##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
  FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number 000-28167
 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
  Delaware
    
    52-2126573(State or Other Jurisdiction 
of Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 600 Telephone Avenue, Anchorage, Alaska 99503
 (907) 297-3000
 Not Applicable
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes þ No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
 Yes o No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated and large accelerated filer in Rule
12b-2 of the Exchange Act.
 Large accelerated filero
    
    Accelerated filerþ
    
    Non-accelerated filero
(Do not check if smaller reporting company)
    
    Smaller Reporting Companyo
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes o No þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
 Yes o No o
 APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrants Common Stock, as of July 19, 2010, was
44,612,061.




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##### 



TABLE OF CONTENTS
 PageNumberPART I. Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets Unaudited
As of June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations Unaudited
For the Three and Six Months Ended June 30, 2010 and 2009
    
    
    4Consolidated Statements of Stockholders Equity (Deficit) Unaudited
For the Six Months Ended June 30, 2010
    
    
    5Consolidated Statements of Cash Flows Unaudited
For the Six Months Ended June 30, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements Unaudited
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. Other InformationItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults upon Senior Securities
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26EX-31.1EX-31.2EX-32.1EX-32.2
  2




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Balance Sheets
(Unaudited, In Thousands except Per Share Amounts)
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    13,810
    
    
    $
    6,271Restricted cash
    
    
    4,888
    
    
    
    5,843Accounts receivable-trade, net of allowance of $7,440 and $6,066
    
    
    40,041
    
    
    
    35,414Materials and supplies
    
    
    6,727
    
    
    
    7,109Prepayments and other current assets
    
    
    4,050
    
    
    
    4,489Deferred income taxes
    
    
    15,156
    
    
    
    13,814Total current assets
    
    
    84,672
    
    
    
    72,940Property, plant and equipment
    
    
    1,421,196
    
    
    
    1,416,359Less: accumulated depreciation and amortization
    
    
    (994,169
    )
    
    
    (965,470
    )Property, plant and equipment, net
    
    
    427,027
    
    
    
    450,889Non-current investments
    
    
    455
    
    
    
    855Goodwill
    
    
    8,850
    
    
    
    8,850Intangible assets, net
    
    
    21,413
    
    
    
    21,517Debt issuance costs
    
    
    4,673
    
    
    
    5,960Deferred income taxes
    
    
    77,059
    
    
    
    113,994Other assets
    
    
    3,202
    
    
    
    293Total assets
    
    $
    627,351
    
    
    $
    675,298Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    762
    
    
    $
    793Accounts payable, accrued and other current liabilities
    
    
    59,398
    
    
    
    68,651Advance billings and customer deposits
    
    
    9,469
    
    
    
    9,351Total current liabilities
    
    
    69,629
    
    
    
    78,795Long-term obligations, net of current portion
    
    
    539,306
    
    
    
    538,557Other long-term liabilities
    
    
    29,738
    
    
    
    27,906Total liabilities
    
    
    638,673
    
    
    
    645,258Commitments and contingenciesStockholders equity (deficit):Common stock, $.01 par value; 145,000 authorized, 44,611 and
44,484 issued and outstanding, respectively
    
    
    446
    
    
    
    445Additional paid in capital
    
    
    182,157
    
    
    
    198,979Accumulated deficit
    
    
    (183,875
    )
    
    
    (157,472
    )Accumulated other comprehensive loss
    
    
    (10,050
    )
    
    
    (11,912
    )Total stockholders equity (deficit)
    
    
    (11,322
    )
    
    
    30,040Total liabilities and stockholders equity
    
    $
    627,351
    
    
    $
    675,298
 See Notes to Consolidated Financial Statements
 3




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Statements of Operations
(Unaudited, In Thousands except Per Share Amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating revenues
    
    $
    84,532
    
    
    $
    85,902
    
    
    $
    166,979
    
    
    $
    171,943Operating expenses:Cost of services and sales
    
    
    32,067
    
    
    
    34,225
    
    
    
    64,466
    
    
    
    66,568Selling, general and administrative
    
    
    22,052
    
    
    
    21,821
    
    
    
    42,822
    
    
    
    44,482Depreciation and amortization
    
    
    18,607
    
    
    
    17,631
    
    
    
    37,368
    
    
    
    36,060(Gain) loss on disposal of assets
    
    
    
    
    
    
    19
    
    
    
    (488
    )
    
    
    469Total operating expenses
    
    
    72,726
    
    
    
    73,696
    
    
    
    144,168
    
    
    
    147,579Operating income
    
    
    11,806
    
    
    
    12,206
    
    
    
    22,811
    
    
    
    24,364Other income and expense:Interest expense
    
    
    (8,096
    )
    
    
    (10,302
    )
    
    
    (16,844
    )
    
    
    (18,642
    )Interest income
    
    
    9
    
    
    
    17
    
    
    
    23
    
    
    
    51Total other income and expense
    
    
    (8,087
    )
    
    
    (10,285
    )
    
    
    (16,821
    )
    
    
    (18,591
    )Income before income tax expense
    
    
    3,719
    
    
    
    1,921
    
    
    
    5,990
    
    
    
    5,773Income tax expense
    
    
    (31,392
    )
    
    
    (832
    )
    
    
    (32,393
    )
    
    
    (2,534
    )Net income (loss)
    
    $
    (27,673
    )
    
    $
    1,089
    
    
    $
    (26,403
    )
    
    $
    3,239Net income (loss) per share:Basic
    
    $
    (0.62
    )
    
    $
    0.02
    
    
    $
    (0.59
    )
    
    $
    0.07Diluted
    
    $
    (0.62
    )
    
    $
    0.02
    
    
    $
    (0.59
    )
    
    $
    0.07Weighted average shares outstanding:Basic
    
    
    44,570
    
    
    
    44,195
    
    
    
    44,532
    
    
    
    43,972Diluted
    
    
    44,570
    
    
    
    44,651
    
    
    
    44,532
    
    
    
    44,609
 See Notes to Consolidated Financial Statements
 4




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Statements of Stockholders Equity (Deficit)
Six Months Ended June 30, 2010
(Unaudited, In Thousands except Per Share Amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Equity (Deficit)Balance, December 31, 2009
    
    
    44,484
    
    
    $
    445
    
    
    $
    198,979
    
    
    $
    (157,472
    )
    
    $
    (11,912
    )
    
    $
    30,040Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,403
    )
    
    
    1,862
    
    
    
    (24,541
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    (19,201
    )
    
    
    
    
    
    
    
    
    
    
    (19,201
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,478
    
    
    
    
    
    
    
    
    
    
    
    1,478Tax benefit of convertible bond call options
    
    
    
    
    
    
    
    
    
    
    768
    
    
    
    
    
    
    
    
    
    
    
    768Surrender of 24 shares to cover withholding
taxes on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    (192
    )
    
    
    
    
    
    
    
    
    
    
    (192
    )Issuance of shares of common stock
pursuant to stock plans, $.01 par
    
    
    127
    
    
    
    1
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    326Balance, June 30, 2010
    
    
    44,611
    
    
    $
    446
    
    
    $
    182,157
    
    
    $
    (183,875
    )
    
    $
    (10,050
    )
    
    $
    (11,322
    )
 See Notes to Consolidated Financial Statements
 5




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.



Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Six Months EndedJune 30,2010
    
    
    2009Cash Flows from Operating Activities:Net income (loss)
    
    $
    (26,403
    )
    
    $
    3,239Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:Depreciation and amortization
    
    
    37,368
    
    
    
    36,060Amortization of debt issuance costs and debt discount
    
    
    3,700
    
    
    
    3,453Stock-based compensation
    
    
    1,478
    
    
    
    2,565Deferred income taxes
    
    
    35,061
    
    
    
    2,534Provision for uncollectible accounts
    
    
    1,942
    
    
    
    2,070Other non-cash expenses
    
    
    (112
    )
    
    
    1,018Changes in operating assets and liabilities
    
    
    (8,756
    )
    
    
    757Net cash provided by operating activities
    
    
    44,278
    
    
    
    51,696Cash Flows from Investing Activities:Investment in construction and capital expenditures
    
    
    (14,047
    )
    
    
    (20,673
    )Change in unsettled construction and capital expenditures
    
    
    (4,648
    )
    
    
    (12,104
    )Change in unsettled acquisition costs
    
    
    
    
    
    
    (250
    )Net change in non-current investments
    
    
    400
    
    
    
    Net change in restricted cash
    
    
    955
    
    
    
    13,806Net cash used by investing activities
    
    
    (17,340
    )
    
    
    (19,221
    )Cash Flows from Financing Activities:Repayments of long-term debt
    
    
    (12,362
    )
    
    
    (26,965
    )Proceeds from the issuance of long-term debt
    
    
    12,000
    
    
    
    21,500Payment of cash dividend on common stock
    
    
    (19,171
    )
    
    
    (18,912
    )Payment of withholding taxes on stock-based compensation
    
    
    (192
    )
    
    
    (1,567
    )Proceeds from issuance of common stock
    
    
    326
    
    
    
    322Net cash used by financing activities
    
    
    (19,399
    )
    
    
    (25,622
    )Change in cash and cash equivalents
    
    
    7,539
    
    
    
    6,853Cash and cash equivalents, beginning of period
    
    
    6,271
    
    
    
    1,326Cash and cash equivalents, end of period
    
    $
    13,810
    
    
    $
    8,179Supplemental Cash Flow Data:Interest paid
    
    $
    14,055
    
    
    $
    17,624Income taxes refunded
    
    $
    36
    
    
    $
    Supplemental Non-cash Transactions:Property acquired under capital leases
    
    $
    1
    
    
    $
    660Dividend declared, but not paid
    
    $
    9,606
    
    
    $
    9,622ARO asset
    
    $
    50
    
    
    $
    3
 See Notes to Consolidated Financial Statements
 6




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
 
 Notes to Consolidated Financial Statements  (Unaudited, In Thousands except Per Share Amounts)
 1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   
    
    Alaska Communications Systems
    
    
    
    Crest Communications Corporation (Crest)Holdings, Inc. (ACS Holdings)
    
    
    
    WCI Cable, Inc.
    
    ACS of Alaska, Inc. (ACSAK)
    
    
    
    WCIC Hillsboro, LLC.
    
    ACS of the Northland, Inc. (ACSN)
    
    
    
    Alaska Northstar Communications, LLC.
    
    ACS of Fairbanks, Inc. (ACSF)
    
    
    
    WCI Lightpoint, LLC.
    
    ACS of Anchorage, Inc. (ACSA)
    
    
    
    Worldnet Communications, Inc.
    
    ACS Wireless, Inc. (ACSW)
    
    
    
    Alaska Fiber Star, LLC.
    
    ACS Long Distance, Inc. (ACSLD)
    
    ACS Internet, Inc. (ACSI)
    
    ACS Messaging, Inc. (ACSM)
    
    ACS Cable Systems, Inc. (ACSC)
 Basis of Presentation
   Use of Estimates
  Significant Changes in Accounting Practice, Reclassifications and Correction of Immaterial
Errors
 Materiality. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current
Year Financial Statements,
  7




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
 1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  December 31, 2009As Reported
    
    
    Adj
    
    
    As RevisedNon-current deferred income taxes
    
    $
    111,625
    
    
    $
    2,369
    
    
    $
    113,994Total assets
    
    
    672,929
    
    
    
    2,369
    
    
    
    675,298Accounts payable, accrued and
other current liabilities
    
    
    62,887
    
    
    
    5,764
    
    
    
    68,651Total current liabilities
    
    
    73,031
    
    
    
    5,764
    
    
    
    78,795Total liabilities
    
    
    639,494
    
    
    
    5,764
    
    
    
    645,258Accumulated deficit
    
    
    (154,077
    )
    
    
    (3,395
    )
    
    
    (157,472
    )Total stockholders equity
    
    
    33,435
    
    
    
    (3,395
    )
    
    
    30,040Total liabilities and stockholders equity
    
    
    672,929
    
    
    
    2,369
    
    
    
    675,298
  Three Months ended
    
    
    Six Months endedJune 30, 2009
    
    
    June 30, 2009As Reported
    
    
    Adj
    
    
    As Revised
    
    
    As Reported
    
    
    Adj
    
    
    As RevisedOperating revenues
    
    $
    86,019
    
    
    $
    (117
    )
    
    $
    85,902
    
    
    $
    172,177
    
    
    $
    (234
    )
    
    $
    171,943Operating income
    
    
    12,323
    
    
    
    (117
    )
    
    
    12,206
    
    
    
    24,598
    
    
    
    (234
    )
    
    
    24,364Income before income tax expense
    
    
    2,038
    
    
    
    (117
    )
    
    
    1,921
    
    
    
    6,007
    
    
    
    (234
    )
    
    
    5,773Income tax expense
    
    
    (880
    )
    
    
    48
    
    
    
    (832
    )
    
    
    (2,630
    )
    
    
    96
    
    
    
    (2,534
    )Net income
    
    
    1,158
    
    
    
    (69
    )
    
    
    1,089
    
    
    
    3,377
    
    
    
    (138
    )
    
    
    3,239
  Six Months endedJune 30, 2009As Reported
    
    
    Adj
    
    
    As RevisedNet income
    
    $
    3,377
    
    
    $
    (138
    )
    
    $
    3,239Deferred income taxes
    
    
    2,630
    
    
    
    (96
    )
    
    
    2,534Changes in operating assets and liabilities
    
    
    523
    
    
    
    234
    
    
    
    757
 Regulated Operations (ASC 980)
 8




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
 2. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (27,673
    )
    
    $
    1,089
    
    
    $
    (26,403
    )
    
    $
    3,239Minimum pension liability adjustment
    
    
    82
    
    
    
    40
    
    
    
    226
    
    
    
    291Interest rate swap marked to market
    
    
    951
    
    
    
    1,733
    
    
    
    1,636
    
    
    
    2,400Total comprehensive income (loss)
    
    $
    (26,640
    )
    
    $
    2,862
    
    
    $
    (24,541
    )
    
    $
    5,930
 3. FAIR VALUE MEASUREMENTS
 The Company has developed valuation techniques based upon observable and unobservable inputs
to calculate the fair value of non-short-term monetary assets and liabilities. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs
reflect internal market assumptions. These two types of inputs create the following fair
value hierarchy:
    
    Level 1- Quoted prices for identical instruments in active
markets;
    
    Level 2- Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are
observable; and
    
    Level 3- Significant inputs to the valuation model are unobservable.
  Fair Value Measurements on a Recurring Basis
   June 30, 2010
    
    
    December 31, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Non-current investments in
auction rate securities
    
    $
    455
    
    
    $
    
    
    
    $
    
    
    
    $
    455
    
    
    $
    855
    
    
    $
    
    
    
    $
    
    
    
    $
    855Liabilities:Interest rate swaps
    
    $
    (12,018
    )
    
    $
    
    
    
    $
    (12,018
    )
    
    $
    
    
    
    $
    (14,796
    )
    
    $
    
    
    
    $
    (14,796
    )
    
    $
    
  9




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
 3. FAIR VALUE MEASUREMENTS (Continued)
  4. STOCK INCENTIVE PLANS
    Six Months EndedJune 30,2010
    
    
    2009Restricted stock:Risk free rate
    
    
    0.00
    %
    
    
    0.00% - 0.25
    %Quarterly dividend
    
    $
    0.215
    
    
    $
    0.215Expected per annum, forfeiture rate
    
    
    0.00% - 6.47
    %
    
    
    0.00% - 5.47
    %Stock Options:Risk free rate
    
    
    
    
    
    
    0.25
    %Dividend yield
    
    
    
    
    
    
    9.29
    %Expected volatility factor
    
    
    
    
    
    
    36.38
    %Expected option life (years)
    
    
    
    
    
    
    3.2
 5. EARNINGS PER SHARE
  10




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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
 5. EARNINGS PER SHARE (Continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator  net income (loss)
    
    $
    (27,673
    )
    
    $
    1,089
    
    
    $
    (26,403
    )
    
    $
    3,239Denominator  weighted average shares outstanding:Basic shares
    
    
    44,570
    
    
    
    44,195
    
    
    
    44,532
    
    
    
    43,972Dilutive impact of restricted stock, options and deferred shares
    
    
    
    
    
    
    456
    
    
    
    
    
    
    
    637Dilutive shares
    
    
    44,570
    
    
    
    44,651
    
    
    
    44,532
    
    
    
    44,609Earnings per share:Basic
    
    $
    (0.62
    )
    
    $
    0.02
    
    
    $
    (0.59
    )
    
    $
    0.07Diluted
    
    $
    (0.62
    )
    
    $
    0.02
    
    
    $
    (0.59
    )
    
    $
    0.07
 6. RETIREMENT PLANS
     Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Interest cost
    
    $
    195
    
    
    $
    210
    
    
    $
    403
    
    
    $
    420Expected return on plan assets
    
    
    (230
    )
    
    
    (182
    )
    
    
    (413
    )
    
    
    (364
    )Amortization of loss
    
    
    127
    
    
    
    195
    
    
    
    319
    
    
    
    390Amortization of prior service cost
    
    
    13
    
    
    
    51
    
    
    
    64
    
    
    
    102Net periodic pension expense
    
    $
    105
    
    
    $
    274
    
    
    $
    373
    
    
    $
    548
 11




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
 7. BUSINESS SEGMENTS
  Wireline
 Wireless
   
    
    eliminated $10,727 and $21,096 of intercompany revenue and expense previously
not eliminated during the three and six months ended June 30, 2009, respectively;
    
    reclassified $623 and $1,143 of bad debt expense from contra revenue to
Selling, General & Administrative (SG&A) expense in the three and six months ended June
30, 2009, respectively; and
    
    classified certain other operating expenses as cost of services and sales
(COGS) or SG&A expense, as appropriate.
   Three Months Ended June 30, 2010Wireline
    
    
    Wireless
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    63,275
    
    
    $
    35,347
    
    
    $
    1,476
    
    
    $
    (15,566
    )
    
    $
    84,532Intersegment revenue
    
    
    13,661
    
    
    
    429
    
    
    
    1,476
    
    
    
    
    
    
    
    15,566Income (loss) before income tax
    
    
    480
    
    
    
    10,605
    
    
    
    (7,366
    )
    
    
    
    
    
    
    3,719Income tax (expense) benefit
    
    
    71
    
    
    
    (4,360
    )
    
    
    (27,103
    )
    
    
    
    
    
    
    (31,392
    )Net income (loss)
    
    
    551
    
    
    
    6,245
    
    
    
    (34,469
    )
    
    
    
    
    
    
    (27,673
    )Total assets
    
    
    459,757
    
    
    
    165,960
    
    
    
    1,634
    
    
    
    
    
    
    
    627,351
 Three Months Ended June 30, 2009Wireline
    
    
    Wireless
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    64,727
    
    
    $
    35,870
    
    
    $
    2,431
    
    
    $
    (17,126
    )
    
    $
    85,902Intersegment revenue
    
    
    14,042
    
    
    
    653
    
    
    
    2,431
    
    
    
    
    
    
    
    17,126Income (loss) before income tax
    
    
    (680
    )
    
    
    12,129
    
    
    
    (9,528
    )
    
    
    
    
    
    
    1,921Income tax (expense) benefit
    
    
    (1,674
    )
    
    
    (4,986
    )
    
    
    5,828
    
    
    
    
    
    
    
    (832
    )Net income (loss)
    
    
    (2,354
    )
    
    
    7,143
    
    
    
    (3,700
    )
    
    
    
    
    
    
    1,089Total assets
    
    
    530,958
    
    
    
    187,772
    
    
    
    6,267
    
    
    
    
    
    
    
    724,997
  12




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
 7. BUSINESS SEGMENTS (Continued)
   Six Months Ended June 30, 2010Wireline
    
    
    Wireless
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    126,134
    
    
    $
    68,285
    
    
    $
    2,889
    
    
    $
    (30,329
    )
    
    $
    166,979Intersegment revenue
    
    
    26,557
    
    
    
    883
    
    
    
    2,889
    
    
    
    
    
    
    
    30,329Income (loss) before income tax
    
    
    940
    
    
    
    20,635
    
    
    
    (15,585
    )
    
    
    
    
    
    
    5,990Income tax expense
    
    
    (29
    )
    
    
    (8,487
    )
    
    
    (23,877
    )
    
    
    
    
    
    
    (32,393
    )Net income (loss)
    
    
    911
    
    
    
    12,148
    
    
    
    (39,462
    )
    
    
    
    
    
    
    (26,403
    )Total assets
    
    
    459,757
    
    
    
    165,960
    
    
    
    1,634
    
    
    
    
    
    
    
    627,351
 Six Months Ended June 30, 2009Wireline
    
    
    Wireless
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    128,760
    
    
    $
    71,696
    
    
    $
    6,601
    
    
    $
    (35,114
    )
    
    $
    171,943Intersegment revenue
    
    
    27,254
    
    
    
    1,259
    
    
    
    6,601
    
    
    
    
    
    
    
    35,114Income (loss) before income tax
    
    
    (95
    )
    
    
    24,819
    
    
    
    (18,951
    )
    
    
    
    
    
    
    5,773Income tax (expense) benefit
    
    
    (374
    )
    
    
    (10,206
    )
    
    
    8,046
    
    
    
    
    
    
    
    (2,534
    )Net income (loss)
    
    
    (469
    )
    
    
    14,613
    
    
    
    (10,905
    )
    
    
    
    
    
    
    3,239Total assets
    
    
    530,958
    
    
    
    187,772
    
    
    
    6,267
    
    
    
    
    
    
    
    724,997
 8. COMMITMENTS AND CONTINGENCIES
   Income Taxes
  13




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
 8. COMMITMENTS AND CONTINGENCIES (Continued)
   9. SUBSEQUENT EVENTS
  14




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Forward-Looking Statements and Analysts Reports
  
    
    our strongly competitive environment, which comprises national and local wireless and
wireline facilities-based competitors;
    
    our substantial debt which requires us to dedicate a substantial portion of our cash
flow from operations to payments on our debt;
    
    the availability of future financing in the amounts, at the terms, and subject to the
conditions necessary, to support our business and pursue growth opportunities;
    
    our ability to generate sufficient earnings and cash flows to continue to make dividend
payments to our stockholders;
    
    our ability to keep pace with rapid technological developments and changing standards in
the telecommunications industry, including our ability to obtain new devices, spectrum,
bandwidth, and other network elements;
    
    our ability to develop attractive integrated products and services making use of our
substantial investments in fiber optic cable facilities, including our AKORN® and Northstar
fiber optic cables that connect Alaska to the Lower 48 states;
    
    unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps, fishing boats or natural disasters;
    
    changes in general industry and market conditions, and structural declines within the
telecommunications industry;
    
    changes in overall national, regional or local economic conditions;
    
    governmental and public policy changes, including changes in our revenues resulting from
regulatory actions affecting inter-carrier compensation or changes in revenue from
Universal Service Funds (USFs);
    
    unanticipated costs required to fund our postretirement benefit plans;
    
    the success or failure of any future acquisitions;
    
    the outcome of on-going IRS audits; and
    
    the matters described under Item 1A  Risk Factors in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, and subsequent Quarterly Reports on Form 10-Q.
  15




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##### Table of Contents



Important Changes to Presentation
 Materiality. Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in the Current Year Financial Statements,
  
    
    recognize an extraordinary item as a result of the extinguishment of all our
jurisdictional assets and liabilities net of the liability representing the
Companys asset retirement obligation in accordance with ASC Topic 410  Asset
Retirement and Environmental Obligations;
    
    eliminate all intercompany transactions;
    
    reclassify bad debt expense, as a component of SG&A; and
    
    make certain other reclassifications in the Consolidated Statement of Operations
to separate operating expenses into COGS and SG&A.
   Overview
   
    
    activity in the oil and gas markets, including regulatory activity;
    
    tourism levels;
    
    military activity;
    
    the cost of long-haul telecommunications bandwidth;
 16




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##### Table of Contents




    
    local customer preferences;
    
    average usage of Internet technology;
    
    unemployment levels; and
    
    housing activity.
  Strategy
  
    
    Emphasis on Top-Line Growth: We emphasize revenue growth as well as growth in net cash
provided by operating activities. We devote more resources to higher growth markets such as
wireless, including wireless data and wireline broadband, including our interstate MPLS
network comprising redundant long-haul undersea fiber optic cables and other managed data
services to businesses.
    
    Investment with Discipline: We focus on gaining market share in those markets that
contain high revenue producing customers. In our wireline business, we focus on deploying
reliable and redundant data connectivity in each market covered by our network underpinned
by high-speed fiber links within and between Alaskas urban centers. We have increasingly
targeted commercial and government customers of all sizes that demand managed or other
sophisticated data solutions. In our wireless business, we have directed resources towards
enhancing and expanding our 3G coverage and marketing wireless plans that encourage
customer adoption of mobile data; larger monthly-minute postpaid plans; and unlimited
postpaid plans.
    
    Process Improvement to Achieve Operational Excellence:While focusing resources on
revenue growth and market share gains, we continually challenge our management team and
employees at all levels of the organization to lower expenses and improve the customer
experience through process improvements. We expect to continue to invest in
technology-assisted process improvement, including self-service initiatives. We expect
efforts such as call center routing improvements and deploying enhanced self-service tools
to customers on our web site, to improve our cost structure and maintain or improve
operating income margins. As a result of past successes, we have been able to serve more
customers while maintaining our workforce at or below prior levels.
    
    Pay for Performance:We embrace a culture of urgency and accountability. We establish
goals for all of our employees that are tied to the imperatives described above. We seek to
provide our non-represented employees cash incentives and equity compensation tied to these
goals. We design executive compensation programs carefully to align executives and
stockholders long-term interests.
    
    Continuous Enhancement of Products and Services:We intend to continue to
introduce new services that draw upon our core competencies that we believe will be
attractive to our target customers. In considering new services, we look for market
opportunities that we believe present significant growth opportunities such as, our
investments in our AKORN and Northstar fiber optic cable systems and our first-to-market
deployment of 3G wireless services. In July we launched a new suite of services that make
use of our data centers in Anchorage, Alaska and Hillsboro, Oregon. On July 28, 2010 we
also entered into an agreement to acquire a 49% interest in TekMate, LLC., Alaskas largest
privately-owned information technology services company. With this investment and a
partnership operating agreement, we believe we will bring broader managed IT solutions and
professional services to the market.
  17




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
 Three Months ended June 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeOperating revenues:Retail
    
    $
    20,720
    
    
    $
    21,071
    
    
    $
    (351
    )
    
    
    -1.7
    %Wholesale
    
    
    2,428
    
    
    
    2,917
    
    
    
    (489
    )
    
    
    -16.8
    %Access
    
    
    14,666
    
    
    
    14,980
    
    
    
    (314
    )
    
    
    -2.1
    %Enterprise
    
    
    11,800
    
    
    
    11,717
    
    
    
    83
    
    
    
    0.7
    %Wireline
    
    
    49,614
    
    
    
    50,685
    
    
    
    (1,071
    )
    
    
    -2.1
    %Wireless
    
    
    34,918
    
    
    
    35,217
    
    
    
    (299
    )
    
    
    -0.8
    %Total operating revenues
    
    
    84,532
    
    
    
    85,902
    
    
    
    (1,370
    )
    
    
    -1.6
    %Operating expenses:WirelineCost of services and sales
    
    
    18,980
    
    
    
    21,243
    
    
    
    (2,263
    )
    
    
    -10.7
    %Selling, general and administrative
    
    
    16,298
    
    
    
    15,652
    
    
    
    646
    
    
    
    4.1
    %WirelessCost of services and sales
    
    
    13,087
    
    
    
    12,982
    
    
    
    105
    
    
    
    0.8
    %Selling, general and administrative
    
    
    5,754
    
    
    
    6,169
    
    
    
    (415
    )
    
    
    -6.7
    %Depreciation and amortization
    
    
    18,607
    
    
    
    17,631
    
    
    
    976
    
    
    
    5.5
    %Loss on disposal of assets
    
    
    
    
    
    
    19
    
    
    
    (19
    )
    
    
    -100.0
    %Total operating expenses
    
    
    72,726
    
    
    
    73,696
    
    
    
    (970
    )
    
    
    -1.3
    %Operating income
    
    
    11,806
    
    
    
    12,206
    
    
    
    (400
    )
    
    
    -3.3
    %Operating margin
    
    
    14.0
    %
    
    
    14.2
    %Other income and expense:Interest expense
    
    
    (8,096
    )
    
    
    (10,302
    )
    
    
    2,206
    
    
    
    -21.4
    %Interest income
    
    
    9
    
    
    
    17
    
    
    
    (8
    )
    
    
    -47.1
    %Total other income and expense
    
    
    (8,087
    )
    
    
    (10,285
    )
    
    
    2,198
    
    
    
    -21.4
    %Income before income tax expense
    
    
    3,719
    
    
    
    1,921
    
    
    
    1,798
    
    
    
    93.6
    %Income tax expense
    
    
    (31,392
    )
    
    
    (832
    )
    
    
    (30,560
    )
    
    
    3673.1
    %Net income (loss)
    
    $
    (27,673
    )
    
    $
    1,089
    
    
    $
    (28,762
    )
    
    
    -2641.1
    %
 Revenue Sources by Segment
  
    
    Wireline:We provide communications services including voice, data, broadband,
multi-protocol label switching services, network access, long distance and other services
to consumer, carrier, business and government customers throughout Alaska and to and from
Alaska.
    
    Wireless:We provide wireless voice and data services, products, other value-added
services and equipment sales across Alaska.
 18




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##### Table of Contents



Operating Revenue
 Wireline
 Retail:
 Wholesale:
 Access:
 Enterprise:
 Wireless
  Operating Expense
 Wireline:
 Cost of Services and Sales 
 Selling, General and Administrative 
 Wireless:
 Cost of Services and Sales 
 Selling, General and Administrative 
 Depreciation and Amortization:
 Other Income and Expense:
 19




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##### Table of Contents



Income Taxes:
 Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
 Six Months ended June 30,2010
    
    
    2009
    
    
    Change
    
    
    % ChangeOperating revenues:Retail
    
    $
    41,362
    
    
    $
    42,513
    
    
    $
    (1,151
    )
    
    
    -2.7
    %Wholesale
    
    
    5,032
    
    
    
    5,959
    
    
    
    (927
    )
    
    
    -15.6
    %Access
    
    
    29,666
    
    
    
    30,234
    
    
    
    (568
    )
    
    
    -1.9
    %Enterprise
    
    
    23,517
    
    
    
    22,800
    
    
    
    717
    
    
    
    3.1
    %Wireline
    
    
    99,577
    
    
    
    101,506
    
    
    
    (1,929
    )
    
    
    -1.9
    %Wireless
    
    
    67,402
    
    
    
    70,437
    
    
    
    (3,035
    )
    
    
    -4.3
    %Total operating revenues
    
    
    166,979
    
    
    
    171,943
    
    
    
    (4,964
    )
    
    
    -2.9
    %Operating expenses:WirelineCost of services and sales
    
    
    38,329
    
    
    
    40,882
    
    
    
    (2,553
    )
    
    
    -6.2
    %Selling, general and administrative
    
    
    31,977
    
    
    
    32,876
    
    
    
    (899
    )
    
    
    -2.7
    %WirelessCost of services and sales
    
    
    26,137
    
    
    
    25,686
    
    
    
    451
    
    
    
    1.8
    %Selling, general and administrative
    
    
    10,845
    
    
    
    11,606
    
    
    
    (761
    )
    
    
    -6.6
    %Depreciation and amortization
    
    
    37,368
    
    
    
    36,060
    
    
    
    1,308
    
    
    
    3.6
    %(Gain)/loss on disposal of assets
    
    
    (488
    )
    
    
    469
    
    
    
    (957
    )
    
    
    -204.1
    %Total operating expenses
    
    
    144,168
    
    
    
    147,579
    
    
    
    (3,411
    )
    
    
    -2.3
    %Operating income
    
    
    22,811
    
    
    
    24,364
    
    
    
    (1,553
    )
    
    
    -6.4
    %Operating margin
    
    
    13.7
    %
    
    
    14.2
    %Other income and expense:Interest expense
    
    
    (16,844
    )
    
    
    (18,642
    )
    
    
    1,798
    
    
    
    -9.6
    %Interest income
    
    
    23
    
    
    
    51
    
    
    
    (28
    )
    
    
    -54.9
    %Total other income and expense
    
    
    (16,821
    )
    
    
    (18,591
    )
    
    
    1,770
    
    
    
    -9.5
    %Income before income tax expense
    
    
    5,990
    
    
    
    5,773
    
    
    
    217
    
    
    
    3.8
    %Income tax expense
    
    
    (32,393
    )
    
    
    (2,534
    )
    
    
    (29,859
    )
    
    
    1178.3
    %Net income
    
    $
    (26,403
    )
    
    $
    3,239
    
    
    $
    (29,642
    )
    
    
    -915.2
    %
 20




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##### Table of Contents



Operating Revenue
 Wireline
 Retail:
 Wholesale:
 Access:
 Enterprise:
 Wireless
  Operating Expense
 Wireline:
 Cost of Services and Sales 
 Selling, General and Administrative 
 Wireless:
 Cost of Services and Sales 
 Selling, General and Administrative 
 Depreciation and Amortization:
 Gain/Loss on Disposal of Assets:
 Other Income and Expense:
 21




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##### Table of Contents



Income Taxes:
 Liquidity and Capital Resources
  Six Months EndedJune 30,2010
    
    
    2009Net cash provided by operating activities
    
    $
    44,278
    
    
    $
    51,696Net change in funds held in restricted accounts
    
    $
    955
    
    
    $
    13,806Capital expenditures
    
    $
    (14,047
    )
    
    $
    (20,673
    )Net settlement of capital expenditures payable
    
    $
    (4,648
    )
    
    $
    (12,104
    )Net borrowings/(repayments)
    
    $
    (362
    )
    
    $
    (5,465
    )Dividends
    
    $
    (19,171
    )
    
    $
    (18,912
    )Interest paid
    
    $
    14,055
    
    
    $
    17,624
 Sources
     Uses
   22




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##### Table of Contents



Legal
  Employees
  Recent Developments
  Critical Accounting Policies and Accounting Estimates
   Recently Issued Accounting Pronouncements
 Revenue Recognition  Multiple-Deliverable Revenue Arrangements a
Consensus of the FASB Emerging Issues Task Force.
 Software  Certain Revenues Arrangements
That Include Software Elements
 23




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
     
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   24




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Working capital restrictions and other limitations on the payment of dividends
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 (a) Exhibits :
 31.1
    
    Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of David Wilson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Liane Pelletier, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of David Wilson, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
 25




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##### Table of Contents



SIGNATURES
  Date: August 5, 2010
    ALASKA COMMUNICATIONS SYSTEMS GROUP, INC./s/ Liane PelletierLiane PelletierChief Executive Officer,
Chairman of the Board and President/s/ David WilsonDavid WilsonChief Financial Officer,
Executive Vice President
(Principal Accounting Officer) 26