27




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 15. RETIREMENT PLANS (Continued) For measurement purposes, the assumed annual rates of increase in health care costs are 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 2004: +1%
    
    
    -1%Effect on total of service and interest cost components
    
    
    
    
    
    
    Effect on accumulated postretirement benefit obligation
    
    
    (3
    )
    
    
    (4
    )
 The ACS Health Plans asset allocations at December 31, 2004 and 2003, by asset category, are
as follows: Asset Category
    
    2004
    
    
    2003Equity securities*
    
    
    31
    %
    
    
    33
    %Debt securities*
    
    
    58
    %
    
    
    56
    %Other/Cash
    
    
    11
    %
    
    
    11
    %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: Asset Category
    
    TargetEquity securities
    
    
    30
    %Fixed income
    
    
    60
    %Other/cash
    
    
    10
    %
 The benefits expected to be paid in the each of the next five years, and in the aggregate for the
five fiscal years thereafter are as follows: 2005
    
    
    $
    62006
    
    
    
    102007
    
    
    
    102008
    
    
    
    102009
    
    
    
    172010 - 2014
    
    
    
    86
 F-28




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 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 and offering different services than those offered by the other
segments. The Company evaluates the performance of its segments based on operating income (loss). 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. As a result of this transaction,
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 had a wireless cable television service segment that did not meet the
criteria for a reportable segment and 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
and other operating and non operating income and expense at the corporate level which are not
allocated to the business segments, or 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 ACS Group or 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, 2004: LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    211,169
    
    
    $
    56,743
    
    
    $
    20,280
    
    
    $
    17,067
    
    
    $
    23,097
    
    
    $
    (25,649
    )
    
    $
    302,707Depreciation and amortization
    
    
    52,368
    
    
    
    7,480
    
    
    
    3,925
    
    
    
    430
    
    
    
    14,184
    
    
    
    
    
    
    
    78,387Operating income (loss)
    
    
    13,298
    
    
    
    4,257
    
    
    
    (10,304
    )
    
    
    (3,402
    )
    
    
    6,269
    
    
    
    
    
    
    
    10,118Interest expense
    
    
    (311
    )
    
    
    (13
    )
    
    
    
    
    
    
    (187
    )
    
    
    (46,234
    )
    
    
    
    
    
    
    (46,745
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,857
    
    
    
    
    
    
    
    1,857Income tax benefit (provision)
    
    
    (5,254
    )
    
    
    (1,854
    )
    
    
    
    
    
    
    
    
    
    
    7,327
    
    
    
    
    
    
    
    219Income (loss) from
continuing operations
    
    
    7,733
    
    
    
    2,390
    
    
    
    (10,304
    )
    
    
    (3,589
    )
    
    
    (30,981
    )
    
    
    
    
    
    
    (34,751
    )Total assets
    
    
    481,363
    
    
    
    112,836
    
    
    
    2,856
    
    
    
    22,639
    
    
    
    16,346
    
    
    
    
    
    
    
    636,039Capital expenditures
    
    
    26,426
    
    
    
    13,935
    
    
    
    4,654
    
    
    
    5
    
    
    
    6,402
    
    
    
    
    
    
    
    51,422
 Operating revenues disclosed above include intersegment operating revenues of $25,612 for
local telephone, $2,048 for wireless, $2,667 for interexchange and $23,251 for all other. In
accordance with SFAS No. 71, intercompany revenues between local telephone and non-local telephone
operations are not eliminated above. F-29




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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, 2003: LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    215,675
    
    
    $
    46,628
    
    
    $
    33,026
    
    
    $
    20,562
    
    
    $
    37,205
    
    
    $
    (29,249
    )
    
    $
    323,847Depreciation 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 benefit (provision)
    
    
    (9,950
    )
    
    
    (1,412
    )
    
    
    
    
    
    
    
    
    
    
    10,267
    
    
    
    
    
    
    
    (1,095
    )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
    
    
    
    8,422
    
    
    
    
    
    
    
    50,906
 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
    
    $
    226,697
    
    
    $
    43,233
    
    
    $
    20,848
    
    
    $
    26,350
    
    
    $
    58,411
    
    
    $
    (35,145
    )
    
    $
    340,394Depreciation 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 benefit (provision)
    
    
    (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
    
    
    
    10,596
    
    
    
    
    
    
    
    72,621
 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. 17. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Fox Paine & Company, ACS Groups majority stockholder, received 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 earnings (loss) of investments, calculated
without regard to the fee pursuant to an agreement dated May 14, 1999. The management fee expense
for 2004, 2003 and 2002 was $943, $930, and $1,316, respectively. The management fee payable at
December 31, 2004 and 2003 was $946 and $950, respectively. The annual management fee obligation to
Fox Paine was terminated effective for periods beginning after December 31, 2004 as partial
consideration for a $2.7 million transaction fee paid to Fox Paine in February 2005 in connection
with assistance rendered in structuring a stock offering and
refinancing transaction that the Company completed during the first quarter of 2005. The
transaction fee agreement was approved by the Companys board of directors. See Note 22, Subsequent
Events. F-30




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 17. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (Continued) The board of directors approved the payment to Fox Paine & Company of a fee equal to 1% of the
gross proceeds generated from the sale of the Companys Directories Business 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. On September 19, 2003, Fox Paine entered into a consulting agreement with a now retired
officer of the Company. The consulting term began on January 1, 2004, continued for one year, and
was terminated on December 31, 2004. During the consulting term, the retired officer advised Fox
Paine on and evaluated potential opportunities in the telecommunications industry, and Fox Paine
paid the former officer a monthly fee of $20 for those services. Two of the Companys directors, Messrs. Saul A. Fox and W. Dexter Paine, III are co-founders
of Fox Paine and currently serve as Fox Paines Chief Executive Officer and President. A third
director of the Company, Mr. Wray T. Thorn, is a former Director of Fox Paine. 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, 2004, and 2003,
respectively, the Company had recorded in accounts payable  affiliates $3,027 and $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, Leonard A.
Steinberg, an officer of the Company, is a manager of ACS Media LLC. The Company also has various intercompany transactions with the Parent and at December 31,
2004 and 2003, ($1,088) and $148, respectfully was due (to) from ACS Group. F-31




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 18. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Commencing January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,and 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 has used derivative financial instruments to partially hedge variable interest
transactions in the past and expects to do so in the future when appropriate for managing interest
rate risk. In accordance with this policy, the Company entered into a variable-to-fixed interest
rate swap agreement during 1999. The Company extinguished early that 1999 interest rate swap
agreement in November 2003. Subsequently during February 2005, in connection with a refinancing
transaction, the Company entered into floating-to-fixed interest rate swaps in order to hedge its
exposure to variable interest rates associated with the 2005 senior credit facility and to comply
with the terms of that agreement with respect to variable interest rate risk exposure. See Note 22,
Subsequent Events. To the extent that derivatives financial instruments are outstanding as of a period end, the
fair value of those instruments, represented by the estimated amount the Company would receive or
pay to terminate the agreement, is reported on the its balance sheet. The realized gains and losses
of the 1999 interest rate swap 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. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of cash and cash equivalents, accounts receivable and payable, and other
short-term monetary assets and liabilities approximate carrying values due to their short-term
nature. The fair value for the Companys 2003 and 1999 senior secured credit facility, senior
subordinated notes and senior unsecured notes, and capital leases and other long-term obligations
were estimated based on quoted market prices. The following table summarizes the Companys carrying values and fair values of the debt
components of its financial instruments at December 31, 2004: Carrying
    
    
    FairValue
    
    
    Value2003 senior secured credit facility
    
    $
    198,000
    
    
    $
    200,7239 3/8% senior subordinated notes due 2009
    
    
    147,500
    
    
    
    152,2949 7/8% senior unsecured notes due 2011
    
    
    172,329
    
    
    
    190,974Capital leases and other long-term obligations
    
    
    8,060
    
    
    
    8,060$
    525,889
    
    
    $
    552,051
 F-32




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) 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
    
    
    Value2003 senior secured credit facility
    
    $
    200,000
    
    
    $
    201,5009 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
    
    
    $
    551,460
 Subsequent to December 31, 2004, the 2003 senior secured credit facility was redeemed and
retired at its carrying value, the senior subordinated notes were tendered in part and called in
part at a premium of 104.688% and the entire issue was retired, and $59,346 aggregate principal
amount of the senior unsecured notes were tendered and retired at a premium of 109.875%. See Note
22, Subsequent Events. 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS 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 Groups and 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. F-33




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Balance Sheet
December 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsAssets
    
    Subsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    99
    
    
    $
    85,761
    
    
    $
    
    
    
    $
    85,860Restricted cash
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    4,690Accounts receivable-trade, net
    
    
    15,397
    
    
    
    24,857
    
    
    
    (841
    )
    
    
    39,413Accounts receivable-affiliates
    
    
    12,490
    
    
    
    (13,578
    )
    
    
    
    
    
    
    (1,088
    )Materials and supplies
    
    
    6,623
    
    
    
    
    
    
    
    
    
    
    
    6,623Prepayments and other current assets
    
    
    1,493
    
    
    
    2,231
    
    
    
    
    
    
    
    3,724Total current assets
    
    
    36,102
    
    
    
    103,961
    
    
    
    (841
    )
    
    
    139,222Investments
    
    
    10
    
    
    
    360,418
    
    
    
    (360,418
    )
    
    
    10Property, plant and equipment
    
    
    957,589
    
    
    
    104,178
    
    
    
    
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    590,471
    
    
    
    58,984
    
    
    
    
    
    
    
    649,455Property, plant and equipment, net
    
    
    367,118
    
    
    
    45,194
    
    
    
    
    
    
    
    412,312Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets, net
    
    
    21,871
    
    
    
    
    
    
    
    
    
    
    
    21,871Debt issuance costs, net
    
    
    
    
    
    
    15,482
    
    
    
    
    
    
    
    15,482Deferred charges and other assets
    
    
    1,772
    
    
    
    6,967
    
    
    
    
    
    
    
    8,739Total assets
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    548
    
    
    $
    1,750
    
    
    $
    
    
    
    $
    2,298Accounts payable-affiliates
    
    
    2,964
    
    
    
    1,009
    
    
    
    
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    14,705
    
    
    
    40,784
    
    
    
    (841
    )
    
    
    54,648Advance billings and customer deposits
    
    
    8,942
    
    
    
    6
    
    
    
    
    
    
    
    8,948Total current liabilities
    
    
    27,159
    
    
    
    43,549
    
    
    
    (841
    )
    
    
    69,867Long-term obligations, net of current portion
    
    
    4,114
    
    
    
    519,477
    
    
    
    
    
    
    
    523,591Deferred income taxes
    
    
    1,345
    
    
    
    (1,345
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    72,240
    
    
    
    5,676
    
    
    
    
    
    
    
    77,916Commitments and contingenciesStockholders equity:Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    245,585
    
    
    
    (491,240
    )
    
    
    245,585Retained earnings (accumulated deficit)
    
    
    (169,227
    )
    
    
    (276,389
    )
    
    
    169,227
    
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,531
    )
    
    
    
    
    
    
    (4,531
    )Total stockholders equity (deficit)
    
    
    322,015
    
    
    
    (35,335
    )
    
    
    (322,015
    )
    
    
    (35,335
    )Total liabilities and stockholders equity (deficit)
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039
 F-34




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Balance Sheet
December 31, 2003 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsAssets
    
    Subsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedCurrent 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 Equity (Deficit)Current 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 contingenciesStockholders equity:Common stock
    
    
    25
    
    
    
    
    
    
    
    (25
    )
    
    
    Paid in capital in excess of par value
    
    
    501,374
    
    
    
    264,630
    
    
    
    (501,374
    )
    
    
    264,630Retained earnings (accumulated deficit)
    
    
    (140,418
    )
    
    
    (241,638
    )
    
    
    140,418
    
    
    
    (241,638
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,543
    )
    
    
    
    
    
    
    (4,543
    )Total stockholders equity (deficit)
    
    
    360,981
    
    
    
    18,449
    
    
    
    (360,981
    )
    
    
    18,449Total liabilities and stockholders equity (deficit)
    
    $
    463,203
    
    
    $
    582,965
    
    
    $
    (360,981
    )
    
    $
    685,187
 F-35




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Operations
Year Ended December 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    211,169
    
    
    $
    23,097
    
    
    $
    (23,079
    )
    
    $
    211,187Wireless
    
    
    56,743
    
    
    
    
    
    
    
    (49
    )
    
    
    56,694Internet
    
    
    20,280
    
    
    
    
    
    
    
    (107
    )
    
    
    20,173Interexchange
    
    
    17,067
    
    
    
    
    
    
    
    (2,414
    )
    
    
    14,653Total operating revenue
    
    
    305,259
    
    
    
    23,097
    
    
    
    (25,649
    )
    
    
    302,707Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    145,507
    
    
    
    2,585
    
    
    
    (20,174
    )
    
    
    127,918Wireless (exclusive of depreciation and amortization)
    
    
    42,179
    
    
    
    
    
    
    
    (4,261
    )
    
    
    37,918Internet (exclusive of depreciation and amortization)
    
    
    26,689
    
    
    
    
    
    
    
    (950
    )
    
    
    25,739Interexchange (exclusive of depreciation and amortization)
    
    
    20,037
    
    
    
    
    
    
    
    (264
    )
    
    
    19,773Depreciation and amortization
    
    
    64,203
    
    
    
    14,184
    
    
    
    
    
    
    
    78,387Loss (gain) on disposal of assets, net
    
    
    2,795
    
    
    
    59
    
    
    
    
    
    
    
    2,854Total operating expense
    
    
    301,410
    
    
    
    16,828
    
    
    
    (25,649
    )
    
    
    292,589Operating income
    
    
    3,849
    
    
    
    6,269
    
    
    
    
    
    
    
    10,118Other income (expense):Interest expense
    
    
    (511
    )
    
    
    (46,234
    )
    
    
    
    
    
    
    (46,745
    )Interest income and other
    
    
    
    
    
    
    1,641
    
    
    
    
    
    
    
    1,641Total other expense
    
    
    (511
    )
    
    
    (44,593
    )
    
    
    
    
    
    
    (45,104
    )Income (loss) before income taxes
    
    
    3,338
    
    
    
    (38,324
    )
    
    
    
    
    
    
    (34,986
    )Income tax benefit (expense)
    
    
    (5,620
    )
    
    
    5,839
    
    
    
    
    
    
    
    219Equity in income (loss) of investments
    
    
    16
    
    
    
    (2,266
    )
    
    
    2,266
    
    
    
    16Net loss
    
    $
    (2,266
    )
    
    $
    (34,751
    )
    
    $
    2,266
    
    
    $
    (34,751
    )
 F-36




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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
    
    $
    215,675
    
    
    $
    25,574
    
    
    $
    (25,563
    )
    
    $
    215,686Wireless
    
    
    46,628
    
    
    
    
    
    
    
    (80
    )
    
    
    46,548Directory
    
    
    11,631
    
    
    
    
    
    
    
    
    
    
    
    11,631Internet
    
    
    33,026
    
    
    
    
    
    
    
    
    
    
    
    33,026Interexchange
    
    
    20,562
    
    
    
    
    
    
    
    (3,606
    )
    
    
    16,956Total operating revenue
    
    
    327,522
    
    
    
    25,574
    
    
    
    (29,249
    )
    
    
    323,847Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    136,860
    
    
    
    1,298
    
    
    
    (21,505
    )
    
    
    116,653Wireless (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
    
    
    261,789
    
    
    
    15,912
    
    
    
    (29,249
    )
    
    
    248,452Operating 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
    )Total other income (expense)
    
    
    3,610
    
    
    
    (82,623
    )
    
    
    
    
    
    
    (79,013
    )Income (loss) before income taxes and discontinued
operations
    
    
    69,343
    
    
    
    (72,961
    )
    
    
    
    
    
    
    (3,618
    )Income tax benefit (expense)
    
    
    (62,680
    )
    
    
    61,585
    
    
    
    
    
    
    
    (1,095
    )Equity in income (loss) of investments
    
    
    783
    
    
    
    7,394
    
    
    
    (7,394
    )
    
    
    783Income (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-37




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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
    
    $
    226,697
    
    
    $
    
    
    
    $
    
    
    
    $
    226,697Wireless
    
    
    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
    
    
    351,448
    
    
    
    24,807
    
    
    
    (35,861
    )
    
    
    340,394Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    136,503
    
    
    
    2,188
    
    
    
    (23,859
    )
    
    
    114,832Wireless (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
    
    
    319,725
    
    
    
    79,833
    
    
    
    (36,400
    )
    
    
    363,158Operating 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 loss
    
    $
    (6,218
    )
    
    $
    (182,656
    )
    
    $
    6,218
    
    
    $
    (182,656
    )
 F-38




---



##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 20. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) Condensed Consolidated Statement of Cash Flows
Year Ended December 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    89,264
    
    
    $
    16,669
    
    
    $
    (36,700
    )
    
    $
    69,233Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (52,105
    )
    
    
    683
    
    
    
    
    
    
    
    (51,422
    )Placement of funds in escrow
    
    
    
    
    
    
    (1,055
    )
    
    
    
    
    
    
    (1,055
    )Net cash used by investing activities
    
    
    (52,105
    )
    
    
    (372
    )
    
    
    
    
    
    
    (52,477
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (499
    )
    
    
    (9,150
    )
    
    
    
    
    
    
    (9,649
    )Dividends
    
    
    (36,700
    )
    
    
    (19,045
    )
    
    
    36,700
    
    
    
    (19,045
    )Net cash used by financing activities
    
    
    (37,199
    )
    
    
    (28,195
    )
    
    
    36,700
    
    
    
    (28,694
    )Decrease in cash and cash equivalents
    
    
    (40
    )
    
    
    (11,898
    )
    
    
    
    
    
    
    (11,938
    )Cash and cash equivalents, beginning of the period
    
    
    139
    
    
    
    97,659
    
    
    
    
    
    
    
    97,798Cash and cash equivalents, end of the period
    
    $
    99
    
    
    $
    85,761
    
    
    $
    
    
    
    $
    85,860Supplemental Cash Flow Data:Interest paid, net of capitalized interest
    
    $
    520
    
    
    $
    42,506
    
    
    $
    
    
    
    $
    43,026Income taxes paid
    
    
    
    
    
    
    876
    
    
    
    
    
    
    
    876Supplemental Noncash Transactions:Minimum pension liability adjustment
    
    $
    
    
    
    $
    (12
    )
    
    $
    
    
    
    $
    (12
    )
 F-39




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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
    
    
    $
    167,055
    
    
    $
    (158,973
    )
    
    $
    55,378Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (40,199
    )
    
    
    (8,367
    )
    
    
    
    
    
    
    (48,566
    )Net proceeds from sale of business
    
    
    155,269
    
    
    
    
    
    
    
    
    
    
    
    155,269Release of funds from escrow
    
    
    
    
    
    
    3,539
    
    
    
    
    
    
    
    3,539Placement of funds in escrow
    
    
    
    
    
    
    (3,725
    )
    
    
    
    
    
    
    (3,725
    )Net cash provided (used) by investing activities
    
    
    115,070
    
    
    
    (8,553
    )
    
    
    
    
    
    
    106,517Cash 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 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, net of capitalized interest
    
    $
    685
    
    
    $
    48,598
    
    
    $
    
    
    
    $
    49,283Income taxes paid, net of refund
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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-40




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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
    
    
    $
    7,695
    
    
    $
    
    
    
    $
    66,956Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (57,838
    )
    
    
    (10,596
    )
    
    
    
    
    
    
    (68,434
    )Release of funds from escrow
    
    
    
    
    
    
    3,706
    
    
    
    
    
    
    
    3,706Issuance of note receivable
    
    
    
    
    
    
    (15,000
    )
    
    
    
    
    
    
    (15,000
    )Net cash used by investing activities
    
    
    (57,838
    )
    
    
    (21,890
    )
    
    
    
    
    
    
    (79,728
    )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, net of capitalized interest
    
    $
    86
    
    
    $
    44,587
    
    
    $
    
    
    
    $
    44,673Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Supplemental Noncash Transactions:Property acquired under capital leases and mortgages
    
    $
    4,187
    
    
    $
    
    
    
    $
    
    
    
    $
    4,187Minimum pension liability adjustment
    
    
    
    
    
    
    (2,342
    )
    
    
    
    
    
    
    (2,342
    )Interest rate swap marked to market
    
    
    
    
    
    
    (2,715
    )
    
    
    
    
    
    
    (2,715
    )
 F-41




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(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 $4,188 as of December 31,
2004 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 in May 2001. The litigation alleges
various contract and tort claims concerning the Companys decision to terminate its Infinite
Minutes long distance plan. In September 2004, the Company entered into a settlement agreement with
plaintiffs counsel. As a class action, the court granted preliminary approval of the settlement
and provided an opportunity for members of the class to review the proposed settlement and file
objections. On February 18, 2005, the court granted final approval of the settlement agreement and
dismissed the case. On July 15, 2002 the Company fulfilled a commitment to Crest 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 Crest,
the expenditures for which are expected to be significant and may exceed $20,000 over the next two
years. While the Company has an agreement with Crest, 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) Crests restoration of the Companys traffic carried on
another cable system, iii) and specific interconnection arrangements between the Company and Crest,
should the Company exercise its option to purchase certain network assets from Crest. The Company
is currently negotiating open elements of its agreement with Crest and renegotiating other terms
and conditions of the agreement. It is impossible to determine the ultimate outcome of these
negotiations at this time. 22. SUBSEQUENT EVENTS On December 20, 2004, the ACS Group filed a shelf Registration Statement on Form S-3 with the
Securities Exchange Commission registering 15,000 primary shares of its common stock and 19,599
secondary shares of its common stock on behalf of selling stockholders. Subsequently, on January
26, 2005, the ACS Group offered to the public 8,824 shares of its common stock for $75,000, or
$8.50 per share which offering closed and settled on February 1, 2005. The offering generated net
proceeds of approximately $67,500 after underwriting discounts and expenses of the offering. Under
the terms of the underwriting agreement for this offering, the underwriters were granted an
over-allotment option to sell up to an additional 1,324 shares at $8.50. They exercised in part
their over-allotment option for a total of 1,074 shares, which settled on March 2, 2005, and
generated an additional $8,669 of net proceeds after underwriting discounts. No secondary shares of
common stock that were registered on behalf of the selling stockholders on the Form S-3
Registration Statement were offered or sold to the public in this offering. Simultaneous with the offering of common stock, the ACS Group negotiated and entered into a
new $380,000 bank credit facility (the 2005 senior secured credit facility) which consists of a
drawn term loan of $335,000 and an undrawn revolver of $45,000. The 2005 senior secured credit
facility also closed on February 1, 2005, and generated net proceeds of approximately $324,300
after deducting fees and expenses associated with the debt issuance of approximately $10,700. The
$335,000 term loan generally bears interest at Libor plus 2.0% per annum, has a term of seven years
and has no scheduled principal payments prior to maturity. The revolver, to the extent it is drawn,
also generally bears interest at Libor plus 2.0% per annum and, to the extent undrawn, has
commitment fees equal to 0.375% per annum. The term of the revolver is six years and is
collateralized by substantially all assets of the Company. The approximately $10,700 of fees and
expenses have been charged to debt issuance costs and will be amortized over the term of the 2005
bank credit facility. In connection with the 2005 senior secured credit facility, the ACS Group entered into
floating-to-fixed interest rate swaps as a component of its interest rate hedging strategy and to
fulfill a requirement of the 2005 senior secured credit agreement. The total notional amount of the
swaps is $135,000, the variable interest rate component paid to ACS Group is three-month Libor and
the fixed interest rate component paid by ACS Group is 4.13%. The term of the 2005 swap agreement
is five years. F-42




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Amounts) 22. SUBSEQUENT EVENTS (Continued) The net proceeds of the common stock offering and the 2005 senior secured credit facility were
used, together with cash on hand, to repay in full and retire the 2003 senior secured credit
facility on February 1, 2005, and to tender and extinguish on February 10, 2005, $59,346 in
outstanding principal of the Companys 9 7/8% senior unsecured notes due 2011 and $140,070 in
outstanding principal of the Companys 9 3/8% senior subordinated notes due 2009. All remaining
principal, or $7,430, of the 9 3/8% senior subordinated notes due 2009 have been called and were
extinguished in full on March 3, 2005. The Company has or will have incurred tender and call
premiums and expenses of approximately $13,000 and incur a charge of approximately $13,000 as a
result of writing off unamortized debt issuance costs and original issue discount in association
with these early extinguishments of debt during the first quarter of 2005. In connection with assistance rendered in structuring ACS Groups common stock offering and
2005 senior bank credit facility, the Company paid a $2.7 million transaction fee to Fox Paine in
February 2005. The transaction fee agreement was approved by the Companys board of directors, and
has been included in the expenses of the common stock offering and debt issuance costs for the 2005
senior secured credit facility discussed above. 23. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED) Quarterly Financial DataFirst
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Total2004Operating revenues
    
    $
    75,455
    
    
    $
    75,354
    
    
    $
    76,773
    
    
    $
    75,125
    
    
    $
    302,707Operating income
    
    
    3,098
    
    
    
    7,788
    
    
    
    (4,815
    )
    
    
    4,047
    
    
    
    10,118Net loss
    
    
    (8,120
    )
    
    
    (3,326
    )
    
    
    (16,240
    )
    
    
    (7,065
    )
    
    
    (34,751
    )2003Operating revenues
    
    $
    83,792
    
    
    $
    84,296
    
    
    $
    78,522
    
    
    $
    77,237
    
    
    $
    323,847Operating income (loss)
    
    
    6,600
    
    
    
    103,500
    
    
    
    (37,884
    )
    
    
    3,179
    
    
    
    75,395Income (loss) from continuing operations
    
    
    (5,895
    )
    
    
    93,367
    
    
    
    (74,923
    )
    
    
    (16,479
    )
    
    
    (3,930
    )Loss on discontinued operations
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )Net income (loss)
    
    
    (5,947
    )
    
    
    93,367
    
    
    
    (74,923
    )
    
    
    (16,479
    )
    
    
    (3,982
    )
 During the year ended December 31, 2003, the Company recorded $54,858 in contract termination and
asset impairment charges (see Note 9), 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-43




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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 Period2004 Allowance for doubtful accounts
    
    $
    4,865
    
    
    $
    2,922
    
    
    $
    948
    
    
    $
    3,866
    
    
    $
    4,8692003 Allowance for doubtful accounts
    
    $
    6,075
    
    
    $
    839
    
    
    $
    2,582
    
    
    $
    4,631
    
    
    $
    4,8652002 Allowance for doubtful accounts
    
    $
    4,944
    
    
    $
    4,884
    
    
    $
    214
    
    
    $
    3,967
    
    
    $
    6,075
  (1)
    Represents the reserve for accounts receivable collected on the behalf of others.(2)
    Represents credit losses. F-44