##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 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 333-82363
 ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
  Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
    
    91-1921377
(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 is an accelerated filer (as defined in Rule 12b-2 of
the Exchange 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 :
 Indicate the number of shares outstanding of each of the issuers classes of common stock.
None




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TABLE OF CONTENTS
  
 PageNumberPART I. Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets (unaudited) As of June 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations (unaudited) For the Three and Six Months Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Signatures
    
    
    38EXHIBIT 10.23EXHIBIT 10.24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 
 Consolidated Balance Sheets
(Unaudited, In Thousands Except Per Share Amounts)
 June 30,
    
    December 31,2005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    36,832
    
    
    $
    50,660Restricted cash
    
    
    4,545
    
    
    
    4,690Short-term investments
    
    
    19,945
    
    
    
    35,200Accounts receivable-trade, net of allowance of $5,218 and $4,869
    
    
    34,428
    
    
    
    38,325Materials and supplies
    
    
    8,124
    
    
    
    6,623Prepayments and other current assets
    
    
    5,102
    
    
    
    3,724Total current assets
    
    
    108,976
    
    
    
    139,222Property, plant and equipment
    
    
    1,090,230
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    687,010
    
    
    
    649,455Property, plant and equipment, net
    
    
    403,220
    
    
    
    412,312Goodwill
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,780
    
    
    
    21,871Debt issuance costs
    
    
    13,755
    
    
    
    15,482Deferred charges and other assets
    
    
    6,235
    
    
    
    8,749Total assets
    
    $
    592,369
    
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    413
    
    
    $
    2,298Accounts payable-affiliate
    
    
    2,856
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    49,173
    
    
    
    54,648Advance billings and customer deposits
    
    
    9,454
    
    
    
    8,948Total current liabilities
    
    
    61,896
    
    
    
    69,867Long-term obligations, net of current portion
    
    
    457,259
    
    
    
    523,591Other deferred credits and long-term liabilities
    
    
    78,564
    
    
    
    77,916Stockholders equity (deficit):Common stock, $.01 par value; 1,000 shares authorized, 2 shares issued
and outstanding
    
    
    
    
    
    
    Contributed capital
    
    
    306,048
    
    
    
    245,585Accumulated deficit
    
    
    (304,692
    )
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    (6,706
    )
    
    
    (4,531
    )Total stockholders equity (deficit)
    
    
    (5,350
    )
    
    
    (35,335
    )Total liabilities and stockholders equity
    
    $
    592,369
    
    
    $
    636,039
 See Notes to Consolidated Financial Statements
 3




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 
 Consolidated Statements of Operations
(Unaudited, In Thousands Except Per Share Amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Operating revenues:Local telephone
    
    $
    50,341
    
    
    $
    52,998
    
    
    $
    101,906
    
    
    $
    108,830Wireless
    
    
    21,354
    
    
    
    13,461
    
    
    
    38,410
    
    
    
    25,062Internet
    
    
    5,508
    
    
    
    5,105
    
    
    
    10,569
    
    
    
    9,718Interexchange
    
    
    4,022
    
    
    
    3,790
    
    
    
    7,748
    
    
    
    7,199Total operating revenues
    
    
    81,225
    
    
    
    75,354
    
    
    
    158,633
    
    
    
    150,809Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    30,659
    
    
    
    29,162
    
    
    
    61,182
    
    
    
    61,736Wireless (exclusive of depreciation and amortization)
    
    
    11,338
    
    
    
    8,331
    
    
    
    20,920
    
    
    
    16,259Internet (exclusive of depreciation and amortization)
    
    
    5,583
    
    
    
    6,407
    
    
    
    10,820
    
    
    
    13,913Interexchange (exclusive of depreciation and amortization)
    
    
    4,561
    
    
    
    4,858
    
    
    
    8,961
    
    
    
    9,874Depreciation and amortization
    
    
    20,692
    
    
    
    18,810
    
    
    
    41,105
    
    
    
    37,916Loss (gain) on disposal of assets, net
    
    
    
    
    
    
    (2
    )
    
    
    (68
    )
    
    
    225Total operating expenses
    
    
    72,833
    
    
    
    67,566
    
    
    
    142,920
    
    
    
    139,923Operating income
    
    
    8,392
    
    
    
    7,788
    
    
    
    15,713
    
    
    
    10,886Other income and expense:Interest expense
    
    
    (8,865
    )
    
    
    (11,304
    )
    
    
    (18,631
    )
    
    
    (22,707
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (26,204
    )
    
    
    Interest income
    
    
    412
    
    
    
    236
    
    
    
    906
    
    
    
    478Other
    
    
    (42
    )
    
    
    (46
    )
    
    
    (87
    )
    
    
    (103
    )Total other income (expense)
    
    
    (8,495
    )
    
    
    (11,114
    )
    
    
    (44,016
    )
    
    
    (22,332
    )Net loss
    
    $
    (103
    )
    
    $
    (3,326
    )
    
    $
    (28,303
    )
    
    $
    (11,446
    )
 See Notes to Consolidated Financial Statements
 4




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 
 Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Six Months EndedJune 30,2005
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (28,303
    )
    
    $
    (11,446
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    41,105
    
    
    
    37,916Loss (gain) on disposal of assets, net
    
    
    (68
    )
    
    
    225Amortization of debt issuance costs and original issue discount
    
    
    14,477
    
    
    
    1,693Other deferred credits
    
    
    (3,416
    )
    
    
    2,562Changes in components of working capital:Accounts receivable and other current assets
    
    
    (3,064
    )
    
    
    (12,891
    )Accounts payable and other current liabilities
    
    
    (8,727
    )
    
    
    (8,600
    )Deferred charges and other assets
    
    
    3,113
    
    
    
    (744
    )Net cash provided by operating activities
    
    
    15,117
    
    
    
    8,715Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (29,965
    )
    
    
    (20,873
    )Purchase of short-term investments
    
    
    (67,745
    )
    
    
    (66,200
    )Sale of short-term investments
    
    
    83,000
    
    
    
    52,700Placement of funds in restricted account
    
    
    (300
    )
    
    
    (1,250
    )Release of funds from escrow
    
    
    445
    
    
    
    Net cash used by investing activities
    
    
    (14,565
    )
    
    
    (35,623
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (405,330
    )
    
    
    (1,480
    )Proceeds from issuance of long-term debt
    
    
    335,000
    
    
    
    (1,325
    )Debt issuance costs
    
    
    (10,637
    )
    
    
    Contribution from Parent
    
    
    80,389
    
    
    
    Dividends
    
    
    (13,802
    )
    
    
    Net cash used by financing activities
    
    
    (14,380
    )
    
    
    (2,805
    )Decrease in cash and cash equivalents
    
    
    (13,828
    )
    
    
    (29,713
    )Cash and cash equivalents at beginning of the period
    
    
    50,660
    
    
    
    65,398Cash and cash equivalents at the end of the period
    
    $
    36,832
    
    
    $
    35,685Supplemental Cash Flow Data:Interest paid
    
    $
    15,380
    
    
    $
    21,373Income taxes paid, net of refund
    
    
    
    
    
    
    1,120Supplemental Noncash Transactions:Interest rate swap
    
    $
    (2,175
    )
    
    $
    
 See Notes to Consolidated Financial Statements
 5




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   
    
    ACS Holdings
    
    ACS of Alaska, Inc. (ACSAK)
    
    ACS of the Northland, Inc. (ACSN)
    
    ACS of Fairbanks, Inc. (ACSF)
    
    ACS of Anchorage, Inc. (ACSA)
    
    ACS Wireless, Inc. (ACSW)
    
    ACS Long Distance, Inc. (ACSLD)
    
    ACS Internet, Inc. (ACSI)
   Short-term Investments
  Revenue Recognition
  6




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Regulatory Accounting and Regulation
 Accounting for the Effects of Certain Types of Regulation.
 Accounting for Asset Retirement Obligations
 Stock Incentive Plans
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation,
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss:As reported
    
    $
    (103
    )
    
    $
    (3,326
    )
    
    $
    (28,303
    )
    
    $
    (11,446
    )Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards
    
    
    (177
    )
    
    
    (253
    )
    
    
    (475
    )
    
    
    (250
    )Pro forma
    
    $
    (280
    )
    
    $
    (3,579
    )
    
    $
    (28,778
    )
    
    $
    (11,696
    )
  2005
    
    2004Risk free rate
    
    
    4.21
    %
    
    
    3.69
    %Dividend yield
    
    
    8.65
    %
    
    
    3.09
    %Expected volatility factor
    
    
    40.17
    %
    
    
    40.80
    %Expected option life (years)
    
    
    6.0
    
    
    
    6.4
 7




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 2. NEW ACCOUNTING STANDARDS
 Accounting for Conditional Asset Retirement
Obligations
 Share-Based Payments
 Exchanges of Non-Monetary Assets,
 3. LONG TERM OBLIGATIONS
  June 30,
    
    December 31,2005
    
    20042003 senior credit facility term loan
    
    $
    
    
    
    $
    198,0002005 senior credit facility term loan
    
    
    335,000
    
    
    
    9 3/8% senior subordinated notes due 2009
    
    
    
    
    
    
    147,5009 7/8% senior unsecured notes due 2011
    
    
    118,304
    
    
    
    177,650Original issue discount - 9 7/8% senior unsecured notes due 2011
    
    
    (3,209
    )
    
    
    (5,321
    )Capital leases and other long-term obligations
    
    
    7,577
    
    
    
    8,060457,672
    
    
    
    525,889Less current portion
    
    
    413
    
    
    
    2,298Long-term obligations, net of current portion
    
    $
    457,259
    
    
    $
    523,591
  2005 (July 1 - December 31)
    
    $
    3582006 (January 1 - December 31)
    
    
    9712007 (January 1 - December 31)
    
    
    1,0282008 (January 1 - December 31)
    
    
    9262009 (January 1 - December 31)
    
    
    6772010 (January 1 - December 31)
    
    
    643Thereafter
    
    
    456,278$
    460,881
 8




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 3. LONG TERM OBLIGATIONS (Continued)
    4. STOCK INCENTIVE PLANS
  Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
   9




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 4. STOCK INCENTIVE PLANS (Continued)
 ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
  Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
   2003 Options for Officer Inducement Grant
  5. RETIREMENT PLANS
   10




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 5. RETIREMENT PLANS (Continued)
  laska
Communications Systems Retirement Plan
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Interest cost
    
    $
    191
    
    
    $
    190
    
    
    $
    379
    
    
    $
    374Expected return on plan assets
    
    
    (206
    )
    
    
    (187
    )
    
    
    (407
    )
    
    
    (377
    )Amortization of loss
    
    
    123
    
    
    
    113
    
    
    
    237
    
    
    
    251Amortization of prior service cost
    
    
    51
    
    
    
    51
    
    
    
    102
    
    
    
    101Net periodic pension expense
    
    $
    159
    
    
    $
    167
    
    
    $
    311
    
    
    $
    349
 6. BUSINESS SEGMENTS
    LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    101,906
    
    
    $
    38,429
    
    
    $
    10,696
    
    
    $
    9,476
    
    
    $
    11,411
    
    
    $
    (13,285
    )
    
    $
    158,633Depreciation and
amortization
    
    
    26,398
    
    
    
    5,214
    
    
    
    1,797
    
    
    
    174
    
    
    
    7,522
    
    
    
    
    
    
    
    41,105Operating income (loss)
    
    
    4,771
    
    
    
    9,975
    
    
    
    (2,782
    )
    
    
    223
    
    
    
    3,526
    
    
    
    
    
    
    
    15,713Interest expense
    
    
    (261
    )
    
    
    (1
    )
    
    
    
    
    
    
    (92
    )
    
    
    (18,277
    )
    
    
    
    
    
    
    (18,631
    )Loss on extinguishment
of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,204
    )
    
    
    
    
    
    
    (26,204
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    906
    
    
    
    
    
    
    
    906Income tax provision
(benefit)
    
    
    1,826
    
    
    
    4,097
    
    
    
    
    
    
    
    
    
    
    
    (5,923
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    2,684
    
    
    
    5,867
    
    
    
    (2,782
    )
    
    
    131
    
    
    
    (28,298
    )
    
    
    (5,905
    )
    
    
    (28,303
    )Total assets
    
    
    444,089
    
    
    
    119,577
    
    
    
    (3,242
    )
    
    
    19,663
    
    
    
    12,282
    
    
    
    
    
    
    
    592,369Capital expenditures
    
    
    10,621
    
    
    
    3,262
    
    
    
    14,362
    
    
    
    (1,238
    )
    
    
    2,958
    
    
    
    
    
    
    
    29,965
 11




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 6. BUSINESS SEGMENTS (Continued)
   LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    108,830
    
    
    $
    25,083
    
    
    $
    9,718
    
    
    $
    8,177
    
    
    $
    11,624
    
    
    $
    (12,623
    )
    
    $
    150,809Depreciation and
amortization
    
    
    25,275
    
    
    
    3,623
    
    
    
    1,786
    
    
    
    248
    
    
    
    6,984
    
    
    
    
    
    
    
    37,916Operating income
(loss)
    
    
    12,995
    
    
    
    3,316
    
    
    
    (6,411
    )
    
    
    (2,072
    )
    
    
    3,058
    
    
    
    
    
    
    
    10,886Interest expense
    
    
    (160
    )
    
    
    (12
    )
    
    
    
    
    
    
    (94
    )
    
    
    (22,441
    )
    
    
    
    
    
    
    (22,707
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    478Income tax
provision (benefit)
    
    
    5,190
    
    
    
    1,360
    
    
    
    
    
    
    
    
    
    
    
    (6,550
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    7,645
    
    
    
    1,944
    
    
    
    (6,411
    )
    
    
    (2,166
    )
    
    
    (11,441
    )
    
    
    (1,017
    )
    
    
    (11,446
    )Total assets
    
    
    518,466
    
    
    
    105,978
    
    
    
    5,699
    
    
    
    22,730
    
    
    
    14,423
    
    
    
    
    
    
    
    667,296Capital expenditures
    
    
    10,735
    
    
    
    7,018
    
    
    
    1,055
    
    
    
    49
    
    
    
    2,016
    
    
    
    
    
    
    
    20,873
   LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    50,341
    
    
    $
    21,363
    
    
    $
    5,571
    
    
    $
    5,046
    
    
    $
    5,774
    
    
    $
    (6,870
    )
    
    $
    81,225Depreciation and
amortization
    
    
    13,180
    
    
    
    2,616
    
    
    
    977
    
    
    
    83
    
    
    
    3,836
    
    
    
    
    
    
    
    20,692Operating income (loss)
    
    
    1,459
    
    
    
    5,881
    
    
    
    (1,282
    )
    
    
    348
    
    
    
    1,986
    
    
    
    
    
    
    
    8,392Interest expense
    
    
    (190
    )
    
    
    (1
    )
    
    
    
    
    
    
    (46
    )
    
    
    (8,628
    )
    
    
    
    
    
    
    (8,865
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    412Income tax provision
(benefit)
    
    
    681
    
    
    
    2,411
    
    
    
    
    
    
    
    
    
    
    
    (3,092
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    588
    
    
    
    3,459
    
    
    
    (1,282
    )
    
    
    302
    
    
    
    (101
    )
    
    
    (3,069
    )
    
    
    (103
    )Total assets
    
    
    444,089
    
    
    
    119,577
    
    
    
    (3,242
    )
    
    
    19,663
    
    
    
    12,282
    
    
    
    
    
    
    
    592,369Capital expenditures
    
    
    6,494
    
    
    
    2,963
    
    
    
    13,654
    
    
    
    (1,238
    )
    
    
    910
    
    
    
    
    
    
    
    22,783
   LocalTelephone
    
    Wireless
    
    Internet
    
    Interexchange
    
    All Other
    
    Eliminations
    
    TotalOperating revenues
    
    $
    52,988
    
    
    $
    13,470
    
    
    $
    5,105
    
    
    $
    4,319
    
    
    $
    5,845
    
    
    $
    (6,373
    )
    
    $
    75,354Depreciation and
amortization
    
    
    12,426
    
    
    
    1,978
    
    
    
    784
    
    
    
    91
    
    
    
    3,531
    
    
    
    
    
    
    
    18,810Operating income
(loss)
    
    
    6,682
    
    
    
    2,173
    
    
    
    (2,249
    )
    
    
    (694
    )
    
    
    1,876
    
    
    
    
    
    
    
    7,788Interest expense
    
    
    (79
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    (11,178
    )
    
    
    
    
    
    
    (11,304
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    236Income tax
provision (benefit)
    
    
    2,691
    
    
    
    894
    
    
    
    
    
    
    
    
    
    
    
    (3,585
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    3,912
    
    
    
    1,279
    
    
    
    (2,249
    )
    
    
    (741
    )
    
    
    (3,323
    )
    
    
    (2,204
    )
    
    
    (3,326
    )Total assets
    
    
    514,964
    
    
    
    108,257
    
    
    
    6,302
    
    
    
    23,295
    
    
    
    14,478
    
    
    
    
    
    
    
    667,296Capital expenditures
    
    
    5,235
    
    
    
    3,609
    
    
    
    453
    
    
    
    38
    
    
    
    1,182
    
    
    
    
    
    
    
    10,517
 12




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 6. BUSINESS SEGMENTS (Continued)
  7. RELATED PARTY TRANSACTIONS
    Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
 13




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
  Condensed Consolidating Balance Sheet
June 30, 2005
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    103
    
    
    $
    36,729
    
    
    $
    
    
    
    $
    36,832Restricted cash
    
    
    
    
    
    
    4,545
    
    
    
    
    
    
    
    4,545Short-term investments
    
    
    
    
    
    
    19,945
    
    
    
    
    
    
    
    19,945Accounts receivable-trade, net
    
    
    17,493
    
    
    
    22,929
    
    
    
    
    
    
    
    40,422Accounts receivable-affiliates
    
    
    18,665
    
    
    
    (24,659
    )
    
    
    
    
    
    
    (5,994
    )Materials and supplies
    
    
    8,124
    
    
    
    
    
    
    
    
    
    
    
    8,124Prepayments and other current assets
    
    
    2,562
    
    
    
    2,540
    
    
    
    
    
    
    
    5,102Total current assets
    
    
    46,947
    
    
    
    62,029
    
    
    
    
    
    
    
    108,976Investments
    
    
    10
    
    
    
    366,324
    
    
    
    (366,324
    )
    
    
    10Property, plant and equipment
    
    
    983,059
    
    
    
    107,171
    
    
    
    
    
    
    
    1,090,230Less: accumulated depreciation and amortization
    
    
    620,506
    
    
    
    66,504
    
    
    
    
    
    
    
    687,010Property, plant and equipment, net
    
    
    362,553
    
    
    
    40,667
    
    
    
    
    
    
    
    403,220Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,780
    
    
    
    
    
    
    
    
    
    
    
    21,780Debt issuance costs
    
    
    
    
    
    
    13,755
    
    
    
    
    
    
    
    13,755Deferred charges and other assets
    
    
    799
    
    
    
    5,426
    
    
    
    
    
    
    
    6,225Total assets
    
    $
    432,089
    
    
    $
    488,201
    
    
    $
    (327,921
    )
    
    $
    592,369Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    581
    
    
    $
    (168
    )
    
    $
    
    
    
    $
    413Accounts payable-affiliates
    
    
    2,787
    
    
    
    69
    
    
    
    
    

    
    
    2,856Accounts payable, accrued and other current liabilities
    
    
    13,133
    
    
    
    31,587
    
    
    
    4,453
    
    
    
    49,173Advance billings and customer deposits
    
    
    9,448
    
    
    
    6
    
    
    
    
    
    
    
    9,454Total current liabilities
    
    
    25,949
    
    
    
    31,494
    
    
    
    4,453
    
    
    
    61,896Long-term obligations, net of current portion
    
    
    3,760
    
    
    
    453,499
    
    
    
    
    
    
    
    457,259Deferred income taxes
    
    
    (706
    )
    
    
    706
    
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    75,166
    
    
    
    7,852
    
    
    
    (4,454
    )
    
    
    78,564Stockholders equity (deficit):Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    306,048
    
    
    
    (491,240
    )
    
    
    306,048Retained earnings (accumulated deficit)
    
    
    (163,322
    )
    
    
    (304,692
    )
    
    
    163,322
    
    
    
    (304,692
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (6,706
    )
    
    
    
    
    
    
    (6,706
    )Total stockholders equity (deficit)
    
    
    327,920
    
    
    
    (5,350
    )
    
    
    (327,920
    )
    
    
    (5,350
    )Total liabilities and stockholders equity
    
    $
    432,089
    
    
    $
    488,201
    
    
    $
    (327,921
    )
    
    $
    592,369
 14




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Balance Sheet
December 31, 2004
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    99
    
    
    $
    50,561
    
    
    $
    
    
    
    $
    50,660Restricted cash
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    4,690Short-term investments
    
    
    
    
    
    
    35,200
    
    
    
    
    
    
    
    35,200Accounts receivable-trade, net
    
    
    15,397
    
    
    
    24,857
    
    
    
    (841
    )
    
    
    39,413Accounts receivable-affiliates
    
    
    12,490
    
    
    
    (13,578
    )
    
    
    
    
    
    
    (1,088
    )Materials and supplies
    
    
    6,623
    
    
    
    
    
    
    
    
    
    
    
    6,623Prepayments and other current assets
    
    
    1,493
    
    
    
    2,231
    
    
    
    
    
    
    
    3,724Total current assets
    
    
    36,102
    
    
    
    103,961
    
    
    
    (841
    )
    
    
    139,222Investments
    
    
    10
    
    
    
    360,418
    
    
    
    (360,418
    )
    
    
    10Property, plant and equipment
    
    
    957,589
    
    
    
    104,178
    
    
    
    
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    590,471
    
    
    
    58,984
    
    
    
    
    
    
    
    649,455Property, plant and equipment, net
    
    
    367,118
    
    
    
    45,194
    
    
    
    
    
    
    
    412,312Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,871
    
    
    
    
    
    
    
    
    
    
    
    21,871Debt issuance costs
    
    
    
    
    
    
    15,482
    
    
    
    
    
    
    
    15,482Deferred charges and other assets
    
    
    1,772
    
    
    
    6,967
    
    
    
    
    
    
    
    8,739Total assets
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    548
    
    
    $
    1,750
    
    
    $
    
    
    
    $
    2,298Accounts payable-affiliates
    
    
    2,964
    
    
    
    1,009
    
    
    
    
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    14,705
    
    
    
    40,784
    
    
    
    (841
    )
    
    
    54,648Advance billings and customer deposits
    
    
    8,942
    
    
    
    6
    
    
    
    
    
    
    
    8,948Total current liabilities
    
    
    27,159
    
    
    
    43,549
    
    
    
    (841
    )
    
    
    69,867Long-term obligations, net of current portion
    
    
    4,114
    
    
    
    519,477
    
    
    
    
    
    
    
    523,591Deferred income taxes
    
    
    1,345
    
    
    
    (1,345
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    72,240
    
    
    
    5,676
    
    
    
    
    
    
    
    77,916Commitments and contingenciesStockholders equity (deficit):Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    245,585
    
    
    
    (491,240
    )
    
    
    245,585Retained earnings (accumulated deficit)
    
    
    (169,227
    )
    
    
    (276,389
    )
    
    
    169,227
    
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,531
    )
    
    
    
    
    
    
    (4,531
    )Total stockholders equity (deficit)
    
    
    322,015
    
    
    
    (35,335
    )
    
    
    (322,015
    )
    
    
    (35,335
    )Total liabilities and stockholders equity
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039
 15




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2005
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    50,342
    
    
    $
    5,773
    
    
    $
    (5,774
    )
    
    $
    50,341Wireless
    
    
    21,363
    
    
    
    
    
    
    
    (9
    )
    
    
    21,354Internet
    
    
    5,571
    
    
    
    
    
    
    
    (63
    )
    
    
    5,508Interexchange
    
    
    5,046
    
    
    
    
    
    
    
    (1,024
    )
    
    
    4,022Total operating revenue
    
    
    82,322
    
    
    
    5,773
    
    
    
    (6,870
    )
    
    
    81,225Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    35,703
    
    
    
    (49
    )
    
    
    (4,995
    )
    
    
    30,659Wireless (exclusive of depreciation and amortization)
    
    
    12,866
    
    
    
    
    
    
    
    (1,528
    )
    
    
    11,338Internet (exclusive of depreciation and amortization)
    
    
    5,876
    
    
    
    
    
    
    
    (293
    )
    
    
    5,583Interexchange (exclusive of depreciation and amortization)
    
    
    4,615
    
    
    
    
    
    
    
    (54
    )
    
    
    4,561Depreciation and amortization
    
    
    16,856
    
    
    
    3,836
    
    
    
    
    
    
    
    20,692Gain on disposal of assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expense
    
    
    75,916
    
    
    
    3,787
    
    
    
    (6,870
    )
    
    
    72,833Operating income
    
    
    6,406
    
    
    
    1,986
    
    
    
    
    
    
    
    8,392Other income (expense):Interest expense
    
    
    (237
    )
    
    
    (8,628
    )
    
    
    
    
    
    
    (8,865
    )Interest income
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    412Other
    
    
    (5
    )
    
    
    3,032
    
    
    
    (3,069
    )
    
    
    (42
    )Total other income (expense)
    
    
    (242
    )
    
    
    (5,184
    )
    
    
    (3,069
    )
    
    
    (8,495
    )Income (loss) before income taxes
    
    
    6,164
    
    
    
    (3,198
    )
    
    
    (3,069
    )
    
    
    (103
    )Income tax expense (benefit)
    
    
    (3,095

    )
    
    
    3,095
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    3,069
    
    
    $
    (103
    )
    
    $
    (3,069
    )
    
    $
    (103
    )
 16




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2004
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    52,988
    
    
    $
    5,845
    
    
    $
    (5,835
    )
    
    $
    52,998Wireless
    
    
    13,470
    
    
    
    
    
    
    
    (9
    )
    
    
    13,461Internet
    
    
    5,105
    
    
    
    
    
    
    
    
    
    
    
    5,105Interexchange
    
    
    4,319
    
    
    
    
    
    
    
    (529
    )
    
    
    3,790Total operating revenue
    
    
    75,882
    
    
    
    5,845
    
    
    
    (6,373
    )
    
    
    75,354Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    33,843
    
    
    
    438
    
    
    
    (5,119
    )
    
    

    29,162Wireless (exclusive of depreciation and amortization)
    
    
    9,317
    
    
    
    
    
    
    
    (986
    )
    
    
    8,331Internet (exclusive of depreciation and amortization)
    
    
    6,611
    
    
    
    
    
    
    
    (204
    )
    
    
    6,407Interexchange (exclusive of depreciation and amortization)
    
    
    4,922
    
    
    
    
    
    
    
    (64
    )
    
    
    4,858Depreciation and amortization
    
    
    15,279
    
    
    
    3,531
    
    
    
    
    
    
    
    18,810Gain on disposal of assets, net
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Total operating expense
    
    
    69,970
    
    
    
    3,969
    
    
    
    (6,373
    )
    
    
    67,566Operating income
    
    
    5,912
    
    
    
    1,876
    
    
    
    
    
    
    
    7,788Other income (expense):Interest expense
    
    
    (126
    )
    
    
    (11,178
    )
    
    
    
    
    
    
    (11,304
    )Interest income
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    236Other
    
    
    5
    
    
    
    2,153
    
    
    
    (2,204
    )
    
    
    (46
    )Total other income (expense)
    
    
    (121
    )
    
    
    (8,789
    )
    
    
    (2,204
    )
    
    
    (11,114
    )Income (loss) before income taxes
    
    
    5,791
    
    
    
    (6,913
    )
    
    
    (2,204
    )
    
    
    (3,326
    )Income tax expense (benefit)
    
    
    (3,587
    )
    
    
    3,587
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,204
    
    
    $
    (3,326
    )
    
    $
    (2,204
    )
    
    $
    (3,326
    )
 17




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2005
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    101,908
    
    
    $
    11,409
    
    
    $
    (11,411
    )
    
    $
    101,906Wireless
    
    
    38,429
    
    
    
    
    
    
    
    (19
    )
    
    
    38,410Internet
    
    
    10,696
    
    
    
    
    
    
    
    (127
    )
    
    
    10,569Interexchange
    
    
    9,476
    
    
    
    
    
    
    
    (1,728
    )
    
    
    7,748Total operating revenue
    
    
    160,509
    
    
    
    11,409
    
    
    
    (13,285
    )
    
    
    158,633Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    70,738
    
    
    
    361
    
    
    
    (9,917
    )
    
    
    61,182Wireless (exclusive of depreciation and amortization)
    
    
    23,640
    
    
    
    
    
    
    
    (2,720
    )
    
    
    20,920Internet (exclusive of depreciation and amortization)
    
    
    11,350
    
    
    
    
    
    
    
    (530
    )
    
    
    10,820Interexchange (exclusive of depreciation and amortization)
    
    
    9,079
    
    
    
    
    
    
    
    (118
    )
    
    
    8,961Depreciation and amortization
    
    
    33,583
    
    
    
    7,522
    
    
    
    
    
    
    
    41,105Gain on disposal of assets, net
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    (68
    )Total operating expense
    
    
    148,322
    
    
    
    7,883
    
    
    
    (13,285
    )
    
    
    142,920Operating income
    
    
    12,187
    
    
    
    3,526
    
    
    
    
    
    
    
    15,713Other income (expense):Interest expense
    
    
    (354
    )
    
    
    (18,277
    )
    
    
    
    
    
    
    (18,631
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (26,204
    )
    
    
    
    
    
    
    (26,204
    )Interest income
    
    
    
    
    
    
    906
    
    
    
    
    
    
    
    906Other
    
    
    (1
    )
    
    
    5,819
    
    
    
    (5,905
    )
    
    
    (87
    )Total other income (expense)
    
    
    (355
    )
    
    
    (37,756
    )
    
    
    (5,905
    )
    
    
    (44,016
    )Income (loss) before income taxes
    
    
    11,832
    
    
    
    (34,230
    )
    
    
    (5,905
    )
    
    
    (28,303
    )Income tax expense (benefit)
    
    
    (5,927
    )
    
    
    5,927
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    5,905
    
    
    $
    (28,303
    )
    
    $
    (5,905
    )
    
    $
    (28,303
    )
 18




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2004
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    108,810
    
    
    $
    11,644
    
    
    $
    (11,624
    )
    
    $
    108,830Wireless
    
    
    25,083
    
    
    
    
    
    
    
    (21
    )
    
    
    25,062Internet
    
    
    9,718
    
    
    
    
    
    
    
    
    
    
    
    9,718Interexchange
    
    
    8,177
    
    
    
    
    
    
    
    (978
    )
    
    
    7,199Total operating revenue
    
    
    151,788
    
    
    
    11,644
    
    
    
    (12,623
    )
    
    
    150,809Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    70,327
    
    
    
    1,572
    
    
    
    (10,163
    )
    
    
    61,736Wireless (exclusive of depreciation and amortization)
    
    
    18,142
    
    
    
    
    
    
    
    (1,883
    )
    
    
    16,259Internet (exclusive of depreciation and amortization)
    
    
    14,363
    
    
    
    
    
    
    
    (450
    )
    
    
    13,913Interexchange (exclusive of depreciation and amortization)
    
    
    10,001
    
    
    
    
    
    
    
    (127
    )
    
    
    9,874Depreciation and amortization
    
    
    30,932
    
    
    
    6,984
    
    
    
    
    
    
    
    37,916Loss on disposal of assets, net
    
    
    195
    
    
    
    30
    
    
    
    
    
    
    
    225Total operating expense
    
    
    143,960
    
    
    
    8,586
    
    
    
    (12,623
    )
    
    
    139,923Operating income
    
    
    7,828
    
    
    
    3,058
    
    
    
    
    
    
    
    10,886Other income (expense):Interest expense
    
    
    (266
    )
    
    
    (22,441
    )
    
    
    
    
    
    
    (22,707
    )Interest income
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    478Other
    
    
    9
    
    
    
    905
    
    
    
    (1,017
    )
    
    
    (103
    )Total other income (expense)
    
    
    (257
    )
    
    
    (21,058
    )
    
    
    (1,017
    )
    
    
    (22,332
    )Income (loss) before income taxes
    
    
    7,571
    
    
    
    (18,000
    )
    
    
    (1,017
    )
    
    
    (11,446
    )Income tax expense (benefit)
    
    
    (6,554
    )
    
    
    6,554
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1,017
    
    
    $
    (11,446
    )
    
    $
    (1,017
    )
    
    $
    (11,446
    )
 19




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2005
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    27,296
    
    
    $
    (12,179
    )
    
    
    
    
    
    
    15,117Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (26,971
    )
    
    
    (2,994
    )
    
    
    
    
    
    
    (29,965
    )Purchase of short-term investments
    
    
    
    
    
    
    (67,745
    )
    
    
    
    
    
    
    (67,745
    )Sale of short-term investments
    
    
    
    
    
    
    83,000
    
    
    
    
    
    
    
    83,000Placement of funds in restricted account
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )Release of funds from escrow
    
    
    
    
    
    
    445
    
    
    
    
    
    
    
    445Net cash provided (used) by investing activities
    
    
    (26,971
    )
    
    
    12,406
    
    
    
    
    
    
    
    (14,565
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (321
    )
    
    
    (405,009
    )
    
    
    
    
    
    
    (405,330
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    335,000
    
    
    
    
    
    
    
    335,000Debt issuance costs
    
    
    
    
    
    
    (10,637
    )
    
    
    
    
    
    
    (10,637
    )Contribution from parent
    
    
    
    
    
    
    80,389
    
    
    
    
    
    
    
    80,389Dividends
    
    
    
    
    
    
    (13,802
    )
    
    
    
    
    
    
    (13,802
    )Net cash used by financing activities
    
    
    (321
    )
    
    
    (14,059
    )
    
    
    
    
    
    
    (14,380
    )Increase (decrease) in cash and cash equivalents
    
    
    4
    
    
    
    (13,832
    )
    
    
    
    
    
    
    (13,828
    )Cash and cash equivalents, beginning of the period
    
    
    99
    
    
    
    50,561
    
    
    
    
    
    
    
    50,660Cash and cash equivalents, end of the period
    
    $
    103
    
    
    $
    36,729
    
    
    $
    
    
    
    $
    36,832Supplemental Cash Flow Data:Interest paid
    
    $
    259
    
    
    $
    15,121
    
    
    $
    
    
    
    $
    15,380Supplemental Noncash Transactions:Interest rate swap
    
    $
    
    
    
    $
    (2,175
    )
    
    $
    
    
    
    $
    (2,175
    )
 20




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2004
 Combined
    
    ACS Holdings
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    Parent Only
    
    Eliminations
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    19,152
    
    
    $
    (10,437
    )
    
    
    
    
    
    $
    8,715Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (18,857
    )
    
    
    (2,016
    )
    
    
    
    
    
    
    (20,873
    )Purchase of short-term investments
    
    
    
    
    
    
    (66,200
    )
    
    
    
    
    
    
    (66,200
    )Sale of short-term investments
    
    
    
    
    
    
    52,700
    
    
    
    
    
    
    
    52,700Restricted funds
    
    
    
    
    
    
    (1,250
    )
    
    
    
    
    
    
    (1,250
    )Net cash used by investing activities
    
    
    (18,857
    )
    
    
    (16,766
    )
    
    
    
    
    
    
    (35,623
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (335
    )
    
    
    (1,145
    )
    
    
    
    
    
    
    (1,480
    )Dividends
    
    
    
    
    
    
    (1,325
    )
    
    
    
    
    
    
    (1,325
    )Net cash used by financing activities
    
    
    (335
    )
    
    
    (2,470
    )
    
    
    
    
    
    
    (2,805

    )Increase (decrease) in cash and cash equivalents
    
    
    (40
    )
    
    
    (29,673
    )
    
    
    
    
    
    
    (29,713
    )Cash and cash equivalents, beginning of the period
    
    
    139
    
    
    
    65,259
    
    
    
    
    
    
    
    65,398Cash and cash equivalents, end of the period
    
    $
    99
    
    
    $
    35,586
    
    
    $
    
    
    
    $
    35,685Supplemental Cash Flow Data:Interest paid
    
    $
    296
    
    
    $
    21,077
    
    
    $
    
    
    
    $
    21,373Income taxes paid, net of refund
    
    
    1,120
    
    
    
    
    
    
    
    
    
    
    
    1,120
 21




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 9. COMMITMENTS AND CONTINGENCIES
    10. OTHER EVENTS
  22




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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
  
    
    rapid technological developments and changes in the telecommunications industries;
    
    our competitive environment;
    
    ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996, or the Telecommunications Act, and
other similar federal and state legislation and the federal and state rules and
regulations enacted pursuant to that legislation;
    
    changes in revenue from Universal Service Funds;
    
    regulatory limitations on our ability to change our pricing for communications services;
    
    the possible future unavailability of Statement of Financial Accounting
Standards, or SFAS 71, Accounting for the Effects of Certain Types of Regulation,
to our wireline subsidiaries;
    
    our ability to bundle our products and services;
    
    changes in the demand for our products and services;
    
    changes in general industry and market conditions and growth rates;
    
    changes in interest rates or other general national, regional or local economic conditions;
    
    governmental and public policy changes;
    
    our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders;
    
    the continued availability of financing in the amounts, at the terms, and subject
to the conditions necessary to support our future business;
    
    the success of any future acquisitions; and
    
    changes in accounting policies or practices adopted voluntarily or as required by
accounting principles generally accepted in the United States.
   23




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##### Table of Contents



Introduction
  Alaska Communications Systems Holdings, Inc.
  
    
    the provision of local telephone services, including:
 §
    
    basic local service to retail customers within our service areas;§
    
    wholesale service to Competitive Local Exchange Carriers (CLECs);§
    
    network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls;§
    
    enhanced services;§
    
    ancillary services, such as billing and collection; and§
    
    universal service payments;
 
    
    the provision of wireless services;
    
    the provision of Internet services; and
    
    the provision of interexchange network long-distance and data services.
  Local Telephone 
  
    
    intrastate and interstate revenue settlement methodologies;
    
    authorized rates of return for regulated services;
    
    whether an access line is used by a business or consumer subscriber;
    
    intrastate and interstate calling patterns;
    
    customers selection of various local rate plan options;
    
    selection of enhanced calling services, such as voice mail; and
    
    other subscriber usage characteristics.
  
    
    consumer and business customers located in our local service areas that pay for
local phone service and a portion of network access;
    
    interexchange carriers that pay for access to long distance calling customers
located within our local service areas; and
    
    CLECs that pay for wholesale access to our network in order to provide
competitive local service on either a wholesale or Unbundled Network Element (UNE)
basis as prescribed under the Telecommunications Act.
 24




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##### Table of Contents



Wireless
 Internet
 Interexchange -
 Video Entertainment 
 Critical Accounting Policies and Accounting Estimates
  Accounting for the Effects of Certain Types
of Regulation
   25




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##### Table of Contents



Goodwill and Other Intangible Assets
  26




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Operating Revenue
  Local Telephone.
 Three Months EndedJune 30,2005
    
    2004(in thousands)Local telephone revenue:Local network service
    
    $
    21,512
    
    
    $
    22,995Network access
    
    
    22,798
    
    
    
    24,539Deregulated and other
    
    
    6,031
    
    
    
    5,464Total local telephone revenue
    
    $
    50,341
    
    
    $
    52,998
  As of June 30,2005
    
    2004Local telephone access lines:Retail
    
    
    203,224
    
    
    
    210,819Wholesale
    
    
    15,109
    
    
    
    21,312Unbundled network elements  loop (UNE  L)
    
    
    59,271
    
    
    
    68,664Unbundled network elements  platform (UNE  P)
    
    
    6,454
    
    
    
    4,815Total local telephone access lines
    
    
    284,058
    
    
    
    305,610
    27




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##### Table of Contents



Wireless.
 
    
    growth in subscribers year over year of 18.3% at June 30, 2005;
    
    an increase in quarterly average revenue per unit, or ARPU, of 27.2% to $56.38 for
the three months ended June 30, 2005, from $44.33 for the three months ended June 30,
2004, primarily as a result of improved subscriber mix with a higher proportion of post
paid retail subscribers, increased plan revenue, feature revenue, roaming revenue,
regulatory surcharges and receipt of competitive eligible telecommunications carrier
status (CETC) funding on January 1, 2005 which added $7.97 to cellular ARPU;
    
    higher gross customer adds, handset upgrades and accessory sales in the three months
ended June 30, 2005 resulting in $1.8 million of revenue compared to $1.2 million for
the three months ended June 30, 2004; and
    
    higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $1.5 million from $0.4 million for the three
months ended June 30, 2005 and 2004, respectively.
 Internet.
 Interexchange.
 Operating Expense
  Local Telephone. . .
 Wireless.
 Internet.
 Interexchange.
 28




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##### Table of Contents



Depreciation and amortization.
 Interest expense.
 Income Taxes
  Net loss
 .
 Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Operating Revenue
  Local Telephone.
 June 30,2005
    
    2004(in thousands)Local telephone revenue:Local network service
    
    $
    43,730
    
    
    $
    45,748Network access
    
    
    46,148
    
    
    
    52,234Deregulated and other
    
    
    12,028
    
    
    
    10,848Total local telephone revenue
    
    $
    101,906
    
    
    $
    108,830
  As of June 30,2005
    
    2004Local telephone access lines:Retail
    
    
    203,224
    
    
    
    210,819Wholesale
    
    
    15,109
    
    
    
    21,312Unbundled network elements  loop (UNE  L)
    
    
    59,271
    
    
    
    68,664Unbundled network elements  platform (UNE  P)
    
    
    6,454
    
    
    
    4,815Total local telephone access lines
    
    
    284,058
    
    
    
    305,610
 29




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##### Table of Contents



Wireless.
 
    
    growth in subscribers year over year of 18.3% at June 30, 2005;
    
    an increase in average revenue per unit, or ARPU, of 24.2% to $52.58 for the six
months ended June 30, 2005, from $42.34 for the six months ended June 30, 2004,
primarily as a result of improved subscriber mix with a higher proportion of post paid
retail subscribers, increased plan revenue, feature revenue, roaming revenue,
regulatory surcharges and receipt of competitive eligible telecommunications carrier
status (CETC) funding on January 1, 2005 which added $5.71 to cellular ARPU;
    
    higher gross customer adds, handset upgrades and accessory sales in the six months
ended June 30, 2005 resulting in $3.2 million of revenue compared to $1.9 million for
the six months ended June 30, 2004; and
    
    higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $2.2 million from $0.5 million for the six
months ended June 30, 2005 and 2004, respectively.
 Internet.
 Interexchange.
 Operating Expense
  Local Telephone. .
 30




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##### Table of Contents



.
 Wireless.
 Internet.
 Interexchange.
 Depreciation and amortization.
 Interest expense.
 Loss on extinguishment of debt.
 Income Taxes
  Net loss
 .
 LIQUIDITY AND CAPITAL RESOURCES
 Sources
  31




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##### Table of Contents




    
    repay in full and redeem the $198.0 of outstanding principal under our 2003 senior
credit facility, together with interest accrued thereon;
    
    repurchase $59.3 million of outstanding principal of our senior unsecured notes,
together with tender premiums and interest accrued thereon;
    
    repurchase $147.5 million of outstanding principal of our senior subordinated notes,
together with tender premiums and interest accrued thereon; and
    
    pay underwriters discounts and transaction fees and expenses associated with the
refinancing transactions and the ACS Group equity offering.
    32




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##### Table of Contents



Uses
       33




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##### Table of Contents



Outlook
  
    
    increasing demand for wireless voice and data services following the launch of
our CDMA 1xRTT network;
    
    growth in demand for DSL and Internet access services due to higher business and
consumer bandwidth needs; and
    
    increasing demand for private network services by government and business on a
statewide basis on either a circuit switched or IP basis.
      34




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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
   Changes in internal controls
  35




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##### Table of Contents



PART II            OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  .
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Working capital restrictions and other limitations upon the payment of dividends
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  36




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##### Table of Contents



ITEM 5. OTHER INFORMATION.
   Annual Performance
    
    LTIP
    
    Total Award
    
    Total AwardName
    
    Value
    
    Shares
    
    Value
    
    Shares
    
    Value
    
    SharesLiane J. Pelletier
    
    $
    630,000
    
    
    
    70,000
    
    
    $
    315,000
    
    
    
    35,000
    
    
    $
    945,000
    
    
    
    105,000David Wilson
    
    $
    225,000
    
    
    
    25,000
    
    
    $
    202,500
    
    
    
    22,500
    
    
    $
    427,500
    
    
    
    47,500David C. Eisenberg
    
    $
    270,000
    
    
    
    30,000
    
    
    $
    157,500
    
    
    
    17,500
    
    
    $
    427,500
    
    
    
    47,500Sheldon A. Fisher
    
    $
    225,000
    
    
    
    25,000
    
    
    $
    112,500
    
    
    
    12,500
    
    
    $
    337,500
    
    
    
    37,500Kenneth L. Sprain
    
    $
    225,000
    
    
    
    25,000
    
    
    $
    112,500
    
    
    
    12,500
    
    
    $
    337,500
    
    
    
    37,500
  
 ITEM 6. EXHIBITS
 (a) Exhibits :
 10.23
    
    Alaska Communications Systems Group,
Inc. Restricted Stock Agreement10.24
    
    Supplemental Indenture dated July 15, 2005 among Alaska Communications Systems
Group, Inc., Alaska Communications Systems Holdings, Inc. and The Bank of New York as
Trustee.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.
 37




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##### Table of Contents



SIGNATURES
  ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 /s/ Liane PelletierLiane PelletierChief Executive Officer,
Chairman of the Board and President/s/ David WilsonDavid WilsonSenior Vice President and
Chief Financial Officer
(Principal Accounting Officer) 38