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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 March 31, 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
(Address of Principal Executive Offices) (Zip Code) (907) 297-3000
(Registrants Telephone Number, Including Area Code) Not Applicable
(Former name, former address and former three months, if changed since last report) 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: The number of shares outstanding of the registrants Common Stock, as of April 27, 2005, was zero (0).




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TABLE OF CONTENTS PageNumberPART I.
    
    Financial InformationItem 1.
    
    Financial Statements:Consolidated Balance Sheets (unaudited) As of March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations (unaudited) For the Three Months Ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults upon Senior Securities
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holder
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31Signatures
    
    
    
    
    32EXHIBIT 10.19EXHIBIT 10.20EXHIBIT 10.21EXHIBIT 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)
 March 31,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    63,466
    
    
    $
    85,860Restricted cash
    
    
    4,690
    
    
    
    4,690Accounts receivable  trade, net of allowance of $4,895 and $4,869
    
    
    36,349
    
    
    
    38,325Materials and supplies
    
    
    7,056
    
    
    
    6,623Prepayments and other current assets
    
    
    4,419
    
    
    
    3,724Total current assets
    
    
    115,980
    
    
    
    139,222Property, plant and equipment
    
    
    1,068,740
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    668,596
    
    
    
    649,455Property, plant and equipment, net
    
    
    400,144
    
    
    
    412,312Goodwill
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,826
    
    
    
    21,871Debt issuance costs
    
    
    14,294
    
    
    
    15,482Deferred charges and other assets
    
    
    9,337
    
    
    
    8,749Total assets
    
    $
    599,984
    
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    393
    
    
    $
    2,298Accounts payable-affiliate
    
    
    2,686
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    48,819
    
    
    
    54,648Advance billings and customer deposits
    
    
    8,893
    
    
    
    8,948Total current liabilities
    
    
    60,791
    
    
    
    69,867Long-term obligations, net of current portion
    
    
    457,321
    
    
    
    523,591Other deferred credits and long-term liabilities
    
    
    74,784
    
    
    
    77,916Commitments and contingenciesStockholders equity (deficit):Common stock, $.01 par value; 1,000 shares authorized
2 shares issued and outstanding
    
    
    
    
    
    
    Contributed capital
    
    
    313,751
    
    
    
    245,585Accumulated deficit
    
    
    (304,589
    )
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    (2,074
    )
    
    
    (4,531
    )Total stockholders equity (deficit)
    
    
    7,088
    
    
    
    (35,335
    )Total liabilities and stockholders equity
    
    $
    599,984
    
    
    $
    636,039
 See Notes to Consolidated Financial Statements 3




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Consolidated Statements of Operations
 (Unaudited, In Thousands Except Per Share Amounts)
 Three Months EndedMarch 31,2005
    
    

2004Operating revenues:Local telephone
    
    $
    51,565
    
    
    $
    55,832Wireless
    
    
    17,056
    
    
    
    11,601Internet
    
    
    5,061
    
    
    
    4,613Interexchange
    
    
    3,726
    
    
    
    3,409Total operating revenues
    
    
    77,408
    
    
    
    75,455Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    30,523
    
    
    
    32,574Wireless (exclusive of depreciation and amortization)
    
    
    9,582
    
    
    
    7,928Internet (exclusive of depreciation and amortization)
    
    
    5,237
    
    
    
    7,506Interexchange (exclusive of depreciation and amortization)
    
    
    4,400
    
    
    
    5,016Depreciation and amortization
    
    
    20,413
    
    
    
    19,106Loss (gain) on disposal of assets, net
    
    
    (68
    )
    
    
    227Total operating expenses
    
    
    70,087
    
    
    
    72,357Operating income
    
    
    7,321
    
    
    
    3,098Other income and expense:Interest expense
    
    
    (9,766
    )
    
    
    (11,403
    )Loss on extinguishment of debt
    
    
    (26,204
    )
    
    
    Interest income
    
    
    494
    
    
    
    242Other
    
    
    (45
    )
    
    
    (57
    )Total other income (expense)
    
    
    (35,521
    )
    
    
    (11,218
    )Loss before income taxes
    
    
    (28,200
    )
    
    
    (8,120
    )Income tax expense (benefit)
    
    
    
    
    
    
    Net loss
    
    $
    (28,200
    )
    
    $
    (8,120
    )
 See Notes to Consolidated Financial Statements 4




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. 
 Consolidated Statements of Cash Flows
 (Unaudited, In Thousands)
 Three Months EndedMarch 31,2005
    
    

2004Cash Flows from Operating Activities:Net loss
    
    $
    (28,200
    )
    
    $
    (8,120
    )Adjustments to reconcile net loss to net cash (used) provided by operating activities:Depreciation and amortization
    
    
    20,413
    
    
    
    19,106Loss (gain) on disposal of assets, net
    
    
    (68
    )
    
    
    227Amortization of debt issuance costs, original issue discount
    
    
    13,807
    
    
    
    845Other deferred credits
    
    
    (4,082
    )
    
    
    (2,285
    )Changes in components of working capital:Accounts receivable and other current assets
    
    
    1,689
    
    
    
    4,664Accounts payable and other current liabilities
    
    
    (10,472
    )
    
    
    (8,915
    )Deferred charges and other assets
    
    
    1,869
    
    
    
    206Other
    
    
    (156
    )
    
    
    Net cash (used) provided by operating activities
    
    
    (5,200
    )
    
    
    5,728Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (7,182
    )
    
    
    (10,356
    )Net cash used by investing activities
    
    
    (7,182
    )
    
    
    (10,356
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (405,157
    )
    
    
    (828
    )Proceeds from issuance of long-term debt
    
    
    335,000
    
    
    
    Debt issuance costs
    
    
    (10,637
    )
    
    
    Contribution from Parent
    
    
    76,461
    
    
    
    Dividend
    
    
    (5,679
    )
    
    
    (63
    )Net cash used by financing activities
    
    
    (10,012
    )
    
    
    (891
    )Decrease in cash and cash equivalents
    
    
    (22,394
    )
    
    
    (5,519
    )Cash and cash equivalents at beginning of the period
    
    
    85,860
    
    
    
    97,798Cash and cash equivalents at the end of the period
    
    $
    63,466
    
    
    $
    92,279Supplemental Cash Flow Data:Interest paid
    
    $
    10,142
    
    
    $
    11,870Income taxes paid, net of refund
    
    
    
    
    
    
    1,120Supplemental Noncash Transactions:Interest rate swap
    
    $
    2,457
    
    
    $
    Dividend declared, but not paid
    
    
    (8,140
    )
    
    
    
 See Notes to Consolidated Financial Statements 5




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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 Alaska Communications Systems Holdings, Inc., a Delaware corporation, and its Subsidiaries
(the Company or ACS Holdings), is engaged principally in providing local telephone, wireless,
Internet, interexchange network and other services to its retail consumer and business customers
and wholesale customers in the State of Alaska through its telecommunications subsidiaries. The
Company is a wholly owned subsidiary of Alaska Communication Systems Group, Inc. (the Parent or
ACS Group). The accompanying consolidated financial statements for the Company represent the consolidated
financial position, results of operations and cash flows principally of the following entities:  
    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) Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission. However, the Company believes the disclosures which are made are adequate to
make the information presented not misleading. The consolidated financial statements and footnotes
included in this Form 10-Q should be read in conjunction with the consolidated financial statements
and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2004. Certain reclassifications have been made to the 2004 financial statements to make them
conform to the current presentation. In the opinion of management, the financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the consolidated financial position,
results of operations and cash flows for all periods presented. The results of operations for the
three months ended March 31, 2005 are not necessarily indicative of the results of operations which
might be expected for the entire year or any other interim periods. Revenue Recognition Access revenue is recognized when earned. The Company participates in access revenue pools
with other telephone companies. Such pools are funded by toll revenue and/or access charges
regulated by the Regulatory Commission of Alaska (RCA) within the intrastate jurisdiction and the
Federal Communications Commission (FCC) within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These estimates are derived
from interim financial statements, available separations studies and the most recent information
available about achieved rates of return. These estimates are subject to adjustment in future
accounting periods as additional operational information becomes available. To the extent that
disputes arise over revenue settlements, the Companys policy is to defer revenue collected until
settlement methodologies are resolved and finalized. At March 31, 2005 and 2004, the Company had
liabilities of $16,920 and $13,053, respectively, related to its estimate of refundable access
revenue. Regulatory Accounting and Regulation The local telephone exchange operations of the Company account for costs in accordance with
the accounting principles for regulated enterprises prescribed by Statement of Financial Accounting
Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation.This
accounting recognizes the economic effects of rate regulation by recording cost and a return on
investment as such amounts are recovered through rates authorized by regulatory authorities.
Accordingly, under SFAS No. 71, plant and equipment is depreciated over lives approved by
regulators and certain costs and obligations are deferred based upon approvals received from
regulators to permit recovery of such amounts in future years. 6




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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) The Company implemented, effective January 1, 2003, higher depreciation rates for its
regulated telephone plant for the interstate jurisdiction, which management believes approximate
the economically useful lives of the underlying plant. As a result, the Company has recorded a
regulatory asset under SFAS No. 71 of $39,296 and $21,850 as of March 31, 2005 and 2004,
respectively, related to depreciation of the regulated telephone plant allocable to its intrastate
and local jurisdictions. The Company has also deferred as a regulatory asset $894 of costs incurred
in connection with regulatory rate making proceedings, which is being amortized over three years
starting in 2003. The balance of this regulatory asset was $223 at March 31, 2005. If the Company
were not following SFAS No. 71, it would have recorded additional cumulative depreciation expense
in the three months ended March 31, 2005, of $4,323 for the intrastate and local jurisdictions and
the deferred costs incurred in connection with regulatory rate making proceedings would have been
charged to expense as incurred. The Company also has a regulatory liability of $55,299 at March
31, 2005 related to accumulated removal costs. If the Company were not following SFAS No. 71, it
would have followed SFAS No. 143, Accounting for Asset Retirement Obligations. Non-regulated
revenues and costs incurred by the local telephone exchange operations and non-regulated operations
of the Company are not accounted for under SFAS No. 71 principles. Stock Incentive Plans The Companys employees participate in various plans of ACS Group. The Company applies
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for the stock incentive plans. Accordingly, no compensation cost has been recognized for options
with exercise prices equal to or greater than fair value on the date of grant. No compensation
costs were charged to operations for the three months ended March 31, 2005 or 2004. If compensation
costs had been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation,
the Companys net loss and net loss per share on a pro forma basis for the three months ended March
31, 2005 and 2004 would have been as follows: Three Months EndedMarch 31,2005
    
    
    2004Net loss:As reported
    
    $
    (28,200
    )
    
    $
    (8,120
    )Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards
    
    $
    (749
    )
    
    
    33Pro forma
    
    $
    (28,949
    )
    
    $
    (8,087
    )
 The fair value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for grants made in 2004: 2004Risk free rate
    
    
    2.94
    %Dividend yield
    
    
    0.0
    %Expected volatility factor
    
    
    55.2
    %Expected option life (years)
    
    
    6.8
 No options were granted in 2005. 7




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts) 2. NEW ACCOUNTING STANDARDS In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement
Obligations. FIN 47 will be effective for the Company on December 31, 2005 and requires it to
recognize asset retirement obligations which are conditional on a future event, such as the
obligation to safely dispose of asbestos when a building is remodeled. Uncertainty about the
timing or settlement of the obligation is factored into the measurement of the liability. The
Company is in the process of quantifying the impact FIN 47 will have on its financial position and
results of operations. In April 2005, the Securities and Exchange Commission (SEC) delayed the effective date of
SFAS No. 123R, Share-Based Payments. SFAS No. 123R will now be effective for the Company as of the
interim reporting period beginning January 1, 2006. SFAS 123R requires that compensation cost
relating to share-based payment transactions be recognized in financial statements based on the
fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. The Company
does not anticipate that the adoption of SFAS No. 123R will have a material impact on its financial
position or results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets,which is
effective for the Company starting July 1, 2005. In the past, the Company was frequently required
to measure the value of assets exchanged in non-monetary transactions by using the net book value
of the asset relinquished. Under SFAS No. 153, the Company will measure assets exchanged at fair
value, as long as the transaction has commercial substance and the fair value of the assets
exchanged is determinable within reasonable limits. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of SFAS No. 153 is not anticipated to have a material effect on the
Companys financial position or results of operations. 3. LONG TERM OBLIGATIONS Long term obligations consist of the following at March 31, 2005 and December 31, 2004: March 31,
    
    
    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
subordinated notes due 2011
    
    
    (3,339
    )
    
    
    (5,321
    )Capital leases and other long-term obligations
    
    
    7,749
    
    
    
    8,060457,714
    
    
    
    525,889Less current portion
    
    
    393
    
    
    
    2,298Long-term obligations, net of current portion
    
    $
    457,321
    
    
    $
    523,591
 The aggregate maturities of long-term obligations for each of the five years and thereafter
subsequent to March 31, 2005 are as follows: 2005 (April 1 - December 31)
    
    $
    5302006 (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$
    461,053
 8




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts) 3. LONG TERM OBLIGATIONS (Continued) In the first quarter of 2005, the Company completed refinancing transactions whereby it
entered into a new $380,000 senior secured credit facility, the 2005 senior credit facility, and
used the $335,000 of term loan borrowings under that facility, together with cash on hand and
$76,307 in net proceeds of a simultaneous offering of ACS Group common stock, to repay in full and
redeem the $198,000 of outstanding principal under its 2003 senior credit facility, together with
interest accrued thereon; repurchase $59,346 of outstanding principal of its senior unsecured
notes, together with tender premiums and interest accrued thereon; repurchase $147,500 of
outstanding principal of its senior subordinated notes, together with tender premiums and interest
accrued thereon; and pay underwriters discounts and transaction fees and expenses associated with
the equity offering and refinancing transactions. The $335,000 term loan under the 2005 senior credit facility was drawn on February 1, 2005 and
generally bears interest at an annual rate of LIBOR plus 2.00%, with a term of seven years from the
date of closing and no scheduled principal payments before maturity. The $45,000 undrawn revolving
credit facility, to the extent drawn in the future, will bear interest at an annual rate of LIBOR
plus 2.00% and have a term of six years from the date of closing. To the extent the $45,000
revolving credit facility under the 2005 senior credit facility remains undrawn, the Company will
pay an annual commitment fee of 0.375% of the undrawn principal amount over its term. The Company
also entered into floating-to-fixed interest rate swaps with total notional amounts of $135,000 and
$85,000, respectively, which swap the floating interest rate on a portion of the term loan
borrowings under the 2005 senior credit facility for a five year term at a fixed rate of 6.13% and
6.50% per year, respectively, inclusive of the 2.00% premium over LIBOR. The swaps are accounted
for as cash flow hedges. 4. STOCK INCENTIVE PLANS The Companys employees participate in various plans of ACS Group, which through the
Compensation Committee of the Board of Directors, may grant stock options, stock appreciation
rights and other awards to officers, employees and non-employee directors. At March 31, 2005, ACS
Group has reserved a total of 10,060 shares of authorized common stock for issuance under the
plans. In general, options under the plans vest ratably over three, four or five years. Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan ACS Group has reserved 7,160 shares under this plan, which was adopted by the Company in
November 1999. At March 31, 2005, 7,089 options have been granted, 2,892 have been forfeited, 2,035
have been exercised, and 2,963 shares are available for grant under the plan. ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan The non-employee director stock compensation plan was adopted by ACS Group in November 1999.
ACS Group has reserved 350 shares under this plan. At March 31, 2005, 151 shares have been awarded
and 199 shares are available for grant under the plan. In 2005 and 2004, the plan requires
directors to receive not less than 50% and 25% respectively, of their annual retainer in the form
of ACS Groups stock and directors are permitted to elect up to 100% of their annual retainer in
the form of ACS Groups stock. On March 31, 2005, eight shares under the plan were awarded to
directors, of which six were elected to be deferred until termination of service by the directors. Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan This plan was also adopted by ACS Group in November 1999. ACS Group has reserved 1,550 shares
under this plan. At March 31, 2005, 980 shares are available for issuance and sale. The plan will
terminate on December 31, 2009. All ACS Group employees and all of the employees of designated
subsidiaries generally will be eligible to participate in the purchase plan, other than employees
whose customary employment is 20 hours or less per week or is for not more than five months in a
calendar year, or who are ineligible to participate due to restrictions under the Internal Revenue
Code. A participant in the purchase plan may authorize regular salary deductions of a maximum of 15%
and a minimum of 1% of base compensation. The fair market value of shares which may be purchased by
any employee during any calendar year may not exceed $25. The amounts so deducted and contributed
are applied to the purchase of full shares of common stock at 85% of the lesser of the fair market
value of such shares on the date of purchase or on the offering date for 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) such offering period. The offering dates are January 1 and July 1 of each purchase plan year, and
each offering period will consist of one six-month purchase period. The first offering period under
the plan commenced on January 1, 2000. Shares are purchased on the open market or issued from
authorized but unissued shares on behalf of participating employees on the last business days of
June and December for each purchase plan year and each such participant has the rights of a
stockholder with respect to such shares. 2003 Options for Officer Inducement Grant During 2003, the Board of Directors for ACS Group awarded 1,000 options as an inducement grant
in hiring the Companys Chief Executive Officer, all of which are currently outstanding. The
options were registered with the Securities Exchange Commission on Form S-8 during October 2004. 5. RETIREMENT PLANS Pension benefits for substantially all of the Companys employees are provided through the
Alaska Electrical Pension Plan (AEPP). The Company pays a contractual hourly amount based on
employee classification or base compensation. As a multi-employer defined contribution plan, the
accumulated benefits and plan assets are not determined for or allocated separately to the
individual employer. The Company has no responsibility for the benefit obligation other than the
contractual contribution rate. The Company also provides a 401(k) retirement savings plan covering
substantially all of its employees. The Company also has a separate defined benefit plan that covers certain employees previously
employed by Century Telephone Enterprise, Inc. (CenturyTel Plan). This plan was transferred to
the Company in connection with the acquisition of CenturyTel, Inc.s Alaska properties. Existing
plan assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan on
September 1, 1999. Accrued benefits under the ACS Retirement Plan were determined in accordance
with the provisions of the CenturyTel Plan. Upon completion of the transfer to the Company, covered
employees ceased to accrue benefits under the plan. On November 1, 2000, the ACS Retirement Plan
was amended to conform early retirement reduction factors and various other terms to those provided
by the AEPP. As a result of this amendment, prior service cost of $1,992 was recorded and will be
amortized over the expected service life of the plan participants at the date of the amendment. The
Company uses the traditional unit credit method for the determination of pension cost for financial
reporting and funding purposes and complies with the funding requirements under the Employee
Retirement Income Security Act of 1974 (ERISA). The Company uses a December 31 measurement date
for the plan. The following table represents the net periodic pension expense for the ACS Retirement Plan
for the three months ended March 31, 2005 and 2004: Three Months EndedMarch 31,2005
    
    
    2004Interest cost
    
    $
    188
    
    
    $
    184Expected return on plan assets
    
    
    (201
    )
    
    
    (190
    )Amortization of loss
    
    
    114
    
    
    
    138Amortization of prior service cost
    
    
    51
    
    
    
    51Net periodic pension expense
    
    $
    152
    
    
    $
    183
 6. BUSINESS SEGMENTS The Company has four reportable segments: local telephone, wireless, Internet and
interexchange. Local telephone provides landline telecommunications services and consists of local
telephone service, network access and deregulated and other revenue; wireless provides wireless
telecommunications service; Internet provides Internet service and advanced IP based private
networks; and interexchange provides switched and dedicated long distance services. Each reportable
segment is a strategic business offering different services than those offered by the other
segments. The Company evaluates the performance of its segments based on operating income (loss). 10




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts) 6. BUSINESS SEGMENTS (Continued) The Company also incurs interest expense, interest income, equity in earnings of investments
and other operating and non-operating income and expense at the corporate level which are not
allocated to the business segments, nor are they evaluated by the chief operating decision maker in
analyzing the performance of the business segments. These non-operating income and expense items
are provided in the accompanying table under the caption All Other in order to assist the users
of these financial statements in reconciling the operating results and total assets of the business
segments to the consolidated financial statements. Common use assets are held at ACS Holdings and
are allocated to the business segments based on operating revenue. The accounting policies of the
segments are the same as those described in the summary of significant accounting policies. The following table illustrates selected financial data for each segment as of and for the
three months ended March 31, 2005: LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    51,566
    
    
    $
    17,066
    
    
    $
    5,125
    
    
    $
    4,430
    
    
    $
    5,636
    
    
    $
    (6,415
    )
    
    $
    77,408Depreciation and
amortization
    
    
    13,218
    
    
    
    2,598
    
    
    
    820
    
    
    
    91
    
    
    
    3,686
    
    
    
    
    
    
    
    20,413Operating income (loss)
    
    
    3,312
    
    
    
    4,094
    
    
    
    (1,500
    )
    
    
    (125
    )
    
    
    1,540
    
    
    
    
    
    
    
    7,321Interest expense
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (9,649
    )
    
    
    
    
    
    
    (9,766
    )Loss on extinguishment
of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,204
    )
    
    
    
    
    
    
    (26,204
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    494Income tax provision
(benefit)
    
    
    1,145
    
    
    
    1,686
    
    
    
    
    
    
    
    
    
    
    
    (2,831
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    2,096
    
    
    
    2,408
    
    
    
    (1,500
    )
    
    
    (171
    )
    
    
    (56,397
    )
    
    
    25,364
    
    
    
    (28,200
    )Total assets
    
    
    453,179
    
    
    
    115,645
    
    
    
    (1,606
    )
    
    
    19,723
    
    
    
    13,043
    
    
    
    
    
    
    
    599,984Capital expenditures
    
    
    4,127
    
    
    
    299
    
    
    
    708
    
    
    
    
    
    
    
    2,048
    
    
    
    
    
    
    
    7,182
 Operating revenue disclosed above includes intersegment operating revenue of $6,512 for local
telephone, $557 for wireless, $924 for interexchange and $5,633 for all other. In accordance with
SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated
above. The following table illustrates selected financial data for each segment as of and for the
three months ended March 31, 2004: LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    55,822
    
    
    $
    11,613
    
    
    $
    4,613
    
    
    $
    3,858
    
    
    $
    5,799
    
    
    $
    (6,250
    )
    
    $
    75,455Depreciation and
amortization
    
    
    12,849
    
    
    
    1,645
    
    
    
    1,002
    
    
    
    157
    
    
    
    3,453
    
    
    
    
    
    
    
    19,106Operating income (loss)
    
    
    6,313
    
    
    
    1,143
    
    
    
    (4,162
    )
    
    
    (1,378
    )
    
    
    1,182
    
    
    
    
    
    
    
    3,098Interest expense
    
    
    (81
    )
    
    
    (12
    )
    
    
    
    
    
    
    (47
    )
    
    
    (11,263
    )
    
    
    
    
    
    
    (11,403
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    242Income tax provision
(benefit)
    
    
    2,499
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (2,965
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    3,733
    
    
    
    665
    
    
    
    (4,162
    )
    
    
    (1,425
    )
    
    
    (6,931
    )
    
    
    
    
    
    
    (8,120
    )Total assets
    
    
    517,813
    
    
    
    102,939
    
    
    
    7,655
    
    
    
    23,264
    
    
    
    14,617
    
    
    
    
    
    
    
    666,288Capital expenditures
    
    
    5,235
    
    
    
    3,609
    
    
    
    453
    
    
    
    38
    
    
    
    1,021
    
    
    
    
    
    
    
    10,356
 Operating revenue disclosed above includes intersegment operating revenue of $6,324 for local
telephone, $434 for wireless, $522 for interexchange and $5,789 for all other. In accordance with
SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated
above. 7. RELATED PARTY TRANSACTIONS Fox Paine & Company, LLC (Fox Paine), ACS Groups largest stockholder, was entitled to
receive an annual management fee in the amount of 1% of the Companys net income before interest
expense, interest income, income taxes, depreciation and amortization, and equity in earnings
(loss) of investments, calculated without regard to the fee pursuant to an agreement dated May 14,
1999. The management fee expense for the three months ended March 31, 2005 was $38, related to a
final contract true up, and $220 for the three months ended March 31, 2004. The management fee
payable at March 31, 2005 and 2004 was $0 and $1,206, respectively. The annual management fee
obligation to Fox Paine was 11




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts) 7. RELATED PARTY TRANSACTIONS (Continued) terminated effective for periods beginning after December 31, 2004 as partial consideration for a
$2,700 transaction fee paid to Fox Paine in February 2005 in connection with assistance rendered in
structuring a refinancing transaction and an ACS Group stock offering, which were completed during
the first quarter of 2005. The transaction fee agreement was approved by the Companys board of
directors. Two of the Companys directors, Messrs. Saul A. Fox and W. Dexter Paine, III are co-founders
of Fox Paine and currently serve as Fox Paines Chief Executive Officer and President. A third
director, Mr. Wray T. Thorn, is a former director of Fox Paine. During 2003, the Company spun off its Directory Business to ACS Media LLC and subsequently
sold 99.9% of its interest in ACS Media LLC to the public through a Canadian income fund. As part
of that transaction, the Company entered into several long-term contracts with ACS Media LLC,
including a 50-year publishing agreement, a 50-year license agreement, a 45-year non-compete
agreement, and a 10-year billing and collection agreement. At March 31, 2005, the Company had
recorded in accounts payable  affiliates $2,686 due to ACS Media LLC under these contracts,
primarily under the billing and collection agreement. The Company has a right to minority
representation of one manager of the permitted nine managers of ACS Media LLC so long as its
contracts with ACS Media LLC are in effect. Currently, Leonard A. Steinberg, an officer of the
Company, is a manager of ACS Media LLC. On September 14, 2003, the Company entered into an agreement with a retiring officer to
reacquire 267 shares of ACS Group stock owned by the officer in January 2004 at a purchase price
per share equal to the highest average closing price of a share of ACS Group stock during any
5-consecutive day trading period in January 2004. The officer delivered the shares to the Company
in 2004, and the Company made repurchase payments totaling $1,262 to the officer in four equal
quarterly installments commencing on March 31, 2004. 12




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts) 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS ACS Holdings and its subsidiaries were guarantors of the ACS Groups senior discount
debentures. Additionally, ACS Group and ACS Holdings subsidiaries were guarantors under ACS
Holdings 9 3/8 % senior subordinated notes and 9 7/8% senior unsecured notes. All subsidiaries of
ACS Group and ACS Holdings (the Combined Subsidiaries), are 100% owned. The guarantees are full
and unconditional. In addition, all guarantees are joint and several. Accordingly, the interim
condensed consolidating financial statements are presented below. See ACS Groups Form 10-Q
(Commission File Number 000-28167) for ACS Group only financial statements. Condensed Consolidating Balance Sheet
March 31, 2005 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    82
    
    
    $
    63,384
    
    
    $
    
    
    
    $
    63,466Restricted cash
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    4,690Accounts receivable-trade, net
    
    
    14,479
    
    
    
    23,959
    
    
    
    
    
    
    
    38,438Accounts receivable-affiliates
    
    
    26,828
    
    
    
    (28,917
    )
    
    
    
    
    
    
    (2,089
    )Materials and supplies
    
    
    7,056
    
    
    
    
    
    
    
    
    
    
    
    7,056Prepayments and other current assets
    
    
    1,916
    
    
    
    2,503
    
    
    
    
    
    
    
    4,419Total current assets
    
    
    50,361
    
    
    
    65,619
    
    
    
    
    
    
    
    115,980Investments
    
    
    10
    
    
    
    363,255
    
    
    
    (363,255
    )
    
    
    10Property, plant and equipment
    
    
    962,514
    
    
    
    106,226
    
    
    
    
    
    
    
    1,068,740Less: accumulated depreciation and amortization
    
    
    605,926
    
    
    
    62,670
    
    
    
    
    
    
    
    668,596Property, plant and equipment, net
    
    
    356,588
    
    
    
    43,556
    
    
    
    
    
    
    
    400,144Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,826
    
    
    
    
    
    
    
    
    
    
    
    21,826Debt issuance costs
    
    
    
    
    
    
    14,294
    
    
    
    
    
    
    
    14,294Deferred charges and other assets
    
    
    1,584
    
    
    
    7,743
    
    
    
    
    
    
    
    9,327Total assets
    
    $
    430,369
    
    
    $
    494,467
    
    
    $
    (324,852
    )
    
    $
    599,984Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    571
    
    
    $
    (178
    )
    
    $
    
    
    
    $
    393Accounts payable-affiliates
    
    
    2,618
    
    
    
    68
    
    
    
    
    
    
    
    2,686Accounts payable, accrued and other current liabilities
    
    
    15,182
    
    
    
    28,596
    
    
    
    5,041
    
    
    
    48,819Advance billings and customer deposits
    
    
    8,887
    
    
    
    6
    
    
    
    
    
    
    
    8,893Total current liabilities
    
    
    27,258
    
    
    
    28,492
    
    
    
    5,041
    
    
    
    60,791Long-term obligations, net of current portion
    
    
    3,861
    
    
    
    453,460
    
    
    
    
    
    
    
    457,321Deferred income taxes
    
    
    310
    
    
    
    (310
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    74,089
    
    
    
    5,737
    
    
    
    (5,042
    )
    
    
    74,784Commitments and contingenciesStockholders equity:Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    313,751
    
    
    
    (491,240
    )
    
    
    313,751Retained earnings (accumulated deficit)
    
    
    (166,391
    )
    
    
    (304,589
    )
    
    
    166,391
    
    
    
    (304,589
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (2,074
    )
    
    
    
    
    
    
    (2,074
    )Total stockholders equity
    
    
    324,851
    
    
    
    7,088
    
    
    
    (324,851
    )
    
    
    7,088Total liabilities and stockholders equity
    
    $
    430,369
    
    
    $
    494,467
    
    
    $
    (324,852
    )
    
    $
    599,984
 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 (Continued) Condensed Consolidating Balance Sheet
December 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    99
    
    
    $
    85,761
    
    
    $
    
    
    
    $
    85,860Restricted cash
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    4,690Accounts receivable-trade, net
    
    
    15,397
    
    
    
    24,857
    
    
    
    (841
    )
    
    
    39,413Accounts receivable-affiliates
    
    
    12,490
    
    
    
    (13,578
    )
    
    
    
    
    
    
    (1,088
    )Materials and supplies
    
    
    6,623
    
    
    
    
    
    
    
    
    
    
    
    6,623Prepayments and other current assets
    
    
    1,493
    
    
    
    2,231
    
    
    
    
    
    
    
    3,724Total current assets
    
    
    36,102
    
    
    
    103,961
    
    
    
    (841
    )
    
    
    139,222Investments
    
    
    10
    
    
    
    360,418
    
    
    
    (360,418
    )
    
    
    10Property, plant and equipment
    
    
    957,589
    
    
    
    104,178
    
    
    
    
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    590,471
    
    
    
    58,984
    
    
    
    
    
    
    
    649,455Property, plant and equipment, net
    
    
    367,118
    
    
    
    45,194
    
    
    
    
    
    
    
    412,312Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    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 Stockholders EquityCurrent liabilities:Current portion of long-term obligations
    
    $
    548
    
    
    $
    1,750
    
    
    $
    
    
    
    $
    2,298Accounts payable-affiliates
    
    
    2,964
    
    
    
    1,009
    
    
    
    
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    14,705
    
    
    
    40,784
    
    
    
    (841
    )
    
    
    54,648Advance billings and customer deposits
    
    
    8,942
    
    
    
    6
    
    
    
    
    
    
    
    8,948Total current liabilities
    
    
    27,159
    
    
    
    43,549
    
    
    
    (841
    )
    
    
    69,867Long-term obligations, net of current portion
    
    
    4,114
    
    
    
    519,477
    
    
    
    
    
    
    
    523,591Deferred income taxes
    
    
    1,345
    
    
    
    (1,345
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    72,240
    
    
    
    5,676
    
    
    
    
    
    
    
    77,916Commitments and contingenciesStockholders equity:Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    245,585
    
    
    
    (491,240
    )
    
    
    245,585Retained earnings (accumulated deficit)
    
    
    (169,227
    )
    
    
    (276,389
    )
    
    
    169,227
    
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (4,531
    )
    
    
    
    
    
    
    (4,531
    )Total stockholders equity
    
    
    322,015
    
    
    
    (35,335
    )
    
    
    (322,015
    )
    
    
    (35,335
    )Total liabilities and stockholders equity
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039
 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 Statement of Operations
Three Months Ended March 31, 2005 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    51,566
    
    
    $
    5,636
    
    
    $
    (5,637
    )
    
    $
    51,565Wireless
    
    
    17,066
    
    
    
    
    
    
    
    (10
    )
    
    
    17,056Internet
    
    
    5,125
    
    
    
    
    
    
    
    (64
    )
    
    
    5,061Interexchange
    
    
    4,430
    
    
    
    
    
    
    
    (704
    )
    
    
    3,726Total operating revenue
    
    
    78,187
    
    
    
    5,636
    
    
    
    (6,415
    )
    
    
    77,408Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    35,035
    
    
    
    410
    
    
    
    (4,922
    )
    
    
    30,523Wireless (exclusive of depreciation and amortization)
    
    
    10,774
    
    
    
    
    
    
    
    (1,192
    )
    
    
    9,582Internet (exclusive of depreciation and amortization)
    
    
    5,474
    
    
    
    
    
    
    
    (237
    )
    
    
    5,237Interexchange (exclusive of depreciation and amortization)
    
    
    4,464
    
    
    
    
    
    
    
    (64
    )
    
    
    4,400Depreciation and amortization
    
    
    16,727
    
    
    
    3,686
    
    
    
    
    
    
    
    20,413Gain on disposal of assets, net
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    (68
    )Total operating expense
    
    
    72,406
    
    
    
    4,096
    
    
    
    (6,415
    )
    
    
    70,087Operating income
    
    
    5,781
    
    
    
    1,540
    
    
    
    
    
    
    
    7,321Other income (expense):Interest expense
    
    
    (117
    )
    
    
    (9,649
    )
    
    
    
    
    
    
    (9,766
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (26,204
    )
    
    
    
    
    
    
    (26,204
    )Interest income
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    494Other
    
    
    4
    
    
    
    2,787
    
    
    
    (2,836
    )
    
    
    (45
    )Total other income (expense)
    
    
    (113
    )
    
    
    (32,572
    )
    
    
    (2,836
    )
    
    
    (35,521
    )Income (loss) before income taxes
    
    
    5,668
    
    
    
    (31,032
    )
    
    
    (2,836
    )
    
    
    (28,200
    )Income tax expense (benefit)
    
    
    (2,832
    )
    
    
    2,832
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,836
    
    
    $
    (28,200
    )
    
    $
    (2,836
    )
    
    $
    (28,200
    )
 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 March 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    55,822
    
    
    $
    5,799
    
    
    $
    (5,789
    )
    
    $
    55,832Wireless
    
    
    11,613
    
    
    
    
    
    
    
    (12
    )
    
    
    11,601Internet
    
    
    4,613
    
    
    
    
    
    
    
    
    
    
    
    4,613Interexchange
    
    
    3,858
    
    
    
    
    
    
    
    (449
    )
    
    
    3,409Total operating revenue
    
    
    75,906
    
    
    
    5,799
    
    
    
    (6,250
    )
    
    
    75,455Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    36,484
    
    
    
    1,134
    
    
    
    (5,044
    )
    
    
    32,574Wireless (exclusive of depreciation and amortization)
    
    
    8,825
    
    
    
    
    
    
    
    (897
    )
    
    
    7,928Internet (exclusive of depreciation and amortization)
    
    
    7,752
    
    
    
    
    
    
    
    (246
    )
    
    
    7,506Interexchange (exclusive of depreciation and amortization)
    
    
    5,079
    
    
    
    
    
    
    
    (63
    )
    
    
    5,016Depreciation and amortization
    
    
    15,653
    
    
    
    3,453
    
    
    
    
    
    
    
    19,106Loss on disposal of assets, net
    
    
    197
    
    
    
    30
    
    
    
    
    
    
    
    227Total operating expense
    
    
    73,990
    
    
    
    4,617
    
    
    
    (6,250
    )
    
    
    72,357Operating income
    
    
    1,916
    
    
    
    1,182
    
    
    
    
    
    
    
    3,098Other income (expense):Interest expense
    
    
    (140
    )
    
    
    (11,263
    )
    
    
    
    
    
    
    (11,403
    )Interest income
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    242Other
    
    
    4
    
    
    
    (1,248
    )
    
    
    1,187
    
    
    
    (57
    )Total other income (expense)
    
    
    (136
    )
    
    
    (12,269
    )
    
    
    1,187
    
    
    
    (11,218
    )Income (loss) before income taxes
    
    
    1,780
    
    
    
    (11,087
    )
    
    
    1,187
    
    
    
    (8,120
    )Income tax expense (benefit)
    
    
    (2,967
    )
    
    
    2,967
    
    
    
    
    
    
    
    Net loss
    
    $
    (1,187
    )
    
    $
    (8,120
    )
    
    $
    1,187
    
    
    $
    (8,120
    )
 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 Cash Flows
Three Months Ended March 31, 2005 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    5,347
    
    
    $
    (10,547
    )
    
    $
    
    
    
    
    (5,200
    )Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (5,134
    )
    
    
    (2,048
    )
    
    
    
    
    
    
    (7,182
    )Net cash used by investing activities
    
    
    (5,134
    )
    
    
    (2,048
    )
    
    
    
    
    
    
    (7,182
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (230
    )
    
    
    (404,927
    )
    
    
    
    
    
    
    (405,157
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    335,000
    
    
    
    
    
    
    
    335,000Debt issuance costs
    
    
    
    
    
    
    (10,637
    )
    
    
    
    
    
    
    (10,637
    )Contribution from Parent
    
    
    
    
    
    
    76,461
    
    
    
    
    
    
    
    76,461Dividends
    
    
    
    
    
    
    (5,679
    )
    
    
    
    
    
    
    (5,679
    )Net cash provided (used) by financing
activities
    
    
    (230
    )
    
    
    (9,782
    )
    
    
    
    
    
    
    (10,012
    )Decrease in cash and cash equivalents
    
    
    (17
    )
    
    
    (22,377
    )
    
    
    
    
    
    
    (22,394
    )Cash and cash equivalents, beginning of the period
    
    
    99
    
    
    
    85,761
    
    
    
    
    
    
    
    85,860Cash and cash equivalents, end of the period
    
    $
    82
    
    
    $
    63,384
    
    
    $
    
    
    
    $
    63,466Supplemental Cash Flow Data:Interest paid
    
    $
    152
    
    
    $
    9,990
    
    
    $
    
    
    
    $
    10,142Supplemental Non cash Transactions:Interest rate swap
    
    $
    
    
    
    $
    2,457
    
    
    $
    
    
    
    $
    2,457Dividend declared, but not paid
    
    
    
    
    
    
    (8,140
    )
    
    
    
    
    
    
    (8,140
    )
 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 Cash Flows
Three Months Ended March 31, 2004 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    9,605
    
    
    $
    (3,877
    )
    
    $
    
    
    
    $
    5,728Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (9,335
    )
    
    
    (1,021
    )
    
    
    
    
    
    
    (10,356
    )Net cash used by investing activities
    
    
    (9,335
    )
    
    
    (1,021
    )
    
    
    
    
    
    
    (10,356
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (257
    )
    
    
    (571
    )
    
    
    
    
    
    
    (828
    )Dividends
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    (63
    )Net cash used by financing activities
    
    
    (257
    )
    
    
    (634
    )
    
    
    
    
    
    
    (891
    )Increase (decrease) in cash and cash equivalents
    
    
    13
    
    
    
    (5,532
    )
    
    
    
    
    
    
    (5,519
    )Cash and cash equivalents, beginning of the period
    
    
    139
    
    
    
    97,659
    
    
    
    
    
    
    
    97,798Cash and cash equivalents, end of the period
    
    $
    152
    
    
    $
    92,127
    
    
    $
    
    
    
    $
    92,279Supplemental Cash Flow Data:Interest paid
    
    $
    180
    
    
    $
    11,690
    
    
    $
    
    
    
    $
    11,870Income taxes paid, net of refund
    
    
    1,120
    
    
    
    
    
    
    
    
    
    
    
    1,120
 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) 9. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business and has recorded litigation reserves of $2,824 at March 31, 2005
against certain current claims and legal actions. The Company believes that the disposition of
these matters will not have a material adverse effect on the Companys consolidated financial
position, results of operations or cash flows. On July 15, 2002, the Company fulfilled a commitment to Crest Communications, LLC (Crest) to
provide a loan for the aggregate principal amount of $15,000 in return for certain consideration.
The significant provisions of this agreement are: (i) purchase commitments by the Company for
capacity in 2005 and 2007, the final price and quantity of which are subject to future events, but
may exceed $20,000, (ii) Crests restoration of the Companys traffic carried on another cable
system, and (iii) specific interconnection arrangements between the Company and Crest, should the
Company exercise its option to purchase certain network assets from Crest. Under its 2002
agreement with Crest, the Company was granted an option to exchange its $15,000 note for the Alaska
assets owned by Crest. The value of this note was reassessed and written down to $0 with a charge
taken in 2003. On April 19, 2005, the Company provided Crest with notice that it is exercising its option to
acquire certain of Crests Alaska assets. The assets consist of significant fiber optic transport
facilities in Alaska between Whittier and Anchorage, and between Anchorage and Fairbanks. No
additional financial consideration is due to Crest in connection with this exercise and the Company
is reviewing the accounting treatment of this transaction. 19




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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 This Form 10-Q and future filings by Alaska Communications Systems Holdings, Inc. and its
consolidated subsidiaries (we, our, us the Company, and ACS Holdings) on Forms 10-K, 10-Q
and 8-K and the documents incorporated therein by reference include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these provisions. All
statements other than statements of historical fact are forward-looking statements for purposes
of federal and state securities laws, including statements about anticipated future operating and
financial performance, financial position and liquidity, growth opportunities and growth rates,
pricing plans, acquisition and divestiture opportunities, business prospects, strategic
alternatives, business strategies, regulatory and competitive outlook, investment and expenditure
plans, financing needs and availability and other similar forecasts and statements of expectation
and statements of assumptions underlying any of the foregoing. Words such as aims, anticipates,
believes, could, estimates, expects, hopes, intends, may, plans, projects,
seeks, should and variations of these words and similar expressions are intended to identify
these forward-looking statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our historical experience
and our present expectations or projections. Forward-looking statements by us are based on
estimates, projections, beliefs and assumptions of management and are not guarantees of future
performance. Such forward-looking statements may be contained in this Form 10-Q and the documents
incorporated by reference. Actual future performance, outcomes and results may differ materially
from those expressed in forward-looking statements made by us as a result of a number of important
factors. Such important factors may be included, without limitation, in our Form 10-K under
Business and Managements discussion and analysis of financial condition and results of
operations and Risk Factors in Exhibit 99.2 to the ACS Group Form 8-K filed on March 7, 2005.
Examples of these factors include (without limitation):  
    rapid technological developments and changes in the telecommunications industries;
    our competitive environment;
    ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996, or the Telecommunications Act, and
other similar federal and state legislation and the federal and state rules and
regulations enacted pursuant to that legislation;
    changes in revenue from Universal Service Funds;
    regulatory limitations on our ability to change our pricing for communications services;
    the possible future unavailability of Statement of Financial Accounting
Standards, or SFAS, No. 71, Accounting for the Effects of Certain Types of
Regulation, to our wireline subsidiaries;
    our ability to bundle our products and services;
    changes in the demand for our products and services;
    changes in general industry and market conditions and growth rates;
    changes in interest rates or other general national, regional or local economic conditions;
    governmental and public policy changes;
    our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholder;
    the continued availability of financing in the amounts, at the terms, and subject
to the conditions necessary to support our future business;
    the success of any future acquisitions; and
    changes in accounting policies or practices adopted voluntarily or as required by
accounting principles generally accepted in the United States. In light of these risks, uncertainties and assumptions, you should not place undue reliance on
any forward-looking statements. Additional risks that we may currently deem immaterial or that are
not presently known to us could also cause the forward-looking events discussed in this Form 10-Q
not to occur. Except as otherwise required by applicable securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, changed circumstances or any other reason after the date of this Form
10-Q. 20




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##### Table of Contents



Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree with any statement
or report issued by an analyst irrespective of the content of the statement or report. To the
extent that reports issued by securities analysts contain any projections, forecasts or opinions,
such reports are not our responsibility. Introduction The following discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes and the other financial information included elsewhere in
this Form 10-Q. Alaska Communications Systems Holdings, Inc. We generate revenue primarily through:  
    the provision of local telephone services, including:  
    basic local service to retail customers within our service areas;
    wholesale service to Competitive Local Exchange Carriers (CLECs);
    network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls;
    enhanced services;
    ancillary services, such as billing and collection; and
    universal service payments;  
    the provision of wireless services;
    the provision of Internet services; and
    the provision of interexchange network long-distance and data services. In addition, we provide video entertainment services through our partnership with the
satellite operator, DISH Network. Local Telephone We are the largest Local Exchange Carrier (LEC) in Alaska and the 13th
largest in the United States. Basic local service is generally provided at a flat monthly rate and
allows the user to place unlimited calls within a defined local calling area. Access revenues are
generated, in part, by billing interexchange carriers for access to the LECs local network and its
customers and, in part, by billing the local customers themselves. Universal service revenues are a
subsidy paid to rural LECs to support the high cost of providing service in rural markets. Changes in revenue are largely attributable to changes in the number of access lines, local
service rates and minutes of use. Other factors can also impact revenue, including:  
    intrastate and interstate revenue settlement methodologies;
    authorized rates of return for regulated services;
    whether an access line is used by a business or consumer subscriber;
    intrastate and interstate calling patterns;
    customers selection of various local rate plan options;
    selection of enhanced calling services, such as voice mail; and
    other subscriber usage characteristics. LECs have three basic tiers of customers:  
    consumer and business customers located in our local service areas that pay for
local phone service and a portion of network access;
    interexchange carriers that pay for access to long distance calling customers
located within our local service areas; and
    CLECs that pay for wholesale access to our network in order to provide
competitive local service on either a wholesale or Unbundled Network Element (UNE)
basis as prescribed under the Telecommunications Act. 21




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##### Table of Contents



LECs provide access service to numerous interexchange carriers and may also bill and collect
long distance charges from interexchange carrier customers on behalf of the interexchange carriers.
The amount of access charge revenue associated with a particular interexchange carrier varies
depending on long distance calling patterns and the relative market share of each long distance
carrier. Our local service rates for end users are authorized by the Regulatory Commission of Alaska.
Authorized rates are set by the Federal Communications Commission, or FCC, and the RCA for
interstate and intrastate access charges, respectively, and may change from time to time. Wireless- We are the second largest statewide provider of wireless services in Alaska,
currently serving over 102,000 subscribers. Our wireless network footprint covers over 482,000
residents, including all major population centers and highway and ferry corridors. We currently
operate a TDMA digital network in substantially all of our service areas, and are rolling out a new
generation of digital network known as CDMA 1xRTT, which provides customers with improved voice
call quality, average mobile data speeds of 70-80kbps and provides a platform for the launch of
enhanced services. We began offering CDMA 1xRTT services in several of our service areas in May
2004. In June 2004 we began offering wireless broadband service based on EV-DO which enables high
speed data connectivity with speeds that burst up to 2mbps to our wireless markets in Anchorage,
Fairbanks, and Juneau. We estimate that the new CDMA service currently covers 73% of the wireless
footprint of 482,000 residents. Internet- We are the second largest provider of Internet access services in Alaska with over
49,000 customers. We offer dial-up and dedicated DSL Internet access to our customers. We are a
single source provider of advanced IP based private networks in Alaska. Interexchange-We provide switched and dedicated long distance services to over 48,000
customers in Alaska. The traffic from these customers is carried over our owned or leased
facilities. Video Entertainment We provide video entertainment services on a resale basis through our
partnership with the satellite provider, DISH Network. The current agreement with the provider
became effective in August 2003 and will either be renegotiated or will terminate in December 2005. Critical Accounting Policies and Accounting Estimates Management is responsible for the financial statements herein and has evaluated the accounting
policies used in their preparation. Management believes these policies to be reasonable and
appropriate. Our significant accounting policies are described in Note 1, Description of Company
and Summary of Significant Accounting Policies, to the Alaska Communications Systems Holdings,
Inc. Consolidated Financial Statements. The following discussion identifies those accounting
policies that management believes are critical in the preparation of our financial statements, the
judgments and uncertainties affecting the application of those policies, and the possibility that
materially different amounts would be reported under different conditions or using different
assumptions. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of commitments and
contingencies at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the significant estimates affecting the financial
statements are those related to the realizable value of accounts receivable, long-lived assets (in
particular, those assets accounted for under SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation), income taxes, network access revenue reserves and litigation reserves. Actual
results may differ from those estimates. We use an allowance method to estimate the net realizable value of accounts receivable. As of
March 31, 2005, the allowance for doubtful accounts receivable was $4.9 million. Actual collection
results could vary from this estimate. Access revenue is recognized when earned. We participate in access revenue pools with other
telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the
RCA within the intrastate jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These estimates are derived
from interim financial statements, available separations studies and the most recent information
available 22




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##### Table of Contents



about achieved rates of return. These estimates are subject to adjustment in future accounting
periods as additional operational information becomes available. To the extent that disputes arise
over revenue settlements, our policy is to defer revenue collected until settlement methodologies
are resolved and finalized. At March 31, 2005, we had recorded liabilities of $16.9 million related
to our estimate of refundable access revenue. Actual results could vary from this estimate. We utilize the liability method of accounting for income taxes. Under the liability method,
deferred taxes reflect the temporary differences between the financial and tax bases of assets and
liabilities using the enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it
is more likely than not that such deferred tax assets will not be realized. The cumulative
valuation allowance against deferred tax assets was $120.6 million as of March 31, 2005, which
represents 100% of all deferred tax assets. Our local telephone exchange operations account for costs in accordance with the accounting
principles for regulated enterprises prescribed by SFAS No. 71. This accounting recognizes the
economic effects of rate regulation by recording cost and a return on investment as such amounts
are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71,
plant and equipment is depreciated over lives approved by regulators and certain costs and
obligations are deferred based upon approvals received from regulators to permit recovery of such
amounts in future years. Effective January 1, 2003, we implemented higher depreciation rates for our regulated
telephone plant for the interstate jurisdiction which management believes approximate the
economically useful lives of the underlying plant. As a result, we have recorded a regulatory asset
under SFAS No. 71 of $39.3 million as of March 31, 2005 related to depreciation of the regulated
telephone plant allocable to its intrastate and local jurisdictions. We have also deferred as a
regulatory asset $0.9 million of costs incurred in connection with regulatory rate making
proceedings, which is being amortized over three years starting in 2003. The balance of this
regulatory asset was $0.2 million at March 31, 2005. If we were not following SFAS No. 71, we would
have recorded additional cumulative depreciation expense in the three months ended March 31, 2005
of $4.3 million for the intrastate and local jurisdictions and the deferred costs incurred in
connection with regulatory rate making proceedings would have been charged to expense as incurred.
We also have a regulatory liability of $55.3 million at March 31, 2005 related to accumulated
removal costs. If we were not following SFAS No. 71, we would have followed SFAS No. 143 for asset
retirement obligations. Non-regulated revenues and costs incurred by the local telephone exchange
operations and our non-regulated operations are not accounted for under SFAS No. 71 principles. Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. In
accordance with the guidelines of this accounting principle, goodwill and indefinite-lived
intangible assets are no longer amortized but will be assessed for impairment on at least an annual
basis. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level
upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step
requires us to determine the fair value of each reporting unit and compare it to the carrying
value, including goodwill, of such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds
its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is
then measured in the second step. We determined the fair value of each reporting unit for purposes
of this test primarily by using a discounted cash flow valuation technique. Significant estimates
used in the valuation include estimates of future cash flows, both future short-term and long-term
growth rates, and estimated cost of capital for purposes of arriving at a discount factor. At March
31, 2005, we had recorded goodwill of $38.4 million applicable to our local telephone and wireless
segments and intangible assets of $21.8 million related primarily to our wireless segment. We are involved in various claims, legal actions and regulatory proceedings arising in the
ordinary course of business, and have recorded litigation reserves of $2.8 million against certain
claims and legal actions as of March 31, 2005. We believe that the disposition of these matters
will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows beyond the amounts already recorded. Estimates involved in developing
these litigation reserves could change as these claims, legal actions and regulatory proceedings
are resolved. 23




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##### Table of Contents



RESULTS OF OPERATIONS All amounts are discussed at the consolidated level after the elimination of intercompany
revenue and expense. Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Operating Revenue Operating revenue increased $2.0 million, or 2.6%, for the three months ended March 31, 2005
compared to the three months ended March 31, 2004. Wireless, Internet and interexchange revenue
increased compared to the corresponding period of 2004, while local telephone revenue decreased
compared to the corresponding period of 2004. Local Telephone.Local telephone revenue, which consists of local network service, network
access and deregulated and other revenue, decreased $4.3 million, or 7.6%, for the three months
ended March 31, 2005 compared to the same period in 2004. The following table summarizes the
Companys consolidated local telephone revenue by category: Three Months EndedMarch 31,2005
    
    
    2004(in thousands)Local telephone revenue:Local network service
    
    $
    22,218
    
    
    $
    22,753Network access
    
    
    23,350
    
    
    
    27,695Deregulated and other
    
    
    5,997
    
    
    
    5,384Total local telephone revenue
    
    $
    51,565
    
    
    $
    55,832
 The following table summarizes our local telephone access lines: As of March 31,2005
    
    
    2004Local telephone access lines:Retail
    
    
    204,458
    
    
    
    213,784Wholesale
    
    
    15,897
    
    
    
    20,068Unbundled network elements  loop (UNE  L)
    
    
    62,263
    
    
    
    69,624Unbundled network elements  platform (UNE  P)
    
    
    6,551
    
    
    
    5,178Total local telephone access lines
    
    
    289,169
    
    
    
    308,654
 Local network service revenue decreased $0.5 million or 2.4% for the three months ended March
31, 2005, compared to the three months ended March 31, 2004, while access lines in service
decreased 6.3% to 289,169. The decrease in revenue primarily reflects the net effect of access line
losses representing a revenue reduction of approximately $1.2 million offset by increases in UNE
rates representing a revenue increase of approximately $0.7 million. In November 2004 we received
a final order from the RCA with respect to UNE-L rates for Anchorage, retroactive to June 2004,
increasing the UNE-L rate from $14.92 to $18.64, and on January 1, 2005, rates increased for UNE-P
and UNE-L in Fairbanks and Juneau from $19.19 to $23.00 and from $16.71 to $18.00, respectively. Network access revenue decreased $4.3 million, or 15.7%, for the three months ended March 31,
2005, compared to the same period in 2004. Network access revenue is based on a regulated return
on rate base and recovery of allowable expenses associated with the origination and termination of
toll calls for our retail and resale customers. The decrease was primarily attributable to higher
than typical settlement adjustments to the prior year interstate access and universal service fund
studies. Management expects that network access revenue will decline as a component of local
telephone revenue for the foreseeable future. Deregulated and other revenue consists principally of billing and collection services, space
and power rents, deregulated equipment sales (CPE), paystation revenue, regulated directory
listing revenue, and other miscellaneous telephone revenue. Deregulated revenue increased $0.6
million, or 11.4%, for the three months ended March 31, 2005, compared to the three months ended
March 31, 2004 as the result of higher CPE sales. Consistent with the U.S. telecommunications industry trend, we experienced a loss of local
telephone access lines as customers migrated to broadband Internet services reducing demand for
second lines, migrated to cable telephony, or replaced landline service with wireless service. Our
primary competitor has begun to deploy cable telephony and began switching its UNE-L provisioned
subscribers over to its own network in the Anchorage market during 2004. Wireless.Wireless revenue increased $5.5 million, or 47.2%, to $17.1 million for the three
months ended March 31, 2005 compared to $11.6 million for the three months ended March 31, 2004.
This increase is due primarily to the following:  
    growth in average subscribers of 16% for the three months ended March 31, 2005 over
the prior year period;
    an increase in quarterly average revenue per unit, or ARPU, of 20.7% to $48.65 for
the three months ended March 31, 2005, from $40.30 for the three months ended March 31,
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 $3.37 to cellular ARPU;
    higher gross customer adds in the three months ended March 31, 2005 resulting in
$1.4 million of handset revenue compared to $0.7 million for the three months ended
March 31, 2004; and 24




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
    higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $0.7 million from $0.2 million for the three
months ended March 31, 2005 and 2004, respectively. Internet.Internet revenue increased $0.4 million, or 9.7%, for the three months ended March
31, 2005 compared to the three months ended March 31, 2004, primarily as a result of growth in DSL
subscribers of 39.5% to 27,115 at March 31, 2005 from 19,433 at March 31, 2004. Interexchange.Interexchange revenue increased $0.3 million, or 9.3%, for the three months
ended March 31, 2005, compared to the three months ended March 31, 2004. Long distance subscribers
increased 15.4% to 48,542 at March 31, 2005, from 42,053 at March 31, 2004 and quarterly minutes of
use increased to 36.6 million for the three months ended March 31, 2005, from 32.1 million for the
three months ended March 31, 2004. Operating Expense Operating expense decreased $2.3 million, or 3.1%, to $70.1 million for the three months ended
March 31, 2005, from $72.4 million for the three months ended March 31, 2004. Depreciation and
amortization associated with the operation of each of our segments has been included in total
depreciation and amortization. Local Telephone.The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and property and other
operating tax expense.Local telephone expense decreased $2.1 million to $30.5 million for the
three months ended March 31, 2005 from $32.6 million for the three months ended March 31, 2004.
The decrease in local telephone expense was substantially attributable to a $2.6 million decline in
consulting expense related to marketing, process improvement and strategic sourcing initiatives
incurred in the first quarter of 2004, offset in part, by a $0.5 million increase in cost of goods
sold in 2005. Wireless.Wireless expense increased $1.7 million, or 20.9%, for the three months ended March
31, 2005 compared to the three months ended March 31, 2004. The increase in subscribers and the
continued rollout of our new CDMA network resulted in an increase of $0.6 million in handset,
accessory and data content expense, and $0.2 million in incremental roaming expense. We also
increased our advertising $0.2 million to promote our new network build out and premier product
line and outsourced our billing and provisioning function resulting in $0.5 million of additional
expense. Internet.Internet expense decreased by $2.3 million, or 30.2%, to $5.2 million in 2005, from
$7.5 million in 2004. The decrease was due to a $0.7 million decline in internal labor which was
primarily the result of severance expense
in the first three month of 2004, $0.8 million in ISP access and circuit expense reductions
resulting from a decrease in DSL access loop costs and network grooming, and $0.3 million in IT
outside service cost reductions. Interexchange.Interexchange expenses decreased by $0.6 million, or 12.3% to $4.4 million for
the three months ended March 31, 2005 compared to $5.0 million for the three months ended March 31,
2004. The decline is attributable to network grooming efforts and favorable renegotiated carrier
contracts. Depreciation and amortization.Depreciation and amortization expense increased $1.3 million,
or 6.8%, for the three months ended March 31, 2005 compared to the three months ended March 31,
2004. Approximately $1.0 million of the increase is due to additional depreciation associated with
the build out of our new CDMA network and additional depreciation due to lowering the expected
remaining life of our TDMA network assets. Other income and expense.Interest expense increased by $24.6 million to $36.0 million for
the three months ended March 31, 2005 compared to $11.4 million for the three months ended March
31, 2004. The increase included $26.2 million of charges associated with our accretive debt
restructuring, comprised of $12.8 million of tender premiums and $13.4 million for the write off of
unamortized debt issuance costs and settlement of original issue discounts. Interest income and
other increased $0.3 million in the three months ended March 31, 2005 from the same period last
year. Income Taxes We have fully reserved the income tax benefit resulting from the consolidated losses we have
incurred since May 14, 1999, the date of the acquisition of substantially all of our operations. 25




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Net loss The change increase in net loss is primarily a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES Sources We have satisfied our cash requirements in the first quarter of 2005 for operations, capital
expenditures and debt service primarily through internally generated funds, the sale of stock and
debt financing. For the three months ended March 31, 2005, our net cash flows used by operating
activities were $5.2 million. At March 31, 2005, we had approximately $55.2 million in net working
capital, including approximately $63.5 million represented by cash and cash equivalents and $4.7
million by restricted cash. As of March 31, 2005, we had $45.0 million of remaining capacity under
our revolving credit facility, representing 100% of available capacity. In February and March 2005, we completed refinancing transactions whereby we entered into a
new $380.0 million senior secured credit facility, the 2005 senior credit facility, and used the
$335.0 million of term loan borrowings under that facility, together with the $76.3 million in net
proceeds of a simultaneous offering of ACS Group common stock and cash on hand to:  
    repay in full and redeem the $198.0 of outstanding principal under our 2003 senior
credit facility, together with interest accrued thereon;
    repurchase $59.3 million of outstanding principal of our senior unsecured notes,
together with tender premiums and interest accrued thereon;
    repurchase $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. These transactions resulted in total long-term obligations outstanding, gross of original
issue discount, of $461.1 million as of March 31, 2005, consisting primarily of the $380.0 million
2005 senior credit facility with a drawn term loan of $335.0 million and an undrawn revolving
credit facility of $45.0 million, and $118.3 million remaining aggregate principal amount
outstanding of senior unsecured notes. The $335.0 million term loan under the 2005 senior credit
facility was drawn on February 1, 2005 and generally bears interest at an annual rate of LIBOR plus
2.00%, with a term of seven years from the date of closing and no scheduled principal payments
before maturity. The $45.0 million undrawn revolving credit facility, to
the extent drawn in the future, will bear interest at an annual rate of LIBOR plus 2.00% and have a
term of six years from the date of closing. To the extent the $45.0 million revolving credit
facility under the 2005 senior credit facility remains undrawn, we will pay an annual commitment
fee of 0.375% of the undrawn principal amount over its term. We also entered into floating-to-fixed
interest rate swaps with total notional amounts of approximately $135.0 million and $85.0 million,
respectively, which swap the floating interest rate on a portion of the term loan borrowings under
the 2005 senior credit facility for five years at a fixed rate of 6.13% and 6.50% per year,
respectively, inclusive of the 2.00% premium over LIBOR. The swaps are accounted for as cash flow
hedges. From time to time we consider making purchases of our outstanding debt securities on the open
market or in negotiated transactions. The timing and amount of such purchases, if any, will depend
upon cash needs and market conditions, among other things. Interest on the senior unsecured notes
is payable semiannually. The 2005 senior secured credit facility and the senior unsecured notes
contain a number of restrictive covenants and events of default, including covenants limiting
capital expenditures, incurrence of debt, and payment of dividends. The 2005 senior credit
facility also requires that we achieve certain financial ratios quarterly. Uses Our networks require the timely maintenance of plant and infrastructure. Our historical
capital expenditures have been significant. The construction and geographic expansion of our
wireless network has required significant capital. The implementation of our interexchange network
and data services strategy is also capital intensive. Capital expenditures for the three months
ended March 31, 2005 were $7.2 million, of which $0.6 million was expended on CDMA 1xRTT build out
and $1.4 million was used to upgrade our IT infrastructure including customer service applications.
We intend to fund future 26




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capital expenditures with cash on hand, through internally generated cash
flows, and if necessary, through borrowings under our revolving credit facility. At March 31, 2005,
we had allocated $49.5 million of our current unrestricted cash balance of $63.5 million to fund
the completion over the next two years of our CDMA 1xRTT and EV-DO build out and to secure fiber
capacity within Alaska and to the lower 48 states in the United States under the terms of our
agreement with Crest. Our capital requirements may change due to impacts of regulatory decisions that affect our
ability to recover our investments, changes in technology, the effects of competition, changes in
our business strategy, and our decision to pursue specific acquisition opportunities, among other
things. On July 15, 2002, we fulfilled a commitment to Crest to provide a loan for the aggregate
principal amount of $15 million in return for certain consideration. We have an agreement that
enables us to purchase additional fiber optic capacity in future years from Crest, the expenditures
for which are expected to be significant and may exceed $20 million over the next two years. We
purchased additional capacity under this agreement for $5.6 million during 2004. While we have an
agreement with Crest, certain material terms of the agreement remain subject to continued
renegotiation. The significant provisions of this agreement are: (i) purchase commitments by us for
capacity in 2005 and 2006, the final price and quantity of which are subject to future events, (ii)
Crests restoration of our traffic carried on another cable system and (iii) specific
interconnection arrangements between us and Crest, should we exercise our option to purchase
certain network assets from Crest. We are currently renegotiating open elements of our agreement
with Crest. It is impossible to determine the ultimate outcome of these negotiations at this time.
The loan was written down to zero, its estimated fair value, during September 2003. See Note 9,
Commitments and Contingencies for further information. On October 28, 2004, ACS Group announced the adoption of a dividend policy by their board of
directors and declared their first quarterly dividend of $0.185 per share, paid on January 19, 2005
to holders of record on December 31, 2004. On March 21, 2005, the board of directors for ACS Group
declared a quarterly cash dividend of $0.20 per share, an increase over the prior quarterly cash
dividend of approximately 8%. The dividend was paid on April 19, 2005 to holders of record on
March 31, 2005. While ACS Group intends to continue to pay quarterly dividends, such payment is
subject to our future operating and financial performance, capital expenditures, working capital
requirements and other factors. Accordingly, the board of directors for ACS Group may modify or
revoke the dividend policy at any time. In January 2005, ACS Group issued 8.8 million shares of common stock in an equity offering
that closed on February 1, 2005 and, through the partial exercise by the underwriters of their
over-allotment option, an additional 1.1 million shares closed on March 2, 2005. As a result of
these issuances, ACS Group has 40.6 million shares outstanding as of March 31, 2005. The issuance
of the additional shares of ACS Group common stock will increase their aggregate annual
dividend payments by approximately $7.9 million to approximately $32.5 million annually, based on
the current ACS Group annual dividend policy of $0.80 per share. We believe that we will have sufficient working capital provided by operations and available
borrowing capacity under our revolving credit facility to service our debt, pay quarterly
dividends, and fund our operations, capital expenditures and other obligations over the next 12
months. Our ability to meet such obligations will be dependent upon our future financial
performance, which is, in turn, subject to future economic conditions and to financial, business,
regulatory and other factors, many of which are beyond our control. Outlook We expect that, overall, the demand for telecommunications services in Alaska will grow,
particularly as a result of:  
    increasing demand for wireless voice and data services following the launch of
our CDMA 1xRTT network;
    growth in demand for DSL and Internet access services due to higher business and
consumer bandwidth needs; and
    increasing demand for private network services by government and business on a
statewide basis on either a circuit switched or IP basis. We believe that we will be able to capitalize on this demand through our diverse service
offerings on our owned circuit switched and IP facilities, new sales and marketing initiatives
directed toward basic voice, enhanced and data services, 27




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and offering customers an integrated
bundle of telecommunication services including local telephone, wireless, Internet, long distance,
messaging and video entertainment. Consistent with the U.S. telecommunications industry, we continue to experience losses in
local telephone access lines as customers cancel second lines, replace wireline services with
wireless, and lines migrate to cable telephony. Our primary UNE customer has announced plans to
migrate most of its Anchorage area customers to its own cable telephony plant during the next three
years. Consequently, we anticipate that these trends will continue. There are currently a number of regulatory proceedings underway at the state and federal
levels that could have a significant impact on our operations. Regarding the wireless business,
the FCC granted ACSW certain waivers in an order adopted March 22, 2005 and released on April 1,
2005. Under this order, ACSW was granted additional time to meet two significant FCC requirements:
(1) that all new handset activations be location capable; and (2) that 95% of all subscribers have
location capable handsets. Under the FCCs order, ACSW will need to ensure that 100% of all new
handset activations are location capable in its Anchorage and Fairbanks markets, and remaining
markets, by May 30, 2005 and December 31, 2005, respectively, and it must further have
location-capable handsets deployed to 95% of all subscribers in its Anchorage and Fairbanks
markets, and remaining markets, by June 30, 2006 and January 31, 2007, respectively. We cannot
predict with certainty the impact of current or future regulatory developments on any of our
businesses. The telecommunications industry is extremely competitive, and we expect competition to
intensify in the future. As an ILEC, we face competition mainly from resellers, local providers who
lease our UNEs and from providers of local telephone services over separate facilities. Moreover,
while wireless telephone services have historically complemented traditional LEC services, we
anticipate that existing and emerging wireless technologies may increasingly compete with LEC
services. Similarly, local and interexchange service competition may come from cable television
providers and voice over IP providers. In wireless services, we currently compete with at least one
other wireless provider in each of our wireless service areas. In the highly competitive business
for Internet access services, we currently compete with a number of established online service
companies, interexchange carriers and cable companies. In the interexchange market, we believe we
currently have less than 5% of total revenue in Alaska and face competition from two major
interexchange providers. The telecommunications industry is subject to continuous technological change. We expect that
new technological developments in the future will generally serve to enhance our ability to provide
service to our customers. However, these developments may also increase competition or require us
to make significant capital investments to maintain our leadership position in Alaska. 28




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the first quarter of 2005, we completed refinancing transactions that significantly changed
our capital structure and changed our exposure to interest rate and other market risks  See Note
3, Long Term Obligations for further information. As of March 31, 2005, we had $118 million in outstanding senior unsecured notes, $335 million on
our 2005 senior credit facility and two floating-to-fixed interest rate swaps with total notional
amounts of $135,000 and $85,000, respectively. These on-balance sheet financial instruments, to
the extent they provide for variable rates of interest, expose us to interest rate risk, with the
primary interest rate risk exposure resulting from changes in LIBOR or the prime rate, which are
used to determine the interest rates that are applicable to borrowings under our 2005 senior credit
facility. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures We carried out an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (Exchange
Act) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report under the
supervision and with the participation of our management, including our Chief Executive Officer and
its Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and its Chief
Financial Officer concluded that our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed in
the reports that we file or submit under the Exchange Act, and are effective in ensuring that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure. Changes in internal controls There were no significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect its disclosure controls and procedures subsequent to the
date we carried out this evaluation. 29




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PART II OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. GCI filed a complaint against the Company and the RCA in the United States District Court,
District of Alaska, on January 6, 2005, alleging that the RCA erred in setting rates, terms, and
conditions for GCIs interconnection agreement with ACSA. The Company cannot predict the outcome
of this litigation. The Company intends to mount a vigorous defense of the RCAs decision. The Company is involved in various other claims, legal actions and regulatory proceedings
arising in the ordinary course of business.In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the Companys consolidated financial
position, results of operations or cash flows. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Working capital restrictions and other limitations upon the payment of dividends The 2005 senior secured credit facility and the senior unsecured notes contain a number
of restrictive covenants and events of default, including covenants limiting capital expenditures,
incurrence of debt, and the payment of dividends. The 2005 senior credit facility also requires
that we achieve certain financial ratios. See Note 3, Long term obligations for further
information. Also see Item 5, Market for registrants common equity and related stockholder matters 
Dividends. and Item 7, Managements discussion and analysis of financial condition and results of
operations  Liquidity and capital resources of the Alaska Communications Systems Holdings, Inc,
Form 10-K, for the year ended 2004, for further information. 30




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 
 ITEM 5. OTHER INFORMATION. On February 17, 2004 the Compensation and Personnel Committee of the Board of Directors
modified the form of Director compensation under the Alaska Communications Systems Group, Inc.,
1999 Non-Employee Director Stock Compensation Plan. At the time, Directors were required to
receive at least 50 percent of their annual retainer in the form of Company stock. Directors
retained the opportunity to be compensated up to 100 percent in Company stock and also retained the
opportunity to defer their compensation. On February 25, 2005, the Compensation and Personnel Committee of the Board of Directors
approved a cash incentive program for executives. The program provides for cash payments based on
the Company and individuals achieving certain targets. For 2005 the Companys target is based on
EBITDA. On April 11, 2005, the Compensation and Personnel Committee of the Board of Directors approved
an Equity Incentive Program comprising an annual performance program
for all non-represented employees and an
equity-based long term incentive program (LTIP) for executives within the scope of the Companys
existing 1999 Stock Incentive Plan. These programs provide
performance accelerated restricted stock vesting in five years with
accelerated vesting at three years if certain three-year cumulative
objectives that impact free cash flow are met. 
 ITEM 6. EXHIBITS (a)Exhibits: 10.19
    
    Alaska Communications Systems Group, Inc. 1999 Non-Employee Director Stock
Compensation Plan, 2004 and 2005 Terms of Distribution letter and Election Form.10.20
    
    Alaska Communications Systems Group, Inc. Executive Cash Incentive Program
Letter for 2005.10.21
    
    Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan, 2005 Terms
of Distribution letter.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.
 31




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized. Date: May 9, 2005
    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) 32