<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------

                                    FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 [FEE REQUIRED]

                        For the fiscal year ended December 31, 2000

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
    1934 [NO FEE REQUIRED]

                        For the transition period from to

                        COMMISSION FILE NUMBER 000-28167

                                 ---------------

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

                 DELAWARE                                91-1921377
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)

         510 L STREET, SUITE 500                            99501
            ANCHORAGE, ALASKA                            (Zip Code)
 (Address of principal executive offices)

                                 (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 REGISTERED
-------------------                    -----------------------------------------
      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS
-------------------
      None

                                 ---------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 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. [ ] (Not Applicable)

    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 sold, or the average bid and asked price of such common equity as of
a specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) (Not Applicable)

                       DOCUMENTS INCORPORATED BY REFERENCE

    Portions of Alaska Communications Systems Group, Inc.'s proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
for the registrant's 2001 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.

<PAGE>   2

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.


                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2000



<TABLE>
<CAPTION>
                                                                               PAGE
<S>            <C>                                                             <C>
PART I

ITEM 1.        BUSINESS                                                          2
ITEM 2.        PROPERTIES                                                       24
ITEM 3.        LEGAL PROCEEDINGS                                                24
ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              25

PART II

ITEM 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER MATTERS                                      26
ITEM 6.        SELECTED FINANCIAL DATA                                          27
ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                              33
ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       45
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      46
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE                              46

PART III

ITEM 10.       EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT               47
ITEM 11.       EXECUTIVE COMPENSATION                                           49
ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT                                                       49
ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   49

PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
               FORM 8-K                                                         50

SIGNATURES                                                                      52

INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS                         F-1
</TABLE>



                                       1
<PAGE>   3

                                     PART I


ITEM 1. BUSINESS


FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS

        This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the United States.

        Investors should also be aware that while Alaska Communications Systems
Holdings, Inc. ("ACS Holdings" or the "Company") does, at various times,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Holdings
agrees with any statement or report issued by an analyst irrespective of the
content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of ACS Holdings.


INTRODUCTION

        ACS Holdings is a wholly owned subsidiary of Alaska Communications
Systems Group, Inc. ("ACS Group"). ACS Holdings was formed in 1998 by Fox Paine
& Company, members of the former senior management team of Pacific Telecom, and
other experienced telecommunications industry executives. In May 1999, the
Company acquired Century Telephone Enterprises, Inc.'s Alaska properties
("CenturyTel's Alaska Properties") and Anchorage Telephone Utility or ATU
(collectively the "Predecessor Entities"). CenturyTel's Alaska Properties were
the incumbent provider of local telephone services in Juneau, Fairbanks and more
than 70 rural communities in Alaska and provided Internet services to customers
statewide. CenturyTel's Alaska Properties included ACS of Fairbanks, Inc., ACS
of Alaska, Inc., and ACS of the Northland, Inc. ATU was the largest local
exchange carrier ("LEC") in Alaska and provided local telephone and long
distance services primarily in Anchorage and cellular services statewide. ATU
provided long distance services through ATU Long Distance, Inc. and cellular
services through MACtel, Inc. These companies are now known as ACS of Anchorage,
Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.

        The financial statements for the ACS Holdings represent the operations
of the following entities:

           -   Alaska Communications Systems Holdings, Inc.

           -   ACS of Alaska, Inc. ("ACSAK") (formerly Telephone Utilities of
               Alaska, Inc.)

           -   ACS of the Northland, Inc. ("ACSN") (formerly Telephone Utilities
               of the Northland, Inc.)

           -   ACS of Fairbanks, Inc. ("ACSF") (formerly PTI Communications of
               Alaska, Inc.)

           -   ACS of Anchorage, Inc. ("ACSA") (formerly Alaska Communications
               Systems, Inc.)

           -   ACS Wireless, Inc. ("ACSW") (formerly MACtel, Inc.)

           -   ACS Long Distance, Inc. ("ACSLD") (formerly ATU Long Distance,
               Inc.)

           -   ACS Television, L.L.C. ("ACSTV") (formerly Alaskan Choice
               Television, L.L.C.)

           -   ACS Internet, Inc. ("ACSI") (formerly PTINet, Inc.)

           -   Internet Alaska, Inc. ("IAI")



                                       2
<PAGE>   4

        ACS Holdings is the leading diversified, facilities-based
telecommunications provider in Alaska, offering local telephone, cellular, long
distance, data and Internet services to business and residential customers
throughout the state. ACS Holdings is the only telecommunications provider in
Alaska using its own network facilities to provide full service end-to-end
communications to its customers.

        At various times, ACS Holdings evaluates opportunities for establishing
or acquiring other telecommunications businesses through acquisitions or
otherwise in Alaska and elsewhere in the United States, and may make investments
in such businesses in the future. ACS Holdings has focused its attention on
local telephone, cellular, interexchange network and data services, and Internet
businesses.

        LOCAL TELEPHONE. With almost 330,000 access lines, representing
approximately 70% of the access lines in Alaska, ACS Holdings is the largest LEC
in Alaska and the 14th largest in the U.S. The Company provides service to all
of the state's major population centers, including Anchorage, Juneau and
Fairbanks.

        CELLULAR. ACS Holdings is the largest and only statewide provider of
cellular services in Alaska, currently serving approximately 76,000 subscribers.
Its cellular network covers over 460,000 residents, including all major
population centers and highway corridors. The Company recently upgraded its
network to be fully digital in substantially all of its service areas.

        INTERNET. ACS Holdings is the second largest provider of Internet access
services in Alaska with over 45,000 customers. ACS Holdings offers dedicated and
dial-up Internet access and digital subscriber line, or DSL, Internet access to
its customers.

        INTEREXCHANGE NETWORK AND OTHER

        Wireless cable television. Long-distance. ACS Holdings provides long
distance and other interexchange services to over 57,000 customers in Alaska.
ACS Holdings has migrated long distance traffic on main routes from leased
circuits onto its own network infrastructure.

        Wireless cable television. ACS Holdings provides wireless cable
television services in the Fairbanks and Anchorage service areas. ACS Holdings
is evaluating opportunities to expand its offering of wireless cable television
services.


PRODUCTS, SERVICES AND REVENUE SOURCES

        ACS Holdings offers a broad portfolio of telecommunications services to
residential and business customers in its markets. The Company's service
offerings are locally managed to better serve the needs of each community. The
Company believes that, as the communications marketplace continues to converge
and competition continues to enter the market, the ability to offer an
integrated package of communications products will provide a distinct
competitive advantage, as well as increase customer loyalty, and thereby
decrease customer turnover. The Company complements its local telephone services
by actively marketing its cellular, Internet, and interexchange network and
other service offerings.



                                       3
<PAGE>   5
        Profit or loss and total assets for each of the Company's segments is
disclosed in Note 13 "Business Segments" of the Alaska Communications Systems
Holdings, Inc. Consolidated Financial Statements. The following table sets forth
the components of ACS Holdings' consolidated revenues for the year ended
December 31, 2000 and pro forma combined revenues for the years ended December
31, 1999 and 1998 (dollars in millions):

<TABLE>
<CAPTION>
                                                        REVENUE FOR THE YEAR ENDED DECEMBER 31,
                                         ---------------------------------------------------------------------
                                                2000                     1999                     1998
                                            CONSOLIDATED               COMBINED                 COMBINED
                                         -------------------      -------------------      -------------------
                                         AMOUNT      PERCENT      AMOUNT      PERCENT      AMOUNT      PERCENT
                                         ------      -------      ------      -------      ------      -------
<S>                                      <C>         <C>          <C>         <C>          <C>         <C>
Revenue by Source:
    Local network service                $ 92.4        29.5%      $ 94.5        31.5%      $ 93.1        33.1%
    Network access                        105.2        33.6        105.3        35.1         98.6        35.0
    Directory advertising                  32.0        10.2         27.9         9.3         26.5         9.4
    Deregulated and other revenue          21.8         7.0         21.2         7.1         19.6         7.0
                                         ------      ------       ------      ------       ------      ------
       Local telephone                    251.4        80.3        248.9        83.0        237.8        84.4
    Cellular                               39.5        12.6         36.1        12.0         31.8        11.3
    Internet                                9.2         2.9          4.9         1.6          5.2         1.8
    Interexchange network and other        12.9         4.1         10.0         3.3          6.8         2.4
                                         ------      ------       ------      ------       ------      ------
       Total                             $313.0       100.0%      $299.9       100.0%      $281.6       100.0%
                                         ======      ======       ======      ======       ======      ======
</TABLE>

        LOCAL TELEPHONE

        The Company provides local telephone service through its four LECs.
Local telephone revenue consist of local network service, network access,
directory advertising, and deregulated and other revenue, each of which is
described below.

        Local Network Service

        Basic Local Network Service. Basic local network service enables
customers to originate and receive telephone calls within a defined "exchange"
area. The Company provides basic local services on a retail basis to residential
and business customers, generally for a fixed monthly charge. The maximum amount
that can be charged to a customer for basic local services is determined by rate
proceedings involving the Regulatory Commission of Alaska ("RCA"). The Company
charges business customers higher rates to recover a portion of the costs of
providing local service to residential customers as is customary in the
industry. On average, U.S. business rates for basic local services have been
over two times the rates of residential customers. 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 ID.

        At December 31, 2000, approximately 56% of ACS Holdings' retail access
lines served residential customers, while 44% served business customers.
Currently, monthly charges for basic local service for residential customers
range from $9.42 to $16.30 in ACS Holdings' service areas compared to the
national average for urban areas of $13.84. Monthly charges for business
customers range from $17.65 to $26.05 in ACS Holdings' service areas compared to
the national average for urban areas of $34.31.



                                       4
<PAGE>   6

        The table below sets forth the annual growth in access lines for ACS
Holdings and its Predecessor Entities from December 31, 1996 to December 31,
2000. The number of access lines shown for 1997 includes approximately 37,000
access lines that were acquired by CenturyTel's Alaska Properties as part of its
acquisition of the City of Fairbanks Telephone Operation in October 1997. The
number of access lines shown represents all revenue producing access lines
connected to both retail and wholesale customers.

<TABLE>
<CAPTION>
                                                                 AS OF DECEMBER 31,
                                        ----------------------------------------------------------  --------
                                          2000           1999           1998           1997           1996
                                        --------       --------       --------       --------       --------
<S>                                     <C>            <C>            <C>            <C>            <C>
Retail access lines                      272,936        281,726        266,704        275,549        237,721
Wholesale access lines                    17,303         15,680         13,010          5,106             --
Unbundled network elements                39,221         28,202         20,680          2,700             --
                                        --------       --------       --------       --------       --------
Total Local Telephone Access Lines       329,460        325,608        300,394        283,355        237,721
Percentage Growth                            1.2%           8.4%           6.0%          19.2%           5.4%
</TABLE>

        On June 1, 1999, as part of the consolidation of its operating and
billing systems, ACS Holdings conformed the methodology by which the number of
access lines is calculated across all of its local exchanges to that used for
CenturyTel's Alaska Properties. The Company intends to use the method used to
calculate access lines in service for CenturyTel's Alaska Properties to
calculate its access lines in all future periods. In the table above, for the
year ended December 31, 1999, the Company shows ATU's number of access lines
calculated using this method. If the number of ATU's access lines in service at
December 31, 1998 was computed under this same method, the number of access
lines at ATU would increase by 4,940 and the total number of access lines would
equal 305,334 and the combined growth percentage would be 6.6% for 1999. Due to
limited data available to ACS Holdings, no adjustments to the access lines in
service for any year prior to 1998 have been computed.

        Management believes that future access line growth is dependent on among
other things, the economic outlook in Alaska and the United States, the impact
of technology on line demand and population growth in the Company's serving
areas.

        Competitive Local Network Service. The Company also provides
interconnection through wholesale access to its basic local service and through
leasing unbundled network elements ("UNEs") to its competitors as required by
the Telecommunications Act of 1996 (the "1996 Act"). Revenues for these services
are included in local network service revenues. The Company currently provides
56,524 lines to competitors in the Anchorage service area on either a wholesale
or UNE basis. UNE rates in Anchorage are currently $13.85, which, in the opinion
of management, is below the Company's forward looking and embedded cost. The RCA
has lifted the Company's rural exemption for the Fairbanks and Juneau serving
areas and awarded interconnection rates to a competitor on a UNE basis of $19.19
and $16.71, respectively, which the Company also believes to be below its cost.
As of March 8, 2001, no facilities have been provided to competitors on a
wholesale or UNE basis in Fairbanks or Juneau. See "Business -- Regulation" for
further discussion of regulatory matters including interconnection under the
1996 Act.

        While there is some seasonality, operating results for local telephone
services are not materially impacted by seasonal factors.

        Network Access

        Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than one
company in the provision of such long distance service on an end-to-end basis.
Since toll calls are generally billed to the customer originating the call, a
mechanism is required to compensate each company providing services relating to
the call. This mechanism is the access charge, which the Company bills to each
interexchange carrier for the use of its facilities to access the customer. The
Company also receives universal service revenue, which it includes in its
reported network access revenue. These components of network access revenue are
described below.



                                       5
<PAGE>   7
        Intrastate Access Charges. ACS Holdings generates intrastate access
revenue when an intrastate long distance call that involves an ACS Holdings LEC
and an interexchange carrier is originated and terminated within the same state.
The interexchange carrier pays the Company an intrastate access payment for
either terminating or originating the call. The Company records the details of
the call through its carrier access billing system and receives the access
payment from the interexchange carrier. The company also provides billing and
collection ("B&C") services for interexchange carriers through negotiated B&C
agreements for certain types of toll calls placed by the Company's local
customers. ACS Holdings' LECs in competitive areas are under their own
stand-alone tariffs for intrastate access. In non-competitive areas, ACS
Holdings' LECs participate in a statewide tariff and access charge pooling
arrangement that is administered by the Alaska Exchange Carriers Association
("AECA"). The access charge for ACS Holdings' intrastate service is regulated by
the RCA.

        Interstate Access Charges. ACS Holdings generates interstate access
revenue when an interstate long distance call is originated from an Alaskan
local calling area served by an ACS Holdings' LEC and is terminated in a local
calling area in another state, and vice versa. The Company bills interstate
access charges in a manner similar to intrastate access charges. However,
interstate access charges are regulated by the Federal Communications Commission
("FCC") rather than the RCA. ACS Holdings' LECs participate in a nationwide
tariff and access charge pooling arrangement that is administered by the
National Exchange Carrier Association ("NECA") for all ACS Holdings LECs except
ACSA. ACSA participates in the NECA common line tariff, but has its own
interstate access tariff for traffic sensitive and special access services.

        Universal Service Revenue. Universal service revenue supplements the
amount of local service revenue the Company receives to ensure that basic local
service rates for customers in high cost rural areas are not significantly
higher than rates charged in lower cost urban and suburban areas. The 1996 Act
prescribed new standards applicable to universal service, including mechanisms
for defining the types of services to be provided as part of a universal service
program, specific goals or criteria applicable to universal service programs,
new qualifications for receipt of universal service funding and new requirements
for contributions to universal service funding. The FCC, in conjunction with a
federal-state joint board composed of FCC and state commission members, has been
working since passage of the 1996 Act to implement these new statutory
provisions. The FCC has chosen to address universal service matters, initially
for non-rural telephone companies, and subsequently for rural telephone
companies. New cost-identification models for non-rural local carriers were
adopted effective on January 1, 2000. New rules for rural telephone companies,
applicable to all ACS Holdings LEC operations except ACSA, have been proposed to
the FCC by the Joint Board. If these rules are adopted in 2001, they are
unlikely to have a material impact on ACS Holdings' revenue.

        Operating results for network access services are not materially
impacted by seasonal factors.

        Directory Advertising

        Directory advertising revenues are derived by ACS Holdings principally
from yellow pages advertising in the local telephone books of each of the
Company's local exchange service areas. The Company provides this service under
a contractual arrangement with a directory publishing company. Directory
advertising is billed in conjunction with local telephone service. ACS Holdings
competes for directory advertising services in substantially all of its service
areas.

        Deregulated and Other Revenue

        Deregulated and other revenues consist of B&C contracts, space and power
rents, pay telephone service, customer premise equipment sales, and other
miscellaneous revenues generated by the Company's LECs. ACS Holdings seeks to
capitalize on its local presence and network infrastructure by offering these
additional services to customers and interexchange carriers.



                                       6
<PAGE>   8

        CELLULAR

        ACS Holdings' cellular business is currently managed separately from its
LEC business and is subject to a different regulatory framework and cost
structure. Cellular services are provided statewide under the ACS Wireless and
MACtel brand names. The primary sources of cellular revenue include subscriber
access charges, airtime usage, toll charges, connection fees, roaming revenues,
and enhanced features, such as caller ID and call waiting. A subscriber may
purchase services separately or may purchase rate plans that package these
services in different ways to fit different calling patterns and desired
features.

        The table below sets forth the annual growth in the number of cellular
subscribers served and total covered population for ACS Holdings and its
Predecessor Entities from December 31, 1996 to December 31, 2000.

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                  ---------------------------------------------------------------
                                   2000          1999          1998          1997          1996
                                  -------       -------       -------       -------       -------
<S>                               <C>           <C>           <C>           <C>           <C>
Estimated covered population      462,057       460,802       460,162       453,361       353,674
Ending subscribers                 75,933        73,068        66,572        55,131        39,329
Ending penetration                   16.4%         15.9%         14.5%         12.2%         11.1%
</TABLE>

        Although ACS Holdings has achieved cellular penetration rates of 17% in
Anchorage and Fairbanks, and 21% in Kenai, penetration rates in the Company's
other service areas are significantly lower. Management believes there are
opportunities to improve the penetration rates of its cellular operations in
Juneau. Management also believes that the market for cellular services will
continue to grow with the expansion of the cellular industry as a whole.

        ACS Holdings also owns 10 megahertz E Block PCS licenses covering
Anchorage, Juneau and Fairbanks, which were purchased by CenturyTel's Alaska
Properties in 1997. Management is analyzing the build out of these licenses and
technical alternatives for using this spectrum to enhance the Company's service
offerings in its overall business.

        Cellular revenue declines in the winter months and increases in the
summer months due to Alaska's northern latitude and the wide swing in available
daylight. However, operating results for cellular services are not materially
impacted by seasonal factors.

        INTERNET

        ACS Holdings provides Internet access services to approximately 45,000
customers at December 31, 2000. In order to offer Internet access, the Company
provides local dial-up telephone numbers for its customers. ACS Holdings also
offers high speed DSL. 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 ACS Holdings owns and maintains. These servers allow
customers to access their e-mail accounts and to be routed to local access
points that connect customers to the Internet. ACS Holdings charges customers
either a flat rate for unlimited Internet usage or a usage sensitive rate,
which, in either case, is billed on customers' local telephone bill.

        Operating results for Internet access services are not materially
impacted by seasonal factors.

        INTEREXCHANGE NETWORK AND OTHER

        Long Distance Services. ACS Holdings' predecessors began offering long
distance services on a resale basis in October 1997, primarily in Anchorage. The
Company currently has approximately 57,000 long distance customers and less than
5% of total long distance revenues in Alaska. Before August 1998, CenturyTel's
Alaska Properties were precluded from entering the long distance business by a
non-competition agreement with AT&T Alascom which was signed when Pacific
Telecom sold Alascom, Inc. to AT&T in 1995. To date, ACS Holdings'



                                       7
<PAGE>   9

long distance operations have generated significant operating losses. The
Company is evaluating its long distance strategy.

        In April 1999, ACS Holdings entered into a settlement agreement with
General Communication, Inc. ("GCI") under which the Company agreed to enter into
a number of new business arrangements and to settle a number of outstanding
disputes, including GCI's opposition to ACS Holdings' acquisitions of
CenturyTel's Alaska Properties and ATU. As part of this agreement and to support
other aspects of the Company's business strategy, ACS Holdings purchased from
GCI $19.5 million of fiber capacity for high-speed links within Alaska and for
termination of traffic in the lower 49 states. Subsequently, the Company entered
into an amendment to the purchase agreement with GCI, whereby, among other
things, ACS Holdings agreed to purchase additional capacity for $19.5 million.
The Company fulfilled this commitment to purchase additional capacity on January
12, 2001.

        ACS Holdings is subject to numerous conditions imposed by the RCA and,
to a lesser degree, by the FCC on the manner in which the Company conducts its
long distance operations. The restrictions are intended to prohibit
cross-subsidization from the regulated LEC to the long distance affiliate and
discrimination against other long distance providers in favor of a LEC's long
distance affiliate. Among the conditions applied to ACS Holdings' long distance
affiliates are those which:

        -  require the Company to hold all books and records, management,
           employees and administrative services separate, except that services
           may be provided among affiliates through arm's length affiliated
           interest agreements,

        -  prohibit ACSAK, ACSN and ACSF properties from bundling local and long
           distance services until competition develops in their local markets
           and

        -  prevent the Company from joint ownership of telephone transmission or
           switching facilities with the LEC and from using the LEC's assets as
           collateral for its own indebtedness.


        As a result of the introduction of competition in ACSA's local service
areas, the Alaska Public Utilities Commission ("APUC"), predecessor to the RCA,
lifted the restriction on bundling of local and long distance services in ACSA's
service areas in 1998. The status of this bundling restriction for ACSA is
unclear based on recent RCA actions.

        Operating results for long distance services are not materially impacted
by seasonal factors.

        Wireless Cable Television. ACS Holdings owns ACSTV, a wireless cable
television provider. ACSTV provides wireless cable television services over
assigned UHF frequencies to approximately 2,300 customers in the Company's
Anchorage and Fairbanks service areas. ACS Holdings is evaluating opportunities
to expand its offering of wireless cable television services.

NETWORK FACILITIES

         As of December 31, 2000, ACS Holdings owned 74 exchanges serving
approximately 330,000 access lines. All of the Company's exchanges are served by
digital switches provided predominately by Nortel Networks. ACS Holdings'
switches are linked through a combination of extensive aerial, underground and
buried cable, including 485 miles of fiber optic cable, as well as digital
microwave and satellite links. The Company has 100% single-party services (one
customer per access line), and believes substantially all of its switches have
current generic software upgrades installed, allowing for the full range of
enhanced customer features.

        ACS Holdings has integrated numerous network elements to offer a variety
of services and applications that meet the increasingly sophisticated needs of
customers. These elements include Signal System 7 signaling networks, voice
messaging platforms, digital switching, digital subscriber lines and, in some




                                       8
<PAGE>   10
communities, integrated service digital network access. As the
telecommunications industry experiences significant changes in technology,
customer demand and competition, the Company intends to introduce additional
enhancements.

        Network operations and monitoring are provided by ACS Holdings' network
operating control center located in Anchorage. The network operating control
center has technicians staffed or on-call seven days a week, 24 hours a day.
Automated alarm systems are in place should problems arise with the network
after normal business hours. The Company also has customer care call center
facilities in Anchorage and Fairbanks along with additional customer care
facilities in Juneau, Sitka, Kenai/Soldotna and Kodiak. All of these facilities
offer extended business hours to efficiently handle customer inquiries and
orders for service.

        ACS Holdings' cellular operations consist of three switching centers, 89
cell sites and four repeaters covering substantially all major population
centers and highway corridors in Alaska. The Company uses Ericsson switches and
radios for its cellular operations. The Company converted substantially of all
of its switching and cell site equipment to digital service in 2000. The
Company's switching and cell site infrastructure is linked by fiber and digital
microwave. ACS Holdings' network operating control center located in Anchorage
also supports all cellular switches in ACS Holdings' markets. Customer care
centers are located in Anchorage, Fairbanks, Juneau and Kenai/Soldotna.

        The Company is enhancing its interexchange network to accommodate
developing products and technology. The Company is working with Nortel Networks
and other vendors on a multiple phase conversion of its network from a time
division multiple access, or TDMA, circuit switched platform to an asynchronous
transfer mode/Internet protocol, or ATM/IP. ACS Holdings believes the
implementation of an ATM/IP network will enhance its capability to provide a
complete suite of telecommunications and data services and achieve significant
operating efficiencies. The Company completed the first phase of the conversion
in 1999, which resulted in the migration of its network traffic to its fiber
optic transport facilities acquired in June 1999. The Company completed the
second phase in 2000, which involved the conversion of its transport connections
between Anchorage and each of Fairbanks, Kenai, Juneau and Seattle from TDMA to
ATM/IP. ACS Holdings expects to complete the implementation of its ATM/IP
network by year-end 2002. Planned network enhancements prior to year-end 2002
will include the installation of call servers in Anchorage and either Fairbanks
or Juneau and the conversion of network switching nodes to accommodate ATM/IP
traffic.

        Completion of the ATM/IP network will enable the Company to provide an
array of IP products throughout its core business. ACS Holdings currently offers
frame relay, and will offer each of the following services as the necessary
network elements are completed:

        -  virtual private networks,

        -  virtual private lines,

        -  transparent local area networks (LAN),

        -  proprietary LANs and wide area networks (WAN) and

        -  high speed Internet access.

CUSTOMERS

        ACS Holdings has three basic types of customers for the services of its
LECs:

           -   business and residential customers located in their local service
               areas that pay for local phone service,

           -   interexchange carriers that pay for access to long distance
               calling customers located within the Company's local service
               areas and

           -   competitive local exchange carriers ("CLECs") that pay for
               wholesale access to the Company's network in order to provide
               competitive local service on either a wholesale or UNE basis as
               prescribed under the 1996 Act.



                                       9
<PAGE>   11

        Approximately 56% of ACS Holdings' retail access lines served
residential customers, while 44% served business customers.

        ACS Holdings also has approximately 76,000 cellular subscribers, 45,000
Internet subscribers and 57,000 long-distance subscribers consisting
substantially of retail residential and business consumers.

        No single ACS Holdings customer represented more than 10% of its total
2000 consolidated revenue.

COMPETITION

        Local Telephone Service

        Incumbent local exchange carriers ("ILECs") may be subject to any of
three types of competition:

           -   facilities-based competition from providers with their own local
               service network,

           -   resale competition from resale interconnection, or providers who
               purchase local service from the ILEC at wholesale rates and
               resell these services to their customers and

           -   competition from UNE interconnection, that is, providers who
               lease UNEs from the ILEC.

        The geographic characteristics of rural areas presently make the
entrance of most facilities-based competitors uneconomical because of the
significant capital investment required and the limited market size. Therefore
ACS Holdings believes competition is likely to come from resale interconnection
or UNE interconnection. There are no regional Bell operating companies in
Alaska.

        In September 1997, GCI and AT&T Alascom, the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage. GCI competes principally through UNE interconnection with ACSA
facilities, while AT&T Alascom competes primarily by reselling ACSA's services.
Competition is based upon price and pricing plans, types of services offered,
customer service, billing services, quality and reliability. GCI has focused
principally on advertising discount plans for bundled services. AT&T Alascom's
strategy has been to resell ACSA's service as part of a package of local and
long distance services. As a result, ACSA now has approximately 37% competitive
market penetration as of December 31, 2000. The Company expects GCI and AT&T
Alascom to continue to compete for local telephone business.

        As "rural telephone companies" under the 1996 Act, ACS Holdings' rural
LECs have historically been exempt from the obligation to lease their facilities
or resell their services on a wholesale discount basis to CLECs seeking
interconnection. However, on June 30, 1999 the APUC ordered these exemptions
terminated for certain rural service areas of ACS Holdings, and on October 11,
1999, the RCA, which replaced the APUC on July 1, 1999, sustained the APUC's
order. As a result, ACS Holdings' rural LECs entered into interconnection
arbitration with GCI. This arbitration resulted in arbitration agreements for
certain rural service areas of ACS Holdings. See "Business - Regulation" for
further discussion.

        ACS Holdings expects increasing competition from providers of various
services that provide users the means to bypass its network. Long distance
companies may construct, modify or lease facilities to transmit traffic directly
from a user to a long distance company. Cable television companies also may be
able to modify their networks to partially or completely bypass the Company's
local network.

         In addition, while cellular telephone services have historically
complemented traditional LEC services, the Company anticipates that existing and
emerging wireless technologies may increasingly compete with LEC services. For
example, AT&T has recently introduced its fixed wireless product to the
Anchorage market. At this time it is not possible to predict the impact of this
product on the Company's share of the local market. Technological developments
in cellular telephone features, personal communications services, digital
microwave and other wireless technologies are expected to further permit the
development of alternatives to traditional wireline services.



                                       10
<PAGE>   12

         Cellular 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. ACS Holdings
believes that the demand for wireless telecommunications services is likely to
increase significantly as equipment costs and service rates continue to decline
and equipment becomes more convenient and functional. Competition is based on
price, quality, network coverage, packaging features and brand reputation. In
addition, there are six PCS licensees in each of the Company's cellular service
areas. ACS Holdings holds PCS licenses covering Anchorage, Fairbanks and Juneau.
ACS Holdings currently competes with at least one other wireless provider in
each of its cellular service areas, including AT&T Wireless Services, Alaska
DigiTel, and Dobson Communications. At least one new wireless competitor is
expected to enter the Alaska market in 2001. The Company believes that the
unique and vast terrain and the high cost of PCS system buildout make entrance
into markets outside Anchorage uneconomical at this time.

        As the market for simple cellular voice services approaches maturity,
providers are experiencing downward pressure on price. ACS Holdings is
positioning itself to offset this impact by bringing new higher margin services
to market. By developing products for targeted market segments, the Company is
leveraging the advantage in market share and geographical coverage to attract
new customers and increase monthly revenues from existing customers. New
products will be coming to market in 2001 that will address the specific needs
of the oil and construction industries. New consumer offerings will also come to
market in 2001. These new services are expected to provide a means for
differentiation, produce additional revenues and increase margins.

        Long Distance Services

        The long distance telecommunications market is highly competitive.
Competition in the long distance business is based on price, customer service,
billing services and quality. The Company currently offers long distance service
to customers located throughout the state of Alaska; however, it is focused
primarily on the more populous communities in the state. AT&T Alascom and GCI
are currently the two major competing long distance providers in Alaska. The
Company currently has less than 5% of total long distance revenues in Alaska.
The Company provides traditional "1+" direct distance dialing (DDD), toll-free
services, calling cards and private line services for data and voice
applications. In late 2000, The Company introduced its flat-rate long distance
"Infinite Minutes" program, which helped to increase its market share in the
residential long distance segment over previous periods. ACS Holdings expects to
continue offering innovative products of this nature in the future.

         Internet Services

         The market for Internet access services is highly competitive. There
are few significant barriers to entry, and the Company expects that competition
will intensify in the future. ACS Holdings currently competes with a number of
established online services companies, interexchange carriers and cable
companies. The Company believes that its ability to compete successfully will
depend upon a number of factors, including the reliability and security of its
network infrastructure, the ease of access to the Internet, and the pricing
policies of its competitors.


SALES AND MARKETING

        ACS Holdings and its Predecessor Entities have historically conducted
their sales and marketing operations for each of their respective products on a
stand-alone basis, with each product line having its own sales force and
marketing department. ACS Holdings has consolidated its product and service
offerings under the "Alaska Communications Systems" and "ACS" brands, subject to
regulatory and strategic business considerations.

        Key components of the Company's sales and marketing strategy include:

           -   marketing current and future service offerings aggressively,
               including packaged service offerings,

           -   centralizing marketing functions and



                                       11
<PAGE>   13

           -   enhancing direct sales efforts.

        ACS Holdings believes that it can leverage its position as an
integrated, one-stop provider of telecommunications services with strong
positions in local access, cellular, long distance and data, and Internet
markets. By pursuing, within the bounds of any applicable regulatory
constraints, a marketing strategy that takes advantage of these characteristics
and that facilitates cross-selling and packaging of it products and services,
the Company believes it can increase penetration of new product offerings,
improve customer retention rates, increase its share of its customers' overall
telecommunications expenditures, and achieve continued revenue and operating
cash flow growth.

        ACS Holdings has begun, to a limited extent, within regulatory bounds,
marketing local telephone services in attractively priced, packaged service
offerings with cellular, long distance and Internet services. However, ACS
Holdings believes packaged offerings are popular with customers because they
allow customers to enjoy pricing for a number of services at a substantial
discount to a la carte pricing of individual services. Subject to regulatory
limitations, the Company intends to expand this strategy, which it expects will
increase the average revenue per customer, and result in a more loyal and
satisfied customer base and in reduced churn.

        The Company has established a sales and marketing organization where
marketing strategies will be centralized and sales functions will be based
locally. To enhance its direct selling efforts, the Company has established
additional customer and retail service centers in its larger service areas, such
as Juneau and Kenai/Soldotna, and intends to enhance its call center operations
through a combination of technology investments, training, and incentive
compensation programs for call center employees.


EMPLOYEES

        ACS Holdings considers employee relations to be good. As of December 31,
2000, the Company employed a total of 1,163 regular full-time employees, 857 of
whom were represented by the International Brotherhood of Electrical Workers,
Local 1547 ("IBEW"). On November 2, 1999, the IBEW membership for ACS Holdings
ratified the terms of the new master collective bargaining agreement that
governs the terms and conditions of employment for all IBEW represented
employees working for ACS Holdings in the State of Alaska. The master agreement
embraces a labor-management relationship that is founded on trust, cooperation
and shared goals. The November 1999 agreement, which expires December 31, 2006,
provides for wage increases up to 4% in specified years based on the annual
increases in the U.S. Department of Labor CPI-U, the consumer price index for
Anchorage. The last wage increase under the agreement was implemented in January
2000 and the next scheduled wage review is in July 2001. The master agreement
also provides escalation in contributions of up to 4% annually for the health
and welfare contributions that are made by ACS Holdings on behalf of the
represented employee group. There have been no work stoppages or strikes, and
none are anticipated.

        ACS Holdings enjoys good relations with the employee group that is not
represented by the IBEW as well. Non-represented employees qualify for wage
increases based on individual and company performance. Additionally, employees
represented by ACS Holdings receive health and welfare packages that are
competitive in the marketplace in which ACS Holdings competes.



                                       12
<PAGE>   14

REGULATION

        OVERVIEW

        The Company's local telephone operating subsidiaries, ACSA, ACSF, ACSAK,
and ACSN, are each "telecommunications carriers" and ILECs under the
Communications Act of 1934 (the "Communications Act"), which was amended by the
1996 Act, and are subject to FCC jurisdiction. ACSLD, ACS Holdings' long
distance subsidiary, is also subject to both the FCC and RCA's regulatory
jurisdiction. ACS Holdings' cellular and PCS companies are also subject to FCC
jurisdiction because they are telecommunications carriers and because they hold
FCC-issued licenses. The Company's local telephone operating companies are also
"public utilities" within the meaning of the Alaska statutes and are, therefore,
governed by the applicable rules and regulations of the RCA. The RCA succeeded
to the regulatory responsibilities of the APUC when it ceased to exist on June
30, 1999.

        FEDERAL REGULATION

        Under the federal regulatory scheme, ILECs are required to comply with
the Communications Act and the applicable rules and regulations of the FCC. In
substantially overhauling the Communications Act, the 1996 Act was intended to,
among other things, eliminate unproductive regulatory burdens and promote
competition. Despite this, telecommunications carriers are still subject to
extensive ongoing regulatory requirements. For instance, ACS Holdings'
subsidiaries are required to maintain accounting records in accordance with the
Uniform System of Accounts, to structure access charges according to FCC rules,
and to charge for interstate services at a rate of return not to exceed a rate
prescribed by the FCC. The FCC also must give prior consent to transfers of
control and assignments of radio frequency licenses. The FCC requires ILECs
providing access services to file tariffs with the FCC reflecting the rates,
terms and conditions of those services. These tariffs are subject to review and
potential objection by the FCC or third parties. Additionally, all of the
Company's LECs are "ILECs" within the meaning of the 1996 Act. As such, they are
subject to various requirements under that Act, including specific
interconnection duties such as providing requesting telecommunications carriers
with UNEs and wholesale discounted resale of end user services.

        As of 2001, long distance companies will be precluded from filing
tariffs for interstate domestic services. Federal tariffing is being replaced
with Internet web site posting of offers, terms and prices. ACSLD was fully
detariffed prior to the end of 2000.

        STATE REGULATION

        Telecommunications companies subject to the RCA's jurisdiction are
required to obtain certificates of public convenience and necessity prior to
operating as a public utility in Alaska. The RCA is responsible for approving
new certificates and any transfers of existing certificates. In addition, the
RCA is responsible for implementing a portion of the competitive requirements of
the 1996 Act, as well as for regulating intrastate access and rates for local
and other services of local telephone companies. After passage of the 1996 Act,
the APUC adopted a plan to address competition issues across Alaska. The APUC
established multiple dockets to investigate different competition-related
issues, including revising local and long distance market structures, reforming
its intrastate access charge system and establishing a state universal service
fund. In addition to its preliminary actions to mandate access charge depooling
for ILECs operating in competitive markets, the RCA made operational the new
Alaska Universal Service Fund ("AUSF"). In a subsequent rulemaking, the RCA
revised its eligibility standards for companies receiving high-cost switching
support from the AUSF. These new rules resulted in a loss of support to ACS
Holdings' rural affiliates. Rather than seeking interim local relief for this
cost recovery shift, ACS Holdings has opted to include consideration of this
issue in the more comprehensive rate proceedings described below.

        In connection with regulatory approval of ACS Holdings' acquisitions of
CenturyTel's Alaska Properties and ATU in 1999, the APUC imposed several
conditions on its operating companies. Among those conditions was a requirement
that ACSA, ACSF, ACSAK, and ACSN each file revenue requirement, cost of service
and rate design studies no later than July 2001. All of these companies except




                                       13
<PAGE>   15
ACSF were also required to file updated depreciation analyses concurrently with
the rate case filings. ACS Holdings is actively involved in the production of
these filings and anticipates that a comprehensive schedule will be established
after a pre-hearing conference.

        As previously noted, restrictions were placed on the ability of ACS
Holdings' rural LECs to bundle service offerings with ACSLD. In October 2000,
ACSLD offered its innovative, flat-rated long distance plan called "Infinite
Minutes." Initially, Infinite Minutes was offered in the interstate jurisdiction
and included an eligibility requirement that customers subscribe to ACS
Holdings' local service (or Internet service where ACS Holdings' local service
was not otherwise available). After introducing the interstate plan, ACS
Holdings' filed a similar instate plan with the RCA. Although approved on an
interim basis, the RCA imposed several conditions on t Infinite Minutes. Among
these was the conclusion that requiring LEC subscription as an eligibility
criterion violated ACSLD's certificate restrictions regarding "bundled offers."
The RCA ordered ACSLD to "de-link" the instate Infinite Minutes offer from any
LEC bundling requirement for all markets, including Anchorage. The RCA also
ordered ACSLD to offer instate Infinite Minutes to all customers on a statewide
basis and to do so via a "1-800" platform in those locations where ACSLD did not
already operate. Finally, the RCA directed ACSLD to order equal access
interconnection with its competitor, GCI, in Anchorage, to facilitate access to
Infinite Minutes by GCI's LEC customers. After considerable review of the
changing economic profile of this offer as imposed by the RCA, ACSLD has
determined to discontinue its instate Infinite Minutes plan and has made
appropriate filings with the RCA to do so.

        Having secured both LEC certification and interconnections agreements to
serve the local exchange markets in Juneau and Fairbanks, Alaska, GCI's CLEC
operation has filed for "Eligible Telecommunications Carrier" ("ETC") status
with the RCA. ETC designation is an essential first step in securing "portable"
or shared universal service support. ACS Holdings' operating companies are
currently designated as ETCs in the same two markets for which GCI seeks similar
designation. Although it is possible to have multiple ETCs in a single market,
GCI's request is unusual in that it asks the RCA to act in advance of all
eligibility requirements having been met. ACS Holdings and the Alaska Telephone
Association are expected to file comments with the RCA.

        The RCA also commenced a rulemaking geared towards new regulations for
the "deaveraging" of LEC study areas for purposes of computing universal service
support. The regulatory objectives include creating competitive incentives in
the lower cost components of the study area without placing undue pressure on
support mechanisms for the higher cost segments. Although currently inactive,
this rulemaking is of particular interest to ACS Holdings and is likely to be
scheduled for further proceedings in 2001 along with an anticipated new
rulemaking targeted at further access charge reform.

        COST RECOVERY AND REVENUE RECOGNITION

        As a regulated common carrier, the operating subsidiary companies of ACS
Holdings are afforded the opportunity to set maximum rates at a level that
allows the Company to recover the reasonable costs incurred in the provision of
regulated telecommunications services and to earn a reasonable rate of return on
the investment required to provide these services.

        These costs are recovered through:

           -   monthly charges to end users for basic local telephone services
               and enhanced service offerings,

           -   access charges to interexchange carriers for originating and
               terminating interstate and intrastate interexchange calls,

           -   interconnection charges, wholesale service charges, UNE charges,
               and other rates to competing carriers interconnecting with the
               Company's networks or reselling its services and

           -   high-cost support mechanisms, such as the federal Universal
               Service Fund and the AUSF.

        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.



                                       14
<PAGE>   16

        In conjunction with the recovery of costs and establishment of rates for
regulated services, a LEC must first determine its aggregate costs and then
allocate those costs between regulated and nonregulated services. After
identifying the regulated costs of providing local telephone service, a LEC must
allocate those costs between state and federal jurisdictions and among its
various interstate and intrastate services. This process is complicated by the
necessity to allocate specific pieces of plant and equipment to a particular
service because a LEC's plant and equipment are utilized for different
jurisdictional services, such as local telephone and interstate and intrastate
access. This process is referred to as "separations" and is governed primarily
by the FCC's rules and regulations. The underlying legal purpose of separations
rules is to define how a carrier's expenses are allocated and recovered from
federal and state jurisdictions. 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.

        INTERSTATE END-USER RATES

        The deployment of the local telephone network from the switching
facility to the customer is known as the "local loop" and is one of the most
significant costs incurred by a LEC in providing telephone service. The FCC has
established a rate structure that provides for the recovery of a portion of the
cost of the local loop allocated to the interstate jurisdiction directly from
the end user customer through the assessment of a subscriber line charge. The
remaining portion of the local loop costs are recovered from interstate access
charges to an interexchange carrier or, in some circumstances, from the federal
Universal Service Fund. A number of new initiatives under review at the FCC have
the potential to shift substantial portions of the interexchange contribution
directly to the end user. Both the Coalition for Affordable Local and Long
distance Services ("CALLS") and the proposed Multi-Association Group ("MAG")
plans include an appreciable increase in the subscriber line charge paid by both
residential and business customers. The CALLS plan, affecting companies
servicing predominantly large, urban markets, has already been given FCC
approval. The similarly structured MAG plan, which may, if adopted, have direct
application to markets in Alaska, is under review by the FCC at this time.

        As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher than in
urban areas. In the absence of an accommodation in the FCC rules to address this
fact, a substantial portion of the costs of smaller LECs would remain allocated
to the intrastate jurisdiction placing substantial pressure on such carriers to
charge higher rates for intrastate services. Accordingly, the FCC provides for
additional interstate cost recovery by eligible telecommunications carriers
through the federal Universal Service Fund. The federal Universal Service Fund
is available to carriers whose local loop costs are significantly above the
national average as calculated pursuant to FCC rules. Recent FCC rulings have
made this high-cost support available to a competitive carrier, on an averaged
per line basis, for those lines serving customers switching to the competitive
carrier. See "Promotion of Universal Service," below. Rules for rural telephone
companies are still being developed by the FCC and have not been adopted as of
March 8, 2001.

        INTERSTATE ACCESS RATES

        Interstate access rates are developed on the basis of a LEC's
measurement of its interstate costs for the provision of access service to
interexchange carriers divided by its projected demand for access service. The
resulting rates are published in a company's interstate access tariff and filed
with the FCC, at which time they are subject to challenge by third parties and
to review by the FCC.

        The FCC recognized that this rate making and tariff filing process may
be administratively burdensome for small LECs. Accordingly, the FCC established
NECA, in 1983 to, among other things, develop common interstate access service
rates, terms and conditions. NECA develops interstate access rates on the basis
of data that are provided individually by participating LECs and blended to
yield average rates. These rates are intended to generate revenue equal to the
aggregate costs plus a return on the investment of all of the participants.
Currently, the authorized maximum rate of return used in setting interstate
access rates is 11.25%.

        On August 24, 2000, GCI, filed a formal complaint with the FCC under
various provisions of the Communications Act of 1934 (as amended), alleging that




                                       15
<PAGE>   17
ACSA (formerly known as ATU) exceeded their federally authorized rates of
return related to the 1997-1998 monitoring period. The principal issue raised in
the complaint focuses on the proper jurisdictional recognition (federal versus
state) of minutes of use associated with Internet service provider traffic. On
January 24, 2001, the FCC issued an order finding for GCI on the matter and
ordering the Company to pay GCI approximately $2.7 million plus interest. The
Company has filed an appeal in the United States Court of Appeals for the
District of Columbia Circuit and will seek a stay concerning its obligation to
pay GCI during the pendency of the appeal. The Company believes it has adhered
to applicable legal requirements and is actively defending its position, but
cannot predict the ultimate outcome of the proceedings. Amounts potentially
refundable under the FCC's order are fully reserved at December 31, 2000.

        Individual participating LECs are likely to have costs of providing
service that are either higher or lower than the revenues generated by applying
the overall NECA tariff rate. To rectify this result, the revenues generated by
applying the NECA rates are pooled from all of the participating companies and
redistributed on the basis of each individual company's costs. The result of
this process not only eliminates the burden of individual tariff filing, but
also produces a system in which small companies can share and spread risk. For
example, if a smaller LEC filed its own tariff and subsequently suffered the
loss of major customers that utilize interstate access service, the LEC could
suffer significant under-recovery of its costs. In the NECA pool environment,
the impact of this loss is reduced because it is spread over all of the pool
participants.

        NECA operates separate pools for traffic sensitive costs, which are
primarily switching costs, and non-traffic sensitive costs, which are primarily
loop costs. Companies are also free to develop and administer their own
interstate access charges. ACS Holdings' rural LECs participate in both the
traffic sensitive and non-traffic sensitive NECA pools. ACSA files its own
traffic sensitive access tariffs with the FCC but participates in the NECA
non-traffic sensitive pool.

        The FCC has initiated a proceeding to review its policies governing
interstate exchange access rates and the rate of return applicable to ILECs who
are subject to rate-of-return, rather than price cap, regulation. All of the
Company's LEC subsidiaries are rate-of-return regulated, and thus the outcome of
this proceeding could directly affect their earning prospects. The FCC has not
yet taken final action in this proceeding. In October, 2000, the MAG composed of
three trade associations representing small rural telephone companies, submitted
a proposal to the FCC that would, if adopted: (1) preserve the current 11.25
percent authorized rate of return for LECs subject to rate-of-return regulation;
(2) permit these carriers to elect "incentive" regulation that would allow them
to earn in excess of the authorized rate of return under some circumstances; and
(3) decrease overall interstate access charge rate levels, while increasing
universal service support payments. The FCC sought comment on the MAG Plan in
January 2001. The outcome of this proceeding and its ultimate impact on the
Company cannot be predicted at this time.

        On October 26, 2000, the FCC granted the petition of a subsidiary of ACS
Holdings, ACSA (previously filed under the name of ATU), seeking a waiver of
certain federal access charge rules. The effect of the waiver is to permit ACSA
pricing flexibility through the ability to offer term and volume discount
pricing in connection with its switched access services. The FCC waiver was
granted, in part, upon findings concerning the level of competition in the
Anchorage marketplace, as demonstrated in the record of the proceedings.

        END USER LOCAL RATES

        The levels of rates charged to end-users for the provision of basic
local service are generally subject to rate-of-return regulation administered by
the RCA. Local rates are typically set at a level that will allow recovery of
embedded costs for local service divided by the number of services and
customers. Recognized costs include an allowance for a rate of return on
investment in plant used to provide local service. Rate cases are typically
infrequent, carrier-initiated and require the carrier to meet substantial
burdens of proof. The last APUC-authorized rates of return were 12.55% and
11.70% for ACSAK and ACSN, respectively. These rates were ordered in 1989.
ACSA's last authorized rate of return was 8.97% for retail local exchange and
10.85% for intrastate access, ordered in 1991. ACSF was previously not regulated
by the APUC and instead was regulated by the City of Fairbanks Public Utilities
Board. As a condition of the acquisition of the City of Fairbanks Telephone
Operation by a predecessor company, the APUC required that a general rate




                                       16
<PAGE>   18
proceeding be initiated for ACSF by June 1999. This proceeding has been delayed
and combined with a requirement that all ACS Holdings' affiliate LECs file
revenue requirement analyses, cost of service studies and proposed rate designs
with the RCA no later than July 1, 2001.

        The APUC adopted regulations to govern competition in the local exchange
marketplace. The transitional regulations provide for, among other things:

        -  initial classification of all ILECs, including the Company's rural
           properties and ACSA, as dominant carriers,

        -  symmetrical requirements that all carriers, both dominant and
           nondominant, offer all retail services for resale at wholesale rates
           and

        -  substantial 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 to the APUC. Only rate increases
           affecting existing services are subject to full cost support showings
           for LECs in areas with local competition.

        INTRASTATE ACCESS RATES

        In the past, the APUC had required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each LEC charges interexchange carrier fees for originating or
terminating long distance calls on its network based on the statewide average
cost of access rather than on its individual costs of access. Access revenues
are collected in a pool administered by the AECA and then redistributed to the
LECs based on their actual costs. With the passage of the 1996 Act and increased
competition in the local exchange market, the APUC began a process of reforming
intrastate access charges.

        Under recent revisions to the Alaska access system, LECs not yet subject
to local competition continue to participate in the AECA pool. Participants in
this pool recover their costs based on the embedded cost of services most
recently authorized by the RCA. In the event of competitive entry into a
dominant incumbent carrier's service area, these revisions also require the
dominant LEC to exit the pool and initiate separate access charges. Dominant
LECs subjected to competitive entry have the right to propose that their access
charges be based on market rates. The RCA is currently advancing a proceeding to
examine whether changes to the current annual process for establishing access
charges are warranted. The RCA is also expected to issue a new access charge
reform Notice of Inquiry in early 2001 which will target further substantive
changes in access charge derivation.

        An additional consequence of this access reform is the continued removal
of subsidies implicit in access pricing. For instance, the APUC abolished the
"weighting system" for the non-traffic-sensitive rate element that had loaded
extra costs on access charges for lower cost urban exchanges to support rural
exchanges. At the same time, the APUC shifted the support requirement for high
switching costs to a state universal service fund. The RCA has adopted new
regulations which limit this switching support to local companies with access
lines of 20,000 or less. This change has reduced the amount of AUSF, which the
Company's rural LECs receive and the resulting cost recovery shift will be
addressed in the local service rate cases to be filed in 2001.

         The AUSF serves as a complement to the federal Universal Service Fund,
but must meet federal statutory criteria concerning consistency with federal
rules and regulations. Currently, the AUSF only subsidizes a portion of higher
cost carriers' switching costs, and the costs of lifeline service, which
supports rates of low income customers. It is expected that application of the
fund to support certain public interest payphones will occur in 2001. It is
unclear the degree to which the AUSF might be used to absorb cost shifts that
occur if federal universal service support is scaled back in the future.

        THE TELECOMMUNICATIONS ACT OF 1996

        Among other things, the 1996 Act was enacted to enhance competition
without jeopardizing the availability of nationwide universal service at
affordable rates. These two objectives have resulted in a complex set of rules
intended to promote competitive entry in the provision of local telephone
services except where entry would adversely affect the provision of universal
service or the public interest.



                                       17
<PAGE>   19

        PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL EXEMPTIONS

        The 1996 Act made competitive entry into the local telephone business
more attractive to other carriers by removing barriers to competition. In order
to promote competition, the 1996 Act established new interconnection rules
generally requiring LECs to allow competing carriers to interconnect with their
local networks. Congress recognized, however, that when the desire to promote
competition conflicted with the ability of existing carriers to provide
universal service to higher cost customers, LECs classified as "Rural Telephone
Companies" should be exempted from interconnection requirements until the
continuation of the exemption was no longer required by the public interest, as
defined in the 1996 Act.

        Under the 1996 Act, all LECs, including both ILECs and new competitive
carriers, are required to:

           -   offer reasonable and nondiscriminatory resale of their
               telecommunications services,

           -   ensure that customers can keep their telephone numbers when
               changing carriers,

           -   ensure that competitors' customers can use the same number of
               digits when dialing and receive nondiscriminatory access to
               telephone numbers, operator service, directory assistance and
               directory listing,

           -   ensure access to telephone poles, ducts, conduits and rights of
               way and

           -   compensate competitors for the costs of terminating traffic.

        The 1996 Act also requires ILECs to:

           -   negotiate in good faith the terms and conditions of
               interconnection with any competitive carrier making a request for
               same,

           -   interconnect their facilities and equipment with any requesting
               telecommunications carrier at any technically feasible point,

           -   unbundle and provide nondiscriminatory access to UNEs, such as
               local loops, switches and transport facilities, at
               nondiscriminatory rates and on nondiscriminatory terms and
               conditions, unless such carriers are exempt as rural telephone
               companies,

           -   offer resale interconnection at wholesale rates,

           -   provide reasonable notice of changes in the information necessary
               for transmission and routing of services over the ILEC's
               facilities or in the information necessary for interoperability
               and

           -   provide for the physical collocation of equipment necessary for
               interconnection or access to UNEs at the premises of the ILEC, at
               rates, terms and conditions that are just, reasonable and
               nondiscriminatory.

        In order to implement interconnection requirements, LECs generally enter
into negotiated interconnection arrangements with competing carriers. LECs may
also offer interconnection tariffs, available to all competitors.

        Competitors are required to compensate a LEC for the cost of providing
interconnection services. In the case of resale interconnection, the rules
provide that the rates charged should be on a wholesale basis and reflect the
current retail rates of the ILEC, excluding the portion of costs avoided by the
ILEC. In the case of UNE interconnection, rates are based on costing
methodologies that employ a forward-looking economic cost pricing methodology
known as Total Element Long Run Incremental Cost ("TELRIC").

         On January 25, 1999, in AT&T Corp. et al. v. Iowa Utilities Board et
al. 525 U.S. 366 (1999), the U.S. Supreme Court affirmed the FCC's authority to
develop national pricing guidelines, but the Supreme Court did not evaluate the
substance of these rules. Some ILECs have argued that the FCC improperly placed
upon them the burden of proof in rural exemption proceedings and improperly
defined the meaning of the term "not unduly economically burdensome" as used in
the 1996 Act. In addition, some ILECs argued that the FCC's forward-looking
TELRIC pricing methodology does not allow adequate compensation for the
provision of UNEs.



                                       18
<PAGE>   20

        On July 18, 2000, in Iowa Utilities Board, et al. v. Federal
Communications Commission 219 F.3d 744 (8th Cir. 2000) ("Iowa II"), the Eighth
Circuit Court of Appeals ordered some of these FCC rules to be vacated on the
grounds they were inconsistent with the 1996 Act. The Eighth Circuit said the
FCC's rural exemption rules were contrary to the plain language of the 1996 Act.
As to the FCC's TELRIC pricing methodology, the Eighth Circuit upheld the use of
a forward-looking economic model but vacated the FCC's rule requiring the
pricing model to assume a hypothetical network based upon the most efficient
technology currently available and the lowest cost network configuration.

        On September 22, 2000, the Eighth Circuit stayed that portion of its
mandate which vacated the FCC hypothetical network rule (set out at 47 C.F.R.
Section 51.505(b)(1)). This suspension was ordered by the Court to permit
parties to the proceeding to seek review of its Iowa II decision by the U.S.
Supreme Court. On January 22, 2001, the U.S. Supreme Court granted certiorari to
review the Eighth Circuit's decision requiring the FCC to vacate its
hypothetical network rule. The Eighth Circuit did not suspend other portions of
its decision, including those portions vacating FCC rules addressing the "rural
exemption" provisions of 47 U.S.C. Section 251(f)(1), and the U.S. Supreme Court
declined to review the Eighth Circuit's rural exemption decision.

        Subsequent to staying its mandate concerning the hypothetical network
rule, on January 8, 2001, the Eighth Circuit, in Southwestern Bell v. Missouri
Public Service Commission, 2001 W.L. 13289 (8th Cir. 2001), vacated an
interconnection agreement approved by the Missouri PSC on the grounds that it
relied on the hypothetical network rule that the Eighth Circuit had previously
found invalid. The Eighth Circuit, in that case, specifically held that despite
staying its mandate in Iowa II, all interconnection agreements must be based on
use of a pricing methodology that is consistent with the court's ruling in Iowa
II.

        The 1996 Act also specifies that resale and UNE rates are to be
negotiated among the parties, or, if the parties fail to reach an agreement,
arbitrated by the relevant state regulatory commission. Once the parties have
come to agreement, the proposed rates are subject to final approval by the state
regulatory commission.

         In January 1997, ACSA's predecessor ATU entered into an interconnection
agreement with GCI, which provides for resale and UNE interconnection, and with
AT&T Alascom, which provides for resale interconnection. Neither interconnection
agreement contained a defined term or a termination date. Near the end of 1999,
the Company notified GCI and AT&T of its view that the interconnection
agreements pertaining to ACSA had reached the end of a reasonable period of
availability. In January of 2000, the Company filed a motion with the RCA to
reopen the original GCI arbitration proceedings involving ACSA for the purpose
of establishing of an appropriate forward looking cost model and the re-pricing
various interconnection services and UNEs in the Anchorage market. The RCA
subsequently granted the essence of the Company's motion and has reopened the
docket for such purposes. No action was taken in 2000, but the Company expects
the RCA to hold hearings and consider the matter in 2001.

        Certain of ACS Holdings' local operating utilities, ACSAK, ACSN, and
ACSF, are defined as "rural telephone companies" under the 1996 Act. As rural
telephone companies, they were granted rural exemptions from the requirements
relating to both resale interconnection and UNE interconnection. The rural
exemptions were to continue until the APUC determined that interconnection was
technically feasible, not unduly economically burdensome and consistent with the
1996 Act's universal service provisions.

        On June 30, 1999, the APUC issued an order terminating the rural
exemptions of ACSN, ACSAK and ACSF. On October 11, 1999, the RCA affirmed the
APUC's order. As a result, these rural LECs are no longer exempt from the 1996
Act's interconnection requirements applicable to ILECs, and the Company's
competitors immediately requested interconnection agreements.

        Separately, on September 1, 1999, ACS Holdings filed petitions with the
RCA seeking suspension or modification of interconnection duties and addressing
market structure reforms for the Fairbanks and Juneau-Douglas markets. In those
petitions, the Company's rural LECs proposed tariffed terms and conditions,
including pricing, for resale of their services at wholesale discounts, for
certain UNEs, and for the interconnection of their facilities and those of CLECs
in the Fairbanks and Juneau-Douglas markets, effective January 1, 2000. Further,
as part of that proposal, ACS Holdings also requested that the RCA permit its




                                       19
<PAGE>   21
LECs to operate subject to cometitive regulation and that the RCA remove or
reduce other regulatory limitations in those markets, effective January 1, 2001.
Subsequently, on October 26, 1999, the RCA dismissed the Company's petitions
seeking to establish open competitive markets in Fairbanks and Juneau through
tariffed interconnection terms and conditions.

        On November 10, 1999, the Company filed a formal appeal of the RCA's
order terminating the rural exemptions in the Alaska Superior Court. On November
12, 1999, the Company filed a parallel appeal of the RCA's order dismissing its
petitions for tariffed interconnection in the Alaska Superior Court. The issues
in the case were fully briefed during the year 2000. Recently, the court denied
the Company's request to stay the RCA's order terminating the rural exemptions.
Although ACS Holdings believes that the appeals are well founded, it cannot
predict the timing and outcome of this litigation. The Company believes that the
RCA's order is inconsistent with the pronouncements of the Eighth Circuit and
that tariffing terms and conditions for interconnection will promote more open
competitive markets and thus eventually promote regulatory flexibility and/or
reduced regulation.

        Subsequent to terminating the rural exemptions for the Fairbanks and
Juneau-Douglas markets, the Company entered into unsuccessful negotiations for
interconnection agreements with GCI. Interconnection issues, including the
pricing for UNEs, were subject to a RCA arbitration during the year 2000. On
September 5, 2000, the RCA issued orders largely ratifying the findings of the
arbiter in the Fairbanks and Juneau interconnection arbitration proceedings
involving the Company and GCI. On September 25, 2000, the Company filed
protective appeals in the State Superior Court and in the Federal District Court
for the District of Alaska, alleging various errors in the RCA orders. On
October 5, 2000, the RCA issued final orders affirming the interconnection
agreements arbitrated in these proceedings. On October 20, 2000, the Company
filed a petition for reconsideration with the RCA, seeking Commission review and
redetermination of specific elements in its final order. The RCA did not act on
this petition. Although ACS Holdings believes that the appeals are well founded,
it cannot predict the timing and outcome of this litigation. The Company has and
will continue to vigorously defend its proposed cost models and interconnection
charges but it cannot be certain that it will be able to charge rates that
provide fair compensation for providing UNEs and/or schedule discounted resale
services.

        In 1999, the Company also received requests for interconnection from
Alaska Fiber Star, L.L.C. In 2000, the Company executed interconnection
agreements with Alaska Fiber Star, L.L.C. with terms tied to the Company's
interconnection agreements with GCI. The Company expects other interconnection
requests in the future.

        For 2000, ACS Holdings' LECs benefiting from rural exemptions accounted
for 40.2% of its consolidated operating revenues and 44.4% of its consolidated
operating income. The loss of the rural exemptions, absent compensating
measures, such as rate increases or market structure reforms, including the
replacement of implicit subsidies by explicit support mechanisms, rate
deaveraging, or regulatory flexibility, could adversely affect the Company's
operating results.

        PROMOTION OF UNIVERSAL SERVICE

        While the 1996 Act promoted Congress' policy of ensuring that affordable
service is provided to consumers universally in rural, high-cost areas of the
country, the 1996 Act altered the framework for providing universal service by:

           -   providing for the identification of those services eligible for
               universal service support,

           -   requiring the FCC to make implicit subsidies explicit,

           -   expanding the types of communications carriers required to pay
               universal service contributions and

           -   allowing CLECs to be eligible for funding.

        These and other provisions were intended to make provision of universal
service support compatible with a competitive market.

        Pursuant to the 1996 Act, federal Universal Service Fund payments are
only available to carriers that are designated as eligible telecommunications
carriers by a state public utilities commission. In areas served by rural



                                       20
<PAGE>   22

LECs, the 1996 Act provides that a state public utilities commission may
designate more than one eligible telecommunications carrier, in addition to the
ILEC, only after determining that the designation of an additional eligible
telecommunications carrier is consistent with the public interest. As a result,
an incumbent rural LEC has an opportunity to maintain its status as the sole
recipient of federal Universal Service Fund payments in its service area, even
if it is subsequently subjected to competition. ACSAK, ACSN and ACSF are
currently the sole designated eligible telecommunications carriers in their
respective service areas, although GCI has requested that the RCA designate it
as an eligible telecommunications carrier in Fairbanks, Juneau, Eielson, and
Fort Wainwright, all of which are currently served by the Company's
subsidiaries. The addition of a second eligible telecommunications carrier in
the service areas of ACS Holdings' properties could have the effect of reducing
the amount of funds available from the federal Universal Service Fund and could
materially adversely affect the Company's ability to achieve a reasonable rate
of return on the capital invested in its network.

        The FCC has adopted new universal service rules for non-rural LECs, such
as ACSA, effective January 1, 2000. These rules, like those previously in
effect, provide no federal universal service fund support to ACSA.

        Rules for rural telephone companies are still being developed by the
FCC, in consultation with a Federal-State Joint Board on Universal Service
("Joint Board"). The RCA Chairman is a member of this Joint Board, and the
Company's remaining LEC subsidiaries are rural telephone companies as defined in
the 1996 Act. In September 1997, the Joint Board created a Rural Task Force
(RTF) to study universal service issues facing rural telephone companies. In
September 2000, the RTF issued a recommendation to the Joint Board that, if
adopted by the FCC, would largely preserve or increase existing universal
service support to rural carriers. The FCC has sought comment on the RTF Plan
and is expected to act on it in 2001.

        Because the operating subsidiary companies of ACS Holdings provide
interstate and international services, they are required to contribute to the
federal Universal Service Fund a percentage of their revenue earned from their
interstate and international services. Although the Company's rural LECs receive
subsidies from the federal Universal Service Fund, they cannot be certain of
how, in the future, the Company's contributions to the fund will compare to the
subsidies they receive from the fund.

        Separately, the FCC has conducted a rulemaking concerning ways to
promote basic and advanced services to unserved and underserved areas. In June
2000, the FCC determined that all carriers, including cellular and other
carriers, must first consult with the relevant state commission to determine
whether the state commission or the FCC may properly designate the carrier as an
eligible telecommunications carrier to receive federal universal service support
for services provided on non-tribal lands. The FCC has indicated that it will
act on carrier requests to be designated as an eligible telecommunications
carriers for non-tribal lands only if the carrier provides a statement from the
state commission or a court of competent jurisdiction that the state commission
lacks authority to do so.

        FCC REGULATION OF 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.

        The FCC restricts the amount of wireless spectrum that a single entity
may hold in a market. Currently, the FCC's rules prohibit an entity from holding
more than 45 MHz of spectrum, except for certain rural cellular markets, in
which the limit is 55 MHz. Many interested parties in the wireless industry have
proposed elimination of the FCC's cap on wireless spectrum. On January 23, 2001,
the FCC initiated a proceeding to examine whether conditions in wireless markets
warrant elimination or modification these spectrum "cap" rules. Until this rule
is relaxed or eliminated, it will limit the amount of wireless spectrum the
Company can acquire in a particular market.



                                       21
<PAGE>   23

        The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of commercial mobile radio service
which includes personal communications services and cellular services and the
FCC does not regulate such rates. The FCC imposes, however, a variety of
additional regulatory requirements on commercial mobile radio service operators.
These include:

        -  Commercial mobile radio service 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 in
           the future, will be required to provide 911 service for individuals
           with speech and hearing disabilities.

        -  The FCC is considering mechanisms to permit commercial mobile radio
           service operators to charge the party initiating the call for the
           call (even if it is not a personal communications service or cellular
           subscriber).

        FCC REGULATION OF INTERSTATE LONG DISTANCE SERVICES

        The Company's long distance services are currently not subject to rate
regulation by the FCC, and it is not required to obtain FCC authorization for
the installation, acquisition or replacement of its domestic interexchange
network facilities. However, the Company must comply with the requirements of
common carriage under the Communications Act. ACS Holdings is subject to the
general requirement that its charges and terms for its telecommunications
services be "just and reasonable" and that it not make any "unjust or
unreasonable discrimination" in its charges or terms, as well as to a number of
other requirements of the Communications Act and the FCC's rules. The FCC has
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations, and it has recently levied substantial
fines on carriers that have engaged in "slamming," which is the industry term
for unauthorized switching of a customer's telecommunications service provider.

        In 1996, the FCC issued an order that required nondominant interexchange
carriers, like ACS Holdings, to cease filing tariffs for its domestic
interexchange services. The order required mandatory detariffing and gave
carriers nine months to withdraw federal tariffs and move into contractual
relationships with their customers. This order subsequently was upheld by the
United States Court of Appeals for the District of Columbia Circuit. As a
result, all interstate interexchange carriers, including ACSLD, were required to
detariff contract-type interstate, interexchange services by January 31, 2001,
and must detariff interstate consumer long distance services by April 30, 2001.
These rules also require ACSLD to post the rates, terms, and conditions of its
service on its Internet web site, and engage in other public disclosure
activities. The FCC has also proposed rules that would require nondominant
international carriers to detariff international services. ACSLD is already in
compliance with these current FCC requirements.

        FCC POLICY ON INTERNET SERVICES

        The 1996 Act establishes a distinction between telecommunications
services, which are regulated by the FCC, and information services, which remain
unregulated. ACS Holdings' Internet services are considered information services
and are not regulated by the FCC. Because the regulatory boundaries in this area
are somewhat unclear and subject to dispute, however, the FCC could seek to
characterize some of the Company's information services as "telecommunications
services." If that happens, those services would become subject to FCC
regulations. The impact of a reclassification of ACS Holdings' Internet services
is difficult to predict.

        In June 2000, the United States Court of Appeals for the Ninth Circuit
held that AT&T's high-speed Internet access service, delivered using cable
television facilities, constituted both a "telecommunications" and an
"information" service. In response to this holding, in September 2000, the FCC
launched a proceeding to examine whether providers of high-speed Internet access
over such cable facilities should be required to provide "open access" to their
facilities to competing Internet service providers on a nondiscriminatory basis.
If the FCC implements such a requirement, the Company may be able to supplement
its own high-speed Internet access offerings by obtaining access to GCI's
high-speed Internet access cable lines for its own Internet service provider.



                                       22
<PAGE>   24

        OTHER REGULATORY PROCEEDINGS

        In addition to the foregoing matters, a number of other FCC, state and
judicial proceedings are currently pending or may be initiated in the future
which could materially affect the Company's business. Some of these proceedings
include:

        -  The 1996 Act placed statutory restrictions on the ability of
           telecommunications carriers to use and disclose certain types of
           customer information in marketing different types of services. The
           U.S. Court of Appeals for the Tenth Circuit has held that the FCC's
           rules implementing this provision of the 1996 Act were an
           unconstitutional abridgment of the carrier's freedom of speech. In
           June 2000, the United States Supreme Court denied a petition to
           review the Tenth Circuit's decision. The FCC has not yet acted to
           develop revised implementing regulations. Although the Company
           continues to adhere to the statutory restrictions and the FCC's
           former rules pending further legal developments, any further FCC
           action to create new implementing rules may impose significant
           additional restrictions on ACS Holdings' ability to market packaged
           service offerings to its customers. The FCC has adopted new rules
           designed to make it easier for customers to understand the bills of
           telecommunications carriers. These new rules, among other things,
           establish certain requirements regarding the formatting of bills and
           the information that must be included on bills. In response to
           several petitions for reconsideration, in March 2000, the FCC largely
           reaffirmed its rules.

        -  The FCC has adopted an order that requires telecommunications service
           providers to make their services accessible to individuals with
           disabilities, if readily achievable. It is unclear the effect that
           this order will have on ACS Holdings' businesses.

        -  The FCC has ordered telecommunications service providers to provide
           law enforcement personnel with a sufficient number of ports and
           technical assistance in connection with wiretaps. In August 2000, the
           United States Court of Appeals for the District of Columbia Circuit
           vacated portions of these FCC rules and remanded the matter to the
           FCC for further consideration. The FCC has not yet taken action on
           remand. The Company cannot predict its costs of complying with these
           rules at this time.

        The foregoing is not an exhaustive list of proceedings that could
materially affect ACS Holdings' business. The Company cannot predict the outcome
of these or any other proceeding before the FCC, the RCA or the courts.

ENVIRONMENTAL REGULATIONS

        ACS Holdings' operations are subject to federal, state and local laws
and regulations governing the use, storage, disposal of, and exposure to,
hazardous materials, the release of pollutants into the environment and the
remediation of contamination. As an owner or operator of property and a
generator of hazardous wastes, the Company could be subject to environmental
laws that impose liability for the entire cost of cleanup at contaminated sites,
regardless of fault or the lawfulness of the activity that resulted in
contamination. The Company believes, however, that its operations are in
substantial compliance with applicable environmental laws and regulations.

         Many of ACS Holdings' properties formerly contained, or currently
contain, underground and above ground storage tanks used for the storage of fuel
or wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.

        ACS Holdings' cellular and television 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,




                                       23
<PAGE>   25
has been the subject of substantial study by the scientific community in recent
years. To date, the results of these studies have been inconclusive. Although
the Company has not been named in any lawsuits alleging damages from radio
frequency emissions, it is possible it could be in the future, particularly if
scientific studies conclusively determine that radio frequency emissions are
harmful.

ITEM 2. PROPERTIES

        At December 31, 2000, ACS Holdings' telecommunications network includes
over 485 miles of fiber optic cable, over 170 switching facilities and a
statewide cellular network. In addition, the Company purchased fiber capacity in
May of 1999 and in January of 2001 for high-speed links within Alaska and for
termination of traffic in the lower 49 states. The Company plans to continue
enhancing its network to meet customer demand for increased bandwidth and
advanced services. See "Business -- Network Facilities."

        Local Telephone. ACS Holdings' primary local telephone properties
consist of 168 switching facilities serving 74 exchanges. The Company owns most
of its administrative and maintenance facilities, customer service center,
central office and remote switching platforms and transport and distribution
network facilities. The Company's local telephone assets are located in Alaska.
The ACS Holdings leases its corporate headquarters located in Anchorage, Alaska.

        ACS Holdings' 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.

        Cellular. ACS Holdings has three cellular switches, 89 cell sites and
four repeaters that cover all major population centers and highway corridors
throughout Alaska. In most cases, the Company leases the land on which these
sites are located.

        Internet. ACS Holdings has point of presence facilities in over 25
communities serving the majority of Alaska's populated areas. These communities
are linked over both owned and leased facilities to the Internet at Seattle,
Washington.

        Interexchange network and other. ACS Holdings is a facilities based
interexchange carrier. The Company has invested in fiber optic capacity through
an indefeasible right of use that provides bandwidth between the Company's
Anchorage, Fairbanks, and Juneau locations and Seattle, Washington. The Company
also leases transport facilities and has arrangements with other interexchange
carriers to terminate traffic in the lower 49 states.

        Substantially all of the Company's assets (including those of its
subsidiaries) are pledged as collateral for its senior obligations. See Note 7
"Long-term Obligations" to the Alaska Communications Systems Holdings, Inc.
Consolidated Financial Statements for further discussion.

ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.

        Some of the legal proceedings involving regulatory matters are described
under "Business -- Regulation." In addition, the ALLTEL Publishing Corporation
initiated litigation alleging improper termination of certain directory
publishing contracts on February 25, 2000. Following various discovery
proceedings in August and September 2000, ALLTEL filed a second amended
complaint on October 10, 2000, alleging new facts in connection



                                       24
<PAGE>   26

with its cause of action. Subsequently, in December 2000, the Company negotiated
an agreement with ALLTEL that released it from all claims, known or unknown, in
exchange for cash consideration.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.



                                       25
<PAGE>   27

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company is a wholly owned subsidiary of ACS Group and as such has no
publicly traded equity securities. ACS Group's Common Stock, $.01 par value, was
first listed on the NASDAQ National Market on November 18, 1999 under the symbol
"ALSK." Prior to November 18, 1999, there was no public market for ACS Group's
Common Stock. The following table sets forth quarterly market price ranges for
ACS Group's Common Stock in 2000 and in 1999 for the period during which it was
publicly traded:

<TABLE>
<CAPTION>
          2000 QUARTERS                                     HIGH           LOW
          -------------                                   --------      --------
          <S>                                             <C>           <C>
          1st                                             $16.7500      $12.0625
          2nd                                             $14.5000      $ 9.8750
          3rd                                             $10.8750      $ 5.4375
          4th                                             $ 9.0000      $ 4.6250
</TABLE>

<TABLE>
<CAPTION>
          1999 QUARTERS                                     HIGH           LOW
          -------------                                   --------      --------
          <S>                                             <C>           <C>
          4th (from November 18 through December 31)      $16.0000      $12.0000
</TABLE>

        The approximate number of holders of record of Common Stock of ACS Group
as of March 7, 2001 was 48. Management believes that actual holders exceed
1,500, including those held in the broker/dealers name on behalf of their
clients.

DIVIDENDS

        The Company's parent, ACS Group, has never declared or paid any cash
dividends on its common stock. ACS Group intends to retain its earnings, if any,
to finance the development and expansion of its business, and, therefore, it
does not anticipate paying any cash dividends in the foreseeable future.
Moreover, ACS Group's ability to declare and pay cash dividends on its common
stock is restricted by covenants in ACS Holdings' bank credit agreement and in
the indentures governing its senior discount debentures and ACS Holdings' senior
subordinated notes.



                                       26
<PAGE>   28

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA

        The following table sets forth selected historical consolidated
financial data of ACS Holdings. Consider the following points in connection with
the table:

    -   The selected historical consolidated operating data for the year ended
        December 31, 1999 represents the consolidated results of ACS Holdings
        from May 15, 1999 through December 31, 1999. Certain reclassifications
        have been made to the 1999 combined operations to conform to the current
        presentation of ACS Holdings' consolidated operations.

    -   "EBITDA" is net income before interest expense, taxes on income,
        depreciation and amortization and extraordinary items. EBITDA is not
        intended to represent cash flow from operations as defined under
        generally accepted accounting principles and should not be considered as
        an alternative to net income as an indicator of the Company's operating
        performance or cash flows. EBITDA is presented because management
        believes it is a useful financial performance measure for comparing
        companies in the telecommunications industry in terms of operating
        performance and ability to satisfy debt service, capital expenditures
        and working capital requirements.

    -   "EBITDA margin" is EBITDA divided by total operating revenues.

        The selected historical consolidated financial data below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated financial statements of
ACS Holdings and the related notes. See Index to Financial Statements and
Schedules which appears on page F-1 hereof.



                                       27
<PAGE>   29

          ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
                 For the Years Ended December 31, 2000 and 1999
                    (dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                      2000             1999
                                                    ---------        ---------
<S>                                                 <C>              <C>
OPERATING DATA:
Operating revenues:
    Local telephone                                 $ 251,424        $ 159,151
    Cellular                                           39,490           24,836
    Internet                                            9,170            2,853
    Interexchange network and other                    12,909            6,305
                                                    ---------        ---------
       Total operating revenues                       312,993          193,145
Operating expenses:
    Local telephone                                   144,876          106,266
    Cellular                                           24,641           15,494
    Internet                                           11,785            5,121
    Interexchange network and other                    21,207            9,671
    Unusual charges                                     5,288               --
    Depreciation and amortization                      72,265           40,306
                                                    ---------        ---------
       Total operating expenses                       280,062          176,858
                                                    ---------        ---------
Operating income                                       32,931           16,287
Other income and expense:
    Interest expense                                  (62,109)         (37,517)
    Interest income and other                           3,631              426
    Equity in loss of investments                        (303)            (198)
                                                    ---------        ---------
       Total other income (expense)                   (58,781)         (37,289)
                                                    ---------        ---------
Loss before income taxes                              (25,850)         (21,002)
Income tax benefit                                       (197)            (301)
                                                    ---------        ---------
Net loss                                            $ (25,653)       $ (20,701)
                                                    =========        =========
OTHER FINANCIAL DATA:
Cash provided (used) by operating activities        $ 143,547        $ (50,648)
Cash used by investing activities                     (74,699)        (774,368)
Cash provided (used) by financing activities          (15,958)         833,741
EBITDA                                                108,524           56,821
EBITDA margin                                            34.7%            29.4%
Capital expenditures                                  (72,253)         (74,792)

OTHER DATA (END OF PERIOD)
Access lines in service                               329,460          325,608
Cellular subscribers                                   75,933           73,068
Cellular penetration                                     16.5%            15.9%

BALANCE SHEET DATA (END OF PERIOD)
Total assets                                        $ 909,306        $ 937,711
Long-term debt including current portion              599,642          598,407
Stockholders' equity                                  231,153          266,541
</TABLE>



                                       28
<PAGE>   30

SELECTED HISTORICAL COMBINED FINANCIAL DATA--CENTURYTEL'S ALASKA PROPERTIES

        The following table sets forth selected historical combined financial
data of CenturyTel's Alaska Properties. Consider the following points in
connection with the table:

        -  The Company derived the selected historical combined financial data
           for each of the three years in the period ended December 31, 1998 and
           as of December 31, 1997 and 1998 from the audited combined financial
           statements and the related notes of CenturyTel's Alaska Properties
           which are included elsewhere in this Form 10-K.

        -  The Company derived the selected historical combined financial data
           as of December 31, 1996, from the unaudited combined financial
           statements of CenturyTel's Alaska Properties which are not included
           in this Form 10-K.

        -  CenturyTel acquired its Alaska properties on December 1, 1997 as part
           of its acquisition of Pacific Telecom. This acquisition was accounted
           for as a purchase, resulting in a pushdown of $248 million of
           goodwill to CenturyTel's Alaska Properties.

        -  The financial statements for the 11-month period ended November 30,
           1997 and prior periods have been presented on Pacific Telecom's basis
           of accounting, while the financial statements as of December 31,
           1997, the one-month period ended December 31, 1997 and subsequent
           periods have been presented on CenturyTel's basis of accounting.

        -  The financial statements of CenturyTel's Alaska Properties include
           the results of the City of Fairbanks Telephone Operation from October
           6, 1997, the date of its acquisition. This acquisition was accounted
           for as a purchase.

        -  On December 31, 1997, the cellular operations in Fairbanks were sold
           to ATU. The Fairbanks cellular property had 5,497 subscribers at the
           time of the sale.

        The selected historical combined financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements of CenturyTel's
Alaska Properties and the related notes. See Index to Financial Statements and
Schedules which appears on page F-1 hereof.



                                       29
<PAGE>   31

<TABLE>
<CAPTION>
                                                            CenturyTel's Alaska Properties
                                              ------------------------------------------------------------
                                                   Century Telephone
                                                    Enterprises, Inc.                Pacific Telecom
                                              ----------------------------    ----------------------------
                                                Year          Dec. 1, 1997    Jan. 1, 1997
                                                Ended          to Dec 31,      to Nov. 30,
                                                1998             1997             1997             1996
                                              ---------       ------------    -------------      ---------
                                                              (Amounts in Thousands)
<S>                                           <C>             <C>             <C>                <C>
OPERATING DATA:
Operating revenues:
    Local telephone                           $ 121,933        $  10,255        $  79,330        $  75,950
    Cellular                                      2,576              181            5,120            4,823
                                              ---------        ---------        ---------        ---------
       Total operating revenues                 124,509           10,436           84,450           80,773

Operating expenses:
    Local telephone                              72,008            6,434           42,404           41,789
    Cellular                                      2,128              147            3,082            3,381
    Depreciation and amortization                30,459            2,466           15,823           15,348
                                              ---------        ---------        ---------        ---------
       Total operating expenses                 104,595            9,047           61,309           60,518

Operating income                                 19,914            1,389           23,141           20,255

Interest expense, net                            (1,405)            (171)          (2,169)          (1,996)
Other income (expense)                              356               53             (298)             (33)
                                              ---------        ---------        ---------        ---------

Income before income taxes                       18,865            1,271           20,674           18,226
Income taxes                                      9,218              736            7,746            6,737
                                              ---------        ---------        ---------        ---------
Net income                                    $   9,647        $     535        $  12,928        $  11,489
                                              =========        =========        =========        =========

OTHER FINANCIAL DATA:
Cash provided by operating activities         $  38,291        $   5,588        $  21,213        $  34,589
Cash used by investing activities               (26,664)          (3,279)         (13,554)         (20,611)
Cash used by financing activities                (6,770)          (2,563)          (8,209)         (12,947)
EBITDA                                           50,729            3,908           38,666           35,570
EBITDA margin                                      40.7%            37.4%            45.8%            44.0%
Capital expenditures                             26,799            1,825           14,575           20,465

OTHER DATA (END OF PERIOD):
Access lines in service                         131,858          124,869               --           82,969
Cellular subscribers                              2,945            2,096               --            5,573
Cellular penetration                                5.2%             3.7%              --              3.8%

BALANCE SHEET DATA (END OF PERIOD):
Total assets                                  $ 472,660        $ 459,175               --        $ 162,834
Long-term debt including current portion         43,408           42,950               --           44,294
Stockholders' equity                            400,962          391,314               --           92,137
</TABLE>



                                       30
<PAGE>   32

SELECTED HISTORICAL FINANCIAL DATA--ATU

        The following table sets forth selected historical financial data of
ATU. Consider the following points in connection with the table:

        -  ACS Holdings derived the selected historical financial data for each
           of the three years in the period ended December 31, 1998 and as of
           December 31, 1997 and 1998 from the audited financial statements and
           the related notes of ATU which are included elsewhere in this Form
           10-K.

        -  ACS Holdings derived the selected historical financial data as of
           December 1996 from the audited financial statements of ATU, which are
           not included in this Form 10-K.

        -  "Other income (expense)" includes the equity in earnings (losses)
           from minority investments.

        -  During the periods presented, ATU was a public utility of the
           Municipality of Anchorage and was exempt from federal and state taxes
           on income.

        -  Net cash data includes information from ATU financial statements
           prepared in accordance with governmental accounting standards. The
           differences between governmental accounting standards and the
           standards promulgated by the Financial Accounting Standards Board,
           and their impact on ATU's financial statements are discussed in Note
           1 to the financial statements of Municipality of Anchorage Telephone
           Utility Fund which are included elsewhere in this Form 10-K.

        -  On June 1, 1999, as part of the consolidation of its operating and
           billing systems, ACS Holdings conformed the methodology by which the
           number of access lines is calculated across all of its local
           exchanges to that used for CenturyTel's Alaska Properties. If the
           number of ATU's access lines in service at December 31, 1998 was
           computed under this same method, the number of access lines at ATU
           would increase by 4,940 and the total number of access lines would
           equal 305,334 and the combined growth percentage would be 6.6% for
           1999. Due to limited data available to ACS Holdings, no adjustments
           to the access lines in service for any year prior to 1998 have been
           computed.

        The selected historical financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of ATU and the related
notes which are included elsewhere in this Form 10-K.



                                       31
<PAGE>   33

<TABLE>
<CAPTION>
                                                                  ATU
                                              -------------------------------------------
                                                1998             1997             1996
                                              ---------        ---------        ---------
                                                         (Amounts in Thousands)
<S>                                           <C>              <C>              <C>
OPERATING DATA:
Operating revenues:
    Local telephone                           $ 121,057        $ 116,555        $ 113,415
    Cellular                                     29,225           21,845           16,897
    Long distance                                 6,815            1,541                2
                                              ---------        ---------        ---------
       Total operating revenues                 157,097          139,941          130,314

Operating expenses:
    Local telephone                              74,240           74,994           75,980
    Cellular                                     19,961           14,455           12,379
    Long distance                                10,395            4,644              543
    Depreciation and amortization                29,608           26,839           20,496
                                              ---------        ---------        ---------
       Total operating expenses                 134,204          120,932          109,398

Operating income                                 22,893           19,009           20,916

Interest expense, net                            (6,427)          (6,768)          (6,840)
Other income (expense)                           (2,896)            (123)            (219)
                                              ---------        ---------        ---------

Income before income taxes                       13,570           12,118           13,857
Income taxes                                         --               --               --
                                              ---------        ---------        ---------
Net income                                    $  13,570        $  12,118        $  13,857
                                              =========        =========        =========

OTHER FINANCIAL DATA:
Cash provided by operating activities         $  53,207        $  46,641        $  42,120
Cash used by investing activities                (5,659)          (3,665)            (787)
Cash used by financing activities               (33,580)         (46,916)         (30,095)
EBITDA                                           49,605           45,725           41,193
EBITDA margin                                      31.6%            32.7%            31.6%
Capital expenditures                             29,644           35,187           24,958

OTHER DATA (END OF PERIOD):
Access lines in service                         168,536          158,486          154,752
Cellular subscribers                             63,627           53,035           37,651
Cellular penetration                               15.8%            13.3%            12.6%

BALANCE SHEET DATA (END OF PERIOD):
Total assets                                  $ 350,245          323,124        $ 308,810
Long-term debt including current portion        172,521          151,945          146,412
Stockholders' equity                            141,884          136,414          132,596
</TABLE>



                                       32
<PAGE>   34

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS

        This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the United States.

        Investors should also be aware that while ACS Holdings does, at various
times, communicate with securities analysts, it is against ACS Holdings' policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Holdings
agrees with any statement or report issued by an analyst irrespective of the
content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of ACS Holdings.

INTRODUCTION

        This discussion and analysis should be read in conjunction with the
financial statements and related notes and the other financial information
included elsewhere in this Form 10-K.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS

            ACS Holdings is a wholly owned subsidiary of ACS Group. ACS Holdings
was formed in 1998 by Fox Paine & Company, members of the former senior
management team of Pacific Telecom, Inc., and other experienced
telecommunications industry executives. In May 1999, the Company acquired
CenturyTel's Alaska Properties and Anchorage Telephone Utility or ATU.
CenturyTel's Alaska Properties were the incumbent provider of local telephone
services in Juneau, Fairbanks and more than 70 rural communities in Alaska and
provided Internet services to customers statewide. CenturyTel's Alaska
Properties included ACS of Fairbanks, Inc., ACS of Alaska, Inc., and ACS of the
Northland, Inc. ATU was the largest LEC in Alaska and provided local telephone
and long distance services primarily in Anchorage and cellular services
statewide. ATU provided long distance services through ATU Long Distance, Inc.
and cellular services through MACtel, Inc. These companies are now known as ACS
of Anchorage, Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.

        The financial statements for the ACS Holdings represent the operations
of the following entities:

           -   Alaska Communications Systems Holdings, Inc.

           -   ACS of Alaska, Inc. (formerly Telephone Utilities of Alaska,
               Inc.)

           -   ACS of the Northland, Inc. (formerly Telephone Utilities of the
               Northland, Inc.)

           -   ACS of Fairbanks, Inc. (formerly PTI Communications of Alaska,
               Inc.)

           -   ACS of Anchorage, Inc. (formerly Alaska Communications Systems,
               Inc.)

           -   ACS Wireless, Inc. (formerly MACtel, Inc.)

           -   ACS Long Distance, Inc. (formerly ATU Long Distance, Inc.)

           -   ACS Television, L.L.C. (formerly Alaskan Choice Television,
               L.L.C.)

           -   ACS Internet, Inc. (formerly PTINet, Inc.)

           -   Internet Alaska, Inc.

        Prior to the consummation of the acquisitions of CenturyTel's Alaska
Properties and ATU in May 1999, ACS Holdings had no operations. Accordingly, the




                                       33
<PAGE>   35
following discussion should be read in conjunction with the Company's
consolidated financial statements and the related notes, the combined financial
statements and the related notes of CenturyTel's Alaska Properties and the
financial statements and the related notes of ATU included herein.

        Today, ACS Holdings generates revenue through:

        -  the provision of local telephone services, including:

           -   basic local service to retail customers within ACS Holdings'
               service areas,

           -   wholesale service to CLECs,

           -   network access services to interexchange carriers for origination
               and termination of interstate and intrastate long distance phone
               calls,

           -   enhanced services,

           -   ancillary services, such as B&C, and

           -   universal service payments;

        -  the provision of wireless services;

        -  the provision of Internet services; and;

        -  the provision of interexchange network services and other services,
           including:

           -   the provision of long distance services and

           -   the provision of wireless cable television services.

        ACS Holdings also recognizes its proportionate share of the net income
or loss of its minority-owned investments.

        Within the telecommunications industry, LECs have historically enjoyed
stable revenue and cash flow from local exchange operations resulting from the
need for basic telecommunications services, the highly regulated nature of the
telecommunications industry and, in the case of rural LECs, the underlying cost
recovery settlement and support mechanisms applicable to local exchange
operations. 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 by providing interexchange carriers access to the
LEC's local network and its customers. Universal service revenues are a subsidy
paid to rural LECs to support the high cost of providing service in rural
markets. Other service revenue is generated from ancillary services, enhanced
services and Internet access.

        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 residential
               subscriber,

           -   intrastate and interstate calling patterns,

           -   customers' selection of various local rate plan options,

           -   selection of enhanced calling services, such as voice mail, or
               other packaged products, such as cellular and Internet and

           -   other subscriber usage characteristics.

        LECs have three basic tiers of customers:

           -   business and residential customers located in their local service
               areas that pay for local phone service,

           -   interexchange carriers that pay for access to long distance
               calling customers located within its local service areas and



                                       34
<PAGE>   36

           -   CLEC's that pay for wholesale access to the Company's network in
               order to provide competitive local service on either a wholesale
               or UNE basis as prescribed under the 1996 Act.

        LECs provide access service to numerous interexchange carriers and may
also bill and collect long distance charges from interexchange carrier customers
on behalf of the interexchange carriers. The amount of access charge revenue
associated with a particular interexchange carrier varies depending upon long
distance calling patterns and the relative market share of each long distance
carrier.

        ACS Holdings' local service rates for end users are authorized by the
RCA. Authorized rates are set by the FCC and the RCA for interstate and
intrastate access charges, respectively, and may change from time to time.



                                       35
<PAGE>   37

RESULTS OF OPERATIONS

        The following unaudited table summarizes ACS Holdings' operations for
the years ended December 31, 2000, 1999 and 1998. For the year ended December
31, 1999, the summary information represents the historical combined operating
results of the Predecessor Entities- prior to their ownership by ACS Holdings,
from January 1, 1999 through May 14, 1999, plus the consolidated results of ACS
Holdings from May 15, 1999 through December 31, 1999. For the year ended
December 31, 1998, the summary information represents the historical combined
operating results of the Predecessor Entities - prior to their ownership by ACS
Holdings. Certain reclassifications have been made to the 1999 and 1998 combined
operations to conform to the current presentation of ACS Holdings' consolidated
operations.

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                       ------------------------------------------
                                       CONSOLIDATED             COMBINED
                                       ------------     -------------------------
                                          2000            1999            1998
                                       ------------     ---------       ---------
                                                     (in thousands)
<S>                                    <C>              <C>             <C>
Operating revenues
  Local telephone:
     Local network service              $  92,420       $  94,499       $  93,079
     Network access revenue               105,172         105,366          98,578
     Directory advertising                 32,056          27,911          26,507
     Deregulated revenue and other         21,776          21,198          19,644
                                        ---------       ---------       ---------
  Total local telephone                   251,424         248,974         237,808
  Cellular                                 39,490          36,041          31,801
  Internet                                  9,170           4,948           5,182
  Interexchange network and other          12,909           9,946           6,815
                                        ---------       ---------       ---------
        Total operating revenues          312,993         299,909         281,606

Operating expenses
  Local telephone                         144,876         160,200         141,933
  Cellular                                 24,641          23,748          22,089
  Internet                                 11,785           7,612           4,315
  Interexchange network and other          21,207          14,509          10,395
  Unusual charges                           5,288              --              --
  Depreciation and amortization            72,265          63,487          60,067
                                        ---------       ---------       ---------
     Total operating expenses             280,062         269,556         238,799
                                        ---------       ---------       ---------

Operating income                           32,931          30,353          42,807

Other income and expense:
  Interest expense                        (62,109)        (42,043)        (12,982)
  Interest income and other                 3,631           2,899           5,555
  Equity in loss of investments              (303)         (1,569)         (2,945)
                                        ---------       ---------       ---------
     Total other income (expense)         (58,781)        (40,713)        (10,372)
                                        ---------       ---------       ---------

Income (loss) before income taxes         (25,850)        (10,360)         32,435
Income tax expense (benefit)                 (197)          3,643           9,218
                                        ---------       ---------       ---------
Net income (loss)                       $ (25,653)      $ (14,003)      $  23,217
                                        =========       =========       =========
</TABLE>



                                       36
<PAGE>   38

        TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
        DECEMBER 31, 1999

OPERATING REVENUES

        Operating revenues increased $13.1 million, or 4.4%, for the year ended
December 31, 2000 compared to the year ended December 31, 1999. Local telephone,
cellular, Internet and interexchange network and other revenues all increased
compared to the prior period.

        Local Telephone

        Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, increased $ 2.5 million, or 1.0%, for the year ended December 31, 2000
compared to the same period in 1999.

        The local network service component of local telephone revenues was
$92.4 million during 2000 compared with $94.5 million during 1999. Revenue
decreased $2.1 million or 2.2% from the prior year, despite growth in average
total access lines in service of 4.6% and increased penetration of enhanced
features. The net decrease was due primarily to charges for uncollectible
accounts and increased market penetration of lower margin wholesale lines in the
Anchorage market. The charges for uncollectible accounts recorded against local
network service revenue in 2000 were $4.1 million in excess of those recorded
during 1999, accounting for more than 100% of the decrease in local network
service revenue. The charges for uncollectible accounts were also approximately
$2.6 million in excess of industry average collection rates. Collection
processes have been improved and management expects that charges for
uncollectible accounts will be in line with industry benchmarks going forward.
Management also believes that the continued loss of market share experienced in
the Anchorage market is attributable to below cost interconnection rates for
UNEs currently in place. The RCA has recently approved arbitrated
interconnection rates for UNEs for the Company's Fairbanks and Juneau markets
which, in the opinion of management, are also below cost. See "Business -
Regulation" under Item 1 of Part I of this report for further discussion.

        Network access revenues decreased by $0.2 million, or 0.2%, from $105.4
million in 1999 to $105.2 million in 2000. Network access revenues were reduced
by $3.6 million in the third quarter of as a result of a complaint filed with
the FCC during the third quarter alleging that one of the Company's subsidiaries
exceeded their federally authorized rate of return. See "Business - Regulatory"
under Item 1 of Part I of this report for further discussion of this matter.
Network access revenues are based on a regulated return on rate base and
recovery of allowable expenses associated with the origination and termination
of toll calls. The decrease in telephone access revenues from the corresponding
period in 1999 is due primarily to changes relating to cost allocation factors,
rate base and expenses from period to period. Management expects that network
access revenues will decline as a component of local telephone revenues for the
foreseeable future.

        Directory advertising revenues increased by $4.1 million from $27.9
million in 1999 to $32.1 million in 2000. This growth corresponds with the
growth in average access lines in service during 2000 over 1999 from 313,001
during 1999 to 327,534 during 2000, or an increase of 4.6%, combined with
additional penetration for the current directory phone book cycles.

        Deregulated and other revenues, which grew $0.6 million, or 2.7% over
1999, consists principally of B&C services, space and power rents, deregulated
equipment sales, paystation revenues and other miscellaneous telephone revenues.
The revenue increase was due primarily to increased deregulated equipment sales
in 2000.

        Cellular

        Cellular revenues increased $3.4 million, or 9.6%, to $39.5 million for
the year ended December 31, 2000 compared to $36.0 million for the year ended
December 31, 1999. This growth in revenue is due to growth in average cellular
subscribers to 74,501 in 2000 from 69,820 in 1999, or 6.7%, and an increase in
average revenue per unit from $43.02 in 1999 to $44.17 in 2000. The increase in
average revenue per unit is due to the rollout of statewide digital service
during 2000 and the introduction of new statewide and national pricing programs.



                                       37
<PAGE>   39

        Internet

        Internet revenues increased from $4.9 million in 1999 to $9.2 million in
2000 -- an increase of $4.2 million, or 85.3%. This increase is primarily due to
the additional revenues from IAI, which was acquired in June of 2000. Internet
revenues were also impacted by growth in DSL and dial-up subscribers.

        Interexchange Network and Other

        Interexchange network and other revenues include long distance and
wireless cable revenues. These revenues increased from $9.9 million in 1999 to
$12.9 million in 2000 -- an increase of $3.0 million, or 29.8%. Long distance
revenues increased from $9.6 million in 1999 to $11.8 million in 2000 due to
increases in long distance minutes of use from 67.7 million to 95.3 million and
increases in circuit rent revenues, coupled with the rollout of competitive
long-distance product offerings. Wireless cable revenues also increased $0.8
million due to the additional revenues from ACSTV, which was acquired in
September 1999.

OPERATING EXPENSES

        Operating expenses increased $10.5 million, or 3.9%, from $269.6 million
for the year ended December 31, 1999 to $280.1 million for the year ended
December 31, 2000.

        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. Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expenses decreased from
$160.2 million for the year ended December 31, 1999 to $144.9 million for the
year ended December 31, 2000 - a decrease of $15.3 million or 9.6%. During 1999,
the Company incurred one-time and transaction related costs associated with the
acquisitions of the Predecessor Entities of $7.1 million. The Company also
incurred $5.7 million of compensation expense related to telephone operations as
a result of options granted below fair value at the date of grant, which vested
fully upon the completion of ACS Group's initial public offering. Adjusted for
these non-recurring items, telephone operating expenses would have been $147.4
million for 1999. As a percentage of revenue, local telephone expense decreased
from 59.2% for 1999, adjusted for the non-recurring items, to 57.6% for 2000.
This change in local telephone expense as a percentage of local telephone
revenue improved despite approximately $4.1 million in charges for uncollectible
accounts recorded against revenues during 2000 in excess of those recorded
during 1999, as previously discussed. During 2000, ACS Holdings also incurred
$1.1 million of local telephone expense resulting from interconnection
proceedings with CLECs for which comparable costs were not incurred during the
corresponding year of 1999. Management expects to incur similar additional costs
associated with interconnection proceedings during 2001.

        Cellular

        Cellular expenses increased $0.9 million, or 3.8%, for the year ended
December 31, 2000 compared to the year ended December 31, 1999. Cellular expense
was 65.9% of cellular revenues for 1999 and 62.4% of cellular revenues for 2000.

        Internet

        Internet expenses increased by $4.2 million, or 54.8%, and decreased as
a percentage of revenue from 153.8% in 1999 to 128.5% in 2000. The increase in
Internet expenses was due to the acquisition in June of 2000 of IAI for which
comparable costs are not included for 1999, and costs associated with developing
the Company's statewide Internet infrastructure and the rollout of the DSL
product.



                                       38
<PAGE>   40

         Interexchange Network and Other

        Interexchange network, data services and other expenses increased by
$6.7 million, or 46.2%, and increased as a percentage of revenue from 145.9% in
1999 to 164.3% in 2000. The majority of this increase was the result of
additional circuit and other costs associated with developing the Company's
statewide network and increases in minutes of use for long distance as discussed
above. Wireless cable expenses also increased due to the acquisition of ACSTV,
which was completed in September of 1999.

        Unusual charges

        During the year ended December 31, 2000, ACS Holdings recorded $5.3
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association, $0.8 million in a legal settlement and $3.0 million related to
severance and restructuring plans. Employee force reductions resulting from
these restructuring plans are expected to total approximately 300 by their
completion, of which approximately 100 were completed by December 31, 2000. The
reduction in workforce, along with other cost structure improvements, is
expected to result in expense reductions for 2001 of between $12 and $15
million.

        Depreciation and Amortization

        Depreciation and amortization expense increased $8.8 million, or 13.8%,
due principally to increases in plant in service for the year ended December 31,
2000 over the corresponding period of 1999.

        INTEREST EXPENSE

        Interest expense increased $20.1 million, or 47.7%, for the year ended
December 31, 2000 as compared to the year ended December 31, 1999. This increase
is due to $591.7 million of debt incurred by ACS Holdings in connection with the
acquisitions on May 14, 1999 of substantially all of its operations.

        INCOME TAXES

        ACS Holdings has fully reserved the income tax benefit resulting from
the consolidated losses it has incurred since May 14, 1999 - the date of the
acquisition of substantially all of its operations. Income taxes reflected in
the combined financial statements are substantially those of the Predecessor
Entities.

        NET INCOME

        The decrease in net income is primarily a result of the factors
discussed above.



                                       39
<PAGE>   41

TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1998


        OPERATING REVENUES

        Operating revenues increased $18.3 million, or 6.5% for the twelve
months ended December 31, 1999 compared to the twelve months ended December 31,
1998. Local telephone, cellular and interexchange network and other revenues all
increased compared to the prior twelve-month period.

        Local Telephone

        Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, increased $11.2 million, or 4.7%, for the twelve months ended December
31, 1999 compared to the twelve months ended December 31, 1998.

        The local service revenue component of local telephone revenues was
$94.5 million during 1999 compared with $93.1 million during 1998 -- an increase
of $1.4 million or 1.5% over the prior year. This increase corresponds with the
growth in average total access lines in service of 6.7%, partially offset by the
growth in lower margin wholesale and UNE lines as a component of access line
growth in the Anchorage market.

        Network access revenues increased by $6.8 million, or 6.9%, from $98.6
million in 1998 to $105.4 million in 1999. Approximately $3.7 million of this
increase is due to the recording by ATU of $1.9 million of 1998 revenue true-ups
in 1999, prior to its acquisition by ACS Holdings.

        Directory advertising revenues increased by $1.4 million, or 5.3%, from
$26.5 million in 1998 to $27.9 million in 1999. This growth corresponds with the
growth in average access lines in service during 1999 over 1998 from 295,580
during 1998 to 315,471 during 1999, or an increase of 6.7%.

        Deregulated and other revenues, consists principally of B&C services,
space and power rents, deregulated equipment sales, paystation revenues and
other miscellaneous telephone revenues.

        Cellular

        Cellular revenues increased $4.2 million, or 13.3%, to $36.0 million for
the twelve months ended December 31, 1999 compared to $31.8 million for the
twelve months ended December 31, 1998. This growth in revenue is due to growth
in average cellular subscribers in service to 69,820 during 1999 from 60,852
during 1998, or a growth rate of 14.7%.

        Internet

        Internet revenues decreased from $5.2 million in 1998 to $4.9 million in
1999, reflecting increased competition.

        Interexchange Network and Other

        Interexchange network and other revenues include long distance and
wireless cable service revenues. These revenues increased from $6.8 million in
1998 to $9.9 million in 1999 -- an increase of $3.1 million, or 45.9%. This
increase is primarily due to an increase in long distance minutes of use from
41.5 million minutes to 67.7 million minutes for 1998 and 1999, respectively.

               OPERATING EXPENSES



                                       40
<PAGE>   42

        Operating expenses increased $30.8 million, or 12.9 %, from $238.8
million for the twelve months ended December 31, 1998 to $269.6 million for the
twelve months ended December 31, 1999. Operating expenses increased to 89.9% of
revenues for the twelve months ended December 31, 1999 from 84.8% of revenues
for the twelve months ended December 31, 1998. During 1999, the Company incurred
one-time and transaction related costs associated with the acquisitions of the
Predecessor Entities of $8.2 million. The Company also incurred $6.1 million of
compensation expense in connection with options granted below fair value at the
date of grant, which vested fully upon the completion of ACS Group's initial
public offering. Adjusted for these non-recurring items, operating expenses
would have been $255.3 million for 1999 compared with $238.8 million for 1998,
or 84.4% and 85.1% of revenues for 1999 and 1998, respectively.

        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. Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expenses increased from
$141.9 million for the year ended December 31, 1998 to $160.2 million for the
year ended December 31, 1999 - an increase of $18.3 million, or 12.9%. These
expense categories included the one-time and transaction related costs
associated with the acquisitions of $7.1 million and approximately $5.7 of the
compensation expenses as described in the preceding paragraph. Without these
non-recurring costs and compensation expense, local telephone expense would have
been approximately $147.4 million for 1999 compared to $141.9 million in 1998,
or an increase of $5.5 million or 3.9%. As adjusted, local telephone expense
represented 59.7% of local telephone revenue for 1998 and 59.2% for 1999.

        Cellular

        Cellular expenses increased $1.7 million, or 7.5%, for the twelve months
ended December 31, 1999 compared to the twelve months ended December 31, 1998.
Cellular expenses included approximately $.3 million of compensation expense as
previously described. Adjusted for the compensation expense, cellular expense
was $23.4 million in 1999 compared to $22.1 million in 1998 - an increase of
$1.3 million or 5.9% from 1998 to 1999. Cellular expense was 69.5% of cellular
revenues for 1998 and, as adjusted for compensation expense, 65.1% of cellular
revenues for 1999.

        Internet

        Internet expenses increased by $3.3 million, or 76.4%. The increase was
the result of costs associated with developing the Company's statewide Internet
infrastructure and marketing costs incurred to acquire additional customers.

         Interexchange Network and Other

        Interexchange network and other expenses increased by $4.1 million, or
39.6%, and decreased as a percentage of revenue from 152.5% in 1998 to 145.9% in
1999. The increase was the result of additional circuit and other costs
associated with developing the Company's statewide network and increases in
minutes of use for long distance as discussed above.

        DEPRECIATION AND AMORTIZATION

        Depreciation and amortization expense increased $3.4 million, or 5.7%,
due principally to increases in plant in service for the twelve months ended
December 31, 1999 over the corresponding period of 1998.

        INTEREST EXPENSE



                                       41
<PAGE>   43

        Interest expense increased $29.1 million, or 223.9%, for the twelve
months ended December 31, 1999 as compared to the year ended December 31, 1998
due to $591.7 million of debt incurred in connection with the acquisitions of
CenturyTel's Alaska Properties and ATU.

        INCOME TAXES

        ACS Holdings has fully reserved the income tax benefit resulting from
the consolidated losses incurred since the date of the acquisitions of the
Predecessor Entities. Income taxes reflected in the combined financial
statements are substantially those of the Predecessor Entities. See Note 10,
"Income Taxes," to the Alaska Communications Systems Holdings, Inc. Consolidated
Financial Statements for further discussion.

        NET INCOME

        The decrease in net income is primarily a result of the factors
discussed above and, in particular, the decrease in operating margin of $12.5
million and the increase in interest expense of $29.1 million as a result of the
financing of the acquisitions.



                                       42
<PAGE>   44

LIQUIDITY AND CAPITAL RESOURCES

        ACS Holdings has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and subsequent
contribution of capital by its parent, ACS Group, and debt financing. For the
twelve months ended December 31, 2000 the Company's cash flows from operating
activities, excluding repayment of advances by the parent, were $47.4 million.
At December 31, 2000, the Company had approximately $54.7 million in working
capital, with approximately $61.9 million in cash and cash equivalents. As of
December 31, 2000 the Company had $75.0 million of remaining capacity under its
revolving credit facility, representing 100% of available capacity.

        The Company has a $435.0 million bank credit agreement ("Senior Credit
Facility") and $150.0 million in 9.375% senior subordinated notes due 2009,
representing substantially all of the Company's long-term debt of $599.6 million
as of December 31, 2000. In addition, $17.3 in senior discount debentures are
recorded at ACS Group and are collateralized by substantially all assets of the
Company. Interest on ACS Group's senior discount debentures and ACS Holdings'
senior subordinated notes are payable semiannually. Interest on borrowings under
the Senior Credit Facility is payable monthly, quarterly or semi-annually at the
Company's option. The Senior Credit Facility requires annual principal payments
commencing on May 14, 2002.

        The Company employs an interest rate hedge transaction, which fixes at
5.99% the underlying variable rate on one-half of the borrowings under the
Senior Credit Facility, or $217.5 million, expiring in June 2002. The underlying
variable rate for the Senior Credit Facility is based on the London Interbank
Offer Rate ("LIBOR"), which is adjusted at each monthly, quarterly or
semi-annual rollover date.

        The local telephone network requires the timely maintenance of plant and
infrastructure. ACS Holdings' local network is of high quality, is technically
advanced and will have relatively predictable annual capital needs. The
Company's historical capital expenditures have been significant. The
construction and geographic expansion of ACS Holdings' cellular network has
required significant capital. The implementation of the Company's interexchange
network and data services strategy is also capital intensive. In 1999, the
Company purchased fiber capacity for $19.5 million, which was funded with monies
borrowed to finance the acquisition of substantially all of its operations.
Capital expenditures for 2000 were $72.3 million, including $3.2 million in
capital leases. ACS Holdings anticipates total capital spending in 2001 to be
approximately $75.0 million, including the purchase of additional fiber capacity
for $19.5 million in January 2001. The Company intends to fund its future
capital expenditures with cash on hand, through internally generated cash flows,
and if necessary, through additional borrowings under the revolving credit
facility.

        ACS Holdings' capital requirements may change, however, due to, among
other things: the Company's decision to pursue specific acquisition
opportunities, changes in technology, the effects of competition or changes in
the Company's business strategy. ACS Holdings' ability to satisfy its capital
requirements will be dependent upon its future financial performance, which is,
in turn, subject to future economic conditions and to financial, business and
other factors, many of which are beyond the Company's control.

        On September 30, 1999, the Company acquired an additional one-third
interest in Alaskan Choice Television (now ACSTV) for $1.9 million, increasing
its ownership to a two-thirds majority interest. On October 6, 1999, the Company
entered into an agreement to acquire the remaining one-third interest and on
February 14, 2000, the Company completed the acquisition of the remaining
one-third interest in ACSTV for $3.0 million.

        On June 16, 2000, ACS Holdings acquired all outstanding shares of IAI,
an Internet service provider with over 25,000 customers in Alaska. The
acquisition was funded entirely with cash on hand.

        ACS Holdings believes that it will have sufficient working capital
provided by operations and available borrowing capacity under the existing
revolving credit facility to fund its operations and capital expenditures over
the next 12 months. ACS Holdings' ability to satisfy its capital requirements
will be dependent upon its future financial performance, which is, in turn,
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.



                                       43
<PAGE>   45

EFFECT OF NEW ACCOUNTING STANDARDS

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures those
instruments at fair value. This statement, as amended, is effective for the
Company on January 1, 2001. Currently, the Company believes that adoption of
this statement will not have a material impact on its consolidated statements of
financial position, results of operations or cash flows.


OUTLOOK

        ACS Holdings expects the demand for telecommunications services in
Alaska to grow, particularly as a result of:

        -  continuing growth in demand for core telephone services and enhanced
           service offerings,

        -  increased line demand from expected growth in the Alaskan economy and
           population growth in ACS Holdings' service areas,

        -  increases in demand for cellular services and

        -  growth in demand for DSL and Internet access services due to higher
           business and consumer bandwidth needs for Internet and data services.

        The Company believes that it will be able to capitalize on this demand
through its diverse service offerings on its owned facilities and new sales and
marketing initiatives directed toward basic, enhanced and data services.

        There are currently a number of regulatory proceedings underway at the
state and federal levels that could have a significant impact on the Company's
operations.

        The Company cannot predict with certainty the impact of current or
future regulatory developments on any of its businesses. See "Business -
Regulation" under Part I, Item 1 of this report for further discussion.

        The telecommunications industry is extremely competitive, and ACS
Holdings expects competition to intensify in the future. As the ILEC, the
Company faces competition mainly from resellers, local providers who lease UNEs
from ACS Holdings and, to a lesser degree, from facilities-based providers of
local telephone services. In addition, as a result of the RCA's recent
affirmation of the APUC's termination of the Company's rural exemptions, ACS
Holdings may be required to provide interconnection elements and/or wholesale
discounted services to competitors in all or some of its rural service areas.
Moreover, while cellular telephone services have historically complemented
traditional LEC services, the Company anticipates that existing and emerging
wireless technologies may increasingly compete with LEC services. In cellular
services, ACS Holdings currently competes with at least one other cellular
provider in each of its cellular service areas. In long distance, the Company
currently has less than 5% of total long distance revenues in Alaska and faces
competition from the two major long distance providers in Alaska. In the highly
competitive business for Internet access services, ACS Holdings currently
competes with a number of established online service companies, interexchange
carriers and cable companies.

        The telecommunications industry is subject to continuous technological
change. ACS Holdings expects that new technological developments in the future
will generally serve to enhance its ability to provide service to its customers.
However, these developments may also increase competition or require the Company
to make significant capital investments to maintain its leadership position in
Alaska.

IMPACT OF INFLATION

        The effect of inflation on ACS Holdings' financial results has not been
significant in the periods presented.



                                       44
<PAGE>   46

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company has issued senior subordinated notes and has entered into a
bank credit facility. ACS Group also issued senior discount debentures, These
on-balance sheet financial instruments, to the extent they provide for variable
rates of interest, expose the Company to interest rate risk, with the primary
interest rate risk exposure resulting from changes in LIBOR or the prime rate,
which are used to determine the interest rates that are applicable to borrowings
under the Company's bank credit facilities. The Company uses off-balance sheet
derivative financial instruments, in particular an interest rate swap agreement,
to partially hedge variable interest transactions. The Company's derivative
financial instrument transaction has been entered into for hedging purposes
only. The terms and characteristics of the derivative financial instruments are
matched with the underlying on-balance sheet instrument or anticipated
transactions and do not constitute speculative or leveraged positions
independent of these exposures.

        The information below summarizes the Company's sensitivity to market
risk associated with fluctuations in interest rates as of December 31, 2000. To
the extent that the Company's financial instruments expose the Company to
interest rate risk, they are presented within each market risk category in the
table below. The table presents principal cash flows and related interest rates
by year of maturity for the Company's bank credit facilities, senior
subordinated notes and capital leases and other long-term obligations in effect
at December 31, 2000. The LIBOR rate used in the variable rate calculation to
forecast expected interest for 2001 and beyond was 6.40%, which was the three
month LIBOR rate on December 31, 2000. The cash flows related to the variable
portion of the interest rate swap is determined by comparing the December 31,
2000 three month LIBOR to the underlying contract rate and applying the spread
to the nominal amount. For the interest rate swap agreement, the table presents
the notional amount and the related reference interest rates by year of
maturity. Fair values included herein have been determined based on (i) quoted
market prices for senior subordinated notes; (ii) the carrying value for the
bank credit facility at December 31, 2000, as interest rates are reset
periodically; and (iii) by discounting expected cash flows to their present
value for the interest rate swap using the weighted average interest rate of the
Company's variable debt in effect at December 31, 2000. Alaska Communications
Systems Holdings, Inc.'s Consolidated Financial Statements contain descriptions
of the senior subordinated notes, credit facility, capital leases and other
long-term obligations and the interest rate swap agreement and should be read in
conjunction with the table below.



                                       45
<PAGE>   47

<TABLE>
<CAPTION>
                                                                                                     THERE-    TOTAL       FAIR
                                         2000      2001      2002      2003      2004      2005      AFTER     PAID        VALUE
                                        -------   -------   -------   -------   -------   -------   -------   --------   ---------
<S>                                     <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>        <C>
Interest Rate Sensitivity:
Credit Facility - Tranche A:                                                                                             $ 150,000
     Interest Amount                    $13,940   $13,948   $13,826   $13,687   $13,585   $13,408   $11,566   $ 93,960
     Average interest rate (variable)      9.29%     9.30%     9.15%     9.15%     9.15%     9.15%     9.15%      9.19%

Credit Facility - Tranche B:                                                                                             $ 150,000
     Interest Amount                    $14,428   $14,328   $14,203   $14,061   $13,956   $13,775   $25,390   $110,141
     Average interest rate (variable)      9.62%     9.55%     9.40%     9.40%     9.40%     9.40%     9.40%      9.45%

Credit Facility - Tranche C:                                                                                             $ 135,000
     Interest Amount                    $13,328   $13,237   $13,123   $12,991   $12,894   $12,727   $29,651   $107,951
     Average interest rate (variable)      9.87%     9.81%     9.65%     9.65%     9.65%     9.65%     9.65%      9.70%

Senior Subordinated Notes:                                                                                               $ 126,375
     Interest Amount                    $14,090   $14,051   $14,051   $14,051   $14,090   $14,051   $47,388   $131,772
     Average interest rate (fixed)         9.38%     9.38%     9.38%     9.38%     9.38%     9.38%     9.38%      9.38%

Capital leases and other                                                                                                 $  14,641
     Interest Amount                    $ 1,449   $ 1,118   $   976   $   907   $   845   $   777   $ 4,117   $ 10,189
     Average interest rate (fixed)         8.91%     8.47%     8.60%     8.56%     8.54%     8.50%    10.36%      8.85%

Credit Facility - $75 Million Revolver                                                                                   $      --
     Interest Amount                    $    --   $    --   $    --   $    --   $    --   $    --   $    --   $     --
     Average interest rate (variable)      0.00%     0.00%     0.00%     0.00%     0.00%     0.00%     0.00%      0.00%
     Comittment fee                     $   381   $   380   $   380   $   380   $   381   $   380   $   140   $  2,423
     Average interest rate (fixed)         0.50%     0.50%     0.50%     0.50%     0.50%     0.50%     0.50%      0.50%

Variable to Fixed Interest Rate Swap
 -- Credit Facility:                                                                                                     $  (1,243)
     Notional amount - $217,500
     Interest received                  $ 1,060   $   935   $   432   $    --   $    --   $    --   $    --   $  2,427
     Interest paid                      $    --   $    --   $    --   $    --   $    --   $    --   $    --   $     --
     Average receive rate                  0.49%     0.43%     0.41%     0.00%     0.00%     0.00%     0.00%      0.44%
     Average pay rate                        --        --        --        --        --        --        --       0.00%
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Combined and consolidated financial statements of Alaska Communications
Systems Holdings, Inc. and Subsidiaries, CenturyTel's Alaska Properties, and
Municipality of Anchorage Telephone Utility Fund are submitted as a separate
section of this Form 10-K. See Index to Financial Statements and Schedules which
appears on page F-1 hereof.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

        None.



                                       46
<PAGE>   48

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Except for the following information regarding ACS Holdings' executive
officers and directors, the information required by this item will be included
in ACS Group's definitive proxy statement for its 2001 Annual Meeting of
Stockholders (the "Proxy Statement"), or by an amendment to this report to be
filed on or before April 30, and such information is incorporated herein by
reference.

EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

        Set forth below are the executive officers and directors of ACS Holdings
as of the date hereof:

<TABLE>
<CAPTION>
NAME                          AGE     POSITION
----                          ---     --------
<S>                           <C>     <C>
Charles E. Robinson           67      Chairman and Chief Executive Officer
Wesley E. Carson              50      President and Chief Administrative Officer
John R. Ayers                 58      Executive Vice President and Chief
                                      Operating Officer
Kevin P. Hemenway             40      Senior Vice President, Treasurer and Chief
                                      Financial Officer
Leonard A. Steinberg          47      General Counsel and Secretary
Carl H. Marrs                 51      Director
Byron I. Mallott              58      Director
W. Dexter Paine, III          40      Director
Saul A. Fox                   47      Director
Wray T. Thorn                 29      Director
Brian Rogers                  50      Director
</TABLE>

        CHARLES E. ROBINSON, ACS Holdings' Chairman and Chief Executive Officer
since May 1999, has over four decades of experience in the telecommunications
industry. Mr. Robinson was instrumental in creating Alaska's long distance
communications systems, including the White Alice Communications System,
beginning in the late 1950's. Between 1979 and 1982, Mr. Robinson served as
President of Alascom, the state's primary long distance carrier at the time.
Under his guidance, Alascom developed the first statewide long distance service
network in Alaska, connecting with more than 27 independent local companies. Mr.
Robinson served as President and Chief Operating Officer of Pacific Telecom from
1981 until its sale to CenturyTel in 1997 and was appointed Chairman and Chief
Executive Officer in 1989. Mr. Robinson remained as President and Chief
Executive officer at Pacific Telecom until February 1999. Mr. Robinson has been
a member of the National Security Telecommunications Advisory Committee for the
last 18 years, having been appointed by President Reagan. Mr. Robinson has also
served on the Board of Directors of the United States Telecommunications
Association from 1993 to 1995 and from 1999 to the present. Since January 2000,
Mr. Robinson has served on the Board of Directors of WJ Communications, Inc.

        WESLEY E. CARSON, ACS Holdings' President and Chief Administrative
Officer, has been with the Company since its inception. Mr. Carson has held his
current position since November 2000. On October 7, 1999, Mr. Carson (previously
an Executive Vice President) was appointed President and Chief Operating
Officer, and served in that capacity until assuming his current role. Mr.
Robinson had previously held the title of President. Mr. Carson has over 20
years of telecommunications experience. He began his career in
telecommunications in 1980 with TRT Telecommunications Corporation, an
international data and voice carrier located in Washington, D.C. that was
acquired by Pacific Telecom in 1988. From 1989 to 1998, Mr. Carson served as the
Vice President of Human Resources for Pacific Telecom. From July 1998 to May
1999, Mr. Carson served as the Executive Vice President of LEC Consulting. Mr.
Carson holds a B.A. in International Relations from Brigham Young University, a
Master of Public Administration degree from the University of
Illinois-Springfield and a J.D. from Georgetown University.



                                       47
<PAGE>   49

        JOHN R. AYERS is Executive Vice President and Chief Operating Officer, a
position he has held since November 2000. Mr. Ayers joined ACS Holdings as
Senior Vice President of Marketing and Sales in May 1999 and served in that
capacity until assuming his current role. Mr. Ayers has more than 20 years of
experience in the telecommunications industry. As President and co-founder of
e.Net, Ltd. in 1996, Mr. Ayers served as a consultant to a variety of
established and start-up businesses. From February 1983 through March 1996, Mr.
Ayers held various leadership positions with Pacific Telecom and its
subsidiaries, including Executive Vice President of Pacific Telecom Services
Company, with responsibility for strategic planning, marketing and business
development, and Executive Vice President and General Manager of Alascom, Inc.,
Alaska's largest interexchange carrier. Mr. Ayers holds a bachelor's degree in
management from Golden Gate University.

        KEVIN P. HEMENWAY is Senior Vice President, Treasurer and Chief
Financial Officer, a position he has held since November 2000. Mr. Hemenway
joined ACS Holdings as Vice President and Treasurer in July 1999 and served in
that capacity until assuming his current role. Mr. Hemenway has over 10 years of
prior experience in the telecommunications industry. Before joining the Company,
Mr. Hemenway served as the Chief Financial Officer and Treasurer of Atlantic
Tele-Network, Inc. based in the U.S. Virgin Islands. From January 1990 to
October 1998, as an independent consultant, Mr. Hemenway performed financial,
accounting, management and rate making consulting services for the
telecommunications industry, principally for Atlantic Tele-Network, Inc. and its
subsidiaries. From 1986 through 1989, Mr. Hemenway was employed by Deloitte &
Touche LLP as a CPA and manager, performing both audit and consulting services
and from 1983 to 1986, was employed by Grant Thornton as a CPA and senior staff
accountant. Mr. Hemenway graduated from Creighton University in 1982 with a
B.S.B.A., majoring in accounting, and is a non-practicing CPA certificate holder
registered in the State of Nebraska.

        LEONARD A. STEINBERG is General Counsel and Secretary, a position he has
held since January 2001. Mr. Steinberg left private practice in June 2000 to
join ACS Holdings as a Senior Attorney in the Corporate Legal Department. From
1998 to 2000, Mr. Steinberg used his expertise in regulatory and administrative
matters to represent telecommunications and energy clients of Brena, Bell &
Clarkson, P.C., an Anchorage, Alaska law firm. Prior to that, Mr. Steinberg was
a Partner in the firm of Hoise, Wes, Sacks & Brelsford with offices in
Anchorage, Alaska and San Francisco, California. Mr. Steinberg practiced in the
firm's Anchorage office from 1996-1998 and in the firm's San Francisco office
from 1988-1996 where he primarily represented large clients in oil and gas
royalty and tax disputes. Mr. Steinberg holds a Masters in Public Administration
degree from Harvard University's Kennedy School of Government, Masters of
Business Administration degree from U.C. Berkeley's Haas School of Business and
a J.D. from the University of California's Hastings College of Law.

        CARL H. MARRS, a director since July 1999, is President and Chief
Executive Officer of Cook Inlet Region, Inc. Mr. Marrs has been with of Cook
Inlet Region, Inc. for approximately 25 years. During that period Mr. Marrs has
been employed in a series of management positions, culminating in his
appointment as President in 1986. Mr. Marrs attended the Stanford University
School of Business for Executives in 1983 and the Amos Tuck School of Business
at Dartmouth College in 1986.

        BYRON I. MALLOTT, a director since January 2000, is the President and
Chief Executive Officer of the First Alaskans Foundation. From 1995 until
January 2000, Mr. Mallott served as the Executive Director of the Alaska
Permanent Fund Corporation. Prior to joining the Alaska Permanent Fund
Corporation, Mr. Mallott served in various capacities, including Director,
Chairman and President and Chief Executive Officer of Sealaska Corporation over
a period of nearly 20 years. Mr. Mallott has also served in various political
appointments and elected positions.

        W. DEXTER PAINE, III, a director since July 1998, was a co-founder and
has been President of Fox Paine & Company since its inception in 1997. From 1994
until founding Fox Paine, Mr. Paine served as a senior partner of Kohlberg &
Company. Prior to joining Kohlberg & Company, Mr. Paine served as a general
partner at Robertson Stephens & Company. Mr. Paine has a B.A. in economics from
Williams College. Since January 2000, Mr. Paine has served as the Chairman of
the Board of Directors of WJ Communications, Inc.

        SAUL A. FOX, a director since May 1999, was a co-founder and has been
Chief Executive Officer of Fox Paine & Company since its inception in 1997. From
1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis &
Roberts & Co. Prior to joining KKR, Mr. Fox was an attorney at Latham & Watkins,
a law firm headquartered in Los Angeles, California. Mr. Fox has a B.S. in




                                       48
<PAGE>   50
communications and computer science from Temple University and a J.D. from the
University of Pennsylvania Law School. Since January 2000, Mr. Fox has served on
the Board of Directors of WJ Communications, Inc.

        WRAY T. THORN, a director since January 2000, has also been a director
with Fox Paine & Company since January 2000. From 1996 until joining Fox Paine &
Company, Mr. Thorn was a principal and founding member of Dubilier & Company.
Prior to joining Dubilier & Company, Mr. Thorn was an associate in the
Acquisition Finance Group of Chase Securities, Inc. Mr. Thorn is a graduate of
Harvard University. Since January 2000, Mr. Thorn has served on the Board of
Directors of WJ Communications, Inc.

        BRIAN ROGERS, a director since February 2001, is currently Principal
Consultant and Chief Financial Officer for Information Insights, Inc., a
management and public policy consulting firm. Mr. Rogers served as Vice
President of Finance for the University of Alaska Statewide System from 1988 to
1995. Mr. Rogers is a former state legislator, who served in the Alaska State
House of Representatives from 1979 to 1982. Mr. Rogers chaired the State of
Alaska Long-Range Planning Commission during 1995 and 1996, and currently, as a
Regent of the University of Alaska, serves as Chair of the University's Audit
Committee. He holds a Master in Public Administration degree from the Kennedy
School of Government, Harvard University.

        DONN T. WONNELL, Executive Vice President, General Counsel and Secretary
since June 1999, left the Company in December 2000 for personal reasons
unrelated to ACS Holdings.

        MICHAEL E. HOLMSTROM, Senior Vice President and Chief Financial Officer
since February 1999, left the Company in November 2000 for personal reasons
unrelated to ACS Holdings.

        F. SCOTT DAVIS, Senior Vice President of Non-Regulated Operations since
February 2000, retired in June 2000.

        JASON B. HURWITZ, a director since October 1999, left the board in
January 2000 for personal reasons unrelated to ACS Holdings.


ITEM 11.  EXECUTIVE COMPENSATION

        The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item will be included in ACS Group's
definitive Proxy Statement, and such information is incorporated herein by
reference.



                                       49
<PAGE>   51

PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a) 1. Financial Statements

        Combined and consolidated financial statements of ACS Holdings and its
        Predecessor Entities are submitted as a separate section of this Form
        10-K. See Index to Combined and Consolidated Financial Statements and
        Schedules which appears on page F-1 hereof.

        2. Financial Statement Schedule

        Financial statement schedules for ACS Holdings and its subsidiaries are
        submitted as a separate section of this Form 10-K. See Index to Combined
        and Consolidated Financial Statements and Schedule which appears on page
        F-1 hereof.

    (b) Reports on Form 8-K

        No reports on Form 8-K were filed during the quarter ended December 31,
2000.


     (c)       Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<S>          <C>
   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.*

   2.2       Asset Purchase Agreement, dated as of October 20, 1998, by and
             between Alaska Communications Systems, Inc. and the Municipality of
             Anchorage*

   3.1       Amended and Restated Certificate of Incorporation of the Registrant*****

   3.2       Amended and Restated By-Laws of the Registrant*****

   4.1       Specimen of Common Stock Certificate*****

   4.2       Stockholders' Agreement, dated as of May 14, 1999, by and among the
             Registrant and the Investors listed on the signature pages thereto*

   4.3       First Amendment to Stockholders' Agreement, dated as of July 6,
             1999, by and among the Registrant and the Stockholders listed on
             the signature pages thereto*

   4.4       Second Amendment to Stockholders' Agreement, dated as of November
             16, 1999 by and among the Registrant and the Stockholder's listed
             on the signature pages thereto*****

   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*

   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*

   4.7       Indenture, dated as of May 14, 1999, by and between the Registrant
             and The Bank of New York*

   4.8       First Amendment, dated as of October 29, 1999, to Indenture listed
             as Exhibit No. 4.7**

   4.9       Form of Second Amendment dated as of November 17, 1999 to Indenture
             listed as Exhibit No. 4.7*****

   4.10      Purchase Agreement, dated as of May 11, 1999, by and among the
             Registrant, DLJ Investment Partners, L.P., DLJ Investment Funding,
             Inc. and DLJ ESC II, L.P.*

   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*

   10.2      Exchange and Registration Rights Agreement, dated as of May 14,
             1999, by and among the Registrant, DLJ Investment Partners, L.P.,
             DLJ Investment Funding, Inc. and DLJ ESC II L.P.*
</TABLE>



                                       50
<PAGE>   52

<TABLE>
<S>          <C>
   10.3      Credit Agreement, dated as of May 14, 1999, by and among Alaska
             Communications Systems Holdings, Inc., the Registrant, the
             financial institutions Lenders party thereto, The Chase Manhattan
             Bank, Credit Suisse First Boston and Canadian Imperial Bank of
             Commerce*

   10.4      Amendment No. 1, dated as of October 19, 1999 to Credit Agreement
             listed as Exhibit No. 10.3**

   10.5      Employment Agreement, dated as of March 12, 1999, by and among
             Alaska Communications Systems Holdings, Inc., the Registrant and
             Charles E. Robinson*

   10.6      Employment Agreement, dated as of March 12, 1999, by and among
             Alaska Communications Systems Holdings, Inc., the Registrant and
             Wesley E. Carson*

   10.7      ALEC Holdings, Inc. 1999 Stock Incentive Plan*

   10.8      Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan *****

   10.9      Alaska Communications Systems Group, Inc. 1999 Non-Employee
             Director Compensation Plan *****

   10.10     Alaska Communications Systems Group, Inc. 1999 Employee Stock
             Purchase Plan *****

   12.1      Statements Re: Computation of Ratios

   21.1      Subsidiaries of the Registrant

   24.1      Powers of Attorney (included on signature page)***
</TABLE>

----------

      *     Filed as an exhibit to the Registrant's Registration Statement on
            Form S-4 No. 333-82361 and incorporated by reference thereto.

      **    Filed as an exhibit to the Registrant's Form 8-K filed on November
            5, 1999 and incorporated by reference thereto.

      ***   Previously filed on October 8, 1999 and incorporated by reference
            thereto.

      ****  Previously filed on November 1, 1999 and incorporated by reference
            thereto.

      ***** Previously filed as an exhibit to the Registrants Registration
            Statement on Form S-1/A file No. 333-888753 filed on November 17,
            1999 and incorporated by reference thereto.

                                       51
<PAGE>   53

                                   SIGNATURES


        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.



                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.



<TABLE>
<CAPTION>
           SIGNATURE                                TITLE                           DATE
           ---------                                -----                           ----
<S>                               <C>                                        <C>
    /s/ Charles E. Robinson       Chief Executive Officer and Chairman of    March 14, 2001
    -----------------------       the Board
      Charles E. Robinson

      /s/ Wesley E. Carson        President and Chief Administrative         March 14, 2001
      --------------------        Officer
        Wesley E. Carson

       /s/ John R. Ayers          Executive Vice President and Chief         March 14, 2001
       -----------------          Operating Officer
         John R. Ayers

     /s/ Kevin P. Hemenway        Senior Vice President, Treasurer and       March 14, 2001
     ---------------------        Chief Financial Officer (Principal
       Kevin P. Hemenway          Accounting Officer)

    /s/ Leonard A. Steinberg      General Counsel and Secretary              March 14, 2001
    ------------------------
      Leonard A. Steinberg

       /s/ Carl A. Marrs          Director                                   March 14, 2001
       -----------------
         Carl A. Marrs

      /s/ Byron I. Mallott        Director                                   March 14, 2001
      --------------------
        Byron I. Mallott

        /s/ Brian Rogers          Director                                   March 14, 2001
        ----------------
          Brian Rogers

    /s/ W. Dexter Paine, III      Director                                   March 14, 2001
    ------------------------
     W. Dexter Paine, III

        /s/ Saul A. Fox           Director                                   March 14, 2001
        ---------------
          Saul A. Fox

       /s/ Wray T. Thorn          Director                                   March 14, 2001
       -----------------
         Wray T. Thorn
</TABLE>


                                       52
<PAGE>   54

             INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                     <C>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
  Independent Auditors' Report                                                           F-2
  Consolidated Balance Sheets - December 31, 2000 and 1999                               F-3
  Consolidated Statements of Operations - Years Ended December 31, 2000 and 1999         F-4
  Consolidated Statements of Stockholder's Equity - Years Ended December 31,
      2000 and 1999                                                                      F-5
  Consolidated Statements of Cash Flows - Years Ended December 31, 2000 and 1999
      and Period from July 16, 1998 (Date of Inception) through December 31, 1998        F-6
  Notes to Consolidated Financial Statements - Years Ended December 31, 2000
      and 1999                                                                           F-7
  Schedule II- Valuation and Qualifying Accounts                                        F-27

CENTURYTEL ALASKA PROPERTIES
  Independent Auditors' Reports                                                         F-28
  Combined Balance Sheets--December 31, 1997 and December 31, 1998                      F-30
  Combined Statements of Income and Retained Earnings--Year Ended December 31,
      1996, Eleven Months Ended November 30, 1997, One Month Ended December 31,
      1997 and Year Ended December 31, 1998                                             F-31
  Combined Statements of Cash Flows--Year Ended December 31, 1996, Eleven Months
      Ended November 30, 1997, One Month Ended December 31, 1997 and Year Ended
      December 31, 1998                                                                 F-32
  Notes to Combined Financial Statements--Year Ended December 31, 1996, Eleven
      Months Ended November 30, 1997, One Month Ended December 31, 1997 and Year
      Ended December 31, 1998                                                           F-33

MUNICIPALITY OF ANCHORAGE TELEPHONE UTILITY FUND
  Independent Auditors' Report                                                          F-43
  Balance Sheets--December 31, 1997 and December 31, 1998                               F-44
  Statements of Revenues, Expenses, and Changes in Retained Earnings--
      Years Ended December 31, 1996, 1997 and 1998                                      F-45
  Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998                F-46
  Notes to Financial Statements--Years Ended December 31, 1996, 1997 and 1998           F-47
</TABLE>



                                      F-1
<PAGE>   55

                          INDEPENDENT AUDITORS' REPORT


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, 2000
and 1999, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the years ended December 31, 2000 and 1999, and the
consolidated statement of cash flows for the period from July 16, 1998 (date of
inception) through December 31, 1998. Our audits included the financial
statement schedule listed in Item 14(a)2 of Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

        In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alaska
Communications Systems Holdings, Inc. and subsidiaries as of December 31, 2000
and 1999, and the results of their operations, and their cash flows for the
years ended December 31, 2000 and 1999 and their cash flows for the period from
July 16, 1998 (date of inception) through December 31, 1998 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, present fairly
in all material respects the information set forth therein.



/s/ DELOITTE & TOUCHE LLP

Portland, Oregon
February 20, 2001



                                      F-2
<PAGE>   56

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
                       (In Thousands Except Share Amounts)


<TABLE>
<CAPTION>
                                ASSETS                                     2000           1999
                                                                         ---------      ---------
<S>                                                                      <C>            <C>
Current assets:
    Cash and cash equivalents                                            $  61,896      $   9,006
    Accounts receivable-trade, net of allowance of $9,831 and $5,203        46,337         49,323
    Accounts receivable-affiliate                                            1,516         97,676
    Materials and supplies                                                  11,103          5,923
    Prepayments and other current assets                                     4,304          3,533
                                                                         ---------      ---------
       Total current assets                                                125,156        165,461

Investments                                                                  1,370          1,673

Property, plant and equipment                                              953,557        902,131
Less:  Accumulated depreciation and amortization                           492,822        452,304
                                                                         ---------      ---------
    Property, plant and equipment, net                                     460,735        449,827

Goodwill, net of accumulated amortization of $11,753 and $4,243            258,236        250,346
Other assets                                                                63,809         70,404
                                                                         ---------      ---------
Total assets                                                             $ 909,306      $ 937,711
                                                                         =========      =========

                      LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
    Current portion of long-term obligations                                 2,870          4,944
    Accounts payable-trade                                                  31,865         30,688
    Accounts payable-affiliate                                               1,145            610
    Advance billings and customer deposits                                   8,689          7,521
    Accrued and other current liabilities                                   25,860         20,324
                                                                         ---------      ---------
       Total current liabilities                                            70,429         64,087

Long-term obligations, net of current portion                              596,772        593,463
Unamortized investment tax credits                                             197            394
Other deferred credits and long-term liabilities                            10,755         13,226
Commitments and contingencies                                                   --             --

Stockholder's equity:
    Common stock, $.01 par value; 1,000 shares authorized, 1 share
       issued and outstanding                                                   --             --
    Contributed capital                                                    287,242        287,242
    Accumulated deficit                                                    (56,089)       (20,701)
                                                                         ---------      ---------
       Total stockholder's equity                                          231,153        266,541
                                                                         ---------      ---------
Total liabilities and stockholder's equity                               $ 909,306      $ 937,711
                                                                         =========      =========
</TABLE>


                 See Notes to Consolidated Financial Statements



                                      F-3
<PAGE>   57

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                            2000           1999
                                          ---------      ---------
<S>                                       <C>            <C>
Operating revenues:
     Local telephone                      $ 251,424      $ 159,151
     Cellular                                39,490         24,836
     Internet                                 9,170          2,853
     Interexchange network and other         12,909          6,305
                                          ---------      ---------
         Total operating revenues           312,993        193,145

Operating expenses:
     Local telephone                        144,876        106,266
     Cellular                                24,641         15,494
     Internet                                11,785          5,121
     Interexchange network and other         21,207          9,671
     Unusual charges                          5,288             --
     Depreciation and amortization           72,265         40,306
                                          ---------      ---------
         Total operating expenses           280,062        176,858
                                          ---------      ---------

Operating income                             32,931         16,287

Other income and expense:
     Interest expense                       (62,109)       (37,517)
     Interest income and other                3,631            426
     Equity in loss of investments             (303)          (198)
                                          ---------      ---------
         Total other income (expense)       (58,781)       (37,289)
                                          ---------      ---------

Loss before income taxes                    (25,850)       (21,002)

Income tax benefit                              197            301
                                          ---------      ---------

Net loss                                  $ (25,653)     $ (20,701)
                                          =========      =========
</TABLE>


                 See Notes to Consolidated Financial Statements



                                      F-4
<PAGE>   58

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                COMMON      CONTRIBUTED   ACCUMULATED    STOCKHOLDER'S
                                STOCK         CAPITAL       DEFICIT         EQUITY
                               ---------    -----------   -----------    -------------
<S>                            <C>          <C>           <C>            <C>
Balance, December 31, 1998     $      --     $      --     $      --      $      --

Contribution of capital               --       287,242            --        287,242

Net loss                              --            --       (20,701)       (20,701)
                               ---------     ---------     ---------      ---------

Balance, December 31, 1999            --       287,242       (20,701)       266,541

Dividends                             --            --        (9,735)        (9,735)

Net loss                              --            --       (25,653)       (25,653)
                               ---------     ---------     ---------      ---------

Balance, December 31, 2000     $      --     $ 287,242     $ (56,089)     $ 231,153
                               =========     =========     =========      =========
</TABLE>


                 See Notes to Consolidated Financial Statements



                                      F-5
<PAGE>   59

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED DECEMBER 31, 2000 AND 1999 AND
    PERIOD FROM JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      2000           1999           1998
                                                                                    ---------      ---------      ---------
<S>                                                                                 <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                            $ (25,653)     $ (20,701)     $      --
Adjustments to reconcile net loss to net cash provided by operating activities:
     Depreciation and amortization                                                     72,265         40,306             --
     Amortization of debt issuance costs                                                4,526          2,855             --
     Amortization of deferred compensation - stock options                                 --          6,145             --
     Investment tax credits                                                              (197)          (301)            --
     Capitalized interest                                                              (1,096)          (860)            --
     Other deferred credits                                                            (1,141)         2,987             --
     Changes in components of working capital:
       Accounts receivable and other current assets                                    (6,443)         3,196             --
       Accounts receivable - affiliates                                                96,160        (97,676)            --
       Accounts payable and other current liabilities                                   4,126         13,968             --
       Other                                                                            1,000           (567)            --
                                                                                    ---------      ---------      ---------
Net cash provided (used) by operating activities                                      143,547        (50,648)            --

CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and capital expenditures, net of capitalized interest                    (69,101)       (74,052)           (36)
Cost of acquisitions, net of cash received                                             (5,598)      (697,732)            --
Other assets                                                                               --         (2,584)          (261)
Accounts receivable from employees and related party                                       --             --            (42)
                                                                                    ---------      ---------      ---------
Net cash used by investing activities                                                 (74,699)      (774,368)          (339)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from stockholder                                                    --             --            620
Proceeds from the issuance of long-term debt                                               --        592,927             --
Payments on long-term debt                                                             (6,223)        (3,269)            --
Debt issuance costs                                                                        --        (37,014)            --
Contributed capital                                                                        --        281,097             --
Dividends                                                                              (9,735)            --             --
                                                                                    ---------      ---------      ---------
Net cash provided (used) by financing activities                                      (15,958)       833,741            620

Increase in cash                                                                       52,890          8,725            281
Cash and cash equivalents at beginning of the year                                      9,006            281             --
                                                                                    ---------      ---------      ---------
Cash and cash equivalents at the end of the year                                    $  61,896      $   9,006      $     281
                                                                                    =========      =========      =========

SUPPLEMENTAL CASH FLOW DATA:
Interest paid                                                                       $  57,418      $  31,783      $      --
Income taxes paid                                                                          --             --             --
SUPPLEMENTAL NONCASH TRANSACTIONS:
Property acquired under capital leases                                              $   3,152      $     740      $      --
Note payable in connection with acquisition                                             2,250             --             --
</TABLE>


                 See Notes to Consolidated Financial Statements



                                      F-6
<PAGE>   60

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (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") (formerly ALEC Holdings, Inc.), a Delaware
corporation, is engaged principally in providing local telephone, wireless,
Internet and interexchange network and other services to its customers in the
State of Alaska through its telecommunications subsidiaries. The Company was
organized in July of 1998 for the purpose of acquiring and operating
telecommunications properties. The principal activities in 1998 and through May
14, 1999 were the preparation of systems and obtaining financing for pending
acquisitions (see Note 2, Acquisitions). On May 14, 1999, the Company was
acquired and became a wholly owned subsidiary of Alaska Communications Systems
Group, Inc. (the "Parent" or "ACS Group").

        The consolidated financial statements for the Company represent the
operating results of the following legal entities from the date of their
respective acquisition (see Note 2, Acquisitions):

    -   Alaska Communications Systems Holdings, Inc.

    -   ACS of Alaska, Inc. ("ACSAK") (formerly Telephone Utilities of Alaska,
        Inc.)

    -   ACS of the Northland, Inc. ("ACSN") (formerly Telephone Utilities of the
        Northland, Inc.)

    -   ACS of Fairbanks, Inc. ("ACSF") (formerly PTI Communications of Alaska,
        Inc.)

    -   ACS of Anchorage, Inc. ("ACSA") (formerly Alaska Communications Systems,
        Inc.)

    -   ACS Wireless, Inc. ("ACSW") (formerly MACtel, Inc.)

    -   ACS Long Distance, Inc. ("ACSLD") (formerly ATU Long Distance, Inc.)

    -   ACS Television, L.L.C. ("ACSTV") (formerly Alaskan Choice Television,
        L.L.C.)

    -   ACS Internet, Inc. (formerly PTINet, Inc.)

    -   Internet Alaska, Inc. ("IAI")

        A summary of significant accounting policies followed by the Company is
set forth below:

Basis Of Presentation

        The accompanying consolidated financial statements are as of and for the
years ended December 31, 2000 and 1999 and include the operations of the Company
and ACSAK, ACSN, ACSF, ACSA, ACSW, ACSLD, and ACS Internet, Inc. since their
acquisition on May 14, 1999, ACSTV since its acquisition on September 30, 1999,
and IAI since its acquisition on June 16, 2000.

        The consolidated financial statements include all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.

        Certain reclassifications have been made to the 1999 financial
statements to make them conform to the current presentation, including a
reduction of operating revenues and operating expenses of $474 to conform to the
current practice of eliminating intersegment revenue and expense.

Use Of Estimates

        The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of commitments and contingencies at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. 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 investments with a maturity at
acquisition of three months or less to be cash equivalents.



                                      F-7
<PAGE>   61

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Materials and Supplies

        Materials and supplies are carried in inventory at the lower of weighted
average cost or market.

Investments

        Investments in unconsolidated subsidiaries and other investees in which
the Company has 20% to 50% interest or otherwise exercises significant influence
are accounted for under the equity method.

        Investments carried at equity consists of the following at December 31,
2000:

<TABLE>
<CAPTION>
        Company:                             Carrying value       Percent Owned
        <S>                                  <C>                  <C>
           Alaska Network Services, Inc.         $1,370               47.0%
</TABLE>

        Investments carried at equity consists of the following at December 31,
1999:

<TABLE>
<CAPTION>
        Company:                             Carrying value       Percent Owned
        <S>                                  <C>                  <C>
           Alaska Network Services, Inc.         $1,614               47.0%
           Internet Alaska, Inc.                     59               28.5%
                                                 ------
                                                 $1,673
                                                 ------
</TABLE>

        Alaska Network Services, Inc. (ANS) by vote of its Board of Directors
has elected to wind up its operations and dissolve, which it expects to complete
during 2001. During 2000 the Company wrote down its investment in ANS to its
expected realizable value.

        The Company acquired all outstanding shares of IAI on June 16, 2000.

Property, Plant and Equipment

        Telephone plant is stated substantially at original cost of
construction. Telephone plant retired in the ordinary course of business,
together with 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 the regulatory authorities. The composite annualized rate of
depreciation for all classes of property, plant, and equipment was 6.6% and 6.5%
for 2000 and 1999, respectively.

        The company is the lessee of equipment and buildings under capital
leases expiring in various years through 2019. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation expense
for 2000 and 1999.

        Non-Telephone plant 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.

Cellular, PCS, and UHF Licenses

        Cellular, PCS, and UHF licenses are stated at purchased cost.
Amortization is computed on the straight-line method over an estimated useful
life of 40 years. These licenses are renewable at the Company's option in
perpetuity. The amortization expense for 2000 and 1999 was $606 and $347,
respectively.



                                      F-8
<PAGE>   62

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill

        Goodwill represents the excess of cost of companies acquired over the
fair value of their net assets at dates of acquisition. Goodwill associated with
the purchase of telephone properties is amortized on the straight-line method
over 40 years. Goodwill associated with non-regulated properties is amortized
using the straight-line method over 15 years. The amortization expense for 2000
and 1999 was $7,510 and $4,243, respectively.

Debt Issue Costs

        Legal, accounting and financing fees, printing costs, and other expenses
associated with the senior credit facility, and senior subordinated notes are
being amortized on the straight-line method over the term of the debt, which
approximates the effective interest method. Amortization expense included in
interest expense for 2000 and 1999 was $4,526 and $2,855.

Revenue Recognition

        Recurring local service revenues are billed one month in advance and are
deferred until earned. Nonrecurring 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 2000
and 1999, no customer accounted for more than 10% of the consolidated revenues
of the Company.

        Access revenues are recognized when earned. The Company participates in
toll revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the Regulatory Commission of Alaska
("RCA") within the intrastate jurisdiction and the Federal Communications
Commission ("FCC") within the interstate jurisdiction. Much of the interstate
access service 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 refined
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.

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 it is unlikely they will be realized. One of the acquired
companies had a remaining unamortized regulatory investment tax credit of $695
at May 14, 1999, of which $301 was amortized against income in 1999, $197 was
amortized against income in 2000 leaving a remaining balance of $197 at December
31, 2000.

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 Statements 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. Depreciable lives of plant and equipment
approximate their estimated economic lives. Unregulated 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 principals. The effect of
adopting SFAS 101 , Regulated Enterprises - Accounting for the Discontinuation
of Application of FASB Statement No. 71, would not be material to the Company's
financial position, results of operations or cash flows.



                                      F-9
<PAGE>   63

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Regulatory Accounting and Regulation, continued

        The local telephone exchange activities of the Company are subject to
rate regulation by the FCC for interstate telecommunication service, and the RCA
for intrastate and local exchange telecommunication service. The Company, as
required by the FCC, accounts for such activity separately. Long distance
services of the Company are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the RCA for intrastate telecommunication services. Cellular operations are not
subject to rate regulation.

Impairment of Long-Lived Assets

        The Company evaluates the carrying value of property, plant and
equipment and intangibles if events or changes in circumstances indicate the
carrying amount of such assets may not be fully recoverable on the undiscounted
cash flow basis of the underlying business.

Comprehensive Income (Loss)

        The Company's comprehensive loss is equal to its net loss for all
periods presented.

Recent Accounting Pronouncements

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the balance sheet and measures
those instruments at fair value. This statement, as amended, is effective
beginning for the Company's fiscal year ending December 31, 2001. Currently, the
Company believes that adoption of this statement will not have a material impact
on its consolidated statements.


2.  ACQUISITIONS

        On May 14, 1999, ACS Holdings acquired Century Telephone Enterprise,
Inc.'s Alaska holdings, including ACSAK, ACSN, ACSF, Pacific Telecom of Alaska
PCS, Inc., and Pacific Telecom Cellular of Alaska, Inc., excluding the assets,
liabilities and equity of Alaska RSA#1 (collectively, "CenturyTel Alaska
properties"). On the same date, ACS Holdings also acquired from the Municipality
of Anchorage ACSA and its subsidiaries, ACSW and ACSLD (collectively, "ATU").
These holdings include local area exchange service, long distance service,
Internet service and cellular operations throughout rural Alaska and Anchorage.
Both acquisitions were accounted for under the purchase method of accounting.
The financial statements reflect the allocation of the purchase price and
assumption of certain liabilities and include the operating results of both ATU
and CenturyTel Alaska properties from the date of acquisition. In total, the
Company paid Century Telephone Enterprise $411,784 for the CenturyTel Alaska
properties and the Municipality of Anchorage $265,115 for the assets acquired.
Acquisition expenses totaling $19,216 were also allocated to the purchase price.



                                      F-10
<PAGE>   64

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


2.  ACQUISITIONS (CONTINUED)

        The following reflects the allocation of the purchase price and the
sources of funds to finance the purchase.

<TABLE>
<CAPTION>
                                  CenturyTel
                                   Alaska
                                  properties        ATU           Total
                                  ----------     ---------      ---------
<S>                               <C>            <C>            <C>
Current assets                    $  16,882      $  42,146      $  59,028
Property, plant and equipment       157,758        248,648        406,406
Other assets                         13,680         20,665         34,345
Liabilities assumed                 (19,746)       (41,177)       (60,923)
                                  ---------      ---------      ---------
Net assets acquired                 168,574        270,282        438,856
Goodwill                            250,323          6,936        257,259
                                  ---------      ---------      ---------
Total cost of acquisition           418,897        277,218        696,115
Acquisition expenses                 (7,113)       (12,103)       (19,216)
                                  ---------      ---------      ---------
Total purchase price paid         $ 411,784      $ 265,115      $ 676,899
                                  =========      =========      =========
</TABLE>

Net assets acquired were purchased for cash provided from the following sources:

<TABLE>
<S>                                                                     <C>
Senior credit facility revolving loan                                   $  6,700
Senior credit facility term loans                                        435,000
9-3/8% senior subordinated notes due 2009                                150,000
13% senior discount debentures due 2011                                   19,911
Issuance of common stock and warrants                                    126,289
                                                                        --------
Total sources                                                           $737,900
                                                                        ========
</TABLE>

        These sources also provided $12,601 of working capital and included
$48,400 of transaction fees and expenses.

        The following are the unaudited pro forma results for the years ended
December 31, 1999 and 1998, giving effect to the acquisitions as if they had
occurred at the beginning of the periods.

<TABLE>
<CAPTION>
                                                1999                    1998
                                              ---------               ---------
<S>                                           <C>                     <C>
Revenues                                      $ 299,909               $ 281,606
Net loss                                        (23,965)                (15,068)
</TABLE>

        On September 30, 1999, the Company acquired a majority interest in
Alaskan Choice Television, LLC ("ACTV"'). The cash purchase price was
approximately $1,900. On February 14, 2000, the Company purchased the remaining
one-third interest of ACTV for $3,042, including a $2,250 note payable which
calls for accelerated principal payments based on the achievement of certain
subscriber goals in the future. This acquisition is not included in the pro
forma results above, as it would not have had a significant effect.

        On June 16, 2000, the Company acquired a 100% interest in IAI. It
previously held a minority interest of 28.5%. This acquisition is not included
in the pro forma results above, as it would not have had a significant effect.



                                      F-11
<PAGE>   65

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


3.  ACCOUNTS RECEIVABLE

        Accounts receivable - trade at December 31, 2000 and 1999 is comprised
of the following:

<TABLE>
<CAPTION>
                                                           2000           1999
                                                          -------        -------
<S>                                                       <C>            <C>
Accounts receivable - trade:
    Customers                                             $39,594        $36,163
    Connecting companies                                   13,410         14,261
    Other                                                   3,164          4,102
                                                          -------        -------
                                                           56,168         54,526
    Less allowance for doubtful accounts                    9,831          5,203
                                                          -------        -------
    Accounts receivable - trade, net                      $46,337        $49,323
                                                          =======        =======
</TABLE>

4.  PROPERTY, PLANT AND EQUIPMENT

        Property, plant, and equipment at December 31, 2000 and 1999 is
comprised of the following:

<TABLE>
<CAPTION>
                                                             2000         1999
                                                           --------     --------
<S>                                                        <C>          <C>
Property, plant, and equipment:
    Land, buildings and support assets                     $144,500     $143,806
    Central office switching and transmission               286,714      256,805
    Outside plant cable and wire facilities                 455,213      437,813
    Cellular switching and transmission systems              34,738       21,861
    Other                                                     5,311        6,316
    Construction work in progress                            27,081       35,530
                                                           --------     --------
                                                            953,557      902,131
    Less accumulated depreciation and amortization          492,822      452,304
                                                           --------     --------
    Property, plant and equipment, net                     $460,735     $449,827
                                                           ========     ========
</TABLE>

        The following is a summary of property held under capital leases
included in the above property, plant and equipment:

<TABLE>
<CAPTION>
                                                             2000         1999
                                                            -------      -------
<S>                                                         <C>          <C>
Property held under capital leases:
    Land, buildings and support assets                      $ 9,230      $ 8,974
    Outside plant cable and wire facilities                   2,710           --
    Other                                                       856           --
                                                            -------      -------
                                                             12,796        8,974
    Less accumulated depreciation and amortization            1,250          325
                                                            -------      -------
    Property held under capital leases, net                 $11,546      $ 8,649
                                                            =======      =======
</TABLE>

        Amortization on assets under capital leases included in depreciation
expense in 2000 and 1999 is $925 and $325, respectively.



                                      F-12
<PAGE>   66

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


4.  PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

        The Company leases various land, buildings, right-of-ways, and personal
property under operating lease agreements. Rental expenses under operating
leases for 2000 and 1999 were $4,055 and $1,030, respectively. Future minimum
payments under these leases for the next five years and thereafter are as
follows:

<TABLE>
<S>                                                  <C>
                       2001                          $ 3,126
                       2002                            2,743
                       2003                            2,213
                       2004                            1,277
                       2005                              804
                    Thereafter                         5,837
                                                     -------
                                                     $16,000
                                                     =======
</TABLE>

5.  OTHER ASSETS

        Other assets at December 31, 2000 and 1999 was comprised of the
following:

<TABLE>
<CAPTION>
                                                                   2000         1999
                                                                  -------      -------
<S>                                                               <C>          <C>
Debt issue costs, net of accumulated amortization
    of $7,381 and $2,855, respectively                            $29,633      $34,159
Cellular, PCS, and UHF licenses, net of amortization of $953
    and $347, respectively                                         24,943       25,431
Prepaid pension asset                                               3,862        3,530
Deferred charges and other assets                                   5,371        7,284
                                                                  -------      -------
                                                                  $63,809      $70,404
                                                                  =======      =======
</TABLE>

6.  ACCRUED AND OTHER CURRENT LIABILITIES

        Accrued and other current liabilities at December 31, 2000 and 1999 was
comprised of the following:

<TABLE>
<CAPTION>
                                                             2000         1999
                                                            -------      -------
<S>                                                         <C>          <C>
Accrued payroll, benefits, and related liabilities          $ 6,028      $ 7,928
Accrued personal time off                                     5,241        4,506
Accrued interest                                              3,079        2,904
Refundable access revenue                                     6,756           --
Other                                                         4,756        4,986
                                                            -------      -------
                                                            $25,860      $20,324
                                                            =======      =======
</TABLE>



                                      F-13
<PAGE>   67

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


7.  LONG-TERM OBLIGATIONS

        Long-term obligations consist of the following at December 31, 2000 and
1999:

<TABLE>
<CAPTION>
                                                           2000           1999
                                                         --------       --------
<S>                                                      <C>            <C>
Senior credit facility term loan - tranche A             $150,000       $150,000
Senior credit facility term loan - tranche B              150,000        150,000
Senior credit facility term loan - tranche C              135,000        135,000
9 3/8% senior subordinated notes due 2009                 150,000        150,000
Capital leases and other long-term obligations             14,642         13,407
                                                         --------       --------
                                                          599,642        598,407
Less current portion                                        2,870          4,944
                                                         --------       --------
Long-term obligations                                    $596,772       $593,463
                                                         ========       ========
</TABLE>

        The aggregate maturities of long-term obligations for each of the five
years and thereafter subsequent to December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                     Total
                                                   --------
<S>                                                <C>
                       2001                        $  2,870
                       2002                           5,195
                       2003                           5,014
                       2004                           5,072
                       2005                           5,144
                    Thereafter                      576,347
                                                   --------
                                                   $599,642
                                                   ========
</TABLE>

Senior Credit Facility

        On May 14, 1999, the Company entered into a credit agreement with a
syndicate of commercial banks which provide the Company's senior credit
facility. The senior credit facility provides $435 million of term loans and a
revolving credit facility with a $75 million line of credit. The Company's
obligations under the senior credit facility are unconditionally and irrevocably
guaranteed, joint and severally, by the Company and its subsidiaries, and
secured by collateral that includes substantially all of the Company and its
subsidiaries' assets. The senior credit facility contains a number of
restrictive covenants and events of default, including covenants limiting
capital expenditures, incurrence of debt, and the payment of dividends, and
requires the Company to achieve certain financial ratios. As of December 31,
2000 and 1999 the Company was in compliance with all of the covenants of the
senior credit facility except one relating to the manner in which licenses are
held, for which a waiver was obtained.

        The tranche A term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2006. The loan bears interest at an annual rate
equal (at the Company's option) to: (1) an adjusted London inter-bank offered
rate ("LIBOR") plus 2.75% or (2) a rate equal to 1.75% plus the greater of the
administrative agent's prime rate, a certificate of deposit rate plus 1.00% or
the federal funds rate plus .50%, in each case subject to reduction based on the
Company's financial performance. The rate of interest in effect at December 31,
2000 and 1999 was 9.25% and 8.94%, respectively, and is based on the LIBOR rate
option.

        The tranche B term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2007. The loan bears 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, a certificate
of deposit rate plus 1.00% or the federal funds rate plus .50%. The rate of
interest in effect at December 31, 2000 and 1999 was 9.50% and 9.19%,
respectively, and is based on the LIBOR rate option.



                                      F-14
<PAGE>   68

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


7.  LONG-TERM OBLIGATIONS (CONTINUED)

        The tranche C term loan of $135 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on May 14, 2008. 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, a certificate of deposit
rate plus 1.00% or the federal funds rate plus .50%. The rate of interest in
effect at December 31, 2000 and 1999 was 9.75% and 9.44%, respectively, and is
based on the LIBOR rate option.

        The senior credit facility also provides a revolving credit facility in
the amount of $75 million which is available, in part, for up to $25 million in
letters of credit and up to $10 million in the form of swingline loans. This
revolving facility is available for seven years and outstanding balances
thereunder will bear interest at an annual interest rate option equivalent to
that provided under tranche A.

        On July 24, 1999 the Company entered into a interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate long-term
debt. This agreement fixed at 5.99% the underlying variable rate on one-half the
borrowings under the senior credit facility, or $217.5 million, for a three-year
period. The differential to be paid or received is recorded as interest expense
in the consolidated statement of operations in the period in which it is
recognized. The Company is exposed to credit losses from counterparty
nonperformance, but does not anticipate any losses from its agreement.

        Senior Subordinated Notes

         On May 14, 1999, the Company issued $150 million 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, commencing November 15, 1999.
The notes will mature on May 15, 2009, and are redeemable, in whole or in part,
at the option of the Company, at any time on or after May 15, 2004 at 104.688%
of the principal amount declining to 100% of the principal amount on or after
May 15, 2007. The notes contain a number of restrictive covenants, including
covenants limiting incurrence of debt and the payment of dividends. As of
December 31, 2000 and 1999 the Company was in compliance with all the covenants
of the notes.

        Capital leases and other long-term obligations

        The Company has entered into various capital leases and other debt
agreements totaling $14,641 and $13,407 with a weighted average interest rate of
8.91% and 8.978 % at December 31, 2000 and 1999, respectively.

        Alaska Communications Systems Group, Inc. Senior Discount Debentures

        The Parent has senior discount debentures of $17,598 at December 31,
1999. As amended on October 29, 1999, interest accrues at 13% and is payable at
the Parent's option semiannually on May 15 and November 15, commencing May 15,
2000 until May 15, 2004 when the Parent will be required to semiannually pay
interest. The debentures will mature on May 15, 2011, and are redeemable, in
whole or in part, at the option of the Parent, at any time on or after May 15,
2004 at 106.5% of the principal amount declining to 100% of the principal amount
on or after May 15, 2009. The debentures contain a number of restrictive
covenants, including covenants limiting incurrence of debt and the payment of
dividends. Although the debt is not recorded on the Company's books,
substantially all of the Company's assets are pledged to secure the Parent's
senior discount debentures. The Parent relies on the Company's cash flow to
service its obligations.



                                      F-15
<PAGE>   69

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


8.  LOCAL TELEPHONE OPERATING REVENUE

        Local telephone operating revenues consisted of the following at
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                        2000          1999
                                                      --------      --------
<S>                                                   <C>           <C>
    Local network service                             $ 92,420      $ 59,891
    Network access revenue                             105,172        67,174
    Directory advertising                               32,056        17,713
    Deregulated revenue and other                       21,776        14,373
                                                      --------      --------
        Total local telephone operating revenues      $251,424      $159,151
                                                      ========      ========
</TABLE>

9.  UNUSUAL CHARGES

        During 2000, the Company recorded $5,288 of unusual charges, consisting
of the following:

<TABLE>
<CAPTION>
                                                                 2000
                                                                ------
<S>                                                             <C>
         Costs incurred in attempted acquisition                $1,451
         Severance and restructuring costs                       3,019
         Legal settlement                                          818
                                                                ------
                                                                $5,288
                                                                ======
</TABLE>

        During 2000, the Company offered to acquire the Matanuska Telephone
Association, a cooperative telephone association located in Alaska, for $187,500
in cash. The acquisition was subject to approval by a vote of the membership of
the cooperative association requiring a super majority, which was held in
September of 2000. The membership of the association voted to approve the
acquisition but failed to achieve the required super majority. The Company had
incurred $1,451 of legal, consulting and other out of pocket costs associated
with the attempted acquisition which were charged to expense during September
2000.

        The Company recorded $3,019 related to severance and restructuring
charges under several plans adopted during 2000. Employee force reductions
resulting from these restructuring plans are expected to total approximately 300
by their completion, which is expected to be during the fourth quarter of 2001.
Employee groups located in Alaska within the local telephone, cellular and
Internet operations are all included within the scope of the severance and
restructuring plans. The plans also call for the closure of a branch operation
in Vancouver, Washington. As of December 31, 2000, $962 has been paid under the
plans and approximately 100 employees have been terminated.

        In December 2000, the Company settled out of court a claim by a vendor
that arose from an undisclosed contractual obligation it incurred in the
purchase of the Company's operations in May 1999, resulting in a charge to
expense of $818.



                                      F-16
<PAGE>   70

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


10. INCOME TAXES

        The Company's combined federal income and state effective income tax
rate from continuing operations was a benefit of 0.8% and 1.4% in 2000 and 1999,
respectively. The difference between taxes calculated as if the statutory
federal rate of 35% was applied to loss from continuing operations before income
tax and the recorded tax benefit is reconciled as follows:

<TABLE>
<CAPTION>
                                                               2000           1999
                                                             --------       --------
<S>                                                          <C>            <C>
Computed federal income taxes at the 35% statutory rate      $ (9,048)      $ (7,351)
   Increase (reduction) in tax resulting from
      State income taxes (net federal benefit)                 (1,559)        (1,272)
      Amortization of investment tax credits                     (197)          (301)
      Valuation allowance - book net operating loss            10,322          8,726
      Other                                                       285           (103)
                                                             --------       --------
Total income tax benefit                                     $   (197)      $   (301)
                                                             ========       ========
</TABLE>

The benefit for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                                               2000           1999
                                                             --------       --------
<S>                                                          <C>            <C>
Current:
   Federal income tax                                        $     --       $     --
   State income tax                                                --             --
                                                             --------       --------
      Total current                                                --             --
                                                             --------       --------
Deferred:
   Federal income tax                                              --             --
   State income tax                                                --             --
                                                             --------       --------
      Total deferred                                               --             --
Amortization of investment tax credits                           (197)          (301)
                                                             --------       --------
Total income tax benefit                                     $   (197)      $   (301)
                                                             ========       ========
</TABLE>

The effect of significant items comprising the Company's net deferred tax
liability were as follows:

<TABLE>
<CAPTION>
                                                                       2000           1999
                                                                     --------       --------
<S>                                                                  <C>            <C>
Deferred tax liabilities - long-term:
      Property, plant and equipment                                  $(16,338)      $ (4,427)
      Intangibles                                                      (7,235)           (80)
                                                                     --------       --------
Total Long-term deferred tax liabilities                              (23,573)        (4,507)
                                                                     --------       --------
Deferred tax assets:
   Current:
      Accrued compensation                                              5,329          1,433
      Accrued bad debts                                                 4,825            997
      Deferred investment tax credit                                       80            162
      Regulatory liabilities FASB 109                                      70            113
      Other                                                               143             --
                                                                     --------       --------
   Total current deferred tax assets                                   10,447          2,705
   Long-term - net operating loss carryforwards from operations        32,324         10,803
                                                                     --------       --------
Total deferred tax assets                                              42,771         13,508
   Valuation allowance                                                (19,048)        (8,726)
                                                                     --------       --------
Net deferred tax asset                                               $    150       $    275
                                                                     ========       ========
</TABLE>



                                      F-17
<PAGE>   71

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


10. INCOME TAXES (CONTINUED)

        The company has available at December 31, 2000 unused operating loss
carryforwards of $78,629 that may be applied against future taxable income and
that expire as follows:

<TABLE>
<CAPTION>
                   Year of               Unused Operating
                  Expiration            Loss Carryforwards
                  ----------            ------------------
                  <S>                   <C>
                    2019                     $18,674
                    2020                      59,955
                                             -------
                                             $78,629
                                             -------
</TABLE>

11. STOCK INCENTIVE PLANS

        The Company's employees participate in various plans of ACS Group, which
through their Compensation Committee of the board of directors, may grant stock
options, stock appreciation rights and other awards to officers, employees and
non-employee directors of the Company. At December 31, 2000, ACS Group has
reserved a total of 6,060 shares of authorized common stock for issuance under
the various plans. In general, options under the plans vest ratably over three,
four or five years and the plans terminate in approximately 10 years.

        The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," in accounting for its plans.
Accordingly, no compensation cost has been recognized for options with exercise
prices equal to or greater than fair value on the date of grant. If compensation
costs had been determined consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation", the Company's net loss on a pro forma bases for 2000
and 1999 would have been as follows:

<TABLE>
<CAPTION>
                       2000           1999
                     --------       --------
<S>                  <C>            <C>
Net loss:
    As reported      $(25,653)      $(20,701)
    Pro forma         (27,315)       (21,367)
</TABLE>


        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:

<TABLE>
<CAPTION>
                                   2000         1999
                                  ------       ------
<S>                               <C>          <C>
Risk free rate                       5.5%         5.5%
Dividend yield                       0.0%         0.0%
Expected volatility factor          52.5%        40.3%
Expected option life (years)         6.1          7.1
</TABLE>



                                      F-18
<PAGE>   72

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


11. STOCK INCENTIVE PLANS (CONTINUED)

ALEC Holdings, Inc. 1999 Stock Incentive Plan

        ACS Group has reserved 3,410 shares under this plan, which was adopted
in connection with the completion of the acquisitions on May 14, 1999 (see Note
2, Acquisitions). At December 31, 2000 3,928 options have been granted, 785 have
been forfeited, 237 have been exercised and 267 are available for grant under
the plan. The plan allows forfeited options to be reissued. The plan will
terminate on May 14, 2009.

        During May, June and July of 1999, 2,919 of these options were granted
at an exercise price equivalent to the then fair value of the underlying stock
as evidenced by sales to third parties. Of the options granted in May, 654 are
variable plan performance vesting options granted to certain officers and
management of the Company. These performance vesting options became vested upon
completion of ACS Group's initial public offering ("IPO") in November 1999, and
resulted in the recording of $4,148 of compensation expense. Compensation
expense recorded for these options represents the difference between the IPO
price of $14.00 and the exercise price of $6.1542. The remaining options granted
during May, June and July of 1999 generally vest ratably over five years or
after nine years subject to acceleration upon the attainment of certain
performance goals.

        During September, October, and November 1999, 504 options were granted,
all at exercise prices below the fair value of the underlying stock at the time
of issuance, which was an average of $10.12 per share. These options vested upon
completion of ACS Group's IPO in November of 1999, and resulted in the recording
of compensation expense of $1,997. Compensation expense recorded for these
options represents the difference between the fair value of the underlying stock
of $10.12 and the exercise price of $6.1542.

        On November 20, 2000, the Board of Directors approved the grant of
options under the plan to purchase 505 shares to certain members of management
at an exercise price of $5.50 per share, generally vesting over four years
ratably.

        Information on outstanding options for the years ended December 31, 2000
and 1999 is summarized as follows:

<TABLE>
<CAPTION>
                                                              2000                        1999
                                                    -----------------------      -----------------------
                                                                   Weighted                     Weighted
                                                                   Average                      Average
                                                    Number of      Exercise      Number of      Exercise
                                                     Shares         Price         Shares         Price
                                                    ---------      --------      ---------      --------
<S>                                                 <C>            <C>           <C>            <C>
Outstanding January 1                                  3,154       $   6.15            --       $     --
Granted                                                  505           5.50         3,423           6.15
Exercised                                               (198)          6.15           (39)          6.15
Canceled or expired                                     (555)          6.08          (230)          6.15
                                                    --------                     --------
Outstanding December 31                                2,906           6.05         3,154           6.15
                                                    ========                     ========

Options exercisable at December 31                     1,541           6.12         1,255           6.15
Weighted average fair value of options granted                         3.09                         3.88
</TABLE>

        The outstanding options at December 31, 2000 have the following
characteristics:

<TABLE>
<CAPTION>
                                       Outstanding Options              Exercisable Options
                              ------------------------------------    ------------------------
                                           Weighted       Weighted                    Weighted
                                            Average       Average                     Average
                              Number of    Remaining      Exercise      Number        Exercise
Range of Exercise Prices       Shares     Life (Years)     Price      Exercisable      Price
------------------------      --------    ------------    --------    -----------     --------
<S>                           <C>         <C>             <C>         <C>             <C>
$5.50 - $6.15                    2,906          7.85      $   6.05         1,541      $   6.12
                              ========      ========      ========      ========      ========
</TABLE>



                                      F-19
<PAGE>   73

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


11. STOCK INCENTIVE PLANS (CONTINUED)

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan

        This plan was adopted by ACS Group in November 1999 in connection with
its IPO. At December 31, 2000 1,247 options have been granted, 155 have been
forfeited, and 408 are available for grant under the plan. The plan allows
forfeited options to be reissued. The term of options granted under the plan may
not exceed 10 years. Unless otherwise determined by the Compensation Committee,
options will vest ratably on each of the first four anniversaries after the
grant date and will have an exercise price equal to the fair market value of the
common stock on the date of grant.

        No shares were awarded under this plan during 1999. On February 9, 2000,
the Board of Directors approved the grant of options under the plan to purchase
887 shares to certain members of management at an exercise price of $14.1354 per
share. On June 20, 2000, the Board of Directors approved the grant of options
under the plan to purchase 28 shares to certain members of management at an
exercise price of $12.625 per share. On September 7, 2000, the Board of
Directors approved the grant of options under the plan to purchase 2 shares to a
member of management at an exercise price of $8.5819 per share. On October 20,
2000, the Board of Directors approved the grant of options under the plan to
purchase 5 shares to certain members of management at an exercise price of
$6.438 per share. On November 20, 2000, the Board of Directors approved the
grant of options under the plan to purchase 315 shares to certain members of
management at an exercise price of $5.50 per share. On November 28, 2000, the
Board of Directors approved the grant of options under the plan to purchase 10
shares to certain members of management at an exercise price of $6.125 per
share.


        Information on outstanding options for the year December 31, 2000 is
summarized as follows:

<TABLE>
<CAPTION>
                                                                   Weighted
                                                                   Average
                                                    Number of      Exercise
                                                     Shares         Price
                                                    ---------      --------
<S>                                                 <C>            <C>
Outstanding January 1                                     --       $     --
Granted                                                1,247          11.86
Exercised                                                 --             --
Canceled or expired                                     (155)         14.20
                                                    --------
Outstanding December 31                                1,092          11.53
                                                    ========


Options exercisable at December 31                       186          11.66
Weighted average fair value of options granted                         6.55
</TABLE>

        The outstanding options at December 31, 2000 have the following
characteristics:

<TABLE>
<CAPTION>
                                        Outstanding Options              Exercisable Options
                              ------------------------------------     -----------------------
                                            Weighted      Weighted                    Weighted
                                             Average      Average                     Average
                              Number of     Remaining     Exercise       Number       Exercise
Range of Exercise Prices       Shares      Life (Years)    Price       Exercisable     Price
------------------------      ---------    ------------   --------     -----------    --------
<S>                           <C>          <C>            <C>          <C>            <C>
$5.50 - $6.44                      330          9.89      $   5.53            53      $   5.51
$8.58 - $12.63                      30          9.49         12.29             5         12.29
$14.20                             732          9.12         14.20           128         14.20
</TABLE>



                                      F-20
<PAGE>   74

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


11. STOCK INCENTIVE PLANS (CONTINUED)

ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan

        The non-employee director stock compensation plan was adopted by ACS
Group in connection with its IPO. ACS Group has reserved 150 shares under this
plan. At December 31, 2000 26 shares have been awarded and 124 shares are
available for grant under the plan. Directors are required to receive not less
than 25% of their annual retainer and meeting fees in the form of ACS Group's
stock, and may elect to receive up to 100% of director's compensation in the
form of stock.

        During the year ended December 31, 2000, 26 shares under the plan were
awarded to directors, of which 13 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 in connection with ACS Group's IPO in
November 1999. At December 31, 2000, 868 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 June 30, 2000, 65 shares were issued under the plan. On December 29,
2000, 67 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 will
be 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 will be 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 will be 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 will have the rights of a stockholder with respect to such shares.
During the year ended December 31, 2000 approximately 36% of eligible employees
elected to participate in the plan.


12. 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 benefit plan, the accumulated benefits and plan
assets are not determined or allocated separately to the individual employer.
The Company's portion of the plan's pension cost for 2000 and 1999 was $10,978
and $6,099, respectively.

        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 the CenturyTel 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. Since the plan is adequately
funded, no contribution was made in 2000 or 1999.



                                      F-21
<PAGE>   75

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


12. RETIREMENT PLANS (CONTINUED)

        The following table represents the net periodic pension expense
(benefit) for the ACS Retirement Plan for 2000 and 1999:


<TABLE>
<CAPTION>
                                                            2000          1999
                                                           ------        ------
<S>                                                        <C>           <C>
Service cost                                               $   --        $   --
Interest cost                                                 447           149
Expected return on plan assets                               (813)         (170)
Net amortization and deferral                                  34            --
                                                           ------        ------
Net periodic pension benefit                               $ (332)       $  (21)
                                                           ======        ======
</TABLE>

The following is a reconciliation of the beginning and ending balances for 2000
    and 1999 for the projected benefit obligation and the plan assets for the
    ACS Retirement Plan:

<TABLE>
<CAPTION>
                                                            2000          1999
                                                           -------       -------
<S>                                                        <C>           <C>
Change in projected benefit obligation:
    Projected benefit obligation at beginning of year      $ 5,724       $    --
    Acquisition                                                 --         5,780
    Plan amendments                                          1,992            --
    Amortization of prior service cost                         (34)           --
    Service cost                                                --            --
    Interest cost                                              447           149
    Actuarial (gain) loss                                      501          (205)
    Benefits paid                                              (30)           --
                                                           -------       -------
    Projected benefit obligation at end of year            $ 8,600       $ 5,724
                                                           =======       =======

Change in plan assets
    Fair value of plan assets at beginning of year         $ 9,564       $    --
    Acquisition                                                 --         9,289
    Return on plan assets                                     (277)          275
    Employer contributions                                      --            --
    Benefits paid                                              (30)           --
                                                           -------       -------
    Fair value of plan assets at end of year               $ 9,257       $ 9,564
                                                           =======       =======
</TABLE>

The following table represents the funded status of the ACS Retirement Plan at
    December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                       2000              1999
                                                      -------           -------
<S>                                                   <C>               <C>
Projected benefit obligation                          $(8,600)          $(5,724)
Plan assets at fair value                               9,257             9,564
                                                      -------           -------
Funded Status                                             657             3,840
                                                      -------           -------

Unrecognized net prior obligation                          --                --
Unrecognized prior service cost                         1,958                --
Unrecognized net loss (gain)                            1,247              (310)
                                                      -------           -------
Pension asset at end of year                          $ 3,862           $ 3,530
                                                      =======           =======
</TABLE>



                                      F-22
<PAGE>   76

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


12. RETIREMENT PLANS (CONTINUED)

        The actuarial assumptions used to account for the plan as of December
31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                         2000            1999
                                                       --------        --------
<S>                                                    <C>             <C>
Discount rate                                              7.50%           7.90%
Expected return on assets                                  8.50%           5.50%
Rate of compensation increase                              0.00%           0.00%
</TABLE>

        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 2000 or 1999.


13. BUSINESS SEGMENTS

        The Company has three reportable segments: local telephone, which
provides landline telecommunications services, and consists of local telephone
service, network access, directory advertising, deregulated and other revenues;
cellular, which provides wireless telecommunications service; and Internet,
which is being reported as a separate segment in the current year due to the
growth and acquisition of IAI. Each reportable segment is a strategic business
under separate management and offering different services than those offered by
the other segments. The Company also has interexchange network and television
services segments which do not meet the criteria for a reportable segment and
are therefore included in "All Other" below. The Company also incurs interest
expense, interest income, equity in earnings of investments and other non
operating income and expense at the corporate level which are not allocated to
the business segments, nor are they evaluated by the chief operating decision
maker in analyzing the performance of the business segments. These non operating
income and expense items are provided in the accompanying table under the
caption "All Other" in order to assist the users of these financial statements
in reconciling the operating results and total assets of the business segments
to the consolidated financial statements. Common use assets are held at the
Company and are allocated below based on operating revenues. 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, 2000:

<TABLE>
<CAPTION>
                                    Local
                                  Telephone     Cellular      Internet      All Other    Eliminations     Total
                                  ---------     ---------     ---------     ---------    ------------   ---------
<S>                               <C>           <C>           <C>           <C>          <C>            <C>
Operating revenues                $ 251,424     $  39,540     $   9,172     $  20,904     $  (8,047)    $ 312,993
Depreciation and amortization        56,912         5,029         1,495         8,829            --        72,265
Operating income (loss)              46,906         6,414        (8,760)      (11,629)           --        32,931
Interest expense                     (1,046)          (11)         (109)      (60,943)           --       (62,109)
Interest income                         105           215            --         3,449            --         3,769
Income tax provision (benefit)       14,127         2,703            --       (17,027)           --          (197)
Net income (loss)                    31,755         3,944        (8,863)      (52,489)           --       (25,653)
Total assets                        710,623       114,203        26,769        57,711            --       909,306
Capital expenditures                 53,974        11,505         3,252         3,522            --        72,253
</TABLE>

        Operating revenues disclosed above include intersegment operating
revenues of $9,840 for local telephone, $937 for cellular, and $13,210 for all
other. In accordance with SFAS 71, intercompany revenues between local telephone
and non local telephone operations are not eliminated above.



                                      F-23
<PAGE>   77

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


13. BUSINESS SEGMENTS (CONTINUED)

        The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                    Local
                                  Telephone     Cellular      Internet      All Other    Eliminations     Total
                                  ---------     ---------     ---------     ---------    ------------   ---------
<S>                               <C>           <C>           <C>           <C>           <C>           <C>
Operating revenues                $ 159,151     $  24,882     $   2,853     $   6,733     $    (474)    $ 193,145
Depreciation and amortization        32,881         2,159           219         5,047            --        40,306
Operating income (loss)              19,784         6,801        (2,267)       (8,031)           --        16,287
Interest expense                       (240)          (10)           --       (37,267)           --       (37,517)
Interest income                         682            88            --           254            --         1,024
Income tax provision (benefit)        7,793         2,890            --       (10,984)           --          (301)
Net income (loss)                    11,930         4,056        (2,267)      (34,420)           --       (20,701)
Total assets                        776,090       115,074         5,250        41,297            --       937,711
Capital expenditures                 44,346        10,962            --        19,484            --        74,792
</TABLE>

        Operating revenues disclosed above include intersegment operating
revenues of $3,177 for local telephone, $479 for cellular, and $853 for all
other. In accordance with SFAS 71, intercompany revenues between local telephone
and non local telephone operations are not eliminated above.


14. RELATED PARTY TRANSACTIONS

        The Company has various intercompany transactions with the Parent and at
December 31, 2000 and 1999 $1,516 and $97,676, respectively is due from the
Parent.

        Fox Paine & Company, ACS Group's majority stockholder, receives an
annual management fee in the amount of 1% of the Company's net income before
interest expense, interest income, income taxes, depreciation and amortization,
and equity in loss of investments, calculated without regard to the fee. The
management fee expense for 2000 is $1,169 of which $1,145 was payable at
December 31, 2000. The management fee expense for 1999 is $610 all of which was
payable at December 31, 1999.

        In addition, in 1999, Fox Paine & Company received aggregate advisory
fees in the amount of $14,200 upon consummation of the acquisitions of
CenturyTel Alaska properties and ATU and were reimbursed for pre-closing costs
of $9,941.

        In connection with stock grants, the company loaned officers of the
company $757 with an interest rate of the federal funds rate or 8%, whichever is
greater. The loans are secured by shares of ACS Group's common stock owned by
the individual officers. At December 31, 1999 the balances of the officer loans
were $794. These loans were repaid in their entirety on January 3, 2000.



                                      F-24
<PAGE>   78

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


15. FAIR VALUE OF FINANCIAL INSTRUMENTS

        The fair values of cash and short-term investments, accounts receivable
and payable, and other short-term assets and liabilities approximate carrying
values due to their short-term nature.

        The fair value for the Company's senior subordinated notes is estimated
based on quoted market prices. The fair value of the Company's term loan
facilities approximates carrying values due to the variable interest rate nature
of the debt. The Company employs an interest rate swap agreement to manage
interest rate exposure. Amounts payable or receivable under the agreement are
recognized as adjustments to interest expense in the periods in which they
accrue. The fair value of the Company's interest rate swap agreement represents
the estimated amount the Company would receive or pay to terminate the
agreement, calculated based on the present value of expected payments or
receipts based on the current market interest rate.

        The following table summarizes the Company's carrying values and fair
values of the debt components of its financial instruments at December 31, 2000:

<TABLE>
<CAPTION>
                                                       Carrying         Fair
                                                         Value          Value
                                                       ---------      ---------
<S>                                                    <C>            <C>
Senior credit facility term debt - tranche A           $ 150,000      $ 150,000
Senior credit facility term debt - tranche B             150,000        150,000
Senior credit facility term debt - tranche C             135,000        135,000
9 3/8% senior subordinated notes due 2009                150,000        126,375
Interest Rate Swap Agreement                                  --         (1,243)
Capital leases and other long-term obligations            14,642         14,641
                                                       ---------      ---------
                                                       $ 599,642      $ 574,773
                                                       =========      =========
</TABLE>

        The following table summarizes the Company's carrying values and fair
values of the debt components of its financial instruments at December 31, 1999:

<TABLE>
<CAPTION>
                                                       Carrying         Fair
                                                         Value          Value
                                                       ---------      ---------
<S>                                                    <C>            <C>
Senior credit facility term debt - tranche A           $ 150,000      $ 150,000
Senior credit facility term debt - tranche B             150,000        150,000
Senior credit facility term debt - tranche C             135,000        135,000
9 3/8% senior subordinated notes due 2009                150,000        145,500
Interest Rate Swap Agreement                                  --           (923)
Capital leases and other long-term obligations            13,407         13,407
                                                       ---------      ---------
                                                       $ 598,407      $ 592,984
                                                       =========      =========
</TABLE>

16. COMMITMENTS AND CONTINGENCIES

        At December 31, 2000, the Company had a commitment to acquire additional
fiber optic circuit capacity in the first quarter of 2001 at a purchase price of
$19,500. This commitment was fulfilled on January 12, 2001.

        The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.



                                      F-25
<PAGE>   79

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                     YEARS ENDED DECEMBER 31, 2000 AND 1999
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


17. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                           Quarterly Financial Data
                       --------------------------------------------------------------------
                        First         Second          Third         Fourth
                       Quarter        Quarter        Quarter        Quarter          Total
                       --------       --------       --------       --------       --------
<S>                    <C>            <C>            <C>            <C>             <C>
2000
Operating revenue      $ 77,091       $ 81,863       $ 74,866       $ 79,173        312,993
Operating income         11,234         11,949          3,326          6,422         32,931
Net loss                 (3,848)        (3,394)       (10,716)        (7,695)       (25,653)

1999
Operating revenue      $     --       $ 38,282       $ 75,540       $ 79,323        193,145
Operating income             --          2,374         10,602          3,311         16,287
Net loss                     --         (5,333)        (4,030)       (11,338)       (20,701)
</TABLE>

        Certain reclassifications have been made to the quarterly information
previously presented in order to make them conform to the current presentation.
The first quarter 2000 operating revenue previously reported in the Company's
first quarter 2000 10-Q at $78,324, has been reduced by $1,233 to reflect the
current practice of eliminating intersegment revenue and expense. The second
quarter, third quarter, and fourth quarter 1999 operating revenues previously
reported in the Company's 1999 10-K at $38,330, $75,747, and $79,542,
respectively, have been reduced by $48, $207 and $219, respectively, to reflect
the current practice of eliminating intersegment revenue and expense. The
Company had no operations prior to the acquisitions of CenturyTel Alaska
properties and ATU on May 14, 1999. Fourth quarter operating income for 1999
included stock based compensation expense of $6,145.



                                      F-26
<PAGE>   80

                  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
                 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                          Balance at   Charged to   Charged to                     Balance
                                          Beginning    costs and       other                       at End
Description                               of Period     expenses    accounts(1)   Deductions(2)   of Period
-----------                               ----------   ----------   -----------   -------------   ---------
<S>                                       <C>          <C>          <C>           <C>             <C>
2000 Allowance for doubtful accounts      $  5,203      $  7,839      $    751      $  3,962      $  9,831
                                          ========      ========      ========      ========      ========

1999 Allowance for doubtful accounts      $     --      $  1,130      $  4,798      $    725      $  5,203
                                          ========      ========      ========      ========      ========
</TABLE>

(1) Represents the allowance for doubtful accounts at the date of acquisition,
    and reserve for accounts receivable collected on the behalf of others.

(2) Represents credit losses written off during the period, less collection of
    amounts previously written off.




                                      F-27
<PAGE>   81

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Century Telephone Enterprises, Inc.:

        We have audited the accompanying combined balance sheet of CenturyTel's
Alaska Properties as of December 31, 1998, and the related combined statement of
income and retained earnings, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

        We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel's
Alaska Properties as of December 31, 1998, and the results of their operations
and their cash flows for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.


                                                   /s/ KPMG LLP



Shreveport, Louisiana
February 26, 1999



                                      F-28
<PAGE>   82

                          INDEPENDENT AUDITORS' REPORT


Board of Directors
Century Telephone Enterprises, Inc.
Monroe, Louisiana

        We have audited the combined balance sheet of CenturyTel Alaska
Properties as of December 31, 1997, and the related combined statements of
income and retained earnings and of cash flows for the year ended December 31,
1996, eleven months ended November 30, 1997, and one month ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of CenturyTel
Alaska Properties as of December 31, 1997, and the results of their operations
and their cash flows for the year ended December 31, 1996, eleven months ended
November 30, 1997, and one month ended December 31, 1997, in conformity with
generally accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP



Portland, Oregon
March 25, 1999



                                      F-29
<PAGE>   83

                          CENTURYTEL ALASKA PROPERTIES
                             COMBINED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                      -------------------------
                                                                                        1997            1998
                                                                                      ---------       ---------
<S>                                                                                   <C>             <C>
                                     ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                                                         $     871       $   5,728
    Accounts receivable:
       Customers, less allowance for doubtful accounts of $376, and $164 at
          December 31, 1997 and 1998, respectively                                        5,071           8,446
       Affiliates (Note 8)                                                               20,404          31,922
       Connecting companies                                                               4,146          10,984
       Receivable from sale of cellular license                                           5,022              --
       Miscellaneous accounts receivable and other                                        2,760           1,213
    Material and supplies (at cost)                                                       2,653           2,072
    Prepayments                                                                           1,513             610
                                                                                      ---------       ---------
          Total current assets                                                           42,440          60,975
                                                                                      ---------       ---------
PROPERTY, PLANT, AND EQUIPMENT - Net (Note 4)                                           158,590         161,710
                                                                                      ---------       ---------

OTHER ASSETS:
    Excess cost of net assets acquired, less accumulated amortization of $5,056,
       and $6,853 at December 31, 1997 and 1998, respectively (Note 1)                  248,948         242,632
    Investments, at cost                                                                    997             976
    Other, net                                                                            8,200           6,367
                                                                                      ---------       ---------
          Total other assets                                                            258,145         249,975
                                                                                      ---------       ---------
TOTAL ASSETS                                                                          $ 459,175       $ 472,660
                                                                                      =========       =========


                      LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
    Current maturities of long-term debt (Note 5)                                     $   1,316       $   1,427
    Accounts payable                                                                      3,275           5,322
    Accrued expenses and other accrued liabilities:
       Salaries and benefits                                                              2,434           1,949
       Taxes                                                                              1,123           1,008
       Other                                                                                684           1,849
    Advance billings and customer deposits (Note 1)                                       1,643           2,019
                                                                                      ---------       ---------
          Total current liabilities                                                      10,475          13,574
                                                                                      ---------       ---------
LONG TERM DEBT (Note 5)                                                                  41,634          41,981
                                                                                      ---------       ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
    Deferred income taxes (Note 6)                                                       11,297          13,523
    Deferred investment tax credits                                                       1,421             909
    Other                                                                                 3,034           1,711
                                                                                      ---------       ---------
          Total deferred credits and other liabilities                                   15,752          16,143
                                                                                      ---------       ---------
SHAREHOLDER'S EQUITY:
    Common stock (103 and 104 shares authorized and 23 and 24 issued
       and outstanding, respectively)                                                        23              24
    Paid-in capital                                                                     393,026         393,026
    Retained earnings                                                                    (1,735)          7,912
                                                                                      ---------       ---------
          Total shareholder's equity                                                    391,314         400,962
                                                                                      ---------       ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY                                            $ 459,175       $ 472,660
                                                                                      =========       =========
</TABLE>


             See accompanying notes to combined financial statements



                                      F-30
<PAGE>   84

                          CENTURYTEL ALASKA PROPERTIES
               COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                          ELEVEN
                                                          MONTHS         ONE MONTH
                                         YEAR ENDED        ENDED           ENDED         YEAR ENDED
                                        DECEMBER 31,    NOVEMBER 30,    DECEMBER 31,    DECEMBER 31,
                                           1996            1997            1997            1998
                                        ------------    ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>
OPERATING REVENUES:
    Telephone                               75,950          79,330          10,255         121,933
    Cellular                                 4,823           5,120             181           2,576
                                         ---------       ---------       ---------       ---------
       Total operating revenues             80,773          84,450          10,436         124,509
OPERATING EXPENSES:
    Cost of sales and operating
       expenses-telephone                   41,789          42,404           6,434          72,008
    Cost of sales and operating
       expenses-cellular                     3,381           3,082             147           2,128
    Depreciation and amortization           15,348          15,823           2,466          30,459
                                         ---------       ---------       ---------       ---------
       Total operating expenses             60,518          61,309           9,047         104,595
                                         ---------       ---------       ---------       ---------
OPERATING INCOME                            20,255          23,141           1,389          19,914
OTHER INCOME (EXPENSE):
    Interest expense                        (3,176)         (3,027)           (253)         (3,588)
    Interest income (Note 8)                 1,180             858              82           2,183
    Other income (expense) - Net               (33)           (298)             53             356
                                         ---------       ---------       ---------       ---------
       Total other income (expense)         (2,029)         (2,467)           (118)         (1,049)
INCOME BEFORE INCOME TAX
    EXPENSE                                 18,226          20,674           1,271          18,865
INCOME TAX EXPENSE (Note 6)                  6,737           7,746             736           9,218
                                         ---------       ---------       ---------       ---------
NET INCOME                                  11,489          12,928             535           9,647
                                         =========       =========       =========       =========

RETAINED EARNINGS AT
    BEGINNING OF PERIOD                     63,216          61,079              --          (1,735)
Less dividends to shareholder               13,626           7,080           2,270              --
                                         ---------       ---------       ---------       ---------
RETAINED EARNINGS AT END
    OF PERIOD                            $  61,079       $  66,927       $  (1,735)      $   7,912
                                         =========       =========       =========       =========
</TABLE>


            See accompanying notes to combined financial statements.



                                      F-31
<PAGE>   85

                          CENTURYTEL ALASKA PROPERTIES
                        COMBINED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                     ELEVEN
                                                                                     MONTHS        ONE MONTH
                                                                    YEAR ENDED       ENDED            ENDED         YEAR ENDED
                                                                   DECEMBER 31,    NOVEMBER 30,    DECEMBER 31,    DECEMBER 31,
                                                                      1996            1997            1997            1998
                                                                   ------------    ------------    ------------    ------------
<S>                                                                <C>             <C>             <C>             <C>
OPERATING ACTIVITIES:
    Net income                                                         11,489          12,928             535           9,647
    Adjustments to reconcile net income to net cash
      provided by operating activities:
       Depreciation and amortization                                   15,348          15,823           2,466          30,459
       Deferred income taxes and unamortized
         investment tax credits, net                                    1,538           1,160              65              24
       Change in current assets and liabilities:
          Accounts receivable                                          14,476          (1,383)          3,873          (3,644)
          Accounts payable                                             (6,828)         (2,986)         (1,527)          1,479
          Other current assets and liabilities, net                    (1,434)         (4,329)            176           2,427
          Other, net                                                       --              --              --          (2,101)
                                                                    ---------       ---------       ---------       ---------
Net cash provided by operating activities                              34,589          21,213           5,588          38,291
                                                                    ---------       ---------       ---------       ---------

INVESTING ACTIVITIES:
    Payments for property, plant, and equipment                       (20,465)        (14,575)         (1,825)        (26,799)
    Other, net                                                           (146)          1,021          (1,454)            135
                                                                    ---------       ---------       ---------       ---------
Net cash provided (used) by investing activities                      (20,611)        (13,554)         (3,279)        (26,664)

FINANCING ACTIVITIES:
    Proceeds from issuance of long-term debt                            1,739              --              --              --
    Dividends paid                                                    (13,626)         (7,080)         (2,270)             --
    Payments of long-term debt                                         (1,060)         (1,129)           (293)         (1,322)
    Change in affiliate balance                                            --              --              --          (5,448)
                                                                    ---------       ---------       ---------       ---------

Net cash used by financing activities                                 (12,947)         (8,209)         (2,563)         (6,770)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        1,031            (550)           (254)          4,857

CASH AND CASH  EQUIVALENTS -- BEGINNING OF YEAR                           644           1,675           1,125             871
                                                                    ---------       ---------       ---------       ---------

CASH AND CASH  EQUIVALENTS -- END OF YEAR                           $   1,675       $   1,125       $     871       $   5,728
                                                                    =========       =========       =========       =========

SUPPLEMENTAL CASH FLOW
    INFORMATION:
    Net assets of acquisitions contributed as paid-in capital,
      including push-down of goodwill of $32,159                    $      --       $  89,132       $      --       $      --
    Push-down of excess costs of Alaskan entities from
      CenturyTel acquisition                                               --              --         208,389              --
    Paydown of minority interest liability through transfer of
      property, plant, and equipment                                       --              --           1,525              --
    Income tax paid                                                     5,344           4,653           3,207             600
    Interest paid                                                       3,510           2,706             261           3,434
</TABLE>


            See accompanying notes to combined financial statements.



                                      F-32
<PAGE>   86

                          CENTURYTEL ALASKA PROPERTIES
                     NOTES TO COMBINED FINANCIAL STATEMENTS
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


1.  GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        GENERAL--The combined financial statements for CenturyTel Alaska
Properties (the "Company") represent the operating results of the following
legal entities ("Alaskan Entities"):

        Telephone Utilities of Alaska, Inc. ("TUA")

        Telephone Utilities of the Northland, Inc. ("TUN")

        PTI Communications of Alaska, Inc. ("PTICA")

        Pacific Telecom of Alaska PCS, Inc. ("PTAPCS")

        Pacific Telecom Cellular of Alaska, Inc. ("PTCA"), excluding the assets,
        liabilities and equity of Alaska RSA #1

        TUA, TUN, PTICA, and PTAPCS were wholly owned subsidiaries of Pacific
Telecom, Inc. ("PTI") and PTCA was a wholly owned subsidiary of Pacific Telecom
Cellular, Inc., which was a wholly owned subsidiary of PTI. Until December 1,
1997, PacifiCorp Holdings owned 100% of the voting securities of PTI. The
Company was acquired on December 1, 1997 as a result of Century Telephone
Enterprises, Inc.'s ("CenturyTel") acquisition of Pacific Telecom, Inc. (the
"Acquisition") (Note 13). The financial statements beginning December 1, 1997
reflect the excess cost of net assets acquired and the subsequent amortization
expense which was allocated to the Alaska properties in accordance with purchase
accounting.

        TUA, TUN, PTICA, and PTAPCS became wholly owned subsidiaries of
CenturyTel of the Northwest, Inc. ("CNI") which is a wholly owned subsidiary of
CenturyTel. PTCA is a wholly owned subsidiary of CenturyTel Wireless, Inc. ("CT
Wireless") which is a wholly owned subsidiary of CenturyTel.

        The Company's primary business is to provide traditional and cellular
telephone service to its customers which are located in the state of Alaska. The
Company was dependent on PTI and certain subsidiaries prior to the Acquisition
and is dependent upon CenturyTel and certain CenturyTel subsidiaries to provide
construction and maintenance services, materials and supplies and managerial,
technical and accounting services. Inter-company billings include a return on
investment to the related company.

        The Company's telephone operations are regulated in nature and its
telephone accounting records are maintained in accordance with the rules and
regulations of the Alaska Public Utilities Commission ("APUC") which
substantially adhere to the rules and regulations of the Federal Communications
Commission. The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 71, Accounting For The
Effects Of Certain Types Of Regulation.

        ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results may differ from those estimates.


        REVENUE RECOGNITION--Revenues are 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 APUC within
the intrastate jurisdiction and the Federal Communications Commission within the
interstate jurisdiction. Much of the interstate toll service revenue earned
through various pooling processes is initially recorded based on estimates.
These estimates are derived from interim financial statements, available
separations studies and the most recent rate of return published by the National
Exchange Carriers Association. These estimates are subject to subsequent
adjustment in future accounting periods as refined operational information
becomes available. Any subsequent adjustments have not been material.



                                      F-33
<PAGE>   87

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


1.  GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        PROPERTY, PLANT, AND EQUIPMENT--Telephone plant is stated substantially
at original cost of construction. Telephone plant retired in the ordinary course
of business, together with 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.

        The Company provides depreciation for telephone plant on the
straight-line method, using rates approved by the regulatory authorities.
Depreciation expense for telephone plant amounted to $13,774, $14,406, $1,737,
and $23,550 for the year ended December 31, 1996, eleven months ended November
30, 1997, one month ended December 31, 1997, and year ended December 31, 1998,
respectively. Included in 1998 expense is additional depreciation of
approximately $1,506 which was approved by the regulatory authorities. The
composite depreciation rate was 5.7% for the year ended December 31, 1996, 5.8%
for the eleven months ended November 30, 1997 and the one month ended December
31, 1997, and 6.1% for the year ended December 31, 1998.

        Non-telephone plant is stated at 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 lives ranging from 7 to 15
years. Depreciation for non-telephone plant amounted to $1,198, $922, $190, and
$583 for the year ended December 31, 1996, eleven months ended November 30,
1997, one month ended December 31, 1997, and the year ended December 31, 1998,
respectively.

        LONG-LIVED ASSETS AND EXCESS COST OF NET ASSETS ACQUIRED (GOODWILL)--The
carrying value of long-lived assets, including allocated goodwill, is reviewed
for impairment at least annually, or whenever events or changes in circumstances
indicate that such carrying value may not be recoverable, by assessing the
recoverability of such carrying value through estimated undiscounted future net
cash flows expected to be generated by the assets. The excess cost of net assets
acquired is being amortized over 40 years. Amortization expense was $333 for the
year ended December 31, 1996, $455 during the eleven months ended November 30,
1997, $537 during the one month ended December 31, 1997, and $6,326 for the year
ended December 31, 1998.

        INCOME TAXES--Prior to the Acquisition, the Company was included in the
consolidated federal income tax return of PacifiCorp Holdings and CenturyTel in
subsequent periods. For financial accounting purposes, federal income taxes are
computed and recorded as if the Company filed a separate federal income tax
return, except that, (i) in the event the Company generates a net tax loss which
is utilized in the respective consolidated return, the Company will be given the
benefit of such loss, and (ii) income taxes are calculated based upon the
statutory tax rate in effect for PacifiCorp prior to the Acquisition and
CenturyTel and its subsidiaries for subsequent periods on a consolidated basis.
The Company periodically settles amounts owed to CenturyTel for federal income
taxes. The Company is included in a consolidated Alaska state income tax return.

        The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are established for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Investment tax credits related to plant have been deferred and are being
amortized as a reduction of federal income tax expense over the estimated useful
lives of the assets giving rise to the credits.

        Pursuant to SFAS 71, the regulatory liability, net of the related tax
impact, is being amortized as a reduction of federal income tax expense over the
estimated remaining lives of the assets which generated the deferred taxes.

        CASH EQUIVALENTS--For purposes of the statement of cash flows, the
Company considers all demand deposits, central depository bank account ("CDA")
deposits, and all short-term investments with a maturity at date of purchase of
three months or less to be cash equivalents.

        INVESTMENTS--The Rural Telephone Bank ("RTB") requires borrowers of RTB
funds to purchase RTB stock as a percentage of loan funds provided. These
investments have been accounted for using the cost method.

        ADVANCE BILLINGS--Advance billings creditable to revenue accounts in
future months are recorded in advance billings until the service is rendered.



                                      F-34
<PAGE>   88

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


1.  GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        EARNINGS PER SHARE--The common stock of the Company is not traded in a
public market; therefore, earnings per share amounts are not presented in
accordance with SFAS 128, EARNINGS PER SHARE.


2.  PCS LICENSE ACQUISITION COSTS

        In early 1997, the Company was awarded three 10 MHz licenses to provide
personal communications services ("PCS") in Alaska. The Company paid $3,023 for
such licenses, which will be amortized over the useful economic lives once
construction is complete. At this time, construction has not yet begun. These
licenses are included in Other Assets on the balance sheet.


3.  FAIR VALUE OF FINANCIAL INSTRUMENTS

        CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE,
ACCRUED EXPENSES, AND CUSTOMER DEPOSITS--The carrying amount approximates the
fair value due to the short maturity of these instruments.

        OTHER INVESTMENTS--The Company's other investments are represented by
its investment in RTB stock. The carrying amount of such investment approximates
the fair market value of these instruments.

        LONG-TERM DEBT--The carrying value of the Company's long-term debt had a
fair value of $42,669 at December 31, 1997 and $45,853 at December 31, 1998. The
fair value was estimated by discounting the scheduled payment streams to present
value based upon rates currently offered to the Company for debt of similar
remaining maturities. Prepayment penalties and other costs of debt retirement
are not reflected in the estimates.


4.  PROPERTY, PLANT, AND EQUIPMENT, NET

        The following table summarizes the major classes of property, plant, and
equipment as of December 31, 1997 and 1998:

<TABLE>
<CAPTION>
                                                        1997            1998
                                                      ---------       ---------
<S>                                                   <C>             <C>
General Support                                       $  33,508       $  31,811
Central office                                          113,040         120,613
IOT                                                      21,283           5,652
Cable and wire                                          221,428         232,819
Construction in progress                                  5,633           9,345
Non-regulated and other                                     677           8,452
                                                      ---------       ---------
    Telephone property, plant, and equipment            395,569         408,692
Less accumulated depreciation                          (238,228)       (248,915)
                                                      ---------       ---------
    Net telephone property, plant, and equipment        157,341         159,777
                                                      ---------       ---------
Wireless property, plant, and equipment                   1,340           2,617
Less accumulated depreciation                               (91)           (684)
                                                      ---------       ---------
    Net wireless property, plant, and equipment           1,249           1,933
                                                      ---------       ---------
    Property, plant, and equipment, net               $ 158,590       $ 161,710
                                                      =========       =========
</TABLE>

        The Company retired approximately $1,762 of telephone property, plant,
and equipment and a like amount of accumulated depreciation in 1998.



                                      F-35
<PAGE>   89

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


5.  LONG-TERM DEBT


        Long-term debt as of December 31, 1997 and 1998 is summarized below:

<TABLE>
<CAPTION>
                                                              1997           1998
                                                            --------       --------
<S>                                                         <C>            <C>
First mortgage notes:
    5.0%-6.5%, due in installments to 2027                  $ 29,226       $ 28,546
    7.2%-9.4%, due in installments to 2020                    10,820         10,588
    10.1%-11.8%, due in installments to 2017                   2,904          2,672
Unsecured note at 3%, due in installments to 2007                 --          1,602
                                                            --------       --------
    Subtotal                                                  42,950         43,408
Less current maturities                                       (1,316)        (1,427)
                                                            --------       --------
    Total long-term debt, excluding current maturities      $ 41,634       $ 41,981
                                                            ========       ========
</TABLE>

        The approximate annual debt maturities for the five years subsequent to
December 31, 1998 are as follows: 1999, $1,427; 2000, $1,527; 2001, $1,637;
2002, $1,755; and 2003, $1,551.

        At December 31, 1998, under the most restrictive covenant of the
Company's long-term debt agreement, all of the Company's retained earnings were
available for the payment of cash dividends.

        Substantially all of the Company's telephone property, plant, and
equipment is pledged to secure the first mortgage notes.


6.  INCOME TAXES

        Income tax expense consists of the following components:

<TABLE>
<CAPTION>
                                              ELEVEN
                                              MONTHS        ONE MONTH
                              YEAR ENDED       ENDED          ENDED         YEAR ENDED
                             DECEMBER 31,   NOVEMBER 30,   DECEMBER 31,    DECEMBER 31,
                                1996           1997           1997            1998
                             ------------   ------------   ------------    ------------
<S>                          <C>            <C>            <C>             <C>
Federal:
   Current                    $   4,733      $   5,689      $     575       $   7,093
   Deferred                         265            109            (12)           (177)
State:
   Current                        1,388          1,708            170           2,101
   Deferred                         351            240              3             201
                              ---------      ---------      ---------       ---------
      Income tax expense      $   6,737      $   7,746      $     736       $   9,218
                              =========      =========      =========       =========
</TABLE>



                                      F-36
<PAGE>   90

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


6.  INCOME TAXES (CONTINUED)

        The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate:

<TABLE>
<CAPTION>
                                                                     ELEVEN
                                                                     MONTHS       ONE MONTH
                                                     YEAR ENDED       ENDED          ENDED         YEAR ENDED
                                                    DECEMBER 31,   NOVEMBER 30,   DECEMBER 31,    DECEMBER 31,
                                                        1996           1997          1997             1998
                                                    ------------   ------------   ------------    ------------
<S>                                                 <C>            <C>            <C>             <C>
Statutory federal income tax rate                        35.00%         35.00%         35.00%          35.00%
State income taxes, net of federal income tax
   benefit                                                6.00%          6.00%          8.44%           7.90%
Amortization of nondeductible excess cost of
   net assets acquired                                      --             --          14.20%          10.10%
Amortization of excess deferred income taxes             (1.67%)        (1.32%)        (2.18%)         (1.60%)
Amortization of deferred investment tax credits          (3.15%)        (2.27%)        (3.76%)         (2.70%)
Other, net                                                0.78%          0.06%          6.20%           0.20%
                                                     ---------      ---------      ---------       ---------
   Effective income tax rate                             36.96%         37.47%         57.90%          48.90%
                                                     =========      =========      =========       =========
</TABLE>

        The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                                     1997           1998
                                                                                   --------       --------
<S>                                                                                <C>            <C>
Deferred tax assets:
    Regulatory liability                                                           $     18       $    388
    Deferred investment tax credits                                                     991            374
    Other                                                                               829            567
                                                                                   --------       --------
    Total gross deferred tax assets                                                   1,838          1,329
    Less: Valuation allowances                                                           --             --
                                                                                   --------       --------
    Net Deferred tax assets                                                           1,838          1,329
                                                                                   --------       --------
Deferred tax liabilities:
    Property, plant, and equipment, primarily due to depreciation differences       (13,088)       (14,112)
    Excess costs of net assets acquired                                                 (47)          (740)
                                                                                   --------       --------
    Total gross deferred tax liabilities                                            (13,135)       (14,852)
                                                                                   --------       --------
    Net deferred tax liability                                                     $(11,297)      $(13,523)
                                                                                   ========       ========
</TABLE>



                                      F-37
<PAGE>   91

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


7.  EMPLOYEE BENEFIT PLANS

        Substantially all employees of the Company, except those who are members
of the International Brotherhood of Electrical Workers ("IBEW"), are covered by
a pension plan (the "Plan") which is sponsored by PTI before the Acquisition and
CNI subsequently which includes other affiliated companies. The Plan provides
benefits based upon employees' total years of service and the highest five years
compensation during their last 10 years of service. The Company's portion of
pension income was $57 during the year ended December 31, 1996, $219 during the
eleven months ended November 30, 1997, $23 during the one month ended December
31, 1997, and $384 for the year ended December 31, 1998. Because actuarial
information regarding the status of the Plan is computed for the Plan in total,
the Company does not separately determine its portion of the actuarial present
value of the accumulated plan benefits, projected benefit obligation, or net
assets available for benefits.

        In accordance with the purchase agreement with Alaska Communications
Systems Holdings, Inc., formerly known as ALEC Acquisition Corporation ("ALEC")
(see Note 13), the Plan assets and obligations will be valued at the closing
date. Based on this valuation, assets equaling the actuarial present value of
the accrued benefits of the Company's employees, plus an additional $250, will
be transferred to a replacement plan.

        The Company participates in a post retirement health care and insurance
plan (the "PRB Plan") which is sponsored by PTI prior to acquisition and by CNI
subsequently which includes other affiliated companies.

        The Company recognizes the cost of other post retirement benefits over
the active service period of its employees. PTI's policy was to fund annually an
amount of the post retirement benefit liability that will systematically reduce
that liability using available funds and allow deductibility for federal income
tax purposes. Due to income tax regulations that restrict the deductibility of
certain contributions for post retirement benefits, PTI elected to make non-tax
contributions to meet funding requirements imposed by state regulatory
commissions. PTI recognized the transition obligation, which represents the
previously unrecognized prior service cost, over a period of 20 years. Because
actuarial information regarding the status of the PRB Plan is computed for the
PRB Plan in total, PTI did not separately determine its portion of the actuarial
present value of the accumulated plan benefit, projected benefit obligations or
net assets available for benefits. At December 31, 1997, the date of the latest
actuarial evaluation for the PRB Plan, plan assets were less than the projected
benefit obligation by approximately $46,246 and the unamortized portion of the
transition obligation was $26,099. The Company's portion of the net periodic
post-retirement benefit cost was $846 during the year ended December 31, 1996,
$485 during the eleven months ended November 30, 1997, $41 during the one month
ended December 31, 1997, and $471 during the year ended December 31, 1998, as
follows:

<TABLE>
<S>                                                                 <C>
     Service cost                                                   $ 183
     Interest cost                                                    392
     Amortization of transition obligation                            116
     Amortization of unrecognized prior service cost                   (4)
     Expected return on assets                                       (216)
                                                                    -----
           Net periodic postretirement benefit cost                 $ 471
                                                                    =====
</TABLE>

        At the time of adoption of SFAS 106, Employers' Accounting For
Postretirement Benefits Other Than Pensions, the Company elected to amortize the
transition obligation, at the date of implementation, over 20 years.

        In accordance with the purchase agreement with ALEC (see Note 13), the
purchaser assumes the liability for post retirement benefits related to
employees that retire subsequent to the closing date.



                                      F-38
<PAGE>   92

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


8.  CERTAIN TRANSACTIONS

        The Company purchases certain plant materials and other services
(including certain operating expenses) from PTI, CenturyTel, and other
affiliated companies. Materials and services purchased by the Company from PTI
prior to acquisition and CenturyTel and its subsidiaries subsequently totaled
approximately $9,227 for the year ended December 31, 1996, $8,581 for the eleven
months ended November 30, 1997, $1,626 for the one month ended December 31,
1997, and $29,306 (which included $15,648 of operating expenses) during the year
ended December 31, 1998. Many of the costs that are allocated to the Alaska
companies are based on time distribution and are, therefore, representative of
what costs would have been on a stand-alone basis. General and administrative
costs are allocated based on expense levels of all companies. Such costs, when
allocated to the subsidiaries, include a reasonable rate of return on investment
to the related affiliate and, therefore, are representative of what costs would
have been on a stand-alone basis.

        Prior to the Acquisition, short-term advances were made to PTI under an
agreement providing interest at the prime commercial rate for funds held more
than 90 days. Interest income on these advances was $1,052 during the year ended
December 31, 1996, $797 during the eleven months ended November 30, 1997, and
$81 during the one month ended December 31, 1997.

        Subsequent to the Acquisition, the Company participates in a Central
Depository Account ("CDA") with CenturyTel and other affiliates. The Company is
assessed or receives interest on the net amount of its CDA balance and the net
accounts receivable or payable to CenturyTel and its affiliates. Related
interest income amounted to $2,156 for the year ended December 31, 1998. The
rate used to calculate the related interest income was the three month U.S.
T-Bill rate. Related interest expense amounted to $637 for the year ended
December 31, 1998. The rate used to calculate the related interest expense was
the weighted average rate of CenturyTel's debt.


9.  BUSINESS AND CREDIT CONCENTRATIONS

        The Company provides telephone services to customers (business and
residential) located in the state of Alaska. Receivables from connecting
companies represent the amounts due from various long distance carriers such as
AT&T and the Bell operating companies.

        The ultimate realization of the Company's balance in the CDA discussed
above is dependent upon the financial resources of CenturyTel.


10. COMMITMENTS AND CONTINGENCIES

        Expenditures for property, plant, and equipment are anticipated to be
approximately $19,469 for telephone operations and $615 for wireless operations
during 1999.

        The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect on the
Company's financial position or results of operations.

        The Company's operations are subject to federal, state and local laws
and regulations governing the use, storage, disposal of, and exposure to,
hazardous materials, the release of pollutants into the environment and the
remediation of contamination. As an owner or operator of property and a
generator of hazardous wastes, the Company could be subject to certain
environmental laws that impose liability for the entire cost of cleanup at
contaminated sites, regardless of fault or the lawfulness of the activity that
resulted in contamination. The Company believes, however, that its operations
are in substantial compliance with applicable environmental laws and regulations
and that there is no material exposure to loss related to environmental issues.



                                      F-39
<PAGE>   93

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

        Many of the Company's properties formerly contained, or currently
contain, underground and aboveground storage tanks used for the storage of fuel
or wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.

11.  BUSINESS SEGMENTS

        The Company is engaged in providing local exchange telephone services
and cellular telephone services in Alaska. The following tables illustrate
selected financial data for each segment:


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996             TELEPHONE      CELLULAR          TOTAL
----------------------------             --------       --------        --------
<S>                                      <C>            <C>             <C>
Operating revenues                       $ 75,950       $  4,823        $ 80,773
Depreciation and amortization              14,383            965          15,348
Operating income                           19,778            477          20,255
Capital expenditures                       19,694            771          20,465
</TABLE>

<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED NOVEMBER 30, 1997    TELEPHONE      CELLULAR          TOTAL
-------------------------------------    --------       --------        --------
<S>                                      <C>            <C>             <C>
Operating revenues                       $ 79,330       $  5,120        $ 84,450
Depreciation and amortization              15,090            733          15,823
Operating income                           21,836          1,305          23,141
Capital expenditures                       14,225            350          14,575
</TABLE>

<TABLE>
<CAPTION>
ONE MONTH ENDED DECEMBER 31, 1997        TELEPHONE      CELLULAR          TOTAL
---------------------------------        --------       --------        --------
<S>                                      <C>            <C>             <C>
Operating revenues                       $ 10,255       $    181        $ 10,436
Depreciation and amortization               2,375             91           2,466
Operating income                            1,446            (57)          1,389
Capital expenditures                        1,732             93           1,825
Total assets                              450,155          9,020         459,175
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998             TELEPHONE      CELLULAR          TOTAL
----------------------------             --------       --------        --------
<S>                                      <C>            <C>             <C>
Operating revenues                       $121,933       $  2,576        $124,509
Depreciation and amortization              29,734            725          30,459
Operating income (loss)                    20,190           (276)         19,914
Capital expenditures                       26,664            135          26,799
Total assets                              470,649          2,011         472,660
</TABLE>



                                      F-40
<PAGE>   94

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


11.  BUSINESS SEGMENTS (CONTINUED)

        The following is a reconciliation of operating income to income before
income tax expense:

<TABLE>
<CAPTION>
                                                      ELEVEN
                                                      MONTHS        ONE MONTH
                                      YEAR ENDED       ENDED          ENDED         YEAR ENDED
                                     DECEMBER 31,   NOVEMBER 30,   DECEMBER 31,    DECEMBER 31,
                                        1996           1997           1997             1998
                                     ------------   ------------   ------------    ------------
<S>                                  <C>            <C>            <C>             <C>
Operating income                      $  20,255       $  23,141       $   1,389       $  19,914
Interest expense                         (3,176)         (3,027)           (253)         (3,588)
Interest income                           1,180             858              82           2,183
Other income (expense), net                 (33)           (298)             53             356
                                      ---------       ---------       ---------       ---------
Income before income tax expense      $  18,226       $  20,674       $   1,271       $  18,865
                                      =========       =========       =========       =========
</TABLE>

12.  ACCOUNTING FOR THE EFFECTS OF REGULATION

        The Company currently accounts for its regulated telephone operations in
accordance with the provisions of SFAS 71. While the ongoing applicability of
SFAS 71 to the Company's telephone operations is being monitored due to the
changing regulatory, competitive, and legislative environments, the Company
believes that SFAS 71 still applies. However, it is possible that changes in
regulation or legislation or anticipated changes in competition or in the demand
for regulated services or products could result in the Company's telephone
operations not being subject to SFAS 71 in the near future. In that event,
implementation of SFAS 101, Regulated Enterprises--Accounting For The
Discontinuance Of Application Of FASB Statement No. 71, would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Regulatory assets were $45,600,000, and regulatory
liabilities were $880,000. Such discontinuance of the application of SFAS 71
would result in a material, noncash charge against earnings which would be
reported as an extraordinary item. While the effect of implementing SFAS 101
cannot be precisely estimated at this time, management believes that the
noncash, after-tax, extraordinary charge would be between $25,000 and $28,000.



                                      F-41
<PAGE>   95

                          CENTURYTEL ALASKA PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
      YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
       ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)


13.  ACQUISITIONS AND DISPOSITIONS

        On September 8, 1997, the Company acquired the outstanding stock of
Polarnet, Inc., an Internet service provider. The purchase price was
approximately $1,100 and was accounted for by the purchase method. The excess of
the purchase price over the estimated fair value of net assets acquired amounted
to approximately $968, which is included in goodwill. The results of operations
of Polarnet, Inc. from September 8, 1997 are included in the statement of
income.

        On October 6, 1997, PTI acquired the net assets of the local exchange
utilities ("PTI-Fairbanks") from the City of Fairbanks. The purchase price was
approximately $87 million and was accounted for by the purchase method. The
excess of the purchase price over the estimated fair value of net assets
acquired amounted to approximately $31 million, which is included in goodwill.
The results of operations of PTI-Fairbanks from October 6, 1997 are included in
the statements of income. Assets and liabilities acquired were as follows:

<TABLE>
<S>                                                       <C>
             Fair value of assets acquired                $ 86,750
             Cash paid for net assets                      (85,000)
                                                          --------
                Liabilities assumed                       $  1,750
                                                          ========
</TABLE>

        On December 1, 1997, PTI was sold to CenturyTel for approximately $2.2
billion (including assumed debt). As a result of this transaction, the Company
recorded all previously retained earnings as paid-in capital and pushed down
excess costs of approximately $208 million to the Alaskan entities to reflect
the change from PTI's to CenturyTel's basis of accounting.

        In August 1998 CNI and CT Wireless entered into a definitive agreement
to sell the stock of the Company to ALEC for approximately $409 million, subject
to certain adjustments. The transaction is anticipated to close in 1999 subject
to regulatory approvals and various closing conditions.

14.  YEAR 2000 (UNAUDITED)

        The Company has initiated a plan ("Year 2000 Plan") to identify, assess,
and remediate "Year 2000" issues within each of its significant computer
programs and certain equipment which contain micro-processors. The Year 2000
Plan is addressing the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000, if a
program or chip uses only two digits rather than four to define the applicable
year. The Company has divided the Year 2000 Plan into four major
phases--assessment, planning, implementation, and testing. After completing the
assessment and planning phases earlier this year, the Company is currently in
the implementation and testing phases. Systems which have been determined not to
be Year 2000 compliant are being either replaced or reprogrammed, and thereafter
tested for Year 2000 compliance. The Year 2000 Plan anticipates that by October
1999 the implementation and testing phases will be completed.

        The Company is identifying and contacting critical suppliers and
customers whose computerized systems interface with the Company's systems,
regarding their plans and progress in addressing their Year 2000 issues. The
Company has received varying information from such third parties on the state of
compliance or expected compliance. Contingency plans are being developed in the
event that any critical supplier or customer is not compliant.

        The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity, and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether consequences of Year 2000 failures will
have a material impact on the Company's operations, liquidity, or financial
condition.



                                      F-42
<PAGE>   96

                          INDEPENDENT AUDITORS' REPORT


The Honorable Mayor and Members of the Assembly
Municipality of Anchorage:

        We have audited the accompanying balance sheets of the Municipality of
Anchorage Telephone Utility Fund (Utility) as of December 31, 1998 and 1997, and
the related statements of revenues, expenses, and changes in retained earnings,
and cash flows for each of the years in the three-year period ended December 31,
1998. These financial statements are the responsibility of the Utility's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        The financial statements present only the Municipality of Anchorage
Telephone Utility Fund and are not intended to present fairly the financial
position and results of operations of the Municipality of Anchorage in
conformity with generally accepted accounting principles.

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Municipality of
Anchorage Telephone Utility Fund as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.


                                                       /s/ KPMG LLP



Anchorage, Alaska
February 19, 1999



                                      F-43
<PAGE>   97

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                                 BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                             December 31,
                                                                        ----------------------
                                                                          1997          1998
                                                                        --------      --------
<S>                                                                     <C>           <C>
                                     ASSETS
CURRENT ASSETS
   Cash                                                                 $ 10,474      $ 25,755
   Accounts receivable, net of uncollectibles of $1,586 and $1,343
       in 1998 and 1997                                                   21,216        23,733
   Inventories                                                             4,415         3,074
                                                                        --------      --------
       Total current assets                                               36,105        52,562
RESTRICTED CASH                                                            2,067           754
RESTRICTED INVESTMENTS                                                    12,895        14,838
NET TELEPHONE PLANT                                                      250,669       257,703
OTHER ASSETS
   Cellular licenses                                                       9,670        16,315
   Minority investments                                                    7,983         5,535
   Other                                                                   3,735         2,538
                                                                        --------      --------
       Total other assets                                                 21,388        24,388
                                                                        --------      --------
TOTAL ASSETS                                                            $323,124      $350,245
                                                                        ========      ========

                          FUND EQUITY AND LIABILITIES
CURRENT LIABILITIES
   Accounts payable                                                     $ 23,211      $ 24,366
   Accrued interest                                                        1,730         2,227
   Compensated absences payable                                            3,297         2,786
   Accrued employee benefits                                               2,141         1,938
   Advance billings and customer deposits                                  4,386         4,523
   Current installments of long-term obligations                          16,719        17,614
                                                                        --------      --------
      Total current liabilities                                           51,484        53,454
LONG-TERM OBLIGATIONS                                                    135,226       154,907
FUND EQUITY
   Retained Earnings                                                     136,414       141,884
                                                                        --------      --------
TOTAL FUND EQUITY AND LIABILITIES                                       $323,124      $350,245
                                                                        ========      ========
</TABLE>


                 See accompanying notes to financial statements.



                                      F-44
<PAGE>   98

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
       STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                              -----------------------------------------
                                                1996            1997            1998
                                              ---------       ---------       ---------
<S>                                           <C>             <C>             <C>
OPERATING REVENUES
   Local telephone                            $ 113,415       $ 116,555       $ 121,057
   Cellular                                      16,897          21,845          29,225
   Long distance                                      2           1,541           6,815
                                              ---------       ---------       ---------
      Total operating revenue                   130,314         139,941         157,097
OPERATING EXPENSES
   Cost of sales and operating
       expenses--local                           75,980          74,994          74,240
   Cost of sales and operating
       expenses--cellular                        12,379          14,455          19,961
   Cost of sales and operating
       expenses--long distance                      543           4,644          10,395
   Depreciation and amortization                 20,496          26,839          29,608
                                              ---------       ---------       ---------
       Total operating expenses                 109,398         120,932         134,204
                                              ---------       ---------       ---------

OPERATING INCOME                                 20,916          19,009          22,893
   Interest expense                              (9,187)         (9,308)         (9,394)
   Equity in earnings (loss) of minority
       investments                                  (45)            158          (2,945)
   Interest income                                2,347           2,540           2,967
   Other income (expense), net                     (174)           (281)             49
                                              ---------       ---------       ---------
      Net other expense                          (7,059)         (6,891)         (9,323)
                                              ---------       ---------       ---------
   NET INCOME                                    13,857          12,118          13,570
                                              =========       =========       =========

RETAINED EARNINGS, JANUARY 1                    126,839         132,596         136,414
Utility Revenue Distribution to
       Municipality of Anchorage                 (8,100)         (8,300)         (8,100)
                                              ---------       ---------       ---------
RETAINED EARNINGS, PERIOD END                 $ 132,596       $ 136,414       $ 141,884
                                              =========       =========       =========
</TABLE>


                 See accompanying notes to financial statements.



                                      F-45
<PAGE>   99

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                               1996           1997           1998
                                                                             --------       --------       --------
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Income from operations                                                    $ 20,477       $ 19,005       $ 22,548
   Adjustments to reconcile income from operations to
       net cash provided by operating activities
       Depreciation and amortization                                           20,496         26,839         29,608
       Provision for uncollectible accounts                                     1,112          1,113          1,643
       Loss on disposition of fixed assets                                        288            100            174
       Non-regulated income and other                                             439             43             95
       Changes in assets and liabilities which increase (decrease) cash
            Accounts receivable                                                  (996)        (4,040)        (4,160)
            Inventory of materials, supplies, and goods for resale                159           (504)         1,341
            Other assets                                                         (364)           120          1,244
            Accounts payable                                                      (25)         4,172          1,155
            Accrued employee benefits and compensated absences payable          1,198            194           (713)
            Customer deposits                                                    (620)          (262)          (292)
            Advance billings                                                      306            558            428
            Other liabilities                                                    (350)          (697)           136
                                                                             --------       --------       --------
Net cash provided by operating activities                                      42,120         46,641         53,207
                                                                             --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES
   Cash flows from noncapital financing activities
       Utility revenue distribution--Municipality of Anchorage                 (8,100)        (8,300)        (8,100)
   Cash flows from capital and related financing activities
       Acquisition of telephone plant                                         (24,958)       (35,187)       (29,644)
       Short-term advance from Municipality of Anchorage General Fund         (12,000)            --             --
       Principal payments on long-term obligations                            (22,002)       (19,617)       (17,340)
       Bond issuance                                                           43,659         24,790         29,592
      Interest payments on long-term obligations                               (6,513)        (7,952)        (8,011)
      Cost of removal of telephone plant                                         (181)          (650)           (77)
                                                                             --------       --------       --------
Net cash provided (used) by capital and related financing activities          (21,995)       (38,616)       (25,480)
                                                                             --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES
   Interests                                                                    2,347          2,325          2,968
   Minority investments                                                        (2,398)        (5,227)        (7,283)
   Proceeds from sale of restricted investments                                12,865         12,109         13,912
   Purchase of restricted investments                                         (13,601)       (12,872)       (15,256)
                                                                             --------       --------       --------
Net cash used by investing activities                                            (787)        (3,665)        (5,659)
                                                                             --------       --------       --------
NET CHANGE IN CASH                                                             11,238         (3,940)        13,968
CASH, JANUARY 1                                                                 5,243         16,481         12,541
                                                                             --------       --------       --------
CASH, PERIOD END (including Restricted Cash (see Note 1))                    $ 16,481       $ 12,541       $ 26,509
                                                                             ========       ========       ========

NON-CASH CAPITAL, FINANCING, AND INVESTING ACTIVITIES
   Retirement of telephone plant                                             $  7,124       $  9,077       $  3,401
   Write down of long-term investments                                             --             --          1,888
   Financed equipment purchased                                                    --             --          6,655
                                                                             --------       --------       --------
   Total Non-cash Capital, Financing, and Investing Activities               $  7,124       $  9,077       $ 11,944
                                                                             ========       ========       ========
</TABLE>


                 See accompanying notes to financial statements



                                      F-46
<PAGE>   100

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                          NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Description Of Business

        The accompanying financial statements include the activities of the
Telephone Utility Fund (Utility), a public utility of the Municipality of
Anchorage (Municipality), ATU Communications, Inc. (ACI), a holding company,
MACtel, Inc. (MACtel) and ATU Long Distance, Inc. (ATU LD), wholly owned
subsidiaries of ACI. All significant intercompany transactions have been
eliminated.

        The regulated arm of the Utility provides local telecommunications
service and access to long distance telecommunications service to the Anchorage
Bowl area and to Girdwood and other small communities in the area south of the
Anchorage Bowl both inside and outside the boundaries of the Municipality. The
nonregulated arm of the Utility sells, rents, and leases customer premise
equipment to customers throughout the State of Alaska. MACtel is a
wholesale/retail cellular service provider that operates in Anchorage, the Kenai
Peninsula, and the North Star and North Slope Boroughs. ATU LD provides long
distance service to customers in Anchorage, Fairbanks, Juneau, the Kenai
Peninsula and the Matanuska Valley. Approximately 70% of the Utility's employees
are covered under a labor contract with the International Brotherhood of
Electrical Workers (IBEW) which expires on August 31, 1999.

        On January 5, 1998, MACtel acquired certain assets of Pacific Telecom
Cellular of Alaska RSA #1, Inc. and stock of Prudhoe Communications, Inc.,
collectively d/b/a Cellulink, a cellular service company in Fairbanks, Alaska
for $8,900.

        The purchase price was allocated as follows:

<TABLE>
<S>                                                      <C>
                Property and equipment                   $1,817
                Cellular licenses                         7,083
                                                         ------
                                                         $8,900
                                                         ======
</TABLE>

        Results of operations for the acquired companies have been included in
1998 operations since the date of acquisition. Pro forma information for prior
periods is not presented because it is not material.

        Sale Of Utility

        During 1998, the Municipal Assembly accepted a bid in the amount of
$295,000 from Alaska Communications Systems, Inc. to acquire substantially all
of the assets and assume substantially all of the liabilities of the Utility.
The sale will become effective after review and approval by the Alaska Public
Utilities Commission (APUC), the Federal Communications Commission (FCC), and
non-action by the United States Department of Justice under the
Hart-Scott-Rodino Act. The sales price will be adjusted based upon levels of
cash and net plant on the closing date.

        Regulation

        The Utility is subject to rate regulation by the FCC for interstate
telecommunication service, and the APUC for intrastate and local exchange
telecommunication service. The Utility, as required by the FCC, accounts for
such activity separately.

        The services of ATU LD are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the APUC for intrastate telecommunication services. The operations of MACtel are
not subject to rate regulation.



                                      F-47
<PAGE>   101

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Basis Of Accounting

        The accounting records of the Utility conform to Part 32 Uniform System
of Accounts as prescribed by the FCC and the APUC.

        The accompanying financial statements are prepared on the accrual basis
of accounting. The accounting policies of the Utility are in conformity with the
requirements of the FCC and the APUC. The Utility prepares its financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation". Accounting
under SFAS No. 71 is appropriate as long as rates are established by or subject
to approval by independent third-party regulators; rates are designed to recover
the specific enterprise's cost-of-service; and in view of demand for service, it
is reasonable to assume that rates are set at levels that will recover costs and
can be collected from customers.

        Under Governmental Accounting Standards Board (GASB) Statement No. 20,
Accounting And Financial Reporting For Proprietary Funds And Other Governmental
Entities That Use Proprietary Fund Accounting, the Utility applies all
applicable GASB pronouncements and all Financial Accounting Standards Board
(FASB) Statements and Interpretations, Accounting Principles, Board Opinions and
Accounting Research Bulletins, unless they conflict with or contradict GASB
pronouncements. ATU follows the provisions of GASB Statement No. 27 to account
for pension and post-retirement costs, which differs from FAS Statement No. 87
and FAS Statement No. 106 regarding the methodology for calculation of such
costs and how they are recorded and disclosed. Specifically, GASB Statement No.
27 requires that annual pension cost be equal to the annual required
contributions of the employer (ARC) to the plan for that year calculated via an
actuarial valuation performed in accordance with specific parameters. These
parameters address such matters as the frequency of actuarial valuations,
acceptable actuarial cost methods, asset valuation methodology, minimum and
maximum amortization periods and the amortization method. Generally, employers
are required to record a net pension obligation (NPO) if the ARC calculated in
accordance with the parameters exceeds actual contributions made. Annual pension
cost is calculated as the ARC, one year's interest on the NPO, and certain
required adjustments. Under GASB Statement No. 27, employers are permitted to
apply the measurement and recognition requirements of GASB Statement No. 27 to
postemployment healthcare benefits.

        Pursuant to GASB Statement No. 27, the Municipality of Anchorage
Telephone Utility Fund recorded annual pension cost of $1,041,000 for the year
ended December 31, 1998, of which $749,520 related to pension benefits and
$291,480 related to postemployment healthcare benefits. As of December 31, 1998
and 1997, there is no NPO.

        Under FASB Statement No. 87, Employers' Accounting For Pensions, the
following components are included in the net pension cost recognized for a
period by an employer sponsoring a defined benefit pension plan:

        -  Service cost

        -  Interest cost

        -  Actual return on plan assets, if any

        -  Amortization of unrecognized prior service cost, if any

        -  Gain or loss (including the effects of changes in assumptions) to the
           extent recognized

        -  Amortization of the unrecognized net obligation (and loss or cost) or
           unrecognized net asset (and gain) existing at the date of initial
           application of FASB Statement No. 87.



                                      F-48
<PAGE>   102

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        The service component of net periodic pension cost, the projected
benefit obligation, and the accumulated benefit obligation are based on an
attribution of pension benefits to periods of employee service and on the use of
actuarial assumptions to calculate the actuarial present value of those
benefits. Actuarial assumptions reflect the time value of money (discount rate)
and the probability of payments (assumptions as to mortality, turnover, early
retirement, and so forth).

        Under FASB Statement No. 87, a liability (unfunded accrued pension cost)
is recognized if net periodic pension cost recognized pursuant to FASB Statement
No. 87 exceeds amounts the employer has contributed to the plan. An asset
(prepaid pension cost) is recognized if net periodic pension cost is less than
amounts the employer has contributed to the plan.

        If the accumulated benefit obligations exceeds the fair value of plan
assets, the employer shall recognize in the statement of financial position a
liability (including unfunded accrued pension cost) that is at least equal to
the unfunded accumulated benefit obligation. Recognition of an additional
minimum liability is required in certain other circumstances.

        Accounting for post retirement benefits pursuant to FASB Statement No.
106, Employers' Accounting For Postretirement Benefits Other Than Pensions, is
similar to the accounting proscribed for pension benefits in accordance with
FASB Statement No. 87.

        It is not practicable to quantify the differences between the statements
without an additional complete actuarial valuation because the actuarial
calculations for FAS Statement No. 87 purposes require different assumptions and
represent different measurement bases. Other differences between GASB and FAS
have been evaluated and have been determined not to be material for the periods
presented.

        In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates. The more significant accounting and reporting
policies and estimates applied in the preparation of the accompanying financial
statements are discussed below.

        Cash Pools And Restricted Investments

        The Municipality uses a central treasury to account for all cash and
investments to maximize interest income. Interest income from cash pool
investments is allocated to the Utility based on its monthly closing cash pool
equity balance. Restricted investments are recorded at fair value. All amounts
in the cash pools and in restricted investments are interest bearing and consist
primarily of repurchase agreements, banker's acceptances or U.S. Government
securities. The Utility adopted GASB Statement No. 31, Accounting And Financial
Reporting For Certain Investments And For External Investment Pools, during
1998. The impact of adopting this statement was not material to the financial
statements.

        Under GASB Statement No. 3, Deposits With Financial Institutions,
Investments (Including Repurchase Agreements), And Reverse Repurchase
Agreements, the Utility's cash and investments are classified in credit risk
category 1 because they are insured or registered or are securities held by the
Utility or its agent in the Utility's name.

        Statement Of Cash Flows

        The Utility has adopted GASB Statement No. 9, Reporting Cash Flows Of
Proprietary And Nonexpendable Trust Funds And Governmental Entities That Use
Proprietary Fund Accounting. For purposes of the statement of cash flows, the
Utility has defined cash as the demand deposits and investments maintained in
the general and construction cash pools, including restricted and unrestricted
balances, as well as cash balances maintained separately from the cash pools.
Maturity periods of investments have been disregarded, since the Utility uses
the general and construction cash pools as demand deposit accounts.



                                      F-49
<PAGE>   103

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Cash consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                 1996         1997         1998
                                                                -------      -------      -------
<S>                                                             <C>          <C>          <C>
Equity in general cash pool                                      14,427        9,401       19,254
Cash                                                                963        1,073        6,501
                                                                -------      -------      -------
     Total cash                                                  15,390       10,474       25,755
Amounts included with restricted investments:
Equity in construction cash pool                                     --          927           --
Equity in general cash pool reserved for customer deposits        1,091          830          537
Cash included in revenue bond reserve investments                    --          310          217
                                                                -------      -------      -------
                                                                $16,481      $12,541      $26,509
                                                                =======      =======      =======
</TABLE>

         Inventories

        The Utility's inventories, consisting primarily of parts and supplies,
are valued at the lower of weighted average cost or market.

        Telephone Plant

        Telephone plant is stated at cost. The additions to telephone plant in
service are recorded at the original cost of contracted services, direct
materials and labor, and indirect overhead charges. When property is retired,
the cost of the property unit, plus removal costs, less salvage, is charged to
accumulated depreciation. Gain or loss on the retirement of regulated telephone
plant is not recognized except for extraordinary retirements.

        The Utility's depreciation is computed using the straight-line method
over the estimated lives of the assets. Current rates on regulated plant were
implemented January 1, 1997 and were based on APUC Docket U-96-78. MACtel and
ATU LD property and equipment are depreciated using the straight-line and
declining balance methods over the estimated useful asset lives.

        The estimated life in years of major plant and equipment categories
follows:

<TABLE>
<CAPTION>
PLANT AND EQUIPMENT                                    ESTIMATED LIFE
-------------------                                    --------------
<S>                                                    <C>
Buildings                                                       56
Central office equipment                                      9-10
Cable, wire and conduit                                      12-46
Furniture, computers and support equipment                    7-22
Vehicles                                                     11-19
Leasehold improvements                                         2-3
Nonregulated                                                  3-10
</TABLE>

        Minority Investments

        Minority investments consist of investments in companies which are
accounted for using the equity method.



                                      F-50
<PAGE>   104

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        Cellular Licenses

        Cellular licenses are stated at net book value. Amortization is computed
on the straight-line method over an estimated useful life of 40 years.

        Discount On Revenue Bonds Payable

        The discount on revenue bonds payable is amortized over the life of the
related bond issue using the effective interest method.

        Revenue Recognition

        Recurring revenues are billed one month in advance and are deferred
until the month earned. Nonrecurring revenues are billed in arrears and are
recognized when earned.

        During 1998 the Utility participated in both interstate and intrastate
common line pooled settlements. During 1998 the Utility did not participate in
any traffic-sensitive pools. Pooled revenues are based on settlements with the
applicable pool's administrator. Intrastate pooled revenues are settled on a
monthly basis with the Alaska Exchange Carrier Association (AECA) and are final
at the time of settlement. Participation in the AECA pool was discontinued
effective January 1, 1999. Interstate pooled revenues are settled on a monthly
basis with the National Exchange Carrier Association (NECA). The NECA
settlements may be adjusted for a period of up to twenty-four months. Interstate
traffic sensitive revenue is based on rates and charges defined in the Utility's
interstate tariff approved by the FCC. Interstate traffic sensitive revenue is
recognized when earned for both recurring and nonrecurring charges.

        To the extent that disputes arise over revenue settlement procedures,
the Utility's policy is to defer revenue collected until settlement
methodologies are resolved and finalized.

        Municipal Utility Service Assessment

        The Municipal Utility Service Assessment (MUSA) is assessed by the
Municipality and is calculated based on the net book value of telephone plant in
the prior year. Net book value for each tax district is multiplied by the
current mill rate to determine the assessment. The Utility also pays a gross
receipt tax, which is 1.25% of gross operating revenues, excluding nonregulated
revenues.

        Advertising

        Advertising costs are expensed in the period in which they are incurred.

        Income Taxes

        The Internal Revenue Code provides that gross income for tax purposes
does not include income accruing to a state or territory, or any political
subdivision thereof, which is derived from the exercise of any essential
governmental function or from any public utility. The Utility is a public
utility of the Municipality and is therefore exempt from federal and state
income taxes. ACI and its subsidiaries are exempt from federal and state income
taxes because ACI is a holding company owned 100% by the Utility.



                                      F-51
<PAGE>   105

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        GASB NO. 27

The Utility adopted GASB Statement No. 27, Accounting For Pensions By State And
Local Governmental Employers, during 1998. GASB No. 27 establishes standards for
the measurement, recognition and display of pension expense and related
liabilities, assets, note disclosure and applicable required supplementary
information in the financial reports of state and local governmental employers.
The impact of adopting GASB No. 27 was not material to the financial statements.

        Impairment Of Long-Lived Assets

        The Utility has adopted FASB Statement No. 121, Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of.
Under the provisions of this statement, the Utility has evaluated its long-lived
assets for financial impairments and will continue to evaluate them if events or
changes in circumstance indicate the carrying amount of such assets may not be
fully recoverable.

        Reclassifications

        Certain reclassifications have been made to the December 31, 1997 and
1996 financial statements to conform to the current year's presentation.


(2)  TELEPHONE PLANT

        A summary of telephone plant and equipment at December 31, follows:

<TABLE>
<CAPTION>
                                                     1997            1998
                                                   ---------       ---------
<S>                                                <C>             <C>
Plant in Service
   Cable, wire and conduit                         $ 166,055       $ 169,705
   Central office equipment                          124,199         126,364
   Buildings                                          43,908          44,207
   Furniture, computers and support equipment         21,580          21,380
   Non-regulated equipment                            30,413          36,269
   Vehicles                                            7,523           7,499
   Land                                                5,101           5,168
   Leasehold improvements                                468             741
                                                   ---------       ---------
                                                     399,247         411,333
   Less accumulated depreciation                    (162,990)       (187,179)
                                                   ---------       ---------
   Net plant in service                              236,257         224,154
   Construction work in progress                      14,412          33,549
                                                   ---------       ---------
   Net telephone plant                             $ 250,669       $ 257,703
                                                   =========       =========
</TABLE>



                                      F-52
<PAGE>   106

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(3)  LONG-TERM OBLIGATIONS

        Long-term obligations consist of the following at December 31:

        Bonds payable:

<TABLE>
<CAPTION>
                                                                                1997            1998
                                                                              ---------       ---------
<S>                                                                           <C>             <C>
   1993 Series, effective interest rate of 5.49%, due in 2013                 $  17,390       $  16,670
   1994 Series, effective interest rate of 4.38%, due in 2010                    66,210          54,265
   1996 Series, effective interest rate of 5.71%, due in 2016                    42,745          41,430
   1997 Series, effective interest rate of 5.18%, due in 2017                    25,000          24,275
   1998 Series, effective interest rate of 4.44%, due in 2010                        --          30,000
                                                                              ---------       ---------
                                                                                151,345         166,640
   Less:  Unamortized loss on refunding                                          (2,295)         (1,643)
   Less:  Current portion                                                       (14,705)        (16,370)
   Less:  Unamortized discount                                                     (257)           (226)
   Less:  Unamortized premium                                                       238             678
                                                                              ---------       ---------
Net long-term revenue bonds payable                                             134,326         149,079
                                                                              ---------       ---------
Equipment financing obligations, interest rates range from approximately
   4-5%, final payment due in 2004                                                   --           6,034
   Less: Current portion                                                             --          (1,071)
                                                                              ---------       ---------
Net equipment financing obligations                                                  --           4,963
Note payable:
   Note payable, effective interest rate of 5.98%, due in 1999                    2,187             173
   Less:  Current portion                                                        (2,014)           (173)
                                                                              ---------       ---------
Net note payable                                                                    173              --
                                                                              ---------       ---------
Arbitrage payable                                                                   727             865
                                                                              ---------       ---------
Total long-term obligations                                                   $ 135,226       $ 154,907
                                                                              =========       =========
</TABLE>



        Debt service requirements are the following for the years ended December
31:

<TABLE>
<CAPTION>
   Long-Term Obligations
                                        PRINCIPAL     INTEREST        TOTAL
                                        ---------     --------      --------
   <S>                                  <C>           <C>           <C>
   1999                                 $ 17,614      $  8,272      $ 25,886
   2000                                   17,686         7,592        25,278
   2001                                   18,381         6,853        25,234
   2002                                   19,176         6,063        25,239
   2003                                    9,989         5,152        15,141
   2004-2008                              41,461        18,580        60,041
   2009-2013                              30,825         9,164        39,989
   2014-2017                              17,715         1,720        19,435
                                        --------      --------      --------
                                        $172,847      $ 63,396      $236,243
                                        ========      ========      ========
</TABLE>



                                      F-53
<PAGE>   107

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(3)  LONG-TERM OBLIGATIONS (CONTINUED)

        The 1993 revenue bond covenants require the establishment of reserves
over a five-year period equal to the maximum annual debt service on all
outstanding bonds. The 1994 refunding bond covenants require establishment of a
reserve in the amount of $9,750. The 1996 revenue bond covenants require an
amount equal to the lesser of $4,400 or the maximum annual debt service to be
funded in equal installments over four years. The 1997 revenue bond covenants
require an amount equal to the lesser of $2,500 or the maximum annual debt
service to be funded in equal installments over four years. The 1998 revenue
bond covenants require an amount equal to the lesser of $3,000 or the maximum
annual debt service to be funded in equal installments over four years. The
revenue bond covenants further stipulate that revenues less expenses will be
equal to at least 1.4 times the debt service requirements for that year.
Expenses are defined as costs for operation and maintenance of the system,
excluding depreciation and MUSA for each year. For the years ended December 31,
1998, 1997 and 1996, the Utility complied with the revenue bond covenants.

(4)  REFUNDING OF LONG-TERM OBLIGATIONS

        In 1994, the Utility issued refunding bond issues for the purpose of
redeeming certain bond issues when they become due or callable. The net proceeds
of the refunding bond issue were used to purchase US Government securities which
were deposited in an irrevocable trust with an escrow agent to provide all
future debt service payments on the refunded bonds. Since payment of these
advance refunded issues has been provided, as described above, neither the
liability nor the assets irrevocably pledged, including related interest income
and expense, are reflected in the accompanying financial statements.

        Defeased bonds as of December 31, 1998 total $11,390 for the 1990 issue.

(5)  RETIREMENT PLANS

        Substantially all employees are covered by one of the following plans.

        International Brotherhood of Electrical Workers (IBEW) Plan

        The IBEW Plan is a union sponsored defined benefit pension plan for
members of the IBEW #1547 Union. The Utility contributed $3.67 per compensable
employee hour to the Alaska Electrical Trust Fund in 1998, 1997 and 1996.
Utility contributions to this plan were $3,130, $3,379 and $3,608 for the years
ended December 31, 1998, 1997 and 1996, respectively. The hourly rate paid by
the Utility is determined by the collective bargaining process. The Utility's
obligation for IBEW employee retirement is limited to the amount paid to the
Alaska Electrical Trust Fund.

        State Of Alaska Public Employees' Retirement System Plan

        As discussed in note 1, the Utility adopted the provisions of GASB
Statement No. 27, Accounting For Pensions By State And Local Governmental
Employers (GASB 27), in 1998.

        State Of Alaska Public Employees' Retirement System

        A.  Plan Description

        The Utility contributes to the State of Alaska Public Employees'
Retirement System (PERS), a defined benefit, agent multiple-employer public
employee retirement system which was established and is administered by the
State of Alaska (State) to provide pension, postemployment healthcare, death and
disability benefits to eligible employees.



                                      F-54
<PAGE>   108

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


5.  RETIREMENT PLANS (CONTINUED)

        All full-time Utility employees not covered by the IBEW Plan are
eligible to participate in PERS. Benefit and contribution provisions are
established by State law and may be amended only by the State Legislature.

        Each fiscal year, PERS issues a publicly available financial report that
includes financial statements and required supplementary information. That
report may be obtained by writing to the State of Alaska, Department of
Administration, Division of Retirement and Benefits, P.O. Box 110203, Juneau,
Alaska, 99811-0203 or by calling (907) 465-4460.

        B.  Funding Policy and Annual Pension Cost

        Employee contribution rates are 6.75% as required by State statute. The
funding policy for PERS provides for periodic employer contributions at
actuarially determined rates that, expressed as a percentage of annual covered
payroll, are sufficient to accumulate sufficient assets to pay benefits when
due.

        The Utility's annual pension cost for the current year and the related
information is as follows:

<TABLE>
<CAPTION>
                                                              POST-EMPLOYMENT
                                             PENSION            HEALTHCARE
                                      ----------------------  ---------------
<S>                                   <C>                     <C>
Contribution rates:
   Employee                                   4.86%                1.89%
   Employer                                   6.36%                2.47%
Annual pension cost                            $750                $291
Contributions made                             $750                $291
Actuarial valuation date                  June 30, 1996            Same
Actuarial cost method                 Projected unit credit        Same
Amortization method                     Level dollar, open         Same
Amortization period                      Rolling 25 years          Same
Asset valuation method                5-year smoothed market       Same
Actuarial assumptions:
   Inflation rate                               4%                 Same
   Investment return                          8.25%                Same
   Projected salary increase                  5.50%                 N/A
Health cost trend                              N/A                 5.50%
</TABLE>

The components of annual pension cost for the year ended December 31, 1998 are
as follows:

<TABLE>
<S>                                                         <C>
Annual required contribution (ARC)                          $1,041
Interest on the net pension obligation (NPO)                    --
Adjustment to the ARC                                           --
                                                            ------
Annual pension cost (APC)                                    1,041
Contributions made                                           1,041
Increase in NPO                                                 --
NPO, beginning of year                                          --
                                                            ------
NPO, end of year                                            $   --
                                                            ======
</TABLE>



                                      F-55
<PAGE>   109

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(5)  RETIREMENT PLANS (CONTINUED)

        Three year trend information follows:

<TABLE>
<CAPTION>
                                                                  PERCENTAGE
                                    YEAR ENDED                      OF APC
                                   DECEMBER 31         APC        CONTRIBUTED           NPO
                                   -----------      --------      -----------        --------
<S>                                <C>              <C>           <C>                <C>
Pension                                 1996        $  1,032             100%        $     --
                                        1997             827             100%              --
                                        1998             750             100%              --

Post-employment healthcare              1996        $    382             100%        $     --
                                        1997             306             100%              --
                                        1998             291             100%              --
</TABLE>

        In the current year (the transition year), the Utility determined, in
accordance with provisions of GASB No. 27, that no pension liability (asset)
existed to PERS and there was no previously reported liability (asset) to PERS.

        Information regarding funding progress follows:

<TABLE>
<CAPTION>
                                                                               UNFUNDED
                                                                               ACTUARIAL
                                        ACTUARIAL    ACTUARIAL    ACTUARIAL     ACCRUED                                 UAAL AS A
                                        VALUATION      VALUE       ACCRUED     LIABILITY                                PERCENTAGE
                                       YEAR ENDED     OF PLAN     LIABILITY     (ASSET)        FUNDED       COVERED     OF COVERED
                                         JUNE 30       ASSETS       (AAL)        (UAAL)        RATIO        PAYROLL      PAYROLL
                                       ----------    ---------    ---------    ----------     --------      --------    -----------
<S>                                    <C>           <C>          <C>          <C>            <C>           <C>         <C>
Pension benefits                          1995        $  5,417     $  4,457     $   (960)          122%     $ 11,288          -9%
                                          1996           6,656        5,702         (954)          117%       11,436          -8%
                                          1997          10,180        7,419       (2,761)          137%       12,290         -22%

Post-employment healthcare benefits       1995        $  2,036     $  1,675     $   (361)          122%       11,288          -3%
                                          1996           2,565        2,198         (367)          117%       11,436          -3%
                                          1997           3,794        2,765       (1,029)          137%       12,290          -8%

Total                                     1995        $  7,453     $  6,132     $ (1,321)          122%     $ 11,288         -12%
                                          1996           9,221        7,900       (1,321)          117%       11,436         -11%
                                          1997          13,974       10,184       (3,790)          137%       12,290         -31%
</TABLE>

(6)  OTHER EMPLOYEE BENEFITS

        The Municipality offers its employees, including employees of the
Utility, a deferred compensation plan (Plan) created in accordance with Internal
Revenue Code Section 457. The Plan, available to all Municipal employees,
permits them to defer a portion of their salary until future years. The deferred
compensation is not available to employees until termination, retirement, death
or unforeseeable emergency. It is the opinion of the Municipality's legal
counsel that the Municipality has no liability for losses under the Plan but
does have the duty of due care that would be required of an ordinary prudent
investor.



                                      F-56
<PAGE>   110

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)


(6) OTHER EMPLOYEE BENEFITS (CONTINUED)

        The municipality believes that it is unlikely that it will use the
assets to satisfy the claims of general creditors in the future.

        In accordance with labor agreements, IBEW employees' medical/dental
coverage is provided through the Alaska Electrical Health and Welfare Trust
Fund. Utility contributions to this fund were $2,859, $3,143 and $2,888 for the
years ended December 31, 1998, 1997 and 1996, respectively.

(7)  MINORITY INVESTMENTS

        Minority investments held consist of the following at December 31:

<TABLE>
<CAPTION>
                                       1997          1998       OWNERSHIP %
                                      ------        ------      -----------
<S>                                   <C>           <C>         <C>
Alaskan Choice Television, LLC        $4,627        $2,651            33%
Alaska Network Systems, Inc.           2,353         2,015            47%
Internet Alaska, Inc.                    803           500            30%
Security One, LLC                        200           369            20%
                                      ------        ------
                                      $7,983        $5,535
                                      ======        ======
</TABLE>

        The Utility is one of three members of a limited liability company,
Alaskan Choice Television, LLC (ACTV). ACTV has accumulated substantial losses
since inception and is not generating sufficient cash flow to sustain
operations. These factors, among others, indicate that ACTV may be unable to
continue as a going concern for a reasonable period of time. ACTV's continuation
as a going concern is dependent upon its ability to attain additional equity and
debt financing and achieve positive cash flow and profitability. ACTV is in
negotiation with a potential investor who will provide working capital. The
other two members of the limited liability company have agreed to sell their
interests to this investor. ACTV expects to complete this transaction in the
second quarter of 1999. Additionally, ACTV is in discussion with several
financial institutions to provide the necessary debt financing. Pursuant to
Statement of Financial Accounting Principles Board Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock", the Utility assessed the
recoverability of its investment in ACTV during 1998 and adjusted the carrying
value of the investment to its estimated fair value resulting in a noncash
impairment loss of approximately $1,500.


(8)  RELATED PARTY TRANSACTIONS

        Intragovernmental Charges

        Certain general and administrative functions of the Municipality,
including data processing, workers' compensation insurance and
medical/dental/life insurance, are centralized and the related cost is allocated
to the various funds of the Municipality, including the Utility. Such costs
allocated to the Utility totaled $3,187, $3,672, and $3,204 for the years ended
December 31, 1998, 1997, and 1996, respectively.

        These costs are allocated to ATU from the Municipality of Anchorage
through an inter-governmental charge system ("IGC") based upon ATU's
proportionate share of certain cost drivers, such as manned positions, building
square footage or number of transactions processed, depending upon the type of
cost being allocated. Certain IGC's are based upon work orders for specific
projects between departments. Management believes that the methodology utilized
is reasonable. It is not practicable to quantify what such costs would have been
on a stand-alone basis.



                                      F-57
<PAGE>   111

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)



(9)  FAIR VALUE OF FINANCIAL INSTRUMENTS

        The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Significant differences can
arise between the fair value and carrying amount of financial instruments that
are recognized at historical cost amounts.

        The following methods and assumptions were used by the Utility in
estimating fair value disclosures for financial instruments:

           Cash, restricted investments, accounts receivable, accounts payable
        and accrued liabilities, accrued interest, customer deposits and accrued
        employee benefits--The carrying amounts at December 31, 1998 and 1997
        approximate the fair values due to the short maturity of these
        instruments.

           Long-term debt--The fair value of the Utility's long-term debt is
        estimated by discounting the future cash flows of the various
        instruments at rates currently available to the Utility for similar debt
        instruments of comparable maturities.

        The carrying amount of long-term debt and its estimated fair value at
December 31 are as follows:

<TABLE>
<CAPTION>
                                              1997            1998
                                            --------        --------
<S>                                         <C>             <C>
           Carrying amount                  $153,532        $172,847
           Fair value                        161,000         181,000
</TABLE>

(10)  BUSINESS SEGMENTS

        The Utility has adopted FASB Statement No. 131, Disclosures About
Segments Of An Enterprise And Related Information. The Utility has three
reportable segments: local telephone, long distance and cellular. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each reportable segment is a strategic business
offering different services and is managed separately.

        The following table illustrates selected financial data for each
segment.

<TABLE>
<CAPTION>
                                     LOCAL         LONG
YEAR ENDED 1996                    TELEPHONE     DISTANCE       CELLULAR        TOTAL
-----------------------------      ---------     --------       --------      --------
<S>                                <C>           <C>            <C>           <C>
Operating income (loss)            $ 18,975      $   (542)      $  2,483      $ 20,916
Depreciation and amortization        18,460            --          2,036        20,496
Capital expenditures                 22,280            --          4,992        27,272
Total assets                        278,354            81         30,375       308,810

YEAR ENDED 1997
-----------------------------
Operating income (loss)            $ 17,850      $ (3,218)      $  4,377      $ 19,009
Depreciation and amortization        23,712           114          3,013        26,839
Capital expenditures                 28,922           664          6,201        35,787
Total assets                        287,419         1,757         33,948       323,124

YEAR ENDED 1998
-----------------------------
Operating income (loss)            $ 21,490      $ (3,744)      $  5,147      $ 22,869
Depreciation and amortization        25,327           164          4,117        29,608
Capital expenditures                 26,751           275          9,431        36,457
Total assets                        295,810         2,532         51,903       350,245
</TABLE>



                                      F-58
<PAGE>   112

                            MUNICIPALITY OF ANCHORAGE
                             TELEPHONE UTILITY FUND
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)



(11)  COMMITMENTS AND CONTINGENCIES

        Construction Commitments

        The Municipal Assembly has approved the Utility's 1999 capital budget of
$29,200.

        Contingencies

        The Utility is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect on the
Utility's financial position or results of operations.




                                      F-59