##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2005
 OR
 o

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to .
 Commission file number 333-82363
 ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
  Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
    
    91-1921377
(I.R.S. Employer
Identification No.)
 600 Telephone Avenue, Anchorage, Alaska 99503
 (907) 297-3000
 Not Applicable
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes þ      Noo
 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
 Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o      No þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
 Yes o      No o
 APPLICABLE ONLY TO CORPORATE ISSUERS:
 Indicate the number of shares outstanding of each of the issuers classes of common stock.
 None




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TABLE OF CONTENTS
 PageNumberPART I.
    
    Financial InformationItem 1.
    
    Financial Statements:Consolidated Balance Sheets (unaudited)
As of September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4.
    
    Controls and Procedures
    
    
    41PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    42Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3.
    
    Defaults upon Senior Securities
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    42Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42Signatures
    
    
    
    
    43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  
 2




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Balance Sheets
(Unaudited, In Thousands Except Per Share Amounts)
 September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    31,687
    
    
    $
    50,660Restricted cash
    
    
    4,490
    
    
    
    4,690Short-term investments
    
    
    19,325
    
    
    
    35,200Accounts receivable-trade, net of allowance of $5,612 and $4,869
    
    
    33,980
    
    
    
    38,325Materials and supplies
    
    
    7,865
    
    
    
    6,623Prepayments and other current assets
    
    
    5,497
    
    
    
    3,724Total current assets
    
    
    102,844
    
    
    
    139,222Property, plant and equipment
    
    
    1,101,601
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    705,412
    
    
    
    649,455Property, plant and equipment, net
    
    
    396,189
    
    
    
    412,312Goodwill
    
    
    38,403
    
    
    
    38,403Intangible assets, net
    
    
    21,734
    
    
    
    21,871Debt issuance costs, net
    
    
    12,600
    
    
    
    15,482Deferred charges and other assets
    
    
    8,895
    
    
    
    8,749Total assets
    
    $
    580,665
    
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    613
    
    
    $
    2,298Accounts payable-affiliate
    
    
    2,898
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    48,349
    
    
    
    54,648Advance billings and customer deposits
    
    
    9,680
    
    
    
    8,948Total current liabilities
    
    
    61,540
    
    
    
    69,867Long-term obligations, net of current portion
    
    
    456,762
    
    
    
    523,591Other deferred credits and long-term liabilities
    
    
    79,326
    
    
    
    77,916Commitments and contingenciesStockholders equity (deficit):Common stock, $.01 par value; 1,000 shares authorized, 2 shares issued and outstanding
    
    
    
    
    
    
    Contributed capital
    
    
    297,731
    
    
    
    245,585Accumulated deficit
    
    
    (313,094
    )
    
    
    (276,389
    )Accumulated other comprehensive loss
    
    
    (1,600
    )
    
    
    (4,531
    )Total stockholders equity (deficit)
    
    
    (16,963
    )
    
    
    (35,335
    )Total liabilities and stockholders equity (deficit)
    
    $
    580,665
    
    
    $
    636,039
 See Notes to Consolidated Financial Statements
 3




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited, In Thousands Except Per Share Amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Operating revenues:Local telephone
    
    $
    51,481
    
    
    $
    51,396
    
    
    $
    153,387
    
    
    $
    160,226Wireless
    
    
    24,260
    
    
    
    16,204
    
    
    
    62,670
    
    
    
    41,266Internet
    
    
    5,613
    
    
    
    5,295
    
    
    
    16,182
    
    
    
    15,013Interexchange
    
    
    4,347
    
    
    
    3,878
    
    
    
    12,095
    
    
    
    11,077Total operating revenues
    
    
    85,701
    
    
    
    76,773
    
    
    
    244,334
    
    
    
    227,582Operating expenses:Local telephone (exclusive of depreciation and amortization)
    
    
    32,857
    
    
    
    35,320
    
    
    
    94,508
    
    
    
    97,056Wireless (exclusive of depreciation and amortization)
    
    
    14,196
    
    
    
    10,970
    
    
    
    36,216
    
    
    
    27,229Internet (exclusive of depreciation and amortization)
    
    
    5,744
    
    
    
    7,291
    
    
    
    16,584
    
    
    
    21,204Interexchange (exclusive of depreciation and amortization)
    
    
    4,720
    
    
    
    5,637
    
    
    
    12,631
    
    
    
    15,511Depreciation and amortization
    
    
    20,955
    
    
    
    19,770
    
    
    
    62,060
    
    
    
    57,686Loss (gain) on disposal of assets, net
    
    
    
    
    
    
    2,600
    
    
    
    (68
    )
    
    
    2,825Total operating expenses
    
    
    78,472
    
    
    
    81,588
    
    
    
    221,931
    
    
    
    221,511Operating income
    
    
    7,229
    
    
    
    (4,815
    )
    
    
    22,403
    
    
    
    6,071Other income (expense):Interest expense
    
    
    (8,578
    )
    
    
    (11,664
    )
    
    
    (27,209
    )
    
    
    (34,371
    )Loss on extinguishment of debt
    
    
    (6,888
    )
    
    
    
    
    
    
    (33,092
    )
    
    
    Interest income
    
    
    418
    
    
    
    288
    
    
    
    1,324
    
    
    
    766Other
    
    
    (44
    )
    
    
    (50
    )
    
    
    (131
    )
    
    
    (152
    )Total other income (expense)
    
    
    (15,092
    )
    
    
    (11,426
    )
    
    
    (59,108
    )
    
    
    (33,757
    )Net loss
    
    $
    (7,863
    )
    
    $
    (16,241
    )
    
    $
    (36,705
    )
    
    $
    (27,686
    )
 See Notes to Consolidated Financial Statements
 4




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (36,705
    )
    
    $
    (27,686
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    62,060
    
    
    
    57,686Loss (gain) on disposal of assets, net
    
    
    (68
    )
    
    
    2,825Amortization of debt issuance costs and original issue discount
    
    
    17,508
    
    
    
    2,553Stock compensation costs
    
    
    1,383
    
    
    
    Other deferred credits
    
    
    (1,484
    )
    
    
    1,570Changes in components of working capital:Accounts receivable and other current assets
    
    
    788
    
    
    
    (12,476
    )Accounts payable and other current liabilities
    
    
    (14,844
    )
    
    
    463Deferred charges and other assets
    
    
    3,384
    
    
    
    (445
    )Net cash provided by operating activities
    
    
    32,022
    
    
    
    24,490Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (42,838
    )
    
    
    (38,084
    )Purchase of short-term investments
    
    
    (81,845
    )
    
    
    (102,200
    )Sale of short-term investments
    
    
    97,720
    
    
    
    87,600Placement of funds in restricted account
    
    
    (300
    )
    
    
    (1,055
    )Release of funds from escrow
    
    
    500
    
    
    
    Net cash used by investing activities
    
    
    (26,763
    )
    
    
    (53,739
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (446,833
    )
    
    
    (2,135
    )Proceeds from issuance of long-term debt
    
    
    375,000
    
    
    
    Debt issuance costs
    
    
    (11,307
    )
    
    
    Contribution from Parent
    
    
    80,995
    
    
    
    (1,325
    )Dividends
    
    
    (22,087
    )
    
    
    Net cash used by financing activities
    
    
    (24,232
    )
    
    
    (3,460
    )Decrease in cash and cash equivalents
    
    
    (18,973
    )
    
    
    (32,709
    )Cash and cash equivalents at beginning of the period
    
    
    50,660
    
    
    
    65,398Cash and cash equivalents at the end of the period
    
    $
    31,687
    
    
    $
    32,689Supplemental Cash Flow Data:Interest paid
    
    $
    26,843
    
    
    $
    33,170Income taxes paid, net of refund
    
    
    
    
    
    
    1,120Supplemental Noncash Transactions:Interest rate swap
    
    $
    2,931
    
    
    $
    Stock dividend for pension funding
    
    
    599
    
    
    
    
 See Notes to Consolidated Financial Statements
 5




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##### Table of Contents



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




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 1.
    
    DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 Regulatory Accounting and Regulation
 Accounting for the Effects of Certain Types of Regulation.
 Accounting for Asset Retirement Obligations
 Stock-based Compensation
 Effect of Early Adoption of SFAS 123(R)
 Share-Based Payment, Accounting for
Stock-Based Compensation.
 Accounting
for Stock Issued to Employees
 7




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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)
 Valuation Assumptions
 Nine and Three Months endedSeptember 30,2005
    
    2004Stock options:Risk free rate
    
    
    4.21
    %
    
    
    3.49
    %Dividend yield
    
    
    8.65
    %
    
    Expected volatility factor
    
    
    40.17
    %
    
    
    54.40
    %Expected option life (years)
    
    
    6.0
    
    
    
    6.7Expected forfeiture rate
    
    
    2.00
    %
    
    Restricted stock grants:Expected forfeiture rate
    
    
    2.00
    %
    
    Employee stock purchase plan:Risk free rate
    
    
    3.00
    %
    
    Dividend yield
    
    
    8.32
    %
    
    Expected volatility factor
    
    
    41.70
    %
    
    Expected option life (years)
    
    
    0.5
    
    
    
  2. NEW ACCOUNTING STANDARDS
 Accounting for Conditional Asset Retirement
Obligations
 Exchanges of Non-Monetary Assets,
 8




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 3. LONG TERM OBLIGATIONS
  September 30,
    
    
    December 31,2005
    
    
    20042003 senior credit facility term loan
    
    $
    
    
    
    $
    198,0002005 senior credit facility term loan
    
    
    375,000
    
    
    
    9 3/8% senior subordinated notes due 2009
    
    
    
    
    
    
    147,5009 7/8% senior unsecured notes due 2011
    
    
    76,978
    
    
    
    177,650Original issue discount - 9 7/8% senior unsecured notes due 2011
    
    
    (2,002
    )
    
    
    (5,321
    )Capital leases and other long-term obligations
    
    
    7,399
    
    
    
    8,060457,375
    
    
    
    525,889Less current portion
    
    
    613
    
    
    
    2,298Long-term obligations, net of current portion
    
    $
    456,762
    
    
    $
    523,591
  2005 (October 1 - December 31)
    
    $
    1822006 (January 1 - December 31)
    
    
    9702007 (January 1 - December 31)
    
    
    1,0282008 (January 1 - December 31)
    
    
    9262009 (January 1 - December 31)
    
    
    6772010 (January 1 - December 31)
    
    
    643Thereafter
    
    
    454,951$
    459,377
    9




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 3. LONG TERM OBLIGATIONS (Continued)
  4. STOCK INCENTIVE PLANS
  Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
   Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
   10




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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)
 2003 Options for Officer Inducement Grant
  ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
  Fair Value Disclosures  Prior to SFAS 123(R) Adoption
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (7,863
    )
    
    $
    (16,241
    )
    
    $
    (36,705
    )
    
    $
    (32,229
    )Add: Stock-based employee compensation expense
arising from the adoption of SAFA 123(R)
    
    
    370
    
    
    
    
    
    
    
    909
    
    
    
    Deduct: Total stock-based employee compensation
expense arising from the adoption of SFAS 123(R) for the
current period and SFAS 123 for prior periods
    
    
    (370
    )
    
    
    (108
    )
    
    
    (909
    )
    
    
    (420
    )Pro forma net loss
    
    $
    (7,863
    )
    
    $
    (16,349
    )
    
    $
    (36,705
    )
    
    $
    (32,649
    )
  11




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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)
 Options and Restricted Stock Outstanding
  WeightedNumber of
    
    
    Averageshares
    
    
    Exercise PriceOutstanding at January 1, 2005
    
    
    3,184
    
    
    $
    5.59Changes during the period:Granted
    
    
    7
    
    
    
    8.83Exercised
    
    
    (796
    )
    
    
    5.19Canceled or expired
    
    
    (168
    )
    
    
    9.59Outstanding at September 30, 2005
    
    
    2,227
    
    
    
    5.46Options exercisable at September 30, 2005
    
    
    292
    
    
    $
    9.52Unexercisable options at September 30, 2005
    
    
    1,936
    
    
    
    4.85
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted-average grant-date fair value of stock options granted:
    
    $
    
    
    
    $
    1.76
    
    
    $
    1.57
    
    
    $
    1.57Total fair value of shares vested during the period:
    
    
    184
    
    
    
    
    
    
    
    476
    
    
    
    293Total intrinsic value of options exercised:
    
    
    312
    
    
    
    
    
    
    
    3,658
    
    
    
    227
  WeightedNumber of
    
    
    Average Fairshares
    
    
    ValueOutstanding at January 1, 2005
    
    
    
    
    
    $
    Changes during the period:Granted
    
    
    710
    
    
    
    9.01Vested
    
    
    
    
    
    
    Canceled or expired
    
    
    
    
    
    
    Outstanding at September 30, 2005
    
    
    710
    
    
    $
    9.01
 12




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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)
  Average PeriodUnamortized
    
    
    to ExpenseExpense
    
    
    (years)Stock options
    
    $
    1,629
    
    
    
    1.1Restricted stock
    
    
    5,692
    
    
    
    1.4Total
    
    $
    7,321
    
    
    
    1.3
 5. RETIREMENT PLANS
   Alaska
Communications Systems Retirement Plan
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest cost
    
    $
    189
    
    
    $
    187
    
    
    $
    568
    
    
    $
    561Expected return on plan assets
    
    
    (203
    )
    
    
    (189
    )
    
    
    (610
    )
    
    
    (566
    )Amortization of loss
    
    
    118
    
    
    
    125
    
    
    
    356
    
    
    
    376Amortization of prior service cost
    
    
    51
    
    
    
    51
    
    
    
    152
    
    
    
    152Net periodic pension expense
    
    $
    155
    
    
    $
    174
    
    
    $
    466
    
    
    $
    523
 13




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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 6. BUSINESS SEGMENTS
    LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    153,387
    
    
    $
    62,700
    
    
    $
    16,371
    
    
    $
    15,843
    
    
    $
    17,212
    
    
    $
    (21,179
    )
    
    $
    244,334Depreciation and amortization
    
    
    39,539
    
    
    
    7,889
    
    
    
    2,909
    
    
    
    243
    
    
    
    11,480
    
    
    
    
    
    
    
    62,060Operating income (loss)
    
    
    4,995
    
    
    
    16,090
    
    
    
    (4,325
    )
    
    
    465
    
    
    
    5,178
    
    
    
    
    
    
    
    22,403Interest expense
    
    
    (265
    )
    
    
    (2
    )
    
    
    
    
    
    
    (137
    )
    
    
    (26,805
    )
    
    
    
    
    
    
    (27,209
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,092
    )
    
    
    
    
    
    
    (33,092
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,324
    
    
    
    
    
    
    
    1,324Income tax provision (benefit)
    
    
    1,903
    
    
    
    6,609
    
    
    
    
    
    
    
    
    
    
    
    (8,512
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    2,827
    
    
    
    9,464
    
    
    
    (4,325
    )
    
    
    328
    
    
    
    (36,698
    )
    
    
    (8,301
    )
    
    
    (36,705
    )Total assets
    
    
    433,995
    
    
    
    120,945
    
    
    
    (5,538
    )
    
    
    19,988
    
    
    
    11,275
    
    
    
    
    
    
    
    580,665Capital expenditures
    
    
    19,166
    
    
    
    5,827
    
    
    
    14,104
    
    
    
    59
    
    
    
    3,682
    
    
    
    
    
    
    
    42,838
   LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    160,226
    
    
    $
    41,296
    
    
    $
    15,056
    
    
    $
    12,828
    
    
    $
    17,406
    
    
    $
    (19,230
    )
    
    $
    227,582Depreciation and amortization
    
    
    38,215
    
    
    
    5,527
    
    
    
    3,031
    
    
    
    339
    
    
    
    10,574
    
    
    
    
    
    
    
    57,686Operating income (loss)
    
    
    11,994
    
    
    
    2,579
    
    
    
    (9,834
    )
    
    
    (3,221
    )
    
    
    4,553
    
    
    
    
    
    
    
    6,071Interest expense
    
    
    (236
    )
    
    
    (12
    )
    
    
    
    
    
    
    (141
    )
    
    
    (33,982
    )
    
    
    
    
    
    
    (34,371
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    766Income tax provision (benefit)
    
    
    4,810
    
    
    
    1,166
    
    
    
    
    
    
    
    
    
    
    
    (5,976
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    6,948
    
    
    
    1,401
    
    
    
    (9,834
    )
    
    
    (3,362
    )
    
    
    (22,839
    )
    
    
    
    
    
    
    (27,686
    )Total assets
    
    
    512,258
    
    
    
    107,988
    
    
    
    2,089
    
    
    
    21,624
    
    
    
    15,433
    
    
    
    
    
    
    
    659,392Capital expenditures
    
    
    18,100
    
    
    
    8,704
    
    
    
    7,358
    
    
    
    72
    
    
    
    3,850
    
    
    
    
    
    
    
    38,084
 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)
 6. BUSINESS SEGMENTS (Continued)
   LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    51,480
    
    
    $
    24,271
    
    
    $
    5,675
    
    
    $
    6,367
    
    
    $
    5,802
    
    
    $
    (7,894
    )
    
    $
    85,701Depreciation and amortization
    
    
    13,141
    
    
    
    2,675
    
    
    
    1,112
    
    
    
    69
    
    
    
    3,958
    
    
    
    
    
    
    
    20,955Operating income (loss)
    
    
    693
    
    
    
    6,163
    
    
    
    (1,523
    )
    
    
    244
    
    
    
    1,652
    
    
    
    
    
    
    
    7,229Interest expense
    
    
    (4
    )
    
    
    (1
    )
    
    
    
    
    
    
    (45
    )
    
    
    (8,528
    )
    
    
    
    
    
    
    (8,578
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,888
    )
    
    
    
    
    
    
    (6,888
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418
    
    
    
    
    
    
    
    418Income tax provision (benefit)
    
    
    77
    
    
    
    2,512
    
    
    
    
    
    
    
    
    
    
    
    (2,589
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    612
    
    
    
    3,645
    
    
    
    (1,523
    )
    
    
    199
    
    
    
    (7,861
    )
    
    
    (2,935
    )
    
    
    (7,863
    )Total assets
    
    
    433,995
    
    
    
    120,945
    
    
    
    (5,538
    )
    
    
    19,988
    
    
    
    11,275
    
    
    
    
    
    
    
    580,665Capital expenditures
    
    
    8,417
    
    
    
    3,112
    
    
    
    611
    
    
    
    40
    
    
    
    693
    
    
    
    
    
    
    
    12,873
   LocalTelephone
    
    
    Wireless
    
    
    Internet
    
    
    Interexchange
    
    
    All Other
    
    
    Eliminations
    
    
    TotalOperating revenues
    
    $
    51,396
    
    
    $
    16,213
    
    
    $
    5,338
    
    
    $
    4,651
    
    
    $
    5,782
    
    
    $
    (6,607
    )
    
    $
    76,773Depreciation and amortization
    
    
    12,940
    
    
    
    1,904
    
    
    
    1,245
    
    
    
    91
    
    
    
    3,590
    
    
    
    
    
    
    
    19,770Operating income (loss)
    
    
    (1,001
    )
    
    
    (737
    )
    
    
    (3,423
    )
    
    
    (1,149
    )
    
    
    1,495
    
    
    
    
    
    
    
    (4,815
    )Interest expense
    
    
    (76
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    (11,541
    )
    
    
    
    
    
    
    (11,664
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    288Income tax provision (benefit)
    
    
    (380
    )
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    574
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (697
    )
    
    
    (543
    )
    
    
    (3,423
    )
    
    
    (1,196
    )
    
    
    (10,382
    )
    
    
    
    
    
    
    (16,241
    )Total assets
    
    
    512,258
    
    
    
    107,988
    
    
    
    2,089
    
    
    
    21,624
    
    
    
    15,433
    
    
    
    
    
    
    
    659,392Capital expenditures
    
    
    7,182
    
    
    
    1,687
    
    
    
    6,303
    
    
    
    23
    
    
    
    1,974
    
    
    
    
    
    
    
    17,169
  7. RELATED PARTY TRANSACTIONS
  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)
 7. RELATED PARTY TRANSACTIONS (Continued)
    Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
  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
  Condensed Consolidating Balance Sheet
September 30, 2005
 Combined
    
    
    ACS Holdings
    
    
    Eliminations
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    and Reclassifications
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    130
    
    
    $
    31,557
    
    
    $
    
    
    
    $
    31,687Restricted cash
    
    
    
    
    
    
    4,490
    
    
    
    
    
    
    
    4,490Short-term investments
    
    
    
    
    
    
    19,325
    
    
    
    
    
    
    
    19,325Accounts receivable-trade, net
    
    
    18,817
    
    
    
    23,154
    
    
    
    
    
    
    
    41,971Accounts receivable-affiliates
    
    
    20,879
    
    
    
    (28,870
    )
    
    
    
    
    
    
    (7,991
    )Materials and supplies
    
    
    7,865
    
    
    
    
    
    
    
    
    
    
    
    7,865Prepayments and other current assets
    
    
    3,101
    
    
    
    2,396
    
    
    
    
    
    
    
    5,497Total current assets
    
    
    50,792
    
    
    
    52,052
    
    
    
    
    
    
    
    102,844Investments
    
    
    10
    
    
    
    368,719
    
    
    
    (368,719
    )
    
    
    10Property, plant and equipment
    
    
    993,743
    
    
    
    107,858
    
    
    
    
    
    
    
    1,101,601Less: accumulated depreciation and amortization
    
    
    634,950
    
    
    
    70,462
    
    
    
    
    
    
    
    705,412Property, plant and equipment, net
    
    
    358,793
    
    
    
    37,396
    
    
    
    
    
    
    
    396,189Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,734
    
    
    
    
    
    
    
    
    
    
    
    21,734Debt issuance costs
    
    
    
    
    
    
    12,600
    
    
    
    
    
    
    
    12,600Deferred charges and other assets
    
    
    720
    
    
    
    8,165
    
    
    
    
    
    
    
    8,885Total assets
    
    $
    432,049
    
    
    $
    478,932
    
    
    $
    (330,316
    )
    
    $
    580,665Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    589
    
    
    $
    24
    
    
    $
    
    
    
    $
    613Accounts payable-affiliates
    
    
    2,827
    
    
    
    71
    
    
    
    
    
    
    
    2,898Accounts payable, accrued and other current liabilities
    
    
    12,354
    
    
    
    31,474
    
    
    
    4,521
    
    
    
    48,349Advance billings and customer deposits
    
    
    9,673
    
    
    
    7
    
    
    
    
    
    
    
    9,680Total current liabilities
    
    
    25,443
    
    
    
    31,576
    
    
    
    4,521
    
    
    
    61,540Long-term obligations, net of current portion
    
    
    3,661
    
    
    
    453,101
    
    
    
    
    
    
    
    456,762Deferred income taxes
    
    
    (5,541
    )
    
    
    5,541
    
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    78,170
    
    
    
    5,677
    
    
    
    (4,521
    )
    
    
    79,326Stockholders equity (deficit):Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paid in capital in excess of par value
    
    
    491,240
    
    
    
    297,731
    
    
    
    (491,240
    )
    
    
    297,731Retained earnings (accumulated deficit)
    
    
    (160,926
    )
    
    
    (313,094
    )
    
    
    160,926
    
    
    
    (313,094
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (1,600
    )
    
    
    
    
    
    
    (1,600
    )Total stockholders equity (deficit)
    
    
    330,316
    
    
    
    (16,963
    )
    
    
    (330,316
    )
    
    
    (16,963
    )Total liabilities and stockholders equity (deficit)
    
    $
    432,049
    
    
    $
    478,932
    
    
    $
    (330,316
    )
    
    $
    580,665
 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 Balance Sheet
December 31, 2004
 Combined
    
    
    ACS Holdings
    
    
    Eliminations
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    and Reclassifications
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    99
    
    
    $
    50,561
    
    
    $
    
    
    
    $
    50,660Restricted cash
    
    
    
    
    
    
    4,690
    
    
    
    
    
    
    
    4,690Short-term investments
    
    
    
    
    
    
    35,200
    
    
    
    
    
    
    
    35,200Accounts receivable-trade, net
    
    
    15,397
    
    
    
    24,857
    
    
    
    (841
    )
    
    
    39,413Accounts receivable-affiliates
    
    
    12,490
    
    
    
    (13,578
    )
    
    
    
    
    
    
    (1,088
    )Materials and supplies
    
    
    6,623
    
    
    
    
    
    
    
    
    
    
    
    6,623Prepayments and other current assets
    
    
    1,493
    
    
    
    2,231
    
    
    
    
    
    
    
    3,724Total current assets
    
    
    36,102
    
    
    
    103,961
    
    
    
    (841
    )
    
    
    139,222Investments
    
    
    10
    
    
    
    360,418
    
    
    
    (360,418
    )
    
    
    10Property, plant and equipment
    
    
    957,589
    
    
    
    104,178
    
    
    
    
    
    
    
    1,061,767Less: accumulated depreciation and amortization
    
    
    590,471
    
    
    
    58,984
    
    
    
    
    
    
    
    649,455Property, plant and equipment, net
    
    
    367,118
    
    
    
    45,194
    
    
    
    
    
    
    
    412,312Goodwill
    
    
    
    
    
    
    
    
    
    
    38,403
    
    
    
    38,403Intangible assets
    
    
    21,871
    
    
    
    
    
    
    
    
    
    
    
    21,871Debt issuance costs
    
    
    
    
    
    
    15,482
    
    
    
    
    
    
    
    15,482Deferred charges and other assets
    
    
    1,772
    
    
    
    6,967
    
    
    
    
    
    
    
    8,739Total assets
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039Liabilities and Stockholders Equity (Deficit)Current liabilities:Current portion of long-term obligations
    
    $
    548
    
    
    $
    1,750
    
    
    $
    
    
    
    $
    2,298Accounts payable-affiliates
    
    
    2,964
    
    
    
    1,009
    
    
    
    
    
    
    
    3,973Accounts payable, accrued and other current liabilities
    
    
    14,705
    
    
    
    40,784
    
    
    
    (841
    )
    
    
    54,648Advance billings and customer deposits
    
    
    8,942
    
    
    
    6
    
    
    
    
    
    
    
    8,948Total current liabilities
    
    
    27,159
    
    
    
    43,549
    
    
    
    (841
    )
    
    
    69,867Long-term obligations, net of current portion
    
    
    4,114
    
    
    
    519,477
    
    
    
    
    
    
    
    523,591Deferred income taxes
    
    
    1,345
    
    
    
    (1,345
    )
    
    
    
    
    
    
    Other deferred credits and long-term liabilities
    
    
    72,240
    
    
    
    5,676
    
    
    
    
    
    
    
    77,916Commitments and contingenciesStockholders equity (deficit):Common stock
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    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 stockholders equity (deficit)
    
    
    322,015
    
    
    
    (35,335
    )
    
    
    (322,015
    )
    
    
    (35,335
    )Total liabilities and stockholders equity (deficit)
    
    $
    426,873
    
    
    $
    532,022
    
    
    $
    (322,856
    )
    
    $
    636,039
 18




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2005
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    51,480
    
    
    $
    5,802
    
    
    $
    (5,801
    )
    
    $
    51,481Wireless
    
    
    24,271
    
    
    
    
    
    
    
    (11
    )
    
    
    24,260Internet
    
    
    5,675
    
    
    
    
    
    
    
    (62
    )
    
    
    5,613Interexchange
    
    
    6,367
    
    
    
    
    
    
    
    (2,020
    )
    
    
    4,347Total operating revenue
    
    
    87,793
    
    
    
    5,802
    
    
    
    (7,894
    )
    
    
    85,701Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    37,646
    
    
    
    192
    
    
    
    (4,981
    )
    
    
    32,857Wireless (exclusive of depreciation and amortization)
    
    
    15,433
    
    
    
    
    
    
    
    (1,237
    )
    
    
    14,196Internet (exclusive of depreciation and amortization)
    
    
    6,086
    
    
    
    
    
    
    
    (342
    )
    
    
    5,744Interexchange (exclusive of depreciation and amortization)
    
    
    6,054
    
    
    
    
    
    
    
    (1,334
    )
    
    
    4,720Depreciation and amortization
    
    
    16,997
    
    
    
    3,958
    
    
    
    
    
    
    
    20,955Gain on disposal of assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expense
    
    
    82,216
    
    
    
    4,150
    
    
    
    (7,894
    )
    
    
    78,472Operating income
    
    
    5,577
    
    
    
    1,652
    
    
    
    
    
    
    
    7,229Other income (expense):Interest expense
    
    
    (50
    )
    
    
    (8,528
    )
    
    
    
    
    
    
    (8,578
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (6,888
    )
    
    
    
    
    
    
    (6,888
    )Interest income
    
    
    
    
    
    
    418
    
    
    
    
    
    
    
    418Other
    
    
    (2
    )
    
    
    2,893
    
    
    
    (2,935
    )
    
    
    (44
    )Total other income (expense)
    
    
    (52
    )
    
    
    (12,105
    )
    
    
    (2,935
    )
    
    
    (15,092
    )Income (loss) before income taxes
    
    
    5,525
    
    
    
    (10,453
    )
    
    
    (2,935
    )
    
    
    (7,863
    )Income tax expense (benefit)
    
    
    (2,590
    )
    
    
    2,590
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2,935
    
    
    $
    (7,863
    )
    
    $
    (2,935
    )
    
    $
    (7,863
    )
 19




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2004
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    51,397
    
    
    $
    5,781
    
    
    $
    (5,782
    )
    
    $
    51,396Wireless
    
    
    16,213
    
    
    
    
    
    
    
    (9
    )
    
    
    16,204Internet
    
    
    5,338
    
    
    
    
    
    
    
    (43
    )
    
    
    5,295Interexchange
    
    
    4,651
    
    
    
    
    
    
    
    (773
    )
    
    
    3,878Total operating revenue
    
    
    77,599
    
    
    
    5,781
    
    
    
    (6,607
    )
    
    
    76,773Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    39,675
    
    
    
    696
    
    
    
    (5,051
    )
    
    
    35,320Wireless (exclusive of depreciation and amortization)
    
    
    12,220
    
    
    
    
    
    
    
    (1,250
    )
    
    
    10,970Internet (exclusive of depreciation and amortization)
    
    
    7,525
    
    
    
    
    
    
    
    (234
    )
    
    
    7,291Interexchange (exclusive of depreciation and amortization)
    
    
    5,709
    
    
    
    
    
    
    
    (72
    )
    
    
    5,637Depreciation and amortization
    
    
    16,180
    
    
    
    3,590
    
    
    
    
    
    
    
    19,770Gain on disposal of assets, net
    
    
    2,600
    
    
    
    
    
    
    
    
    
    
    
    2,600Total operating expense
    
    
    83,909
    
    
    
    4,286
    
    
    
    (6,607
    )
    
    
    81,588Operating income
    
    
    (6,310
    )
    
    
    1,495
    
    
    
    
    
    
    
    (4,815
    )Other income (expense):Interest expense
    
    
    (123
    )
    
    
    (11,541
    )
    
    
    
    
    
    
    (11,664
    )Interest income
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    288Other
    
    
    3
    
    
    
    (4,403
    )
    
    
    4,350
    
    
    
    (50
    )Total other income (expense)
    
    
    (120
    )
    
    
    (15,656
    )
    
    
    4,350
    
    
    
    (11,426
    )Income (loss) before income taxes
    
    
    (6,430
    )
    
    
    (14,161
    )
    
    
    4,350
    
    
    
    (16,241
    )Income tax expense (benefit)
    
    
    2,080
    
    
    
    (2,080
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    (4,350
    )
    
    $
    (16,241
    )
    
    $
    4,350
    
    
    $
    (16,241
    )
 20




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2005
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    153,387
    
    
    $
    17,212
    
    
    $
    (17,212
    )
    
    $
    153,387Wireless
    
    
    62,700
    
    
    
    
    
    
    
    (30
    )
    
    
    62,670Internet
    
    
    16,371
    
    
    
    
    
    
    
    (189
    )
    
    
    16,182Interexchange
    
    
    15,843
    
    
    
    
    
    
    
    (3,748
    )
    
    
    12,095Total operating revenue
    
    
    248,301
    
    
    
    17,212
    
    
    
    (21,179
    )
    
    
    244,334Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    108,852
    
    
    
    554
    
    
    
    (14,898
    )
    
    
    94,508Wireless (exclusive of depreciation and amortization)
    
    
    39,121
    
    
    
    
    
    
    
    (2,905
    )
    
    
    36,216Internet (exclusive of depreciation and amortization)
    
    
    17,456
    
    
    
    
    
    
    
    (872
    )
    
    
    16,584Interexchange (exclusive of depreciation and amortization)
    
    
    15,135
    
    
    
    
    
    
    
    (2,504
    )
    
    
    12,631Depreciation and amortization
    
    
    50,580
    
    
    
    11,480
    
    
    
    
    
    
    
    62,060Gain on disposal of assets, net
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    (68
    )Total operating expense
    
    
    231,076
    
    
    
    12,034
    
    
    
    (21,179
    )
    
    
    221,931Operating income
    
    
    17,225
    
    
    
    5,178
    
    
    
    
    
    
    
    22,403Other income (expense):Interest expense
    
    
    (404
    )
    
    
    (26,805
    )
    
    
    
    
    
    
    (27,209
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (33,092
    )
    
    
    
    
    
    
    (33,092
    )Interest income
    
    
    
    
    
    
    1,324
    
    
    
    
    
    
    
    1,324Other
    
    
    (3
    )
    
    
    8,173
    
    
    
    (8,301
    )
    
    
    (131
    )Total other income (expense)
    
    
    (407
    )
    
    
    (50,400
    )
    
    
    (8,301
    )
    
    
    (59,108
    )Income (loss) before income taxes
    
    
    16,818
    
    
    
    (45,222
    )
    
    
    (8,301
    )
    
    
    (36,705
    )Income tax expense (benefit)
    
    
    (8,517
    )
    
    
    8,517
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8,301
    
    
    $
    (36,705
    )
    
    $
    (8,301
    )
    
    $
    (36,705
    )
 21




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
 Con nsolidating Statement of Operations  Nine Months Ended September 30, 2004
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue:Local telephone
    
    $
    160,226
    
    
    $
    17,406
    
    
    $
    (17,406
    )
    
    $
    160,226Wireless
    
    
    41,296
    
    
    
    
    
    
    
    (30
    )
    
    
    41,266Internet
    
    
    15,056
    
    
    
    
    
    
    
    (43
    )
    
    
    15,013Interexchange
    
    
    12,828
    
    
    
    
    
    
    
    (1,751
    )
    
    
    11,077Total operating revenue
    
    
    229,406
    
    
    
    17,406
    
    
    
    (19,230
    )
    
    
    227,582Operating expense:Local telephone (exclusive of depreciation and amortization)
    
    
    110,021
    
    
    
    2,249
    
    
    
    (15,214
    )
    
    
    97,056Wireless (exclusive of depreciation and amortization)
    
    
    30,362
    
    
    
    
    
    
    
    (3,133
    )
    
    
    27,229Internet (exclusive of depreciation and amortization)
    
    
    21,888
    
    
    
    
    
    
    
    (684
    )
    
    
    21,204Interexchange (exclusive of depreciation and amortization)
    
    
    15,710
    
    
    
    
    
    
    
    (199
    )
    
    
    15,511Depreciation and amortization
    
    
    47,112
    
    
    
    10,574
    
    
    
    
    
    
    
    57,686Loss on disposal of assets, net
    
    
    2,795
    
    
    
    30
    
    
    
    
    
    
    
    2,825Total operating expense
    
    
    227,888
    
    
    
    12,853
    
    
    
    (19,230
    )
    
    
    221,511Operating income
    
    
    1,518
    
    
    
    4,553
    
    
    
    
    
    
    
    6,071Other income (expense):Interest expense
    
    
    (389
    )
    
    
    (33,982
    )
    
    
    
    
    
    
    (34,371
    )Interest income
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    766Other
    
    
    12
    
    
    
    (3,498
    )
    
    
    3,334
    
    
    
    (152
    )Total other income (expense)
    
    
    (377
    )
    
    
    (36,714
    )
    
    
    3,334
    
    
    
    (33,757
    )Income (loss) before income taxes
    
    
    1,141
    
    
    
    (32,161
    )
    
    
    3,334
    
    
    
    (27,686
    )Income tax expense (benefit)
    
    
    (4,475
    )
    
    
    4,475
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (3,334
    )
    
    $
    (27,686
    )
    
    $
    3,334
    
    
    $
    (27,686
    )
 22




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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
Nine Months Ended September 30, 2005
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    39,599
    
    
    $
    (7,577
    )
    
    $
    
    
    
    
    32,022Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (39,156
    )
    
    
    (3,682
    )
    
    
    
    
    
    
    (42,838
    )Purchase of short-term investments
    
    
    
    
    
    
    (81,845
    )
    
    
    
    
    
    
    (81,845
    )Sale of short-term investments
    
    
    
    
    
    
    97,720
    
    
    
    
    
    
    
    97,720Placement of funds in restricted account
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    (300
    )Release of funds from escrow
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Net cash provided (used) by investing activities
    
    
    (39,156
    )
    
    
    12,393
    
    
    
    
    
    
    
    (26,763
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (412
    )
    
    
    (446,421
    )
    
    
    
    
    
    
    (446,833
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    375,000
    
    
    
    
    
    
    
    375,000Debt issuance costs
    
    
    
    
    
    
    (11,307
    )
    
    
    
    
    
    
    (11,307
    )Contribution from Parent
    
    
    
    
    
    
    80,995
    
    
    
    
    
    
    
    80,995Dividends
    
    
    
    
    
    
    (22,087
    )
    
    
    
    
    
    
    (22,087
    )Net cash provided (used) by financing activities
    
    
    (412
    )
    
    
    (23,820
    )
    
    
    
    
    
    
    (24,232
    )Increase (decrease) in cash and cash equivalents
    
    
    31
    
    
    
    (19,004
    )
    
    
    
    
    
    
    (18,973
    )Cash and cash equivalents, beginning of the period
    
    
    99
    
    
    
    50,561
    
    
    
    
    
    
    
    50,660Cash and cash equivalents, end of the period
    
    $
    130
    
    
    $
    31,557
    
    
    $
    
    
    
    $
    31,687Supplemental Cash Flow Data:Interest paid
    
    $
    364
    
    
    $
    26,479
    
    
    $
    
    
    
    $
    26,843Supplemental Noncash Transactions:Interest rate swap
    
    $
    
    
    
    $
    2,931
    
    
    $
    
    
    
    $
    2,931Stock dividend for pension funding
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    599
 23




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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 (Continued)
 Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2004
 Combined
    
    
    ACS Holdings
    
    
    
    
    
    
    ACS HoldingsSubsidiaries
    
    
    Parent Only
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided (used) by operating activities
    
    $
    34,604
    
    
    $
    (10,114
    )
    
    $
    
    
    
    $
    24,490Cash Flows from Investing Activities:Construction and capital expenditures
    
    
    (34,234
    )
    
    
    (3,850
    )
    
    
    
    
    
    
    (38,084
    )Purchase of short-term investments
    
    
    
    
    
    
    (102,200
    )
    
    
    
    
    
    
    (102,200
    )Sale of short-term investments
    
    
    
    
    
    
    87,600
    
    
    
    
    
    
    
    87,600Restricted funds
    
    
    
    
    
    
    (1,055
    )
    
    
    
    
    
    
    (1,055
    )Net cash used by investing activities
    
    
    (34,234
    )
    
    
    (19,505
    )
    
    
    
    
    
    
    (53,739
    )Cash Flows from Financing Activities:Payments on long-term debt
    
    
    (414
    )
    
    
    (1,721
    )
    
    
    
    
    
    
    (2,135
    )Dividends
    
    
    
    
    
    
    (1,325
    )
    
    
    
    
    
    
    (1,325
    )Net cash used by financing activities
    
    
    (414
    )
    
    
    (3,046
    )
    
    
    
    
    
    
    (3,460
    )Increase (decrease) in cash and cash equivalents
    
    
    (44
    )
    
    
    (32,665
    )
    
    
    
    
    
    
    (32,709
    )Cash and cash equivalents, beginning of the period
    
    
    139
    
    
    
    65,259
    
    
    
    
    
    
    
    65,398Cash and cash equivalents, end of the period
    
    $
    95
    
    
    $
    32,594
    
    
    $
    
    
    
    $
    32,689Supplemental Cash Flow Data:Interest paid
    
    $
    409
    
    
    $
    32,761
    
    
    $
    
    
    
    $
    33,170Income taxes paid, net of refund
    
    
    1,120
    
    
    
    
    
    
    
    
    
    
    
    1,120
 24




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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
 9. COMMITMENTS AND CONTINGENCIES
    10. OTHER EVENTS
  
 25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward Looking Statements and Analysts Reports
  
    
    rapid technological developments and changes in the telecommunications industries;
    
    our competitive environment;
    
    ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996, or the Telecommunications Act, and
other similar federal and state legislation and the federal and state rules and
regulations enacted pursuant to that legislation;
    
    changes in revenue from Universal Service Funds;
    
    regulatory limitations on our ability to change our pricing for communications services;
    
    the possible future unavailability of Statement of Financial Accounting
Standards, or SFAS 71, Accounting for the Effects of Certain Types of Regulation, to
our wireline subsidiaries;
    
    our ability to bundle our products and services;
    
    changes in the demand for our products and services;
    
    changes in general industry and market conditions and growth rates;
    
    changes in interest rates or other general national, regional or local economic conditions;
    
    governmental and public policy changes;
    
    widespread or lengthy failures of our system or network cables, particularly our
non-redundant systems, including our primary fiber-link connecting Alaska and the
lower 48-states, which would cause significant delays or interruptions of service
and loss of customers;
    
    other unanticipated damage to one or more of our high capacity cables resulting
from construction or digging mishaps or natural disasters;
    
    our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders;
    
    the continued availability of financing in the amounts, at the terms, and subject
to the conditions necessary to support our future business;
    
    the success of any future acquisitions; and
    
    changes in accounting policies or practices adopted voluntarily or as required by
accounting principles generally accepted in the United States.
  26




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##### Table of Contents



Introduction
  Alaska Communications Systems Holdings, Inc.
  
    
    the provision of local telephone services, including:
 
    
    basic local service to retail customers within our service areas;
    
    wholesale service to Competitive Local Exchange Carriers (CLECs);
    
    network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls;
    
    enhanced services;
    
    ancillary services, such as billing and collection; and
    
    universal service payments;
 
    
    the provision of wireless services;
    
    the provision of Internet services; and
    
    the provision of interexchange network long-distance and data services.
  Local Telephone 
  
    
    intrastate and interstate revenue settlement methodologies;
    
    authorized rates of return for regulated services;
    
    whether an access line is used by a business or consumer subscriber;
    
    intrastate and interstate calling patterns;
    
    customers selection of various local rate plan options;
    
    selection of enhanced calling services, such as voice mail;
    
    other subscriber usage characteristics; and
    
    changes in federal and state subsidies.
 27




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##### Table of Contents




    
    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.
   Wireless
 Internet
 Interexchange
 Video Entertainment 
 Critical Accounting Policies and Accounting Estimates
  Accounting for the Effects of Certain Types
of Regulation
 28




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##### Table of Contents



Goodwill and Other Intangible Assets
 29




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##### Table of Contents



30




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
 Operating Revenue
  Local Telephone.
 Three Months EndedSeptember 30,2005
    
    
    2004(in thousands)Local telephone revenue:Local network service
    
    $
    21,945
    
    
    $
    23,224Network access
    
    
    23,395
    
    
    
    23,128Deregulated and other
    
    
    6,141
    
    
    
    5,044Total local telephone revenue
    
    $
    51,481
    
    
    $
    51,396
  As of September 30,2005
    
    
    2004Local telephone access lines:Retail
    
    
    201,284
    
    
    
    207,746Wholesale
    
    
    14,323
    
    
    
    17,500Unbundled network elements  loop (UNE  L)
    
    
    55,802
    
    
    
    68,524Unbundled network elements  platform (UNE  P)
    
    
    6,616
    
    
    
    6,251Total local telephone access lines
    
    
    278,025
    
    
    
    300,021
    31




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##### Table of Contents



Wireless.
 
    
    growth in subscribers year over year of 16.9% at September 30, 2005;
    
    an increase in quarterly ARPU, of 22.4% to $57.99 for the three months ended
September, from $47.39 for the three months ended September 30, 2004, primarily as a
result of receipt of competitive eligible telecommunications carrier status (CETC)
funding on January 1, 2005 which added $8.81 to cellular ARPU, and improved subscriber
mix with a higher proportion of post paid retail subscribers; and
    
    higher gross customer adds, handset upgrades and accessory sales in the three months
ended September 30, 2005 resulting in $2.0 million of revenue compared to $1.7 million
for the three months ended September 30, 2004; and
    
    higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $2.9 million from $0.7 million for the three
months ended September 30, 2005 and 2004, respectively.
 Internet.
 Interexchange.
 Operating Expense
  Local Telephone. .
 Wireless.
 32




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##### Table of Contents



Internet.
 Interexchange.
 Depreciation and amortization.
 Interest expense.
 Loss on extinguishment of debt.
 Income Taxes
  Net loss
 .
 33




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##### Table of Contents



Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
 Operating Revenue
  Local Telephone.
 September 30,2005
    
    
    2004(in thousands)Local telephone revenue:Local network service
    
    $
    65,675
    
    
    $
    68,972Network access
    
    
    69,543
    
    
    
    75,362Deregulated and other
    
    
    18,169
    
    
    
    15,892Total local telephone revenue
    
    $
    153,387
    
    
    $
    160,226
  As of September 30,2005
    
    
    2004Local telephone access lines:Retail
    
    
    201,284
    
    
    
    207,746Wholesale
    
    
    14,323
    
    
    
    17,500Unbundled network elements  loop (UNE  L)
    
    
    55,802
    
    
    
    68,524Unbundled network elements  platform (UNE  P)
    
    
    6,616
    
    
    
    6,251Total local telephone access lines
    
    
    278,025
    
    
    
    300,021
     34




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##### Table of Contents



Wireless.
 
    
    growth in subscribers year over year of 16.9% at September 30, 2005;
    
    an increase in average revenue per unit, or ARPU, of 23.5% to $54.46 for the nine
months ended September 30, 2005, from $44.08 for the nine months ended September 30,
2004, primarily as a result of improved subscriber mix with a higher proportion of post
paid retail subscribers, increased plan revenue, feature revenue, roaming revenue,
regulatory surcharges and receipt of competitive eligible telecommunications carrier
status (CETC) funding on January 1, 2005 which added $6.78 to cellular ARPU;
    
    higher gross customer adds, handset upgrades and accessory sales in the nine months
ended September 30, 2005 resulting in $5.2 million of revenue compared to $3.6 million
for the nine months ended September 30, 2004; and
    
    higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $5.0 million from $1.2 million for the nine
months ended September 30, 2005 and 2004, respectively.
 Internet.
 Interexchange.
 Operating Expense
  Local Telephone. . .
 Wireless.
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Internet.
 Interexchange.
 Depreciation and amortization.
 Interest expense.
 Loss on extinguishment of debt.
 Income Taxes
  Net loss
 .
 LIQUIDITY AND CAPITAL RESOURCES
 Sources
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
    
    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
equity offering and refinancing transactions.
    Uses
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Outlook
  
    
    increasing demand for wireless voice and data services following the launch of
our CDMA 1xRTT network;
    
    growth in demand for DSL and Internet access services due to higher business and
consumer bandwidth needs; and
    
    increasing demand for private network services by government and business on a
statewide basis on either a circuit switched or IP basis.
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"
  
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
   Changes in internal controls over financial reporting
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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  .
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Working capital restrictions and other limitations upon the payment of dividends
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
 (a) Exhibits :
 31.1
    
    
    Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of David Wilson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Liane Pelletier, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of David Wilson, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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SIGNATURES
  Date: November 2, 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) 43