UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xFor ~~QUARTERLY~~the ~~REPORT~~quarterly ~~PURSUANT~~period TOended ~~SECTION~~September 30, ~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2003

For the quarterly period ended June 30, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period ~~from __________ to~~from_______________________to

Commission file number 333-82363

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		91-1921377
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


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:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last
practicable date.

DOCUMENTS INCORPORATED BY REFERENCE
None

TABLE OF CONTENTS

		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 10.16
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

TABLE OF CONTENTS

		~~Page~~	Page
		~~Number~~	Number
PART I.	~~Financial Information~~	Financial Information
Item 1.	~~Financial Statements:~~	Financial Statements:
	Consolidated Balance Sheets (unaudited) As of June 30, 2003 and December 31, 2002	3
		Consolidated Balance Sheets (unaudited) As of September 30, 2003 and December 31, 2002		3
	Consolidated Statements of Operations (unaudited) For the Three and Six Months Ended June 30, 2003 and 2002	4
		Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2003 and 2002		4
	Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2003 and 2002	5
		Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2003 and 2002		5
	~~Notes to Consolidated Financial Statements (unaudited)~~	6Notes to Consolidated Financial Statements (unaudited)		6
Item 2.	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	25Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	~~Quantitative and Qualitative Disclosures About Market Risk~~	40Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	~~Controls and Procedures~~	40Controls and Procedures		45
PART II.	~~Other Information~~	Other Information
Item 1.	~~Legal Proceedings~~	41Legal Proceedings		46
Item 2.	~~Changes in Securities and Use of Proceeds~~	42Changes in Securities and Use of Proceeds		47
Item 3.	~~Defaults upon Senior Securities~~	42Defaults upon Senior Securities		47
Item 4.	~~Submission of Matters to a Vote of Security Holders~~	42Submission of Matters to a Vote of Security Holders		47
Item 5.	~~Other Information~~	42Other Information		47
Item 6.	~~Exhibits and Reports on Form 8-K~~	42Exhibits and Reports on Form 8-K		47
Signatures		43		49

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Consolidated Balance Sheets (Unaudited, In Thousands Except Per Share Amounts)

Consolidated Balance Sheets (Unaudited, In Thousands Except Per Share Amounts)


			September 30,			December 31,
			2003			2002

Assets
Current assets:
	Cash and cash equivalents		$	121,160		$	18,565
	Restricted cash			555			3,440
	Accounts receivable-trade, net of allowance of $6,255 and $6,075			39,470			48,820
	Accounts receivable-affiliate			4,729			3,761
	Materials and supplies			10,327			11,203
	Prepayments and other current assets			6,266			6,172
	Assets held for sale			—			261

		Total current assets		182,507			92,222
Property, plant and equipment				1,055,802			1,090,365
Less: accumulated depreciation				671,447			625,276

	Property, plant and equipment, net			384,355			465,089
Goodwill				38,403			77,225
Intangible assets				22,561			23,269
Debt issuance costs, net of amortization of $5,119 and $15,883				19,312			21,130
Deferred charges and other assets				8,473			26,047

Total assets			$	655,611		$	704,982

Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	2,304		$	5,933
	Accounts payable-affiliates			898			1,319
	Accounts payable, accrued and other current liabilities			48,435			49,480
	Advance billings and customer deposits			8,871			9,804

		Total current liabilities		60,508			66,536
Long-term obligations, net of current portion				533,611			586,898
Other deferred credits and long-term liabilities				28,312			32,930
Commitments and contingencies				—			—
Stockholder’s equity:
	Common stock, $.01 par value; 1,000 shares authorized, 1 share issued and outstanding			—			—
	Paid in capital in excess of par value			287,242			287,242
	Accumulated deficit			(241,537	)		(249,738	)
	Accumulated other comprehensive loss			(12,525	)		(18,886	)

		Total stockholder’s equity		33,180			18,618

Total liabilities and stockholder’s equity			$	655,611		$	704,982

			June 30,			December 31,
			2003			2002
Assets
Current assets:
	Cash and cash equivalents		$	64,560		$	18,565
	Restricted cash			110			3,440
	Accounts receivable-trade, net of allowance of $5,407 and $6,075			46,032			48,820
	Accounts receivable-affiliate			4,766			3,761
	Materials and supplies			11,603			11,203
	Prepayments and other current assets			5,753			6,172
	Assets held for sale			—			261
		Total current assets		132,824			92,222
Investment				1,097			—
Property, plant and equipment				1,100,073			1,090,365
Less: accumulated depreciation				662,128			625,276
	Property, plant and equipment, net			437,945			465,089
Goodwill				38,403			77,225
Intangible assets				22,804			23,269
Debt issuance costs, net of amortization of $21,200 and $15,883				15,813			21,130
Deferred charges and other assets				25,850			26,047
Total assets			$	674,736		$	704,982
		Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	4,909		$	5,933
	Accounts payable-affiliates			3,524			1,319
	Accounts payable, accrued and other current liabilities			41,477			49,480
	Advance billings and customer deposits			9,146			9,804
		Total current liabilities		59,056			66,536
Long-term obligations, net of current portion				477,183			586,898
Other deferred credits and long-term liabilities				30,961			32,930
Commitments and contingencies				—			—
Stockholder’s equity:
	Common stock, $.01 par value; 1,000 shares authorized, 1 share issued and outstanding			—			—
	Contributed capital			287,242			287,242
	Accumulated deficit			(164,460	)		(249,738	)
	Accumulated other comprehensive loss			(15,246	)		(18,886	)
		Total stockholder’s equity		107,536			18,618
Total liabilities and stockholder’s equity			$	674,736		$	704,982

See Notes to Consolidated Financial Statements

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

Consolidated Statements of Operations (Unaudited, In Thousands)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Operating revenue:
	Local telephone		$	53,261		$	52,815		$	162,472		$	172,128
	Wireless			12,591			11,903			34,868			32,420
	Directory			—			8,360			11,631			25,382
	Internet			8,223			6,422			24,416			14,815
	Interexchange			4,147			3,998			12,623			11,991

		Total operating revenue		78,222			83,498			246,010			256,736
Operating expense:
	Local telephone (exclusive of depreciation and amortization)			30,160			27,968			84,267			88,221
	Wireless (exclusive of depreciation and amortization)			7,545			7,441			21,796			21,329
	Directory (exclusive of depreciation and amortization)			—			3,408			5,249			10,366
	Internet (exclusive of depreciation and amortization)			11,730			8,756			35,829			21,904
	Interexchange (exclusive of depreciation and amortization)			6,056			5,723			17,886			17,494
	Contract termination and asset impairment charges			54,539			—			54,539			—
	Depreciation and amortization			22,044			22,458			66,735			61,690
	Loss (gain) on disposal of assets, net			(15,968	)		1,835			(112,507	)		2,108

		Total operating expense		116,106			77,589			173,794			223,112
Operating income (loss)				(37,884	)		5,909			72,216			33,624
Other income (expense):
	Interest expense			(21,939	)		(12,744	)		(49,546	)		(36,462	)
	Interest income and other			(15,100	)		578			(10,121	)		1,626

		Total other expense		(37,039	)		(12,166	)		(59,667	)		(34,836	)

Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle				(74,923	)		(6,257	)		12,549			(1,212	)
Income tax benefit				—			—			—			—

Income (loss) from continuing operations				(74,923	)		(6,257	)		12,549			(1,212	)
Loss from discontinued operations, net of tax				—			(136	)		(52	)		(7,523	)

Income (loss) before cumulative effect of change in accounting principle				(74,923	)		(6,393	)		12,497			(8,735	)
Cumulative effect of change in accounting principle				—			—			—			(105,350	)

Net income (loss)			$	(74,923	)	$	(6,393	)	$	12,497		$	(114,085	)

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2003			2002			2003			2002
Operating revenue:
	Local telephone		$	55,210		$	63,991		$	109,211		$	119,313
	Wireless			11,947			11,162			22,277			20,517
	Directory			3,353			8,381			11,631			17,022
	Internet			9,037			4,551			16,193			8,393
	Interexchange			5,239			4,820			10,005			9,670
		Total operating revenue		84,786			92,905			169,317			174,915
Operating expense:
	Local telephone (exclusive of depreciation and amortization)			27,487			32,571			55,334			61,569
	Wireless (exclusive of depreciation and amortization)			7,019			7,069			13,583			13,111
	Directory (exclusive of depreciation and amortization)			1,800			3,532			5,249			6,958
	Internet (exclusive of depreciation and amortization)			13,050			7,317			23,186			12,445
	Interexchange (exclusive of depreciation and amortization)			7,124			6,997			13,713			13,612
	Depreciation and amortization			22,091			19,973			44,691			39,232
		Total operating expense		78,571			77,459			155,756			146,927
Gain (loss) on disposal of assets				97,285			(273	)		96,539			(273	)
Operating income				103,500			15,173			110,100			27,715
Other income (expense):
	Interest expense			(14,920	)		(10,975	)		(27,607	)		(23,718	)
	Interest income and other			4,787			548			4,979			1,048
		Total other expense		(10,133	)		(10,427	)		(22,628	)		(22,670	)
Income before income taxes, discontinued operations and cumulative effect of change in accounting principle				93,367			4,746			87,472			5,045
Income taxes				—			—			—			—
Income from continuing operations				93,367			4,746			87,472			5,045
Loss from discontinued operations				—			(515	)		(52	)		(7,387	)
Income (loss) before cumulative effect of change in accounting principle				93,367			4,231			87,420			(2,342	)
Cumulative effect of change in accounting principle				—			—			—			(105,350	)
Net income (loss)			$	93,367		$	4,231		$	87,420		$	(107,692	)

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Consolidated Statements of Cash Flows (Unaudited, In Thousands)

Consolidated Statements of Cash Flows (Unaudited, In Thousands)


		Nine Months Ended
		September 30,

		2003			2002

Cash Flows from Operating Activities:
Net income (loss)		$	12,497		$	(114,085	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Loss on discontinued operations		52			7,523
	Cumulative effect of change in accounting principle		—			105,350
	Depreciation and amortization		66,735			61,690
	Loss (gain) on disposal of assets and asset impairment charges, net		(48,748	)		2,108
	Amortization of debt issuance costs and original issue discount		15,866			3,134
	Capitalized interest		(88	)		(1,078	)
	Other deferred credits		1,743			(914	)
	Changes in components of working capital:
	Accounts receivable and other current assets		8,087			(4,774	)
	Accounts payable and other current liabilities		(5,028	)		(8,899	)
	Other		(557	)		(280	)
	Net cash used by discontinued operations		(40	)		(596	)

Net cash provided by operating activities			50,519			49,179
Cash Flows from Investing Activities:
Construction and capital expenditures, net of capitalized interest			(29,787	)		(50,253	)
Net proceeds from sale of business			155,268			—
Issuance of note receivable			—			(15,000	)
Release of funds from escrow			3,539			3,706
Placement of funds in restricted account			(645	)		—

Net cash provided (used) by investing activities			128,375			(61,547	)
Cash Flows from Financing Activities:
Payments on long-term debt			(433,973	)		(6,774	)
Proceeds from issuance of long-term debt			375,970			—
Debt issuance costs			(14,000	)		—
Dividends			(4,296	)		(830	)

Net cash used by financing activities			(76,299	)		(7,604	)
Increase (decrease) in cash and cash equivalents			102,595			(19,972	)
Cash and cash equivalents at beginning of the period			18,565			41,012

Cash and cash equivalents at the end of the period		$	121,160		$	21,040

Supplemental Cash Flow Data:
Interest paid		$	31,670		$	30,796
Income taxes paid			—			—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages		$	2,340		$	2,306
Interest rate swap marked to market		$	(6,361	)	$	3,786

			Six Months Ended
			June 30,
			2003			2002
Cash Flows from Operating Activities:
Net income (loss)			$	87,420		$	(107,692	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Loss on discontinued operations			52			7,387
	Cumulative effect of change in accounting principle			—			105,350
	Depreciation and amortization			44,691			39,232
	Loss (gain) on disposal of assets			(96,539	)		273
	Amortization of debt issuance costs and original issue discount			5,317			2,078
	Capitalized interest			(92	)		(767	)
	Other deferred credits			1,671			(1,891	)
	Changes in components of working capital:
		Accounts receivable and other current assets		1,725			(7,664	)
		Accounts payable and other current liabilities		(9,085	)		(9,730	)
		Other		(122	)		98
	Net cash used by discontinued operations			(41	)		(477	)
Net cash provided by operating activities				34,997			26,197
Cash Flows from Investing Activities:
Construction and capital expenditures, net of capitalized interest				(15,211	)		(31,975	)
Net proceeds from sale of business				138,091			—
Release of funds from escrow				3,539			—
Placement of funds in restricted account				(200	)		—
Net cash provided (used) by investing activities				126,219			(31,975	)
Cash Flows from Financing Activities:
Payments on long-term debt				(113,079	)		(6,640	)
Dividends				(2,142	)		—
Net cash used by financing activities				(115,221	)		(6,640	)
Increase (decrease) in cash and cash equivalents				45,995			(12,418	)
Cash and cash equivalents at beginning of the period				18,565			41,012
Cash and cash equivalents at the end of the period			$	64,560		$	28,594
Supplemental Cash Flow Data:
Interest paid			$	23,862		$	24,914
Income taxes paid				—			—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages			$	2,340		$	2,306
Interest rate swap marked to market			$	(3,640	)	$	577

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements (Unaudited, Amounts In Thousands Except Per Share Amounts)

DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Alaska Communications Systems Holdings, Inc. and Subsidiaries (the “Company” or “ACS Holdings”), a Delaware corporation, is an integrated communications provider engaged principally in providing local telephone, wireless, Internet, and interexchange services to its customers in the state of Alaska through its telecommunications subsidiaries. The Company ~~was~~is formed in October of 1998 for the purpose of acquiring and operating telecommunications properties. The principal activities in 1998 and through May 14, 1999 were the preparation of systems and obtaining financing for pending acquisitions. On May 14, 1999, the Company was acquired and became a wholly owned subsidiary of Alaska Communications Systems Group, Inc. (the “Parent” or “ACS Group”).

The financial statements for the Company represent the consolidated financial position, results of operations and cash flows principally of the following entities:

	•		Alaska Communications Systems Holdings, Inc.

	•		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”)

On May 8, 2003, the Company completed the sale of a majority interest in its directory business, as described in Note 4, Gain on Disposal of Assets.

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, 2002. Certain reclassifications have been made to the 2002 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 and contract termination and asset impairment charges) 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 and ~~six~~ ~~months~~nine months ended ~~June~~September 30, 2003 and 2002 are not necessarily indicative of the ~~results~~ results of operations which might be expected for the entire year or any other ~~interim~~ interim periods.

Revenue Recognition

Access revenue is recognized when earned. The Company participates in toll revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the Regulatory Commission of Alaska (“RCA”) within the intrastate jurisdiction and the Federal Communications Commission (“FCC”) within the interstate jurisdiction. Much of the interstate access 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. During the second quarter of 2002, the Company recognized as revenue $11,066 of previously deferred interstate access revenue and reversed $1,673 of interest expense previously accrued thereon as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. At ~~June~~September 30, 2003 and 2002, the Company had liabilities of $1516,~~423~~433 and $20,~~656~~748, respectively, related to its estimate of refundable access revenue.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. Historically, lives approved for regulatory purposes have approximated economically useful lives. On July 2122, 2002, the Company received an order from the RCA which extended lives approved for ratemaking purposes beyond the economically useful lives of the underlying assets. Management petitioned for reconsideration on the ACSA order and the RCA has accepted additional testimony and held a hearing in ~~June~~May of 2003. AThe ~~final~~RCA subsequently reconsidered its order onand ~~the~~adopted ~~matter~~service islives ~~not~~that ~~expected~~more ~~until~~closely approximate the ~~second~~actual ~~half~~economic lives of ~~2003~~the assets. The Company implemented, effective January 1, 2003, higher depreciation rates for its ~~regulated~~ regulated telephone plant for the interstate jurisdiction. As a result, the Company has recorded a regulatory asset under SFAS No. 71 of $58,~~466~~289 as of ~~June~~ September 30, 2003 related to depreciation of the regulated telephone plant allocable to ~~its~~ 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 $~~745~~670 at ~~June~~September 30, 2003. If the ~~Company~~ Company were not following SFAS No. 71, it would have recorded additional ~~depreciation~~ depreciation expense of $58,~~466~~289 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. 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 its 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 ~~six~~nine months ended ~~June~~ September 30, 2003 or 2002. If compensation costs had been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company’s net income (loss) on a pro forma basis for the ~~six~~nine months ended ~~June~~ September 30, 2003 and 2002 would have been as follows:

		For the six months ended June 30,
		For the nine months ended September 30,
		2003		2002
Net income (loss):
	As reported	$	8710,~~420~~565	$	(~~107~~116,~~692~~025	)
	Pro forma		8710,~~499~~620		(~~108~~117,~~574~~415	)

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:

	2003			2002
Risk free rate		2.5695	%		42.1369	%
Dividend yield		0.0	%		0.0	%
Expected volatility factor		6557.70	%		5457.08	%
Expected option life (years)		6.1			6.1

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

NEW ACCOUNTING STANDARDS

On August 15, 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Under the new accounting method, asset retirement obligations are recognized in the period in which they are incurred if a reasonable estimate of fair value can be made. When the liability is initially recorded, the cost is capitalized and increases the carrying value of the related long-lived asset. The liability is then accreted to its present value each period and the capitalized cost is depreciated over the estimated useful life of the related asset. At the settlement date, the obligation is settled for its recorded amount or a gain or loss is recognized upon settlement.

In accordance with federal and state regulations, depreciation expense for the Company’s local exchange carriers regulated operations have historically included an additional provision for cost of removal. Under SFAS No. 143, the additional cost of removal provision would no longer be included in depreciation expense, because it does not meet the recognition and measurement principles of an asset retirement obligation. On December 20, 2002, the FCC notified local exchange carriers that they should not adopt the provisions of SFAS No. 143 unless specifically required by the FCC in the future. As a result of the FCC ruling, the Company will continue to record a regulatory liability for cost of removal for its local exchange ~~carriers~~carrier subsidiaries that follow SFAS No. 71 accounting.

The Company applied the provisions of SFAS No. 143 to its nonregulated subsidiaries effective January 1, 2003. The Company’s wireless segment has entered into cell site operating leases, which ~~typically~~ ~~have~~are ~~terms~~subject ofto ~~10 years~~the ~~that~~provisions ~~contain~~of this ~~contractual~~statement. ~~obligations~~Cell ~~to restore~~site ~~the~~lease ~~site~~agreements tomay ~~its~~contain ~~original~~clauses ~~condition.~~requiring restoration ~~Since~~of the ~~Company~~leased ~~plans~~site toat ~~renew these~~the ~~leases~~end ~~indefinitely,~~of itthe islease ~~unable~~term, tocreating ~~determine~~an ~~when~~asset retirement itobligation. ~~might~~Landlords ~~have~~may ~~to perform~~choose ~~the~~not ~~restoration~~to ofexercise ~~the~~these rights as cell sites toare ~~their~~considered ~~original~~useful ~~condition~~improvements. The Company’s isinitial ~~therefore~~adoption of ~~unable~~this tostatement ~~estimate~~did ~~the~~not ~~fair~~have ~~value~~a ofmaterial ~~these~~impact ~~asset retirement~~on ~~obligations~~its ~~and~~results ~~has~~of ~~not~~operations, financial ~~recorded~~position aor ~~liability~~cash ~~under SFAS No~~flows. ~~143.~~

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that companies recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company’s adoption of this statement did not have a material impact on its financial position, results of operations, or cash flows.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not currently have plans to change to the fair value method of accounting for ~~our~~its stock based compensation. The disclosure requirements are now effective.

On April 30, 2003, FASB issued ~~Statement~~SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under ~~Statement~~ SFAS No. 133. This Statement is effective for contracts entered into or ~~modified~~ modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company’s ~~does not believe the~~ adoption of this statement ~~will~~ did not have a material impact on its financial position, results of operations, or cash flows.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

2. NEW ACCOUNTING STANDARDS (~~Continued~~continued)

On May 15, 2003, FASB issued ~~Statement~~SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The new Statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity, be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 ~~has~~had no effect on the Company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The recognition and measurement provisions are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no effect on the Company’s financial position, results of operations or cash flows.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 defines variable interest entities as those entities with a business purpose that either do not have any equity investors with voting rights, or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements are effective for all variable interest entities created after January 31, 2003, and to pre-existing entities in the first fiscal year or interim period ~~beginning after~~ending ~~June~~after December 15, 2003. Certain disclosure requirements are effective for ~~financial~~ financial statements issued after January 31, 2003. The adoption of FIN 46 has no effect on the Company’s financial position, results of operations or cash flows.

LONG-TERM OBLIGATIONS

During the first quarter of 2003, the Company’s lenders approved an amendment and waiver to its ~~Senior~~senior ~~Credit~~credit ~~Facility~~facility that, among other things, permitted the Company to sell its directory business and required that in the event the sale was completed, 75% of proceeds would be used to repay outstanding ~~Senior~~senior ~~Credit~~credit ~~Facility~~facility term loans. This amendment and waiver became effective on May 8, 2003, and on May 13, 2003, the Company paid down $106,650 of ~~the~~its outstanding ~~Senior Credit Facility~~ term loans. ~~Long-term~~under ~~obligations consists~~its ofold ~~the~~senior ~~following~~credit ~~at June 30, 2003 and December 31, 2002:~~facility.

	2003		2002
Senior credit facility term loan – tranche A	$	105,727	$	148,500
Senior credit facility term loan – tranche B		113,158		148,500
Senior credit facility term loan – tranche C		101,842		133,650
9 3/8% senior subordinated notes due 2009		150,000		150,000
Capital leases and other long-term obligations		11,365		12,181
		482,092		592,831
Less current portion		4,909		5,933
Long-term obligations, net of current portion	$	477,183	$	586,898

On August 26, 2003, the Company completed the refinancing of its old senior credit facility term loans. The Company entered into a $250,000 new senior credit facility consisting of a term loan facility in an aggregate principal amount of $200,000 and an undrawn revolving credit facility of $50,000. The Company simultaneously issued $182,000 aggregate principal amount of 9 7/8% senior notes due 2011 at an issue price of approximately 96.7% for net proceeds of $175,970. From these proceeds, the Company paid off the remaining $320,727 of its old senior credit facility, thereby extinguishing it. As a result of this early extinguishment of debt, the Company charged $9,696 of unamortized debt issue costs to interest expense in August 2003.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

LONG-TERM OBLIGATIONS (Continued)

~~The aggregate maturities of long~~ Long-term obligations ~~for~~consists ~~each~~ of the ~~five years~~following ~~and~~at ~~thereafter subsequent to June~~September 30, 2003 ~~are~~and December 31, ~~as follows~~2002:

	2003 (July 1-December 31)			$	729
		2003				2002
2004 (January 1 - December 31)					4,979
Old senior credit facility term loan - tranche A		$	—			$	148,500
2005 (January 1 - December 31)					4,178
Old senior credit facility term loan - tranche B			—				148,500
2006 (January 1 - December 31)					106,755
Old senior credit facility term loan - tranche C			—				133,650
2007 (January 1 - December 31)					111,786
New senior credit facility term loan			200,000				—
		Thereafter			253,665
9 3/8% senior subordinated notes due 2009			150,000				150,000
				$	482,092
9 7/8% senior subordinated notes due 2011			182,000				—
Original issue discount - 9 7/8% senior subordinated notes due 2011			(5,982	)			—
Capital leases and other long-term obligations			9,897				12,181
			535,915				592,831
Less current portion			2,304				5,933
Long-term obligations, net of current portion		$	533,611			$	586,898

4. The ~~GAIN~~aggregate ONmaturities ~~DISPOSAL~~of OFlong-term ~~ASSETS~~obligations for each of the five years and thereafter subsequent to September 30, 2003 are as follows:

On April 28, 2003, the Company entered into an underwriting agreement with a syndicate of Canadian investment banks to complete the sale of a majority interest in the newly formed ACS Media, LLC (the “Directories Business”). The Company subsequently filed on April 29, 2003, a final prospectus with Canadian securities regulators to sell a majority interest in its Directories Business in a public offering in Canada to the ACS Media Income Fund (the “Fund”), which is a Canadian income fund. The offering was sponsored by the Company. The transaction closed on May 8, 2003, with the Company selling an 87.42% interest and retaining a 12.58% interest in the Directories Business. The Company is accounting for its 12.58% interest in the Directories Business under the equity method.


2003 (October 1 - December 31)	$	23
2004 (January 1 - December 31)		2,288
2005 (January 1 - December 31)		2,315
2006 (January 1 - December 31)		2,337
2007 (January 1 - December 31)		2,327
2008 (January 1 - December 31)		2,151
Thereafter		524,474

	$	535,915

The ~~Fund~~Company’s ~~sold~~obligations ~~17,500~~under ~~units~~the onnew ~~May 8,~~senior ~~2003~~credit ~~for~~facility ~~net~~are unconditionally ~~proceeds~~and ofirrevocably ~~$110~~guaranteed,~~435, after~~ ~~deducting~~joint ~~its~~and ~~underwriters’~~severally, ~~fees~~by the Company and ~~transaction~~its ~~expenses of $10~~subsidiaries,~~246.~~ ~~The Fund’s~~and ~~net~~secured ~~proceeds~~by ~~were~~collateral ~~used~~that toincludes ~~acquire~~substantially ~~from~~all of the Company anand 87its subsidiaries’ assets.~~42%~~ ~~interest~~The innew senior credit facility ~~the~~contains ~~Directories~~a ~~Business.~~number ~~The~~of ~~Company~~restrictive ~~received~~covenants ~~net~~and ~~proceeds~~events of ~~$105~~default,~~059~~ ~~after~~including ~~deducting~~covenants ~~its~~limiting ~~fees~~capital expenditures, incurrence of debt, and ~~expenses~~the ~~associated~~payment ~~with~~of dividends, and requires the ~~transaction~~Company to achieve certain financial ratios. The Company is in compliance with all of ~~$5,376~~the covenants.

The Company entered into an arrangement with the Metropolitan Life Insurance Company (MetLife) to provide a credit facility to its Directories Business on May 8, 2003 immediately prior to the sale of its Directories Business to the Fund. The Directories Business then drew $35,000 of term loans against the facility, using $1,468 to pay fees and expenses related to the debt issuance and $87 to prepay an annual agency fee to MetLife. Of the $33,445 in net cash proceeds, $413 was deposited into the Directories Business as cash working capital and $33,032 was distributed to the Company as a dividend. The credit facility is non-recourse to the Company.

The Company’s retained 12.58% minority interest was recorded at an initial book value of $1,077 representing the pro-rata retained ownership at historical book value. The Company’s retained 12.58% interest in ACS Media LLC is subject to an exchange rights agreement that permits its conversion to units of the Fund after the expiration of a 90 day lockup period. Units of the Fund are traded on the Toronto Stock Exchange under the symbol AYP.UN. The Company can sell its exchanged units to a qualified investor or investors in a private placement transaction or offer them in a secondary public offering at its option after the expiration of a 180 day lockup agreement that expires on November 4, 2003 with the underwriters of the Fund’s offering in Canada.

The Company realized a gain on foreign exchange of $4,104 as a result of currency fluctuation from April 28, 2003, the date the underwriting and investment agreements were executed, to May 8, 2003, the date the offering closed and the transaction was consummated. The foreign exchange gain is included in Interest and other income in the Consolidated Statement of Operations. The Company recognized a gain on disposition of $97,578 on a pre-tax basis, exclusive of the $4,104 exchange gain. The income tax expense associated with the gain on disposition of $40,114 was offset by a reduction in the valuation allowance that had been established for the tax benefit of prior net operating losses.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

4. ~~GAIN~~CONTRACT ONTERMINATION ~~DISPOSAL~~AND OFASSET ~~ASSETS~~IMPAIRMENT ~~(Continued)~~CHARGES

During the quarter ended September 30, 2003, the Company recorded $54,539 in contract termination and asset impairment charges. These charges resulted from (1) the termination of a 5 year comprehensive Telecommunications Partnering Agreement (“TPA”) with the State of Alaska and (2) an impairment of fiber optic indefeasible rights of use and IP network and service center assets resulting from the termination of the TPA as well as changes in the communications industry and the economy. The following table itemizes the components of the contract termination and asset impairment charges.


Contract termination charges:
	Contract termination payment	$	3,448
	Loss on disposal of assets		5,648
	Accounts receivable and working capital write-downs		3,256

Total contract termination charges			12,352
Asset impairment charges			42,187

	Total contract termination and asset impairment charges	$	54,539

Contract Termination Charges

On September 15, 2003, the Company received notification from the State of Alaska that it intended to terminate the TPA with the Company and disentangle. Subsequently, the Company and the State negotiated and agreed to a definitive Settlement Agreement and Mutual Release (the “Settlement Agreement”) effective October 14, 2003, outlining the terms of disentanglement between the parties. Under the terms of the Settlement Agreement, the Company agreed to pay to the State of Alaska $3,448 in cash, one half of which was due upon signing the agreement and one half of which will be due upon completion of disentanglement. The Company also agreed to transfer to the State title to certain assets used in providing services under the TPA which resulted in a net loss on disposal of those assets of $5,648. Based on terms of the Settlement Agreement, the Company determined that certain accounts receivable and working capital associated with the TPA will not be fully recoverable and has written them down to their estimated net realizable value, resulting in a charge of $3,256 during the quarter. The estimated net realizable value of the working capital and which assets are ultimately transferred to the State could change as the Company completes disentanglement.

Asset Impairment Charges

The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company was prompted to conduct an asset impairment review of its fiber optic Indefeasible Rights of Use (“IRUs”) that were acquired in 1999 and 2001 and certain IP network and certain service center assets due to the termination of the TPA as discussed above (which was a significant customer using these assets), indications that market pricing of similar assets were significantly below the Company’s carrying value, and significant industry and economic trends affecting the Company’s ability to generate positive cash flow from these assets in its interexchange and Internet segments. This review was conducted under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result of its review, the Company determined that its carrying value of IRUs exceeded their fair value by $27,128 and its carrying value of the IP network and service center assets exceeded their fair value by $15,059. Accordingly, the Company recorded a $42,187 impairment charge and wrote the assets down to their fair value during the third quarter of 2003.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, Amounts In Thousands Except Per Share Amounts)

GAIN ON DISPOSAL OF ASSETS

On April 28, 2003, the Company entered into an underwriting agreement with a syndicate of Canadian investment banks to complete the sale of a majority interest in the newly formed ACS Media, LLC (the “Directories Business”). The Company subsequently filed on April 29, 2003, a final prospectus with Canadian securities regulators to sell a majority interest in its Directories Business in a public offering in Canada to the ACS Media Income Fund (the “Fund”), which is a Canadian income fund. The offering was sponsored by the Company. The transaction closed on May 8, 2003, with the Company selling an 87.42% interest and retaining a 12.58% interest in the Directories Business. The Company’s retained 12.58% minority interest was recorded at an initial book value of $1,077 representing the pro-rata retained ownership at historical book value, and accounted for under the equity method.

The Company also entered into an arrangement with the Metropolitan Life Insurance Company (MetLife) to provide a credit facility to its Directories Business on May 8, 2003 immediately prior to the sale of its Directories Business to the Fund. The Directories Business then drew $35,000 of term loans against the facility, using $1,468 to pay fees and expenses related to the debt issuance and $87 to prepay an annual agency fee to MetLife. Of the $33,445 in net cash proceeds, $413 was deposited into the Directories Business as cash working capital and $33,032 was distributed to the Company as a dividend. The credit facility is non-recourse to the Company.

The Fund then sold 17,500 units on May 8, 2003 for net proceeds of $110,435, after deducting its underwriters’ fees and transaction expenses of $10,246. The Fund’s net proceeds were used to acquire from the Company an 87.42% interest in the Directories Business. The Company received net proceeds of $105,059 after deducting its fees and expenses associated with the Transaction of $5,376. The Company recognized a gain on disposition of $97,578 on a pre-tax basis.

The following table indicates the Company’s basis in assets sold to and liabilities assumed by the Fund and its retained interest in ACS Media LLC.

Net proceeds of the Transaction			$	$105,059	~~105,059~~
Basis in directories business sold:
	Assets sold to the Fund:
	Current assets			4,214
		Current assets		$	4,214
	Property, plant and equipment, net			90
		Property, plant and equipment, net			90
	Goodwill			38,821
		Goodwill			38,821
	Debt issue costs			1,468
		Debt issue costs			1,468
	Current liabilities			(1,035	)
		Current liabilities			(1,035	)
	Long-term debt			(35,000	)
		Long-term debt			(35,000	)
Basis of Directories Business				8,558
Basis of Directories Business					8,558
Equity in minority interest retained				1,077
Equity in minority interest retained					1,077
Basis in net assets sold to the Fund				7,481
Basis in net assets sold to the Fund				$	7,481
Gain on sale of Directories Business			$	97,578
Gain on sale of Directories Business				$	97,578

~~The~~ On August 27, 2003, the Company ~~has~~was ~~entered~~released ~~into~~from ~~several~~a ~~long-term~~lockup ~~contracts~~agreement relating ~~with~~to the ~~Directories~~ ~~Business,~~remaining ~~including~~interest ain ~~50-year~~the ~~publishing~~Directories ~~agreement,~~Business aand ~~50-year~~the Company ~~license~~disposed ~~agreement,~~of asubstantially ~~45-year~~all ~~non-compete~~of ~~agreement,~~its ~~and~~remaining ainterest ~~10-year~~in ~~billing~~the ~~and~~Directories ~~collection~~Business ~~agreement.~~through ~~The~~the ~~Company~~exercise ~~will~~of ~~also~~its ~~maintain~~right ~~minority~~to ~~representation through~~convert up99.23% toof ~~three~~its ~~Managers~~then remaining of12.58% interest in the ~~permitted~~Directories ~~nine~~Business ~~Managers~~to 2,500 units of ~~ACS~~the ACS Media ~~LLC~~Income ~~so long~~Fund, aswhich itwere ~~owns~~then sold in an ~~interest~~underwritten ofoffering. ~~10%~~The transaction orsettled ~~more~~on inSeptember 4, ~~the~~2003, ~~Directories~~generating ~~Business. Currently~~$17,177 ~~Charles~~in E.net ~~Robinson,~~proceeds after ~~the~~deducting ~~Company’s~~transaction ~~Chairman~~expenses ~~and~~of ~~CEO~~$100, and W.resulting ~~Dexter Paine,~~in ~~III~~a ~~and~~gain ~~Wray~~on disposition T.of ~~Thorn~~$15,940 ~~both~~after ~~Directors~~deducting of the ~~Company~~basis ~~and~~of ~~employees~~$1,237. ~~of Fox~~As ~~Paine~~a &result ~~Company~~of this transaction, the Company’s ~~majority~~now ~~shareholder,~~owns ~~are~~less ~~Managers~~than 0.1% of ~~ACS Media~~the ~~LLC~~Directories Business.

~~5. DISCONTINUED OPERATIONS~~12

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, Amounts In Thousands Except Per Share Amounts)

GAIN ON DISPOSAL OF ASSETS (Continued)

Related to the initial sale, the Company realized a gain on foreign exchange of $4,104 as a result of currency fluctuation from April 28, 2003, the date the underwriting and investment agreements were executed, to May 8, 2003, the date the offering closed and the transaction was consummated. From the subsequent sale the Company realized an additional gain on foreign exchange of $157 as a result of currency fluctuation from August 27, 2003, the date the purchase agreement for substantially all of its remaining interest in the Directories Business was executed, to September 4 2003, the date the transaction closed. The foreign exchange gains are included in Interest income and other in the Consolidated Statements of Operations.

In contemplation of the sale of the Directories Business, the Company formalized a number of agreements with ACS InfoSource, Inc. in May 2003 effective as of January 1, 2001, the day ACS InfoSource, Inc. was formed. ACS InfoSource, Inc. subsequently assigned certain contracts, including a 50-year directory publishing and distribution agreement and a 50-year license agreement, to ACS Media, LLC as a part of the sale transaction. The Company also entered into a 45-year non-competition agreement and a 10-year billing and collection agreement directly with ACS Media, LLC. The Company has a right to minority representation of one manager of the permitted nine managers of ACS Media LLC so long as its long-term contracts with ACS Media LLC are in effect. Currently, a director of the Company and employee of Fox Paine, the Company’s majority shareholder, is a manager of ACS Media, LLC.

NON-OPERATING IMPAIRMENT CHARGES

The Company periodically evaluates the fair value of its investments and other non-operating assets against their carrying value. Any impairments to non-operating assets are charged to non-operating expense under the caption Interest income and other in the Consolidated Statement of Operations. During the third quarter of 2003, impairment charges were taken as a result of changes in market and economic conditions, a notice of termination of the TPA, and the Company’s reassessment of the net realizable value of its note receivable and the associated option to purchase certain network assets from Neptune Communications, L.L.C. As a result of this analysis, the Company recorded in Interest income and other in the Consolidated Statement of Operations an impairment charge of $15,924. The Company still has purchase commitment obligations associated with this note as described in Note 13.

DISCONTINUED OPERATIONS

On March 30, 2002, the Company approved a plan to sell its wireless cable television service segment. As a result of this decision, the operating revenue and expense of this segment has been classified as discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented and the assets and liabilities of the disposal group have been written down to their fair value, net of expected selling expenses. The income tax benefit in all periods was offset by a valuation allowance. The Company completed its disposal of its wireless cable television segment as of March 31, 2003.

The following discloses the results of the discontinued operations ~~for~~of the ~~six~~wireless cable television service segment for the three and nine months ended ~~June~~ September 30, 2003 and 2002:

	Six Months Ended June 30,
	Three Months Ended						Nine Months Ended
	2003			2002
	September 30,						September 30,
Operating revenue	$	110		$	425
	2003			2002			2003			2002
Operating expense		162			720
Operating revenue	$	—		$	169		$	110		$	594
Operating loss		(52	)		(295	)
Operating expense		—			305			162			1,025
Interest expense		—			(32	)
Operating loss		—			(136	)		(52	)		(431	)
Loss from operations of discontinued segment		(52	)		(327	)
Interest expense		—			—			—			(32	)
Write down of net assets to fair value		—			(7,060	)
Loss from operations of discontinued segment		—			(136	)		(52	)		(463	)
Loss from discontinued operations	$	(52	)	$	(7,387	)
Write down of net assets to fair value		—			—			—			(7,060	)
Loss from discontinued operations of wireless cable television segment	$	—		$	(136	)	$	(52	)	$	(7,523	)

1113

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

68. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. 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 the Company 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. The second step of the goodwill impairment test compares the implied fair value goodwill of the reporting unit with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is the excess of the fair value of a reporting unit over the amounts assigned to assets and liabilities. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

The Company has determined that its business segments constitute reporting units, with the exception of the Internet segment, which ~~includes~~included two reporting units at the time the Company adopted SFAS 142. Those reporting units ~~are~~were (1) Internet service and (2) IP based private network service. The Company completed the initial step of impairment testing which indicated that goodwill recorded in the local telephone, Internet, and interexchange segments was impaired as of January 1, 2002. Due to the potential impairment, the Company then completed the second step of the test to measure the amount of the impairment. The Company 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 the Company’s estimated cost of capital for purposes of arriving at a discount factor. Based on that analysis, a transitional impairment loss of $105,350 was recognized as the cumulative effect of a change in accounting principle in the consolidated statement of operations. The income tax benefit of $39,540 was offset by a valuation allowance.

79. STOCK INCENTIVE PLANS

The Company’s employees participate in various plans of ACS Group, which through its 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 ~~June~~September 30, 2003, ACS Group has reserved a total of of 6,060 shares of authorized common stock for issuance under the plans. The ~~plans~~ plans terminate in approximately 10 years from the date of adoption and allow forfeited options to be reissued. In general, options under the plans vest ratably over three, four or five years and will have an exercise price Equal ~~equal~~ to the fair market value of the common stock on the date of grant. The term of options granted under the plan may not exceed 10 years.

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan

ACS Group has reserved 4,910 shares under this plan, which was adopted by the ~~Parent~~Company in November 1999. At ~~June~~September 30, 2003, 5,712 options have been granted, 2,~~420~~537 have been forfeited, 441 have been exercised, and 1,~~618~~735 shares ~~are~~ are available for grant under the plan.

Alaska Communications Systems 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 150 shares under this plan. At ~~June~~ September 30, 2003, 110 shares have been awarded and 40 shares are available for grant under the plan. Prior to 2003, directors were required to receive not less than 25% of their annual retainer and meeting fees in the form of ACS Group’s stock, and may have elected to receive up to 100% of director’s compensation in the form of stock. Starting in 2003, directors no longer have the option of receiving stock and receive all of their annual retainer and meeting fees in cash.

1214

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

79. STOCK INCENTIVE PLANS (Continued)

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 1,000 shares under this plan. At ~~June~~September 30, 2003, 547 shares are available for issuance and sale. On June 30, 2003, 87 shares were issued under the plan. 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.

810. 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 under separate management and offering different services than those offered by the other segments. The Company evaluates the performance of its segments based on operating income (loss).

Previously, the Company reported its Directories Business as a separate segment. As discussed in Note 45, the Company sold an 87.42% interest in its Directories Business during the second quarter of 2003 and is no longer directly engaged in day-to-day management of that business. Therefore, the Directories Business no longer constitutes a reportable segment. Accordingly, the historical operating results for the Directories Business are included in “All Other” in the accompanying tables.

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 the Company 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 ~~six~~nine months ended ~~June~~September 30, 2003:

	Local
	Local Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total
	Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total
Operating revenue	$	162,472	$	34,929	$	24,416		$	15,380		$	30,913		$	(22,100	)	$	246,010
Operating revenue	$	109,211	$	22,318	$	16,193		$	15,197		$	24,239		$	(17,841	)	$	169,317
Depreciation and amortization		43,115		4,568		7,232			892			10,928			—			66,735
Depreciation and amortization		28,738		2,929		4,832			1,117			7,075			—			44,691
Loss (gain) on disposal of assets and asset impairment charges, net		826		1,947		31,019			12,661			(95,201	)					(48,748	)
Operating income (loss)		1418,~~438~~748		13,~~764~~614		(1457,~~845~~032	)		(~~197~~18,253	)		~~108~~125,~~949~~148			(9	)		~~110~~72,~~100~~216
Interest expense		~~279~~355		23		6793			~~148~~192			2748,~~111~~903			—			2749,~~607~~546
Interest income		130		—		—			—			~~596~~1,055			—			~~597~~1,085
Equity in earnings of minority investments		—		—		—			—			~~303~~628			—			~~303~~628
Income tax provision (benefit)		56,~~881~~712		~~724~~1,485		—			—			(68,~~605~~197	)		—			—
Income (loss) from continuing operations		811,~~279~~712		12,~~038~~126		(1457,~~912~~125	)		(~~345~~18,445	)		9374,~~421~~290			(9	)		8712,~~472~~549
Total assets		~~476~~497,~~228~~546		7681,~~261~~824		(4285,~~816~~431	)		(118,~~052~~066	)		~~166~~179,~~115~~738			—			~~674~~655,~~736~~611
Capital expenditures		814,~~728~~994		~~542~~6,533		34,~~250~~226			1052			56,~~021~~322			—			1732,~~551~~127

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands)

8. BUSINESS SEGMENTS (Continued)

Operating revenue disclosed above includes intersegment operating revenue of $12,692 for local telephone, $ 883 for wireless, $6,863 for interexchange and $13,101 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 six months ended June 30, 2002:

	Local
	Telephone		Wireless			Internet			Interexchange			All Other			Eliminations			Total
Operating revenue	$	119,313	$	20,536		$	8,393		$	14,638		$	26,918		$	(14,883	)	$	174,915
Depreciation and amortization		27,475		2,755			2,974			1,138			4,890			—			39,232
Operating income (loss)		22,945		1,926			(9,932	)		(566	)		13,379			(37	)		27,715
Interest expense		809		(2	)		(55	)		(151	)		(24,319	)		—			(23,718	)
Interest income		1		1			—			—			1,169			—			1,171
Income tax provision (benefit)		9,571		796			—			—			(10,367	)		—			—
Income (loss) from continuing operations		14,184		1,133			(9,987	)		(717	)		469			(37	)		5,045
Total assets		614,346		100,154			(8,516	)		19,660			53,392			—			779,036
Capital expenditures		13,295		5,111			10,099			—			5,776			—			34,281

Operating revenue disclosed above include intersegment operating revenue of $11,323 for local telephone, $881 for wireless, $6,809 for interexchange and $10,598 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 June 30, 2003:

	Local
	Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total
Operating revenue	$	55,210	$	11,965	$	9,037		$	8,358		$	9,640		$	(9,424	)	$	84,786
Depreciation and amortization		14,046		1,484		2,422			562			3,577			—			22,091
Operating income (loss)		8,112		1,735		(8,392	)		378			101,667			—			103,500
Interest expense		143		1		33			74			14,669			—			14,920
Interest income		—		—		—			—			351			—			351
Equity in earnings of minority investments		—		—		—			—			303			—			303
Income tax provision (benefit)		3,374		720		—			—			(4,094	)		—			—
Income (loss) from continuing operations		4,595		1,014		(8,425	)		304			95,879			—			93,367
Total assets		476,324		76,557		(42,456	)		(764	)		165,075			—			674,736
Capital expenditures		4,734		421		2,018			2			1,922			—			9,097

Operating revenue disclosed above includes intersegment operating revenue of $7,329 for local telephone, $470 for wireless, $3,990 for interexchange and $6,430 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 June 30, 2002:

	Local
	Telephone		Wireless			Internet			Interexchange			All Other			Eliminations			Total
Operating revenue	$	63,991	$	11,172		$	4,551		$	7,504		$	13,436		$	(7,749	)	$	92,905
Depreciation and amortization		13,794		1,390			1,721			564			2,504			—			19,973
Operating income (loss)		14,356		1,169			(6,068	)		(287	)		6,018			(15	)		15,173
Interest expense		1,242		(1	)		(48	)		(76	)		(12,092	)		—			(10,975	)
Interest income		—		1			—			—			606			—			607
Income tax provision (benefit)		6,882		502			—			—			(7,384	)		—			—
Income (loss) from continuing operations		8,716		668			(6,116	)		(363	)		1,856			(15	)		4,746
Total assets		616,321		100,929			(8,240	)		18,947			51,080			—			779,037
Capital expenditures		7,325		4,156			6,973			—			2,581			—			21,035

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands)

8. BUSINESS SEGMENTS (Continued)

Operating revenue disclosed above include intersegment operating revenue of $5,947 for local telephone, $477 for wireless, $351 for directory, $3,611 for interexchange and $5,055 for all other. In accordance with SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated above.

9. RELATED PARTY TRANSACTIONS

On April 17, 2001, the Company issued an interest bearing note receivable to an officer totaling $328. The note bore interest at the Mid-Term Applicable Federal Rate and was due on April 15, 2005. The note was secured by a pledge of 100 shares of ACS Group’s stock held in the officer’s name. In accordance with an addendum to the officer’s employment agreement dated May 3, 2001, the loan was to be forgiven ratably over a three year period ending April 16, 2004. Accordingly, $114 was forgiven on April 16, 2002 and recognized as compensation expense. Upon the closing of the sale of the Company’s Directories Business on May 8, 2003 for which the officer received a fee of $840, he waived certain rights under his employment agreement, including the forgiveness terms of this indebtedness that would have occurred during 2003 and 2004. On May 8, 2003, the officer paid off the note balance of $238, including accrued interest.

Fox Paine & Company, the majority stockholder, receives an annual management fee in the amount of one percent of the Company’s net income before interest expense, income taxes and depreciation and amortization, calculated without regard to the fee. The management fee expense for the six months ended June 30, 2003 and 2002 was $571 and $656, respectively.

The board of directors approved the payment of a fee equal to 1% of the gross proceeds generated from the sale of the Company’s Directories Business to Fox Paine & Company upon closing such sale, plus expenses in connection with such transaction, including the reimbursement by the Company of the $250 consulting fee and transaction bonus paid to an officer under the agreement described below. The Company paid Fox Paine & Company $2,095 on May 8, 2003.

Fox Paine & Company entered into a consulting agreement with an officer of the Company for services rendered for the benefit of the Company related to the sale of the Company’s Directories Business. Under this agreement, the officer was paid a lump sum consulting fee and transaction bonus of $250 in May 2003. As described above, Fox Paine & Company was reimbursed for this expense.

As previously described, the Company has 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 June 30, 2003, the Company had recorded in accounts payable – affiliates $2,933 due to ACS Media, LLC under these contracts, primarily under the billing and collection agreement. The Company will also maintain minority representation through up to three Managers of the permitted nine Managers of ACS Media LLC as long as it owns an interest of 10% or more. Currently, Charles E. Robinson, the Company’s Chairman and CEO, and W. Dexter Paine, III and Wray T. Thorn, both Directors of the Company and employees of Fox Paine & Company, the Company’s majority shareholder, are Managers of ACS Media LLC.

10. SEVERANCE AND RESTRUCTURING CHARGES

In June 2002, the Company adopted a restructuring plan and recorded $862 of associated charges, including $523 of severance costs and $339 of lease termination costs for office space. The Company completed this plan as of June 30, 2003. The Company has paid out $434 accrued under this plan for 13 employees who were terminated and eligible for severance. The Company also reversed the remaining restructuring charges of $428 during the quarter ended June 30, 2003. This amount substantially related to a planned early termination of a real property operating lease, which the Company has subsequently determined to retain through its original term.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements~~, Continued~~ (Unaudited, Amounts In Thousands Except Per Share Amounts)

1110. ~~CONDENSED~~BUSINESS ~~CONSOLIDATING~~SEGMENTS ~~FINANCIAL STATEMENTS~~ (Continued)

~~ACS~~ Operating ~~Holdings~~revenue ~~and~~disclosed itabove ~~subsidiaries~~includes ~~are~~intersegment ~~guarantors~~operating revenue of ~~the~~$21,228 ~~ACS~~for ~~Group’s~~local ~~senior discount~~telephone, ~~debentures. Additionally~~$1,351 ~~ACS~~for ~~Group~~wireless, ~~and~~$1,826 ~~ACS~~for ~~Holdings’ subsidiaries are~~interexchange ~~guarantors under ACS Holdings’ 9 3/8 % senior subordinated notes. All ACS Group’s~~ and ~~Holdings’~~$19,775 ~~subsidiaries~~for ~~(the~~all ~~“Subsidiaries”) are 100% owned~~other. ~~The guarantees are full and unconditional.~~ In ~~addition,~~accordance ~~all~~with ~~guarantees~~SFAS ~~are joint and several~~No. ~~Accordingly~~ 71, ~~the~~intercompany ~~interim condensed consolidating financial~~revenue ~~statements~~between ~~are~~local ~~presented~~telephone ~~below.~~and ~~Additionally,~~all ~~see~~other ~~ACS~~segments ~~Group’s~~is ~~10-Q~~not ~~(Commission File~~eliminated ~~Number 000-28167) for ACS Group only financial statements~~above.

~~Condensed~~ The ~~Consolidated~~following ~~Balance~~table ~~Sheet~~illustrates selected financial data for each segment ~~June~~as ~~30,~~of ~~2003~~and for the nine

				Combined				ACS Holdings								ACS Holdings
		Local Telephone				Wireless				Internet				Interexchange				All Other			Eliminations			Total
				Subsidiaries				Parent Only				Eliminations				Consolidated
Operating revenue		$	172,128			$	32,455			$	14,815			$	13,490			$	44,096		$	(20,248	)	$	256,736
Assets
Depreciation and amortization			41,401				4,134				4,773				1,700				9,682			—			61,690
Current assets:
Operating income (loss)			24,071				3,553				(15,286	)			(599	)			21,944			(59	)		33,624
	Cash and cash equivalents			$	214			$	64,346			$	—			$	64,560
Interest expense			(627	)			3				95				226				36,765			—			36,462
	Restricted cash				—				110				—				110
Interest income			2				3				—				2				1,734			—			1,741
	Accounts receivable-trade, net				18,700				27,332				—				46,032
Income tax provision (benefit)			10,010				1,452				—				—				(11,462	)		—			—
	Accounts receivable-affiliates				206,523				(201,757	)			—				4,766
Income (loss) from continuing operations			14,690				2,100				(15,381	)			(823	)			(1,739	)		(59	)		(1,212	)
	Materials and supplies				11,534				69				—				11,603
Total assets			612,582				103,955				(14,064	)			11,250				59,733			—			773,456
	Prepayments and other current assets				2,046				3,707				—				5,753
Capital expenditures			20,937				8,554				15,583				—				7,485			—			52,559
		Total current assets			239,017				(106,193	)			—				132,824
Investments					1,097				614,275				(614,275	)			1,097
Property, plant and equipment					992,586				107,487				—				1,100,073
Less: accumulated depreciation					618,996				43,132				—				662,128
	Property, plant and equipment, net				373,590				64,355				—				437,945
Goodwill					—				—				38,403				38,403
Intangible assets					22,146				658				—				22,804
Debt issuance costs, net					—				15,813				—				15,813
Deferred charges and other assets					3,229				22,621				—				25,850
Total assets				$	639,079			$	611,529			$	(575,872	)		$	674,736
Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations			$	1,350			$	3,559			$	—			$	4,909
	Accounts payable-affiliates				—				3,524				—				3,524
	Accounts payable, accrued and other current liabilities				20,608				20,870				(1	)			41,477
	Advance billings and customer deposits				9,146				—				—				9,146
		Total current liabilities			31,104				27,953				(1	)			59,056
Long-term obligations, net of current portion					6,175				471,008				—				477,183
Deferred income taxes					11,765				(11,765	)			—				—
Other deferred credits and long-term liabilities					14,164				16,797				—				30,961
Commitments and contingencies					—				—				—				—
Stockholder’s equity:
	Common stock				25								(25	)			—
	Treasury stock				—				—				—				—
	Paid in capital in excess of par value				361,124				287,242				(361,124	)			287,242
	Retained earnings (accumulated deficit)				214,722				(164,460	)			(214,722	)			(164,460	)
	Accumulated other comprehensive loss				—				(15,246	)			—				(15,246	)
		Total stockholder’s equity			575,871				107,536				(575,871	)			107,536
Total liabilities and stockholder’s equity				$	639,079			$	611,529			$	(575,872	)		$	674,736

Operating revenue disclosed above include intersegment operating revenue of $17,849 for local telephone, $1,350 for wireless, $1,729 for interexchange and $19,803 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 September 30, 2003:


	Local Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total

Operating revenue	$	53,261	$	12,611	$	8,223		$	5,153		$	6,674		$	(7,700	)	$	78,222
Depreciation and amortization		14,377		1,639		2,400			(225	)		3,853			—			22,044
Loss (gain) on disposal of assets and asset impairment charges, net		529		1,205		31,019			12,661			2,377						47,791
Operating income (loss)		2,777		961		(42,852	)		(14,969	)		16,199			—			(37,884	)
Interest expense		76		1		26			44			21,792			—			21,939
Interest income		29		—		—			—			367			—			396
Equity in earnings of minority investments		—		—		—			—			325			—			325
Income tax provision (benefit)		831		761		—			—			(1,592	)		—			—
Income (loss) from continuing operations		1,900		199		(42,878	)		(15,013	)		(19,131	)		—			(74,923	)
Total assets		497,546		81,824		(85,431	)		(18,066	)		179,738			—			655,611
Capital expenditures		6,266		5,991		976			42			1,301			—			14,576

Operating revenue disclosed above includes intersegment operating revenue of $6,991 for local telephone, $469 for wireless, $697 for interexchange and $6,674 for all other. In accordance with SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated above.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1110. ~~CONDENSED~~ ~~CONSOLIDATING~~BUSINESS ~~FINANCIAL~~SEGMENTS ~~STATEMENTS~~ (Continued)

~~Condensed~~ The ~~Consolidated~~following ~~Balance~~table ~~Sheet~~illustrates selected financial data for each segment ~~December~~as of and for the three months ended September 3130, 2002:

				Combined				ACS Holdings								ACS Holdings
		Local
				Subsidiaries				Parent Only				Eliminations				Consolidated
		Telephone				Wireless				Internet				Interexchange				All Other			Eliminations			Total
Assets
Operating revenue		$	52,815			$	11,919			$	6,422			$	4,586			$	17,178		$	(9,422	)	$	83,498
Current assets:
Depreciation and amortization			13,926				1,379				1,799				562				4,792			—			22,458
	Cash and cash equivalents			$	(73	)		$	18,638			$	—			$	18,565
Operating income (loss)			1,126				1,627				(5,354	)			(33	)			8,565			(22	)		5,909
	Restricted cash				—				3,440				—				3,440
Interest expense			182				1				40				75				12,446			—			12,744
	Accounts receivable-trade, net				28,713				20,107				—				48,820
Interest income			1				2				—				2				565			—			570
	Accounts receivable-affiliates				34,625				(30,864	)			—				3,761
Income tax provision (benefit)			439				656				—				—				(1,095	)		—			—
	Materials and supplies				11,176				27				—				11,203
Income (loss) from continuing operations			506				967				(5,394	)			(106	)			(2,208	)		(22	)		(6,257	)
	Prepayments and other current assets				2,941				3,231				—				6,172
Total assets			598,021				107,001				(9,774	)			11,429				66,779			—			773,456
	Assets held for sale				261				—				—				261
Capital expenditures			7,642				3,443				5,484				—				1,436			—			18,005
		Total current assets			77,643				14,579				—				92,222
Investments					—				550,964				(550,964	)			—
Property, plant and equipment					987,132				103,233				—				1,090,365
Less: accumulated depreciation					588,536				36,740				—				625,276
	Property, plant and equipment, net				398,596				66,493				—				465,089
Goodwill					38,821				—				38,404				77,225
Intangible assets					22,237				1,032				—				23,269
Debt issuance costs, net					—				21,130				—				21,130
Deferred charges and other assets					32,278				(6,231	)			—				26,047
Total assets				$	569,575			$	647,967			$	(512,560	)		$	704,982
Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations			$	1,312			$	4,621			$	—			$	5,933
	Accounts payable-affiliates				—				1,319				—				1,319
	Accounts payable, accrued and other current liabilities				18,834				30,646				—				49,480
	Advance billings and customer deposits				9,804				—				—				9,804
		Total current liabilities			29,950				36,586				—				66,536
Long-term obligations, net of current portion					6,899				579,999				—				586,898
Deferred income taxes					7,673				(7,673	)			—				—
Other deferred credits and long-term liabilities					12,493				20,437				—				32,930
Stockholder’s equity:
	Common stock				25								(25	)			—
	Treasury stock				—				—				—				—
	Paid in capital in excess of par value				355,574				287,242				(355,574	)			287,242
	Retained earnings (accumulated deficit)				156,961				(249,738	)			(156,961	)			(249,738	)
	Accumulated other comprehensive loss				—				(18,886	)			—				(18,886	)
		Total stockholder’s equity			512,560				18,618				(512,560	)			18,618
Total liabilities and stockholder’s equity				$	569,575			$	647,967			$	(512,560	)		$	704,982

Operating revenue disclosed above include intersegment operating revenue of $5,515 for local telephone, $468 for wireless, $711 for interexchange and $9,207 for all other. In accordance with SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated above.

11. RELATED PARTY TRANSACTIONS

Fox Paine & Company, the majority stockholder, receives an annual management fee in the amount of one percent of the Company’s net income before interest expense, income taxes and depreciation and amortization, calculated without regard to the fee. The management fee expense for the nine months ended September 30, 2003 and 2002 was $878 and $986, respectively.

In August 2003, the board of directors also approved the payment of a fee equal to 1% of the gross proceeds generated from the refinancing of the Company’s debt. The Company paid Fox Paine & Company $3,760 on August 28, 2003.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

11. ~~CONDENSED~~ ~~CONSOLIDATING~~RELATED ~~FINANCIAL~~PARTY ~~STATEMENTS~~TRANSACTIONS (Continued)

~~Condensed~~ On ~~Consolidated~~September 14, ~~Statement~~2003, the Company entered into an agreement with a retiring officer to reacquire 267 shares of ~~Operations~~the ACS Group’s stock owned by the ~~Three~~officer ~~Months~~in ~~Ended~~January ~~June~~2004 at a purchase price per share equal to the highest average closing price of a share of the Company’s stock during any 5-consecutive day trading period in January 2004. The officer will deliver the shares to the Company on January 302, ~~2003~~2004, and the Company will make the repurchase payments to the officer in four equal quarterly installments commencing on March 31, 2004.

			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated
Operating revenue:
	Local telephone		$	55,210		$	—		$	—		$	55,210
	Wireless			11,965			—			(18	)		11,947
	Directory			3,353			—			—			3,353
	Internet			9,037			—			—			9,037
	Interexchange			8,358			—			(3,119	)		5,239
	Other			—			6,287			(6,287	)		—
		Total operating revenue		87,923			6,287			(9,424	)		84,786
Operating expense:
	Local telephone			32,759			142			(5,414	)		27,487
	Wireless			8,746			—			(1,727	)		7,019
	Directory			1,832			—			(32	)		1,800
	Internet			15,007			—			(1,957	)		13,050
	Interexchange			7,418			—			(294	)		7,124
	Depreciation and amortization			18,514			3,577			—			22,091
		Total operating expense		84,276			3,719			(9,424	)		78,571
Gain on disposal of assets				97,285			—			—			97,285
Operating income				100,932			2,568			—			103,500
Other income (expense):
	Interest expense			(251	)		(14,669	)		—			(14,920	)
	Interest income and other			4,407			58,833			(58,453	)		4,787
		Total other expense		4,156			44,164			(58,453	)		(10,133	)
Income (loss) before income taxes and discontinued operations				105,088			46,732			(58,453	)		93,367
Income tax expense (benefit)				46,635			(46,635	)		—			—
Income (loss) from continuing operations				58,453			93,367			(58,453	)		93,367
Loss from discontinued operations				—			—			—			—
Net income (loss)			$	58,453		$	93,367		$	(58,453	)	$	93,367

On September 19, 2003, Fox Paine entered into a consulting agreement with an officer of the Company. The consulting term will begin on January 1, 2004 and continue for one year, after which either party may terminate the arrangement. During the consulting term, the officer will advise Fox Paine on and evaluate potential opportunities in the telecommunications industry, and Fox Paine will pay the officer a monthly fee of $20 for these services.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1112. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS ~~(Continued)~~

~~Condensed~~ ACS ~~Consolidated~~Holdings ~~Statement~~ and it subsidiaries are guarantors of ~~Operations~~the ACS Group’s senior ~~Three~~discount ~~Months~~debentures. ~~Ended~~Additionally, ~~June 30~~ACS Group and ACS Holdings’ subsidiaries are guarantors under ACS Holdings’ 9 3/8 % senior subordinated notes. All ACS Group’s and Holdings’ subsidiaries (the “Subsidiaries”) are 100% owned. The guarantees are full and unconditional. In addition, ~~2002~~all guarantees are joint and several. Accordingly, the interim condensed consolidating financial statements are presented below. Additionally, see ACS Group’s 10-Q (Commission File Number 000-28167) for ACS Group only financial statements.

			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated
Operating expense:
	Local telephone		$	63,991		$	—		$	—		$	63,991
	Wireless			11,172			—			(10	)		11,162
	Directory			8,381			—			—			8,381
	Internet			4,551			—			—			4,551
	Interexchange			7,504			—			(2,684	)		4,820
	Other			211			5,055			(5,266	)		—
		Total operating revenue		95,810			5,055			(7,960	)		92,905
Operating expense:
	Local telephone			35,841			1,234			(4,504	)		32,571
	Wireless			8,509			—			(1,440	)		7,069
	Directory			3,535			—			(3	)		3,532
	Internet			8,874			—			(1,557	)		7,317
	Interexchange			7,227			—			(230	)		6,997
	Other			315			—			(315	)		—
	Depreciation and amortization			17,492			2,503			(22	)		19,973
		Total operating expense		81,793			3,737			(8,071	)		77,459
Gain (loss) on disposal of assets				(128	)		(145	)		—			(273	)
Operating income				13,889			1,173			111			15,173
Other income (expense):
	Interest expense			1,113			(12,092	)		4			(10,975	)
	Interest income and other			2			(2,523	)		3,069			548
		Total other expense		1,115			(14,615	)		3,073			(10,427	)
Income (loss) before income taxes and and discontinued operations				15,004			(13,442	)		3,184			4,746
Income tax expense (benefit)				9,376			(9,376	)		—			—
Income (loss) from continuing operations				5,628			(4,066	)		3,184			4,746
Loss from discontinued operations				(400	)		—			(115	)		(515	)
Net income (loss)			$	5,228		$	(4,066	)	$	3,069		$	4,231

Condensed Consolidated Balance Sheet
September 30, 2003


			Combined		ACS Holdings						ACS Holdings
			Subsidiaries		Parent Only			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	190	$	120,970		$	—		$	121,160
	Restricted cash			—		555			—			555
	Accounts receivable-trade, net			15,172		24,298			—			39,470
	Accounts receivable-affiliates			202,873		(198,144	)		—			4,729
	Materials and supplies			10,247		80			—			10,327
	Prepayments and other current assets			3,486		2,780			—			6,266

		Total current assets		231,968		(49,461	)		—			182,507
Investments				—		565,755			(565,755	)		—
Property, plant and equipment				947,139		108,663			—			1,055,802
Less: accumulated depreciation				624,688		46,759			—			671,447

	Property, plant and equipment, net			322,451		61,904			—			384,355
Goodwill				—		—			38,403			38,403
Intangible assets				22,100		461			—			22,561
Debt issuance costs, net				—		19,312			—			19,312
Deferred charges and other assets				1,765		6,708			—			8,473

Total assets			$	578,284	$	604,679		$	(527,352	)	$	655,611

	Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	510	$	1,794		$	—		$	2,304
	Accounts payable-affiliates			—		898			—			898
	Accounts payable, accrued and other current liabilities			17,394		31,041			—			48,435
	Advance billings and customer deposits			8,871		—			—			8,871

		Total current liabilities		26,775		33,733			—			60,508
Long-term obligations, net of current portion				5,617		527,994			—			533,611
Deferred income taxes				4,304		(4,304	)		—			—
Other deferred credits and long-term liabilities				14,236		14,076			—			28,312
Commitments and contingencies				—		—			—			—
Stockholder’s equity:
	Common stock			25		—			(25	)		—
	Paid in capital in excess of par value			361,124		287,242			(361,124	)		287,242
	Retained earnings (accumulated deficit)			166,203		(241,537	)		(166,203	)		(241,537	)
	Accumulated other comprehensive loss			—		(12,525	)		—			(12,525	)

		Total stockholder’s equity		527,352		33,180			(527,352	)		33,180

Total liabilities and stockholder’s equity			$	578,284	$	604,679		$	(527,352	)	$	655,611

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1112. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated ~~Statement of~~Balance ~~Operations~~Sheet ~~Six Months Ended June~~December 3031, ~~2003~~2002

				~~Combined~~	Combined			~~ACS Holdings~~	ACS Holdings							~~ACS Holdings~~	ACS Holdings
				~~Subsidiaries~~	Subsidiaries			~~Parent Only~~	Parent Only			~~Eliminations~~	Eliminations			~~Consolidated~~	Consolidated
Operating revenue:
Assets
	Local telephone			$	109,211			$	—			$	—			$	109,211
Current assets:
	Wireless				22,318				—				(41	)			22,277
	Cash and cash equivalents				$	(73	)		$	18,638			$	—			$	18,565
	Directory				11,631				—				—				11,631
	Restricted cash					—				3,440				—				3,440
	Internet				16,193				—				—				16,193
	Accounts receivable-trade, net					28,713				20,107				—				48,820
	Interexchange				15,197				—				(5,192	)			10,005
	Accounts receivable-affiliates					34,625				(30,864	)			—				3,761
	Other				110				12,608				(12,718	)			—
	Materials and supplies					11,176				27				—				11,203
		Total operating revenue			174,660				12,608				(17,951	)			169,317
	Prepayments and other current assets					2,941				3,231				—				6,172
Operating expense:
	Assets held for sale					261				—				—				261
	Local telephone				65,738				434				(10,838	)			55,334
			Total current assets			77,643				14,579				—				92,222
	Wireless				16,883				—				(3,300	)			13,583
Investments						—				550,964				(550,964	)			—
	Directory				5,359				—				(110	)			5,249
Property, plant and equipment						987,132				103,233				—				1,090,365
	Internet				26,206				—				(3,020	)			23,186
Less: accumulated depreciation						588,536				36,740				—				625,276
	Interexchange				14,277				—				(564	)			13,713
	Property, plant and equipment, net					398,596				66,493				—				465,089
	Other				160				—				(160	)			—
Goodwill						38,821				—				38,404				77,225
	Depreciation and amortization				37,628				7,073				(10	)			44,691
Intangible assets						22,237				1,032				—				23,269
		Total operating expense			166,251				7,507				(18,002	)			155,756
Debt issuance costs, net						—				21,130				—				21,130
Gain on disposal of assets					96,538				—				1				96,539
Deferred charges and other assets						32,278				(6,231	)			—				26,047
Operating income					104,947				5,101				52				110,100
Total assets					$	569,575			$	647,967			$	(512,560	)		$	704,982
Other income (expense):
		Liabilities and Stockholder’s Equity
	Interest expense				(496	)			(27,111	)			—				(27,607	)
Current liabilities:
	Interest income and other				4,408				58,332				(57,761	)			4,979
	Current portion of long-term obligations				$	1,312			$	4,621			$	—			$	5,933
		Total other expense			3,912				31,221				(57,761	)			(22,628	)
	Accounts payable-affiliates					—				1,319				—				1,319
Income (loss) before income taxes and discontinued operations					108,859				36,322				(57,709	)			87,472
	Accounts payable, accrued and other current liabilities					18,834				30,646				—				49,480
Income tax expense (benefit)					46,635				(46,635	)			—				—
	Advance billings and customer deposits					9,804				—				—				9,804
Income (loss) from continuing operations					62,224				82,957				(57,709	)			87,472
			Total current liabilities			29,950				36,586				—				66,536
Loss from discontinued operations					—				—				(52	)			(52	)
Long-term obligations, net of current portion						6,899				579,999				—				586,898
Net income (loss)				$	62,224			$	82,957			$	(57,761	)		$	87,420
Deferred income taxes						7,673				(7,673	)			—				—
Other deferred credits and long-term liabilities						12,493				20,437				—				32,930
Stockholder’s equity:
	Common stock					25								(25	)			—
	Paid in capital in excess of par value					355,574				287,242				(355,574	)			287,242
	Retained earnings (accumulated deficit)					156,961				(249,738	)			(156,961	)			(249,738	)
	Accumulated other comprehensive loss					—				(18,886	)			—				(18,886	)
			Total stockholder’s equity			512,560				18,618				(512,560	)			18,618
Total liabilities and stockholder’s equity					$	569,575			$	647,967			$	(512,560	)		$	704,982

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1112. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations ~~Six~~Three Months Ended ~~June~~September 30, ~~2002~~2003

				Combined	~~Combined~~			ACS Holdings	~~ACS Holdings~~							ACS Holdings	~~ACS Holdings~~
				Subsidiaries	~~Subsidiaries~~			Parent Only	~~Parent Only~~			Eliminations	~~Eliminations~~			Consolidated	~~Consolidated~~
Operating revenue:
	Local telephone	~~Local telephone~~		$	$53,261	~~119,313~~		$	$—	—		$	$—	—		$	$53,261	~~119,313~~
	Wireless	~~Wireless~~			12,611	~~20,536~~			—	—			(20	~~(19~~)	)		12,591	~~20,517~~
		Directory				17,022				—				—				17,022
	Internet				8,223				—				—				8,223
		Internet				8,393				—				—				8,393
	Interexchange				5,153				—				(1,006	)			4,147
		Interexchange				14,638				—				(4,968	)			9,670
	Other				—				6,674				(6,674	)			—
		Other				425				9,896				(10,321	)			—
		Total operating revenue			79,248				6,674				(7,700	)			78,222
			Total operating revenue			180,327				9,896				(15,308	)			174,915
Operating expense:
Operating expense:
	Local telephone				35,578				169				(5,587	)			30,160
		Local telephone				68,893				1,540				(8,864	)			61,569
	Wireless				8,617				—				(1,072	)			7,545
		Wireless				15,751				—				(2,640	)			13,111
	Internet				11,435				—				295				11,730
		Directory				6,964				—				(6	)			6,958
	Interexchange				7,392				—				(1,336	)			6,056
		Internet				15,327				—				(2,882	)			12,445
	Contract termination and asset impairment charges				52,152				2,387				—				54,539
		Interexchange				14,066				—				(454	)			13,612
	Depreciation and amortization				18,191				3,853				—				22,044
		Other				657				—				(657	)			—
	Loss (gain) on disposal of assets				(15,974	)			6				—				(15,968	)
		Depreciation and amortization				34,444				4,888				(100	)			39,232
		Total operating expense			117,391				6,415				(7,700	)			116,106
			Total operating expense			156,102				6,428				(15,603	)			146,927
Operating income (loss)					(38,143	)			259				—				(37,884	)
Gain (loss) on disposal of assets						(128	)			(145	)			—				(273	)
Other income (expense):
Operating income						24,097				3,323				295				27,715
	Interest expense				(147	)			(21,792	)			—				(21,939	)
Other income (expense):
	Interest income and other				512				(64,131	)			48,519				(15,100	)
		Interest expense				569				(24,319	)			32				(23,718	)
		Total other income (expense)			365				(85,923	)			48,519				(37,039	)
		Interest income and other				6				(3,894	)			4,936				1,048
Income (loss) before income taxes					(37,778	)			(85,664	)			48,519				(74,923	)
			Total other expense			575				(28,213	)			4,968				(22,670	)
Income tax expense (benefit)					8,354				(8,354	)			—				—
Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle						24,672				(24,890	)			5,263				5,045
Net income (loss)				$	(46,132	)		$	(77,310	)		$	48,519			$	(74,923	)
Income tax expense (benefit)						14,501				(14,501	)			—				—
Income (loss) from continuing operations						10,171				(10,389	)			5,263				5,045
Loss from discontinued operations						(6,810	)			(250	)			(327	)			(7,387	)
Income (loss) before cumulative effect
	of change in accounting principle					3,361				(10,639	)			4,936				(2,342	)
Cumulative effect of change in accounting principle						(8,297	)			(97,053	)			—				(105,350	)
Net income (loss)					$	(4,936	)		$	(107,692	)		$	4,936			$	(107,692	)

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1112. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2003
	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated
Net cash provided (used) by operating activities	$	(124,533	)	$	159,530		$	—	$	34,997
Cash Flows from Investing Activities:
Construction and capital expenditures		(10,245	)		(4,966	)		—		(15,211	)
Net proceeds from sale of business		138,091			—			—		138,091
Other investing activities		—			3,339			—		3,339
Net cash provided (used) by investing activities		127,846			(1,627	)		—		126,219
Cash Flows from Financing Activities:
Payments on long-term debt		(3,026	)		(110,053	)		—		(113,079	)
Dividends		—			(2,142	)		—		(2,142	)
Net cash used by financing activities		(3,026	)		(112,195	)		—		(115,221	)
Increase in cash and cash equivalents		287			45,708			—		45,995
Cash and cash equivalents, beginning of the period		(73	)		18,638			—		18,565
Cash and cash equivalents, end of the period	$	214		$	64,346		$	—	$	64,560
Supplemental Cash Flow Data:
Interest paid	$	531		$	23,331		$	—	$	23,862
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,340		$	—		$	—	$	2,340
Interest rate swap marked to market	$	—		$	(3,640	)	$	—	$	(3,640	)

Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2002


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
	Local telephone		$	52,815		$	—		$	—		$	52,815
	Wireless			11,919			—			(16	)		11,903
	Directory			8,360			—			—			8,360
	Internet			6,422			—			—			6,422
	Interexchange			4,586			—			(588	)		3,998
	Other			—			8,818			(8,818	)		—

		Total operating revenue		84,102			8,818			(9,422	)		83,498
Operating expense:
	Local telephone			36,938			551			(9,521	)		27,968
	Wireless			8,537			—			(1,096	)		7,441
	Directory			3,415			—			(7	)		3,408
	Internet			9,118			—			(362	)		8,756
	Interexchange			6,120			—			(397	)		5,723
	Other			29			—			(29	)		—
	Depreciation and amortization			17,692			4,766			—			22,458
	Loss (gain) on disposal of assets			(3	)		(145	)		1,983			1,835

		Total operating expense		81,846			5,172			(9,429	)		77,589
Operating income				2,256			3,646			7			5,909
Other income (expense):
	Interest expense			(298	)		(12,446	)		—			(12,744	)
	Interest income and other			—			(699	)		1,277			578

		Total other expense		(298	)		(13,145	)		1,277			(12,166	)

Income (loss) before income taxes and and discontinued operations				1,958			(9,499	)		1,284			(6,257	)
Income tax expense (benefit)				3,106			(3,106	)		—			—

Income (loss) from continuing operations				(1,148	)		(6,393	)		1,284			(6,257	)
Loss from discontinued operations, net				(136	)		—			—			(136	)

Net income (loss)			$	(1,284	)	$	(6,393	)	$	1,284		$	(6,393	)

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

1112. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2002
	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated
Net cash provided (used) by operating activities	$	29,373		$	(3,176	)	$	—	$	26,197
Cash Flows from Investing Activities:
Construction and capital expenditures		(26,635	)		(5,340	)		—		(31,975	)
Net cash used by investing activities		(26,635	)		(5,340	)		—		(31,975	)
Cash Flows from Financing Activities:
Payments on long-term debt		(2,172	)		(4,468	)		—		(6,640	)
Net cash used by financing activities		(2,172	)		(4,468	)		—		(6,640	)
Increase (decrease) in cash and cash equivalents		566			(12,984	)		—		(12,418	)
Cash and cash equivalents, beginning of the period		1,239			39,773			—		41,012
Cash and cash equivalents, end of the period	$	1,805		$	26,789		$	—	$	28,594
Supplemental Cash Flow Data:
Interest paid	$	(532	)	$	25,446		$	—	$	24,914
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,306		$	—		$	—	$	2,306
Interest rate swap marked to market	$	—		$	577		$	—	$	577

Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2003


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
	Local telephone		$	162,472		$	—		$	—		$	162,472
	Wireless			34,929			—			(61	)		34,868
	Directory			11,631			—			—			11,631
	Internet			24,416			—			—			24,416
	Interexchange			15,380			—			(2,757	)		12,623
	Other			—			19,282			(19,282	)		—

		Total operating revenue		248,828			19,282			(22,100	)		246,010
Operating expense:
	Local telephone			99,783			603			(16,119	)		84,267
	Wireless			24,611			—			(2,815	)		21,796
	Directory			5,359			—			(110	)		5,249
	Internet			36,976			—			(1,147	)		35,829
	Interexchange			19,786			—			(1,900	)		17,886
	Other			9			—			(9	)		—
	Contract termination and asset impairment charges			52,152			2,387			—			54,539
	Depreciation and amortization			55,809			10,926			—			66,735
	Loss (gain) on disposal of assets			(112,513	)		6			—			(112,507	)

		Total operating expense		181,972			13,922			(22,100	)		173,794

Operating income				66,856			5,360			—			72,216
Other income (expense):
	Interest expense			(643	)		(48,903	)		—			(49,546	)
	Interest income and other			4,920			(5,799	)		(9,242	)		(10,121	)

		Total other income (expense)		4,277			(54,702	)		(9,242	)		(59,667	)

Income (loss) before income taxes and discontinued operations				71,133			(49,342	)		(9,242	)		12,549
Income tax expense (benefit)				59,452			(59,452	)		—			—

Income (loss) from continuing operations				11,681			10,110			(9,242	)		12,549
Loss from discontinued operations				(52	)		—			—			(52	)

Net income (loss)			$	11,629		$	10,110		$	(9,242	)	$	12,497

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, Amounts In Thousands Except Per Share Amounts)

12. ~~COMMITMENTS~~ ~~AND~~CONDENSED ~~CONTINGENCIES~~CONSOLIDATING FINANCIAL STATEMENTS (Continued)

~~The~~Condensed ~~Company~~Consolidated isStatement ~~involved in various claims, legal actions and regulatory proceedings arising in the ordinary course~~ of ~~business. The Company believes~~Operations ~~that~~Nine ~~the~~Months ~~disposition~~Ended ~~of these matters will not have a material adverse effect on the Company’s consolidated financial position~~September 30, ~~results of operations or cash~~2002 ~~flows.~~

A class action lawsuit was filed against the Company on March 14, 2001. The litigation alleges various contract and tort claims concerning the Company’s decision to terminate its Infinite Minutes long distance plan. Although the Company believes this suit is without merit and intends to vigorously defend its position, it is impossible to determine at this time the actual number of plaintiffs or the claims that will actually continue to be in dispute.


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
	Local telephone		$	172,128		$	—		$	—		$	172,128
	Wireless			32,455			—			(35	)		32,420
	Directory			25,382			—			—			25,382
	Internet			14,815			—			—			14,815
	Interexchange			13,490			—			(1,499	)		11,991
	Other			—			18,714			(18,714	)		—

		Total operating revenue		258,270			18,714			(20,248	)		256,736
Operating expense:
	Local telephone			104,223			2,091			(18,093	)		88,221
	Wireless			23,780			—			(2,451	)		21,329
	Directory			10,379			—			(13	)		10,366
	Internet			22,668			—			(764	)		21,904
	Interexchange			18,345			—			(851	)		17,494
	Other			72			—			(72	)		—
	Depreciation and amortization			52,036			9,654			—			61,690
	Loss on disposal of assets			125			—			1,983			2,108

		Total operating expense		231,628			11,745			(20,261	)		223,112
Operating income				26,642			6,969			13			33,624
Other income (expense):
	Interest expense			303			(36,765	)		—			(36,462	)
	Interest income and other			6			(4,593	)		6,213			1,626

		Total other income (expense)		309			(41,358	)		6,213			(34,836	)

Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle				26,951			(34,389	)		6,226			(1,212	)
Income tax expense (benefit)				17,607			(17,607	)		—			—

Income (loss) from continuing operations				9,344			(16,782	)		6,226			(1,212	)
Loss from discontinued operations				(7,273	)		(250	)		—			(7,523	)

Income (loss) before cumulative effect of change in accounting principle				2,071			(17,032	)		6,226			(8,735	)
Cumulative effect of change in accounting principle				(8,297	)		(97,053	)		—			(105,350	)

Net income (loss)			$	(6,226	)	$	(114,085	)	$	6,226		$	(114,085	)

In December 2001, the Company entered into a material contract with the State of Alaska to provide it with comprehensive telecommunications services for a period of five years. This contract obligates the Company to, among other things, provide on the state’s behalf customer premise equipment and other capital assets that the Company believes will range between $45,000 and $55,000 over the term of the agreement, of which approximately $14,188 has been expended through June 30, 2003. The Company intends to fund this commitment with cash on hand and cash flows from operations. The contract with the State of Alaska contains specific completion dates for certain implementation aspects by as early as April 1, 2003, as well as specific ongoing service level agreements which, if not met, may result in revenue credits and/or penalties which in the aggregate could amount to as much as $325 per month. Both parties to the contract have alleged failures to perform by the other party. The parties are, however, actively engaged in dispute resolution processes and are seeking to renegotiate certain provisions of the contract including the aforementioned specific completion dates and service level agreements. The Company is unable to determine the outcome of the dispute resolution processes and contract renegotiations at this time.

On July 15, 2002 the Company fulfilled a commitment to Neptune Communications, L.L.C. (“Neptune”) to provide a loan in the form of an unsecured note receivable totaling $15,000 in return for certain consideration. The note, which is included in deferred charges and other assets on the Company’s Consolidated Balance Sheets, bears interest at the applicable federal rate, which was 4.84% at June 30, 2003, and matures on July 15, 2022. Interest is payable semiannually, but Neptune may elect to add the interest to the principal in lieu of cash payments. The commitment was funded with cash on hand. In connection with this note, Neptune has granted the Company an option to purchase certain network assets of Neptune, no later than January 2, 2006 at a price equal to the then outstanding loan balance. The Company has also entered into a strategic agreement with Neptune for the life of the fiber optic cable system owned by Neptune. 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, ii) Neptune’s restoration of the Company’s traffic carried on another cable system, iii) and specific interconnection arrangements between the Company and Neptune, should the Company exercise its option to purchase certain network assets from Neptune. The Company is currently renegotiating the terms and conditions of this agreement and it is not possible to determine the ultimate outcome of these negotiations at this time.

In May 2003, the Company entered into a four-year purchase commitment with a telecommunications equipment supplier to acquire approximately $19 million of wireless switches, cell sites and related equipment.

~~Item~~ALASKA 2.COMMUNICATIONS ~~MANAGEMENT’S~~SYSTEMS ~~DISCUSSION~~HOLDINGS, ~~AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~INC.

Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands Except Per Share Amounts)

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2003


	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	(128,362	)	$	178,881		$	—	$	50,519
Cash Flows from Investing Activities:
Construction and capital expenditures		(23,520	)		(6,267	)		—		(29,787	)
Net proceeds from sale of business		155,268			—			—		155,268
Other investing activities		—			2,894			—		2,894

Net cash provided (used) by investing activities		131,748			(3,373	)		—		128,375
Cash Flows from Financing Activities:
Payments on long-term debt		(3,123	)		(430,850	)		—		(433,973	)
Proceeds from issuance of long-term debt		—			375,970			—		375,970
Debt issuance costs		—			(14,000	)		—		(14,000	)
Dividends		—			(4,296	)		—		(4,296	)

Net cash provided (used) by financing activities		(3,123	)		(73,176	)		—		(76,299	)
Increase in cash and cash equivalents		263			102,332			—		102,595
Cash and cash equivalents, beginning of the period		(73	)		18,638			—		18,565

Cash and cash equivalents, end of the period	$	190		$	120,970		$	—	$	121,160

Supplemental Cash Flow Data:
Interest paid	$	639		$	31,031		$	—	$	31,670
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,340		$	—		$	—	$	2,340
Interest rate swap marked to market	$	—		$	(6,361	)	$	—	$	(6,361	)

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands Except Per Share Amounts)

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2002


	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	46,694		$	2,485		$	—	$	49,179
Cash Flows from Investing Activities:
Construction and capital expenditures		(43,280	)		(6,973	)		—		(50,253	)
Issuance of note receivable		—			(15,000	)		—		(15,000	)
Release of funds from escrow		—			3,706			—		3,706

Net cash used by investing activities		(43,280	)		(18,267	)		—		(61,547	)
Cash Flows from Financing Activities:
Payments on long-term debt		(2,245	)		(4,529	)		—		(6,774	)
Dividends		—			(830	)		—		(830	)

Net cash provided (used) by financing activities		(2,245	)		(5,359	)		—		(7,604	)
Increase (decrease) in cash and cash equivalents		1,169			(21,141	)		—		(19,972	)
Cash and cash equivalents, beginning of the period		1,239			39,773			—		41,012

Cash and cash equivalents, end of the period	$	2,408		$	18,632		$	—	$	21,040

Supplemental Cash Flow Data:
Interest paid	$	(284	)	$	31,080		$	—	$	30,796
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,306		$	—		$	—	$	2,306
Interest rate swap marked to market	$	—		$	3,786		$	—	$	3,786

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands Except Per Share Amounts)

13. COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business. 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.

A class action lawsuit was filed against the Company on March 14, 2001. The litigation alleges various contract and tort claims concerning the Company’s decision to terminate its Infinite Minutes long distance plan. The Company believes this suit is without merit and intends to vigorously defend its position. The actual number of plaintiffs remain undetermined nor are the claims that will actually be in dispute been resolved.

On July 15, 2002 the Company fulfilled a commitment to Neptune Communications, L.L.C. (“Neptune”) to provide a loan for the aggregate principal amount of $15,000 in return for certain consideration. The Company has an agreement that enables it to purchase additional fiber optic capacity in future years from Neptune, the expenditures for which are expected to be significant and may exceed $25,000 over the next four years. While the Company has an agreement with Neptune, certain material terms of the agreement remain subject to continued renegotiation. 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, ii) Neptune’s restoration of the Company’s traffic carried on another cable system, iii) and specific interconnection arrangements between the Company and Neptune, should the Company exercise its option to purchase certain network assets from Neptune. The Company is currently negotiating open elements of its agreement with Neptune and renegotiating other terms and conditions of the agreement. It is impossible to determine the ultimate outcome of these negotiations at this time. The loan was written down to its estimated net realizable value during the quarter ended September 30, 2003 as described in Note 6.

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 the Company on Forms 10-K, 10-Q and 8-K and future oral and written statements by the Company and its management may include, certain “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including (without limitation) statements with respect to anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestitive 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. Words such as “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” and “will,” 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~~the Company’s historical experience and ~~our~~its present expectations or projections. Forward-looking statements by the Company and its management are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of important factors. Examples of these factors include (without limitation) rapid technological developments and changes in the telecommunications industries; 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 (the “1996 Act”) and other similar federal and state legislation and the federal and state rules and regulations enacted pursuant to that legislation; regulatory limitations on the Company’s ability to change its pricing for communications services; the possible future unavailability of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, to the Company’s ~~wireline~~local telephone subsidiaries; and possible changes in the demand for the Company’s products and services. In addition to these factors, actual future performance, outcomes and results may differ materially ~~because~~ because of other, more general, factors including (without limitation) changes in 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; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States of America; and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support the Company’s future business.

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

INTRODUCTION

On May 14, 1999, the Company acquired the incumbent providers of local telephone services in Anchorage, Juneau, Fairbanks and approximately 70 rural communities in Alaska, making it the largest provider of local telephone service in the state and the 13th largest provider of local exchange services in the United States. The Company also acquired on May 14, 1999 interexchange operations primarily serving the Anchorage market and wireless and Internet services providing statewide coverage. The Company has unified its statewide branding under the ACS name.

2528

Today, the Company generates revenue primarily through the provision of:

•

local telephone services, including:

• basic local service to retail customers within ACS Holdings’ 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 (“B&C”), and • universal service payments;

	•	wireless services;

	•	Internet services; and

	•	interexchange network long-distance and data services.

On May 8, 2003, the Company completed the sale of a majority interest (87.42%) in its Directories Business~~, which previously represented a reportable segment~~. ~~See Note 4~~Subsequently, ~~Gain~~ on ~~Disposal~~August 27, ~~of Assets~~2003, in the Company ~~footnotes~~was toreleased ~~the financial~~from ~~statements~~a ~~for~~lockup ~~additional~~agreement ~~information~~relating onto ~~this~~the ~~transaction.~~remaining ~~For~~interest ~~periods~~in ~~starting~~the ~~May 8,~~Directories ~~2003~~Business and ~~forward,~~ the Company ~~will~~disposed ~~record~~of ~~its~~substantially ~~12.58%~~all of ~~minority~~its remaining interest in the ~~earnings of the~~ Directories Business ~~under~~through the ~~equity method~~exercise of ~~accounting~~its right soto ~~long~~convert as99.23% itof ~~retains~~its athen ~~minority~~remaining ~~interest~~12.58% ~~The Company’s retained~~ interest isin ~~subject to an exchange rights agreement that permits its~~the ~~conversion~~Directories Business to 2~~.5 million~~,500 units of the ACS Media Income Fund, ~~(“the~~which ~~Fund”) after~~were ~~the~~then ~~expiration~~sold ofin aan ~~90-day~~underwritten ~~lockup period~~offering. ~~Units~~As ~~of the Fund are traded on the Toronto Stock Exchange under the symbol AYP.UN. The Company can sell its exchanged units to~~ a ~~qualified~~result ~~investor~~of orthis ~~investors in a private placement~~ transaction, ~~or offer them in a secondary public offering at its option after~~ the ~~expiration of a 180 day lockup agreement with the underwriters of the~~ ~~Fund’s offering in Canada. The~~ Company’s ~~retained~~now ~~interest~~owns ~~was~~less ~~recorded~~than ~~at an initial book value of $1~~0.1 ~~million~~% ~~representing~~of the ~~pro-rata~~Directories ~~retained ownership at historical book value~~Business. ~~The~~See ~~retained~~Note ~~interest in the Directories Business~~5, ifGain iton ~~were~~Disposal ~~not~~of ~~subject~~Assets, toin the ~~90-day~~footnotes ~~lockup agreement, would be exchangeable~~ to ~~units~~ of the ~~Fund~~financial ~~with~~statements afor additional ~~market~~information ~~value~~on ofthis ~~$18~~transaction.~~4 million as of June 30, 2003.~~

Local Telephone - Within the telecommunications industry, local exchange carriers (“LECs”) have historically enjoyed stable revenue and cash flow from local exchange operations resulting from the need for basic telecommunications services, the highly regulated nature of the telecommunications industry and, in the case of rural LECs, the underlying cost recovery settlement and support mechanisms applicable to local exchange operations. Basic local service is generally provided at a flat monthly rate and allows the user to place unlimited calls within a defined local calling area. Access revenues are generated in part by billing interexchange carriers for access to the LEC’s 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. Other service revenue is generated from ancillary services and enhanced services.

Changes in revenue are largely attributable to changes in the number of access lines, local service rates and minutes of use. Other factors can also impact revenue, including:

	•	intrastate and interstate revenue settlement methodologies,

	•	authorized rates of return for regulated services,

	•	whether an access line is used by a business or residential subscriber,

	•	intrastate and interstate calling patterns,

	•	customers’ selection of various local rate plan options,

	•	selection of enhanced calling services, such as voice mail, and

	•	other subscriber usage characteristics.

LECs have three basic tiers of customers:

• business and residential customers located in their local service areas that pay for local phone service and a portion of network access, • interexchange carriers that pay for access to long distance calling customers located within its local service areas and • CLECs that pay for wholesale access to the Company’s network in order to provide competitive local service on either a wholesale or unbundled network element (“UNE”) basis as prescribed under the 1996 Act.

	•		interexchange carriers that pay for access to long distance calling customers located within its local service areas, and
	•		competitive local exchange carriers (“CLECs”) that pay for wholesale access to the Company’s network in order to provide competitive local service on either a wholesale or unbundled network element (“UNE”) basis as prescribed under the 1996 Act.

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

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

Wireless - The Company is one of the largest statewide providers of wireless services in Alaska, currently serving approximately 8384,000 subscribers. Its wireless network covers over 478,000 residents, including all major population centers and highway corridors. The Company operates a TDMA digital network in substantially all of its service areas, and intends to upgrade this network to a new generation of digital network known as CDMA.

Internet - The Company is the second largest provider of Internet access services in Alaska with approximately 45,000 customers. The Company offers dial-up and dedicated digital subscriber line (“DSL”) Internet access to its customers. The Company is a single source provider of advanced IP based private networks in Alaska.

Interexchange - The Company provides switched and dedicated long distance services to approximately 4443,~~000~~500 customers in Alaska. The traffic from these customers is carried over the Company’s owned or leased facilities.

RECENT DEVELOPMENTS

On September 15, 2003, the Company announced the appointment of Liane Pelletier as CEO and President and the retirement of Charles E. Robinson as CEO effective October 6, 2003. Ms. Pelletier, who also joined our Board of Directors, joined ACS after spending 17 years at Sprint Corporation, most recently as a member of the Executive Management Committee and as Chief Integration Officer. Ms. Pelletier’s position consolidates Mr. Robinson’s day-to-day responsibilities and those of Wesley E. Carson, who left in May 2003 to be CEO of the Directories Business. Mr. Robinson, a 45-year telecom industry veteran who founded ACS in 1999, will remain as Chairman until the end of the year but is retiring from day-to-day management of the Company. The Company also announced on November 6, 2003 the appointment of David C. Eisenberg to its management team. Mr. Eisenberg, also a former Sprint Corporation executive, joined ACS effective November 3, 2003 in the position of Sr. Vice President, Corporate Strategy and Development.

RESULTS OF OPERATIONS

Three Months Ended ~~June~~September 30, 2003 Compared to Three Months Ended ~~June~~ September 30, 2002

All amounts are discussed at the consolidated level after the elimination of intercompany revenue and expense.

Operating Revenue

Operating revenue decreased $85.13 million, or 86.73%, for the three months ended ~~June~~September 30, 2003 compared to the three months ended ~~June~~September 30, 2002. Local ~~Wireless~~telephone, wireless, Internet and interexchange revenue ~~increased~~all ~~compared to the corresponding~~increased ~~period of 2002, while local telephone decreased~~ compared to the corresponding period of 2002.

~~Local Telephone~~30

Local telephone revenue, which consists of local network service, network access revenue and deregulated and other revenue, decreased $8.8 million, or 13.7%, for the three months ended June 30, 2003 compared to the same period in 2002. The following table summarizes the Company’s consolidated local telephone revenue by category.

	Three Months Ended June 30,
	2003		2002
	(In Thousands)
Local telephone revenue:
Local network	$	25,219	$	25,040
Network access		25,140		34,929
Deregulated and other		4,851		4,022
Total local telephone revenue	$	55,210	$	63,991

~~The~~Local ~~following table summarizes the Company’s local telephone access lines.~~Telephone

	As of June 30,
	2003		2002
Retail		227,604		246,310
Wholesale		18,868		24,970
Unbundled network elements - platform (UNE - P)		4,892		—
Unbundled network elements - loop (UNE - L)		66,864		57,633
Total local telephone access lines		318,228		328,913

Local telephone revenue, which consists of local network service, network access revenue and deregulated and other revenue, increased $0.4 million, or 0.8%, for the three months ended September 30, 2003 compared to the same period in 2002. The following table summarizes the Company’s consolidated local telephone revenue by category.

The local network service component of local telephone revenue was $25.2 million for the three months ended June 30, 2003 compared with $25.0 million for the three months ended June 30, 2002. Revenue increased $0.2 million or 0.7% from the prior year. This increase reflects the net effect of retail market share losses offset by increases in unbundled network element revenue and local private line revenue and reduced uncollectible revenue.


		Three Months Ended September 30,

		2003		2002

		(In Thousands)
Local telephone revenue:
	Local network	$	24,022	$	24,186
	Network access		23,750		23,862
	Deregulated and other		5,489		4,767

Total local telephone revenue		$	53,261	$	52,815


The following table summarizes the Company’s local telephone access lines.

		As of September 30,

		2003		2002

Retail			224,744		241,583
Wholesale			18,795		25,074
Unbundled network elements - loop (UNE - L)			67,542		60,504
Unbundled network elements - platform (UNE - P)			4,907		—

Total local telephone access lines			315,988		327,161

The ~~Company continued to experience loss of retail market share for~~ local network service incomponent ~~its~~of ~~Anchorage, Fairbanks and Juneau service areas during the year. Generally, when the Company loses a retail~~ local ~~network~~telephone ~~service line to a competitor, it continues to provide the line to the competitor on a wholesale basis at reduced~~ revenue ~~per~~was ~~line~~$24. ~~Management believes that the continuing loss~~0 ofmillion ~~market share it has experienced in certain of its markets is partially attributable to below cost interconnection rates mandated by the RCA~~ for ~~UNEs. During~~ the ~~first~~three ~~quarter~~months ofended ~~2000~~September 30, ~~the~~2003 ~~Company~~compared ~~reopened~~with ~~interconnection~~$24.2 ~~proceedings~~million for ~~its Anchorage market and in~~ the ~~second~~three ~~quarter~~months ofended ~~2001~~September 30, ~~filed for~~2002. anRevenue ~~interim~~decreased ~~and refundable UNE rate increase of approximately~~ $~~10 per month~~0.2 ~~per~~million ~~loop~~or 0.7% Onfrom ~~October 25, 2001,~~ the ~~RCA~~prior ~~granted~~year. ~~ACSA~~This andecrease ~~interim~~reflects ~~and refundable UNE rate increase of $1.07, increasing~~ the ~~UNE~~net ~~rates~~effect ~~from $13.85 to $14.92. The~~of ~~interim~~retail ~~and~~market ~~refundable~~share ~~rate~~losses ~~increase~~offset ~~was~~by ~~implemented~~increases in ~~November~~unbundled ~~2001~~network ~~and~~element ~~generated~~revenue ~~approximately~~and ~~$0.7 million~~local inprivate ~~additional~~line revenue ~~during 2002. The Company expects the RCA to hold hearings during 2003~~ and ~~adjudicate~~decreased ~~final Anchorage~~uncollectible ~~UNE rates during 2003 or 2004~~revenue.

The Company continued to experience loss of retail market share for local network service in its Anchorage, Fairbanks and Juneau service areas during the year. Generally, when the Company loses a retail local network service line to a competitor, it continues to provide the line to the competitor on a wholesale basis at reduced revenue per line. Management believes that the continuing loss of market share it has experienced in certain of its markets is partially attributable to below cost interconnection rates mandated by the RCA for UNEs. During the first quarter of 2000, the Company reopened interconnection proceedings for its Anchorage market and in the second quarter of 2001, filed for an interim and refundable UNE rate increase of approximately $10 per month per loop. On October 25, 2001, the RCA granted ACSA an interim and refundable UNE rate increase of $1.07, increasing the UNE rates from $13.85 to $14.92. The interim and refundable rate increase was implemented in November 2001 and generated approximately $0.7 million in additional revenue during the calendar year 2002. The Company expects the RCA to hold hearings during November 2003 and adjudicate final Anchorage UNE rates during 2004.

The Company believes it is earning less than its authorized rate of return for local network service in several of its markets and in compliance with the Alaska Public Utilities Commission (“APUC”) orders related to the approval of the acquisition of the four LECs in 1999, filed local service rate cases for all of its LEC businesses with the RCA on July 2, 2001 aimed at making up this deficiency. The RCA’s decisions on revenue requirements will have a direct impact on the retail rates and intrastate access rates that the Company is allowed to charge. A RCA finding of over earnings generally leads to rate reductions while a RCA finding of under earnings generally results in rate increases.

In October 2001, the Company filed for increased interim and refundable local service rates in its Anchorage market in order to expedite a partial recovery of the total revenue deficiency. On November 15, 2001, the RCA approved an interim and refundable rate increase for ACSA of 24% for certain services. This interim and refundable rate increase was implemented in November 2001 and generated ~~approximately $4.2 million in additional revenue in 2002. On~~ ~~December 16, 2002, the RCA reopened the revenue requirement phase of the~~ hearing for ACSA to take additional testimony regarding ACSA’s service lives. The ACSA hearing revisited the RCA’s decision to lengthen the service lives of specific assets and thereby reduced depreciation expense. If the RCA corrects the service lives at issue, it will increase the amount by which ACSA is under earning. The Company expects the RCA to continue to hold hearings during 2003 and to adjudicate final local service rates during 2004.

~~On March 25, 2003, the RCA issued an order approving new revenue~~31 ~~requirements for ACSF, ACSAK, and ACSN. The RCA found over earnings by ACSF and~~ ACSN and under earning by ACSAK. In compliance with RCA orders, ACSF, ACSAK, ACSN have filed cost of service and rate design studies, and supporting testimony, consistent with the RCA revenue requirements orders. Final rates are expected in 2004.

Network access revenue decreased from $34.9 million for the three months ended June 30, 2002 to $25.1 million for the same period in 2003. During the second quarter of 2002, the Company recognized as revenue $11.1 million of previously deferred interstate access revenues related to a dispute on interstate

~~access~~approximately ~~rates~~$4.2 million ~~for~~in ~~the~~additional ~~Anchorage~~revenue ~~market~~in ~~based on a favorable ruling by~~calendar ~~the~~year ~~District of Columbia Court of Appeals~~2002. ~~Network~~On ~~access~~December 16, ~~revenues~~2002, ~~are~~the ~~based~~RCA ~~on a~~reopened ~~regulated~~the ~~return~~revenue onrequirement ~~rate base and recovery~~ phase of ~~allowable expenses associated with~~ the ~~origination~~hearing ~~and~~for ~~termination~~ACSA ofto ~~toll~~take ~~calls~~additional ~~for~~testimony ~~the~~regarding ~~Company~~ACSA’s ~~retail and~~service ~~resale customers~~lives. ~~After~~The ~~consideration~~RCA ofcorrected the ~~revenue~~length ~~recognized as a result~~ of the ~~favorable~~service ~~ruling~~lives byat ~~the court~~issue, increasing the ~~increase~~amount inby ~~network~~which ~~access~~ACSA ~~revenues~~is ~~of $1~~under earning.~~3 million~~ ~~compared~~The toCompany expects the ~~corresponding~~RCA ~~period in 2002 is due primarily~~ to ~~updated~~continue ~~access~~to ~~studies.~~hold ~~Management~~hearings ~~expects~~during ~~that~~2003 ~~network~~and ~~access~~to ~~revenues~~adjudicate ~~will generally~~final belocal onservice rates aduring ~~declining trend for the foreseeable future~~2004.

~~Deregulated~~ On ~~and~~March 25, ~~other revenue~~2003, ~~which~~the ~~increased~~RCA toissued ~~$4.9 million~~an ~~compared~~order ~~to $4.0 million~~approving innew ~~the~~revenue requirements ~~prior~~for ~~year~~ACSF, ~~consists~~ACSAK, ~~principally~~and ofACSN. ~~B&C~~The ~~services,~~RCA ~~space~~found over earnings by ACSF and ~~power~~ACSN ~~rents,~~and ~~deregulated~~under ~~equipment~~earnings ~~sales,~~by ~~paystation~~ACSAK. ~~revenue~~In compliance with RCA orders, ~~regulated~~ACSF, ACSAK, ~~directory~~ACSN ~~listing~~have ~~revenue~~filed cost of service and rate design studies, and ~~other~~supporting testimony, ~~miscellaneous~~consistent ~~telephone~~with the RCA revenue requirements orders. Final rates are expected in 2004.

Network access revenue decreased from $23.9 million for the three months ended September 30, 2002 to $23.8 million for the same period in 2003. Network access revenues are based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of toll calls for the Company’s retail and resale customers. The decrease in network access revenues of $0.1 million compared to the corresponding period in 2002 is due primarily to updated access studies. Management expects that network access revenues will generally be on a declining trend for the foreseeable future.

Deregulated and other revenue, which increased to $5.5 million compared to $4.8 million in the prior year, consists principally of B&C services, space and power rents, deregulated equipment sales, paystation revenue, regulated directory listing revenue, and other miscellaneous telephone revenue. The increase of $0.7 million is due to an increase in B&C and rent revenue offset by a decrease in deregulated equipment sales and paystation revenue.

Wireless

Wireless revenue increased $0.7 million, or 75.08%, to $1112.96 million for the three months ended ~~June~~September 30, 2003 compared to $11.29 million for the three ~~months~~ months ended ~~June~~September 30, 2002. This increase was due to a growth in average ~~subscribers~~ subscribers of 2.76% from 8081,~~354~~334 in 2002 to 8283,~~560~~444 in 2003. Subscriber average minutes of use also increased from ~~207~~227 minutes in 2002 to ~~243~~256 minutes in 2003. ~~Primarily~~ Primarily as a result of increased minutes of use, the monthly average revenue per unit, or ARPU, increased to $4850.2430 in 2003 compared to $4648.3078 during 2002.

Internet

Internet revenue increased from $4.6.4 million in 2002 to $98.02 million in 2003, — an increase of $41.48 million, or 9828.60%. This increase is primarily due to to revenue associated with the Company’s contract with the State of Alaska ~~and approximately $1~~.~~5 million of this increase was earned in prior periods but~~ ~~could not be estimated and therefore was not recorded until the current period.~~ Internet also experienced growth in DSL subscribers of 5047.35% from 911,~~856~~045 in ~~2002~~ 2002 to 1416,~~817~~294 in 2003.

On ~~December~~September 1015, ~~2001~~2003, the Company ~~entered~~received ~~into~~notification afrom ~~five year contract with~~ the State of Alaska that it intended to ~~provide~~terminate a ~~broad~~five ~~range~~year ofTelecommunications ~~telecommunications services,~~Services ~~many~~Partnering ofAgreement ~~which~~with ~~will~~the beCompany ~~provided~~and ~~over~~disentangle. anSubsequently, IPthe Company ~~network~~and ~~owned~~the State negotiated and ~~operated~~agreed byto ~~ACSI. Services~~a ~~under~~definitive ~~this~~Settlement Agreement ~~contract~~and ~~began~~Mutual toRelease beeffective ~~implemented~~October 14, ~~during~~2003, outlining the ~~second~~terms ~~quarter~~ of disentanglement ~~2002~~between the parties. The Company anticipates that revenue for this segment will ~~increase~~decrease in future periods as ~~additional~~disentanglement ~~services~~occurs ~~are added~~ under the ~~contract~~agreement.

Interexchange

Interexchange revenue increased from $4.80 million in 2002 to $54.21 million in 2003. Long distance subscribers decreased from 6467,~~958~~230 in 2002 to 4443,~~289~~499 in 2003. The decrease in subscribers was substantially due to database grooming to remove approximately 20,000 non-revenue generating inactive subscribers from the subscriber list in connection with the conversion of long distance billing from an outside service bureau to an in-house system during the first and second quarters of 2003. The average revenue per unit, or ARPU, increased to $3431.2549 in 2003 compared to $2420.4416 during 2002 and total minutes of use ~~decreased~~increased from 38.97 million in 2002 to 3639.70 million in 2003.

Operating Expense

Operating expense increased $138.15 million, ~~or 1.4%,~~ from $77.56 million for the three months ended ~~June~~September 30, 2002 to $78116.61 million for the three months ~~ended~~ ~~June~~ended September 30, 2003. ~~The~~Operating ~~Company~~expenses ~~also~~for ~~recorded~~2003 includes $54.5 million of contract termination and asset impairment charges and a gain on ~~the~~disposal ~~sale~~of assets of a$16.0 million. ~~majority interest~~Not inincluding ~~its~~these ~~Directories~~items, ~~Business~~operating ~~during~~expenses ~~the~~was relatively ~~quarter~~flat ~~ended~~with ~~June 30,~~the ~~2003~~prior ~~of $97~~year.~~6 million.~~ Depreciation and amortization associated with the operation of each of the Company’s 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 increased to $30.2 million for the three months ended September 30, 2003 from $28.0 million for the three months ended September 30, 2002. The increase in local telephone expense was substantially attributable to executive recruiting and retirement costs and prior years’ federal universal service charges recorded during the third quarter of 2003.

telephone expense decreased to $27.5 million for the three months ended June 30, 2003 from $32.6 million for the three months ended June 30, 2002. The decrease in local telephone expense was substantially attributable to cost reductions achieved as a result of the Company’s restructuring plan adopted in June of 2002. In the second quarter of 2002, there were $2.2 million in costs related primarily to severance and restructuring charges and rate case expenses.

Wireless

Wireless expense ~~decreased~~increased ~~nominally~~$0.1 million from $7.14 million for the three months ended ~~June~~September 30, 2002 to $7.05 million for the three months ended ~~June~~ September 30, 2003.

Internet

Internet expense increased by $53.80 million, or 7834.40%, from $78.38 million in 2002 to $1311.17 million in 2003. The increase in Internet expense was due principally to ~~transition expenses and~~ operating costs associated with ~~commencing~~ providing services under the State of Alaska telecommunications contract. ~~State~~ ofOn ~~Alaska contract related expense totaling $1.6~~September ~~million~~15, ~~was~~2003, ~~incurred~~the inCompany ~~previous~~received ~~periods~~notification ~~but~~from ~~was recorded in~~ the ~~current~~State ~~period~~of asAlaska that it ~~was~~intended ~~the first point in which the expense could be matched~~ to ~~the~~terminate ~~associated revenue, as~~a ~~discussed~~five ~~above~~year inTelecommunications ~~Internet~~Services ~~revenue.~~Partnering AsAgreement awith ~~percentage~~the ofCompany ~~revenue, Internet~~and ~~expense decreased from 160~~disentangle.8% ~~in 2002 to 144.4% in 2003. On December 10~~Subsequently, ~~2001,~~ the Company ~~entered~~and ~~into a five year contract with~~ the State ofnegotiated ~~Alaska~~and agreed to ~~provide~~ a definitive ~~broad~~Settlement ~~range~~Agreement ofand ~~telecommunications~~Mutual ~~services,~~Release ~~many~~effective ofOctober 14, ~~which will be~~2003, ~~provided~~outlining ~~over~~the anterms IPof ~~network~~disentanglement ~~and~~between ~~supported~~the ~~by a service center owned and operated by ACSI~~parties. The Company anticipates expense ~~as a percent of revenue~~ for this segment to ~~level out or~~ decline as it completes the disentanglement ~~integration~~ of ~~the~~these ~~State~~services ofunder ~~Alaska~~the ~~services~~contract.

Interexchange

Interexchange expense increased by $0.14 million, or 5.8%, to $76.1 million for the quarter ended ~~June~~September 30, 2003 from $75.07 million for the quarter ended ~~June~~September 30, ~~2002.~~ ~~As a percentage of revenue, interexchange expense decreased from 145.2% in~~ 2002 ~~to 136~~.~~0% in 2003. The Company converted its long distance billing from~~ ~~an outside service bureau to an in-house system during the first quarter of~~ ~~2003. This billing conversion is expected to result in annual cost savings of approximately $0.6 million and improved customer service.~~

Contract termination and asset impairment charges

During the quarter ended September 30, 2003, the Company recorded $54.5 million in contract termination and asset impairment charges. These charges resulted from (1) the termination of the TPA with the State of Alaska and (2) an impairment of fiber optic indefeasible rights of use and IP network and service center assets resulting from the termination of the TPA as well as changes in the communications industry and the economy. The following table itemizes the components of the contract termination and asset impairment charges (in thousands).


Contract termination charges:
	Contract termination payment	$	3,448
	Loss on disposal of assets		5,648
	Accounts receivable and working capital write-downs		3,256

Total contract termination charges			12,352
Asset impairment charges			42,187

	Total contract termination and asset impairment charges	$	54,539

See Note 4 to the financial statements for a description of each element of the contract termination and asset impairment charges.

Depreciation and Amortization

Depreciation and amortization expense ~~increased~~decreased $20.14 million, or 101.68%, from ~~due~~$22.5 million ~~principally to increases~~ in ~~plant~~2002 ~~in service and~~ to ~~the adoption of shorter depreciable lives for certain classes of assets compared to the corresponding period of 2002~~$22.0 million ~~Management adopted the higher depreciation rates on these classes of assets as a result of an evaluation of the expected useful lives of its underlying assets, primarily~~ in ~~its regulated local telephone segment~~2003.

~~Gain~~ Loss (~~loss~~gain) on disposal of assets

On ~~April~~August 2827, 2003, the Company ~~signed~~was anreleased ~~underwriting~~from a lockup agreement relating to ~~sell~~the ~~a majority~~remaining interest in ~~its~~the ~~directory~~Directories ~~business~~Business and onthe ~~April 29,~~Company disposed ~~2003~~of ~~filed~~substantially aall ~~final prospectus~~of toits ~~offer~~remaining ~~this majority~~ interest toin ~~investors~~the ~~through a Canadian~~Directories ~~income~~Business ~~fund.~~through ~~The~~the ~~transaction~~exercise ~~closed~~of onits ~~May 8,~~right ~~2003,~~to ~~with~~convert ~~the Company selling an 87~~99.4223% ~~interest~~of ~~and~~its ~~retaining~~then remaining a 12.58% interest in ~~its~~the Directories Business~~. The~~ ~~Company~~to ~~recognized~~2.5 million aunits of ~~gain~~the onACS ~~disposition~~Media ofIncome ~~this~~Fund, ~~majority~~which ~~interest~~were ofthen ~~its~~sold ~~directory~~in ~~business~~an ofunderwritten offering. The transaction settled on September 4, 2003, generating $9717.62 million onin net proceeds and a ~~pre-tax~~gain ~~basis.~~on ~~The~~disposition ~~Company~~of ~~also~~$15.9 million. ~~recorded~~As a ~~non-cash~~result ~~loss~~of onthis transaction, the ~~disposal~~Company ofnow ~~certain~~owns ~~other~~less ~~fixed~~than ~~assets of $~~0.~~3 million~~1% ~~during~~of the ~~quarter ended~~Directories ~~June 30, 2003~~Business.

The Company also recorded a non-cash loss on the disposal of assets of $1.8 million during the quarter ended September 30, 2002 as a result of retiring certain assets no longer in use.

Interest Expense and Interest Income and Other

Interest expense increased to $1421.9 million for the three months ended ~~June~~September 30, 2003 compared to $1112.07 million for the three months ended ~~June~~ September 30, 2002. As a result of the early extinguishments of outstanding debt of $~~106,650~~ 320.7 million during the quarter ended ~~June~~September 30, 2003, $39.4 7 million of debt issuance cost was charged to interest expense. ~~During~~After consideration of this item, the ~~second~~decrease ~~quarter~~in interest expense is the result of market ~~2002,~~interest rate effects on the Company’s variable interest rate debt. ~~reversed~~Interest income and other decreased by $115.7 million to an expense of $15.1 million for the three months ended September 30, 2003 compared to income of $0.6 million for the three months ended September 30, 2002, substantially due to a $15.9 million non-operating impairment loss on a note receivable as described in Note 6 to the financial statements attached hereto.

previously accrued interest expense as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. After consideration of these items, the decrease in interest expense is the result of market interest rate effects on the Company’s variable interest rate debt. Interest income and other increased to $4.8 million for the three months ended June 30, 2003 compared to $0.6 million for the three months ended June 30, 2002, substantially due to a $4.1 million gain on foreign exchange on the directory transaction.

Income Taxes

The Company has provided a valuation allowance for the full income tax benefit resulting from the consolidated losses it has incurred since May 14, 1999, the date of the acquisition of substantially all of its operations.

Discontinued Operations

On March 30, 2002, the Company’s management approved a plan to offer for sale its wireless cable television service segment. As a result of this decision, the operating revenue and expense of this segment have been classified as discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented and the assets and liabilities of the disposal group have been written down to their fair value, net of expected selling expense. The results of operations of this discontinued segment resulted in a charge to discontinued operations of $0.51 million for the three months ended ~~June~~September 30, 2002. The Company has fully ~~reserved~~ reserved in the form of a valuation allowance the income tax benefit resulting from this discontinuance. The Company completed its disposal of its wireless ~~cable~~ cable television segment as of March 31, 2003.

Net Income (Loss)

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

~~Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002~~34

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

All amounts are discussed at the consolidated level after the elimination of intercompany revenue and expense.

Operating Revenue

Operating revenue decreased $510.67 million, or 34.2%, for the ~~six~~nine months ended ~~June~~September 30, 2003 compared to the ~~six~~nine months ended ~~June~~September 30, 2002. Wireless, Internet and interexchange revenue increased compared to the ~~corresponding~~ corresponding period of 2002, while local telephone revenue decreased compared to the corresponding period of 2002.

Local Telephone

Local telephone revenue, which consists of local network service, network access revenue and deregulated and other revenue, decreased $109.17 million, or 8.5.6%, for the ~~six~~nine months ended ~~June~~September 30, 2003 compared to the same period in in 2002. The following table summarizes the Company’s consolidated local ~~telephone~~ telephone revenue by category.

		Six Months Ended
		Nine Months Ended
		June 30,
		September 30,
		2003		2002
		(In Thousands)
Local telephone revenue:
	Local network	$	4973,~~348~~370	$	5074,~~684~~870
	Network access		5073,~~201~~951		5983,~~965~~827
	Deregulated and other		915,~~662~~151		813,~~664~~431
Total local telephone revenue		$	~~109~~162,~~211~~472	$	~~119~~172,~~313~~128
The following table summarizes the Company’s local telephone access lines.
		As of September 30,
		2003		2002
Retail			224,744		241,583
Wholesale			18,795		25,074
Unbundled network elements - loop (UNE - L)			67,542		60,504
Unbundled network elements - platform (UNE - P)			4,907		—
Total local telephone access lines			315,988		327,161

31 The local network service component of local telephone revenue was $73.4 million for the nine months ended September 30, 2003 compared with $74.9 million for the nine months ended September 30, 2002. Revenue decreased $1.5 million or 2.0% from the prior year. This decrease reflects the net effect of retail market share losses offset by increases in unbundled network element revenue and local private line revenue and decreased uncollectible revenue

~~The~~approximately ~~following~~$0.7 million ~~table~~in ~~summarizes~~additional revenue for the calendar year 2002. The Company’s ~~local~~expects ~~telephone~~the ~~access~~RCA ~~lines~~to hold hearings during November 2003 and adjudicate final Anchorage UNE rates during 2004.

	As of June 30,
	2003		2002
Retail		227,604		246,310
Wholesale		18,868		24,970
Unbundled network elements - platform (UNE - P)		4,892		—
Unbundled network elements - loop (UNE - L)		66,864		57,633
Total local telephone access lines		318,228		328,913

The local network service component of local telephone revenue was $49.3 million for the six months ended June 30, 2003 compared with $50.7 million for the six months ended June 30, 2002. Revenue decreased $1.3 million or 2.6% from the prior year. This decrease reflects the impact of competition exacerbated by below cost UNE rates.

The Company continued to experience loss of retail market share for local network service in its Anchorage, Fairbanks and Juneau service areas during the year. Generally, when the Company loses a retail local network service line to a competitor, it continues to provide the line to the competitor on a wholesale basis at reduced revenue per line. Management believes that the continuing loss of market share it has experienced in certain of its markets is partially attributable to below cost interconnection rates mandated by the RCA for UNEs. During the first quarter of 2000, the Company reopened interconnection proceedings for its Anchorage market and in the second quarter of 2001, filed for an interim and refundable UNE rate increase of approximately $10 per month per loop. On October 25, 2001, the RCA granted ACSA an interim and refundable UNE rate increase of $1.07, increasing the UNE rates from $13.85 to $14.92. The interim and refundable rate increase was implemented in November 2001 and generated approximately $0.7 million in additional revenue during 2002. The Company expects the RCA to hold hearings during 2003 and adjudicate final Anchorage UNE rates during 2003 or 2004.

The Company believes it is earning less than its authorized rate of return for local network service in several of its markets and in compliance with APUC orders related to the approval of the acquisition of the four LECs in 1999, filed local service rate cases for all of its LEC businesses with the RCA on July 2, 2001 aimed at making up this deficiency. The RCA’s decisions on revenue requirements will have a direct impact on the retail rates and intrastate access rates that the Company is allowed to charge. A RCA finding of over earnings generally leads to rate reductions while a RCA finding of under earnings generally results in rate increases.

In October 2001, the Company filed for increased interim and refundable local service rates in its Anchorage market in order to expedite a partial recovery of the total revenue deficiency. On November 15, 2001, the RCA approved an interim and refundable rate increase for ACSA of 24% for certain services. This interim and refundable rate increase was implemented in November 2001 and generated approximately $4.2 million in additional revenue infor the calendar year 2002. On December 16, 2002, the RCA reopened the revenue requirement phase of the hearing for ACSA to take additional testimony regarding ACSA’s service lives. The ~~ACSA hearing revisited the~~ RCA’s ~~decision~~corrected ~~to lengthen~~ the ~~service~~length ~~lives~~ of ~~specific~~ ~~assets and thereby reduced depreciation expense. If~~ the ~~RCA corrects the~~ service lives at issue, itincreasing ~~will increase~~ the amount by which ACSA is under earning. The Company expects the RCA to continue to hold hearings during 2003 and to adjudicate final local service rates during 2004.

On March 25, 2003, the RCA issued an order approving new revenue requirements for ACSF, ACSAK, and ACSN. The RCA found over earnings by ACSF and ACSN and under ~~earning~~earnings by ACSAK. In compliance with RCA orders, ACSF, ACSAK, ACSN have filed cost of service and rate design studies, and supporting testimony, consistent with the RCA revenue requirements orders. Final rates are expected in 2004.

Network access revenue decreased from $6083.08 million in 2002 to $5074.20 million for 2003. During the second quarter of 2002, the Company recognized as revenue $11.1 million of previously deferred interstate access revenues related to a dispute on interstate access rates for the Anchorage market based on a favorable ruling by the District of Columbia Court of Appeals. Network access revenues are based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of toll calls for the Company’s retail and resale customers. After consideration of the revenue recognized as a result of the favorable ruling by the court, the increase in network access revenues of $1.3 million compared to the corresponding period in 2002 is due primarily to updated access studies. Management expects that network access revenues will generally be on a declining trend for the foreseeable future.

32 Deregulated and other revenue, which increased to $15.2 million compared to $13.4 million in the prior year, consists principally of B&C services, space and power rents, deregulated equipment sales, paystation revenue, regulated directory listing revenue, and other miscellaneous telephone revenue. The increase in deregulated and other revenue of $1.8 million is primarily due to an increase in B&C and rent revenue offset by a decrease in deregulated equipment sales and paystation revenue.

termination of toll calls for the Company’s retail and resale customers. After consideration of the revenue recognized as a result of the favorable ruling by the court, the increase in network access revenues of $1.3 million compared to the corresponding period in 2002 is due primarily to updated access studies. Management expects that network access revenues will generally be on a declining trend for the foreseeable future.

Deregulated and other revenue, which increased to $9.7 million compared to $8.7 million in the prior year, consists principally of B&C services, space and power rents, deregulated equipment sales, paystation revenue, regulated directory listing revenue, and other miscellaneous telephone revenue.

Wireless

Wireless revenue increased $12.84 million, or 87.6%, to $2234.39 million for the ~~six~~nine months ended ~~June~~September 30, 2003 compared to $2032.54 million for the ~~six months~~nine months ended ~~June~~September 30, 2002. This increase was due to a growth in average subscribers of 12.18% from 8180,~~665~~840 in 2002 to 8283,~~557~~107 in 2003. ~~The~~Subscriber average minutes of use also increased from 202 minutes in 2002 to 229 minutes in 2003. Primarily as a result of increased minutes of use, the monthly average revenue per unit, or ARPU, increased to $4446.9762 in 2003 compared to $4144.8756 during 2002.

Internet

Internet revenue increased from $814.48 million in 2002 to $1624.24 million in 2003 — an increase of $79.86 million, or 9264.98%. This increase is primarily due to revenue associated with the Company’s contract with the State of Alaska and approximately $1.2 million of this increase was earned in the prior ~~periods~~year but ~~could not be estimated and therefore was not recorded until the current period.~~ ~~Internet also experienced growth in DSL subscribers of 50.3% from 9,856 in 2002 to 14,817 in 2003.~~

~~On December 10, 2001, the Company entered into a five-year contract with~~36 ~~the State of Alaska to provide a broad range of telecommunications services,~~ many of which will be provided over an IP network owned and operated by ACSI. Services under this contract began to be implemented during the second quarter of 2002. The Company anticipates that revenue for this segment will increase in future periods as additional services are added under the contract.

could not be estimated and therefore was not recorded until the current year. Internet also experienced growth in DSL subscribers of 47.5% from 11,045 in 2002 to 16,294 in 2003.

On September 15, 2003, the Company received notification from the State of Alaska that it intended to terminate a five year Telecommunications Services Partnering Agreement with the Company and disentangle. Subsequently, the Company and the State negotiated and agreed to a definitive Settlement Agreement and Mutual Release effective October 14, 2003, outlining the terms of disentanglement between the parties. The Company anticipates that revenue for this segment will decrease in future periods as disentanglement occurs under the agreement.

Interexchange

Interexchange revenue increased ~~slightly~~$0.6 million from $912.70 million in 2002 to $1012.06 million in 2003. Long distance subscribers decreased from 6467,~~958~~230 in 2002 to 4443,~~289~~499 in 2003. The decrease in subscribers was substantially due to database grooming to remove approximately 20,000 non-revenue generating inactive subscribers from the subscriber list in connection with the conversion of long distance billing from an outside service bureau to an in-house system during the first and second quarters of 2003. The average revenue per unit, or ARPU, increased to $2924.1871 in 2003 compared to $2320.8804 during 2002 and total minutes of use decreased from 76115.85 million in 2002 to 74113.65 million in 2003.

Operating Expense

Operating expense ~~increased~~decreased $849.83 million, or 622.01%, from $~~146~~223.91 million ~~for~~ for the ~~six~~nine months ended ~~June~~September 30, 2002 to $~~155~~173.8 million for the ~~six~~ nine months ended ~~June~~ September 30, 2003. ~~The~~Operating ~~Company~~expenses ~~also~~for ~~recorded~~2003 aincludes ~~gain~~$54.5 million onof ~~the~~contract ~~sale~~termination ofand aasset ~~majority interest~~impairment incharges ~~its~~and ~~Directories~~a ~~Business~~gain ~~during~~on disposal ~~2003~~of assets of $97112.65 million. Depreciation and amortization associated with the operation of each of the Company’s 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 to $5584.3 million for the ~~six~~nine months ended ~~June~~September 30, 2003 from $6188.62 million for the ~~six~~ nine months ended ~~June~~September 30, 2002. The decrease in local telephone expense was substantially attributable to cost reductions achieved as a result of the Company’s restructuring plan adopted in June of 2002. In the second quarter of 2002, there were $2.2 million in costs related primarily to severance and restructuring charges and rate case expenses.

Wireless

Wireless expense increased $0.5 million, or 32.62%, for the ~~six~~nine months ~~ended~~ ~~June~~ended September 30, 2003 compared to the ~~six~~nine months ended ~~June~~September 30, 2002. This increase is due substantially to an increase in roaming minutes of use ~~from 91.6 million minutes in~~ ~~2002~~over tothe ~~107.6 million~~prior ~~minutes in 2003~~year. As a percentage of revenue, wireless expense decreased from 6365.98% in 2002 to 6162.05% in 2003.

Internet

Internet expense increased by $1013.89 million, or 8663.36%, from $1221.49 million in 2002 to $2335.28 million in 2003. The increase in Internet expense was due principally to transition expenses and operating costs associated with ~~commencing~~providing services under the State of Alaska telecommunications contract. ~~State~~ State of Alaska contract related expense totaling $1.5 million was incurred in the previous ~~periods~~year but was recorded in the current ~~period~~year as it was the first point in which the expense could be matched to the associated revenue, as ~~discussed~~ discussed above in Internet revenue. As a percentage of revenue, Internet ~~expense~~ expense decreased from ~~148~~147.39% in 2002 to ~~143~~146.27% in 2003. On ~~December~~September 1015, ~~2001~~2003, ~~the~~ the Company ~~entered~~received ~~into~~notification afrom ~~five-year contract with~~ the State of Alaska that it intended to ~~provide~~terminate a ~~broad~~five ~~range~~year ofTelecommunications ~~telecommunications~~Services ~~services,~~Partnering ~~many~~Agreement ofwith ~~which will be~~the ~~provided~~Company ~~over~~and andisentangle. IPSubsequently, ~~network~~the Company and ~~supported~~the byState anegotiated ~~service center owned~~ and ~~operated~~agreed byto ~~ACSI. The Company anticipates expense as~~ a ~~percent~~definitive ~~of revenue~~Settlement ~~for~~Agreement ~~this~~and ~~segment~~Mutual toRelease ~~level out~~effective orOctober 14, ~~decline~~2003, asoutlining ~~it completes~~ the ~~integration~~terms of ~~the State of Alaska services.~~

disentanglement between the parties. The Company anticipates expense for this segment to level decline as it completes the disentanglement of these services under the contract.

Interexchange

Interexchange expense increased ~~slightly~~$0.4 million from $1317.65 million in 2002 to $1317.79 million in 2003. As a percentage of revenue, interexchange expense decreased from ~~140~~145.89% in 2002 to ~~137~~141.17% in 2003. The Company converted its long distance billing from an outside service bureau to an in-house system during the first quarter of 2003. This billing conversion is expected to result in annual cost savings of approximately $0.6 million and improved customer service.

Contract termination and asset impairment charges


Contract termination charges:
	Contract termination payment	$	3,448
	Loss on disposal of assets		5,648
	Accounts receivable and working capital write-downs		3,256

Total contract termination charges			12,352
Asset impairment charges			42,187

	Total contract termination and asset impairment charges	$	54,539

See Note 4 to the financial statements for a description of each element of the contract termination and asset impairment charges.

Depreciation and Amortization

Depreciation and amortization expense increased $5.50 million, or 138.92%, ~~due~~ due principally to increases in plant in service and to the adoption of shorter depreciable lives for certain classes of assets compared to the corresponding period of 2002. Management adopted the higher depreciation rates on these classes of assets as a result of an evaluation of the expected useful lives of its underlying assets, primarily in its regulated local telephone segment.

~~Gain~~ Loss (~~loss~~gain) on disposal of assets

On April 28, 2003, the Company signed an underwriting agreement to sell a majority interest in its directory business and on April 29, 2003 filed a final prospectus to offer this majority interest to investors through a Canadian income fund. The transaction closed on May 8, 2003, with the Company selling an 87.42% interest and retaining a 12.58% interest in its Directories Business. The Company recognized a gain on disposition of this majority interest of its directory business of $97.6 million on a pre-tax basis. ~~The Company also~~ ~~recorded a non-cash loss on the disposal of certain fixed assets of $1.1~~ ~~million during 2003, the majority of which were wireless assets.~~

~~Interest~~ Subsequently ~~Expense~~on August 27, 2003, the Company was released from a lockup agreement relating to the remaining interest in the Directories Business and the ~~Interest~~Company disposed of substantially all of its remaining interest in the Directories Business through the exercise of its right to convert 99.23% of its then remaining 12.58% interest in the Directories Business to 2.5 million units of the ACS Media Income Fund, which were then sold in an underwritten offering. The transaction settled on September 4, 2003, generating $17.2 million in net proceeds and ~~Other~~a gain on disposition of $15.9 million. As a result of this transaction, the Company now owns less than 0.1% of the Directories Business.

~~Interest expense increased to $27.6 million for the six months ended June~~38 ~~30, 2003 compared to $23.7 million for the six months ended June 30, 2002. As a~~ result of the early extinguishments of outstanding debt of $106,650 during second quarter of 2003, $3.4 million of debt issuance cost was charged to interest expense. During the second quarter of 2002, the Company reversed $1.7 million of previously accrued interest expense as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. After consideration of these items,

~~the~~ The ~~decrease~~Company inrecorded ~~interest~~a ~~expense~~non-cash isloss ~~the result of market interest rate effects~~ on the ~~Company’s~~disposal ~~variable~~of ~~interest~~certain ~~rate debt. Interest income and other~~fixed ~~increased~~assets toof $51.0 million ~~for~~during 2003, the ~~six~~majority ~~months~~of ~~ended~~which ~~June 30,~~were ~~2003~~wireless ~~compared to $1~~assets.~~0 million~~ The ~~for~~Company ~~the~~recorded ~~six~~a ~~months~~non-cash ~~ended~~loss ~~June 30,~~on ~~2002,~~the ~~substantially~~disposal ~~due~~of ~~to a~~ $42.1 million ~~gain~~during 2002 onas ~~foreign~~a ~~exchange~~result onof ~~the~~retiring ~~directory~~certain ~~transaction~~assets no longer in use.

Interest Expense and Interest Income and Other

Interest expense increased to $49.5 million for the nine months ended September 30, 2003 compared to $36.5 million for the nine months ended September 30, 2002. As a result of the early extinguishments of outstanding debt of $106.7 million during second quarter of 2003 and the refinancing of $320.7 million during the third quarter of 2003, $13.1 million of debt issuance cost was charged to interest expense. During the second quarter of 2002, the Company reversed $1.7 million of previously accrued interest expense as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. After consideration of these items, the decrease in interest expense is the result of market interest rate effects on the Company’s variable interest rate debt. Interest income and other decreased to $10.1 million of expense for the nine months ended September 30, 2003 compared to $1.6 million of income for the nine months ended September 30, 2002, substantially due to a $15.9 million non-operating impairment loss on a note receivable offset by the $4.3 million gain on foreign exchange on the directory transactions.

Income Taxes

Discontinued Operations

On March 30, 2002, the Company’s management approved a plan to offer for sale its wireless cable television service segment. As a result of this decision, the operating revenue and expense of this segment have been classified as discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented and the assets and liabilities of the disposal group have been written down to their fair value, net of expected selling expense. The results of operations of this discontinued segment resulted in a charge to discontinued operations of $52 thousand and $7.45 million for the ~~six~~nine months ended ~~June~~September 30, 2003 and 2002, respectively. The Company has fully reserved in the form of a valuation allowance the income tax benefit resulting from this discontinuance. The Company completed its disposal of its wireless cable television segment as of March 31, 2003.

Cumulative Effect of Change in Accounting Principle

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. 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 transitional review for goodwill impairment required under SFAS No. 142 indicated that goodwill recorded in the local telephone, Internet and interexchange segments was impaired as of January 1, 2002. Accordingly, the Company measured and recognized in the first quarter of 2002 a transitional impairment loss of $105.4 million as the cumulative effect of a change in accounting principle in the consolidated statement of operations. The income tax benefit of $39.5 million was offset by a valuation allowance. See Note 68 “Cumulative Effect of Change in Accounting Principle” in the Notes to Consolidated Financial Statements included elsewhere in this 10-Q for additional discussion of the this statement.

Net Income (Loss)

The change in net income (loss) is primarily a result of the factors discussed above.

~~LIQUIDITY AND CAPITAL RESOURCES~~39

The Company has satisfied its operational and capital cash requirements primarily through internally generated funds, the sale of stock and debt financing. For the six months ended June 30, 2003, the Company’s cash flows from operating activities were $35.0 million. At June 30, 2003, the Company had approximately $73.8 million in net working capital, including $64.6 million in unrestricted cash. As of June 30, 2003, the Company had $75.0 million of remaining capacity under its revolving credit facility, representing 100% of available capacity.

The Company has outstanding a $320.7 million bank credit agreement (“Senior Credit Facility”), and $150.0 million in 9.375% senior subordinated notes due 2009, representing substantially all of the Company’s long-term debt of $482.1 million as of June 30, 2003. In addition, $17.3 million in senior discount debentures are recorded at ACS Group and are collateralized by substantially all assets of the Company. Interest on ACS Group’s senior discount debentures and ACS Holdings’ senior subordinated notes are payable semiannually. Interest on borrowings under the Senior Credit Facility is payable monthly, bi-monthly, quarterly or semi-annually at the Company’s option. The Senior Credit Facility requires 1% annual principal payments that commenced on May 14, 2002, with balloon payments in each of 2006,

~~2007, and~~LIQUIDITY ~~2008.~~AND ~~The~~CAPITAL ~~Senior Credit Facility contains a number of restrictive covenants~~RESOURCES ~~and events of default, including covenants limiting capital expenditures,~~ ~~incurrence of debt, and the payment of dividends, and requires the Company to~~ achieve certain financial ratios. The Company is in compliance with all of its debt covenants. During the first quarter of 2003, the Company’s lenders approved an amendment and waiver to its Senior Credit Facility that, among other things, permitted the Company to sell its directory business and that 75% of such proceeds would be used to repay outstanding Senior Credit Facility term loans. This amendment and waiver became effective on May 8, 2003, and on May 13, 2002, the Company paid down $106.7 million of the outstanding Senior Credit Facility term loans.

~~With~~ The ~~the~~Company ~~company’s~~has ~~improved~~satisfied ~~credit~~its ~~profile,~~operational weand ~~are~~capital ~~currently~~cash ~~exploring~~requirements ~~opportunities~~primarily tothrough ~~raise~~internally ~~additional~~generated ~~capital~~funds, ~~to support~~ the ~~future~~sale ~~growth~~ of ~~the~~its Parent’s stock, ~~business~~the ~~and~~sale toof ~~refinance~~its ~~our~~directory ~~senior~~business, ~~secured~~and ~~credit~~debt ~~facilities~~financing. ~~with~~For ~~some combination~~the ofnine ~~new~~months ended ~~senior~~September 30, ~~and~~2003, ~~senior~~the ~~secured~~Company’s ~~indebtedness~~cash ~~that~~flows wefrom ~~expect~~operating ~~would~~activities ~~loosen~~were ~~certain~~$50.5 million. ~~restrictive~~At ~~covenants~~September 30, ~~including~~2003, ~~with~~the ~~respect~~Company tohad ~~the~~approximately ~~payment of dividends~~$122.0 million ~~Such~~in ~~financing~~net ~~would~~working becapital, ~~expected~~including to$121.2 million ~~extend~~in ~~the~~unrestricted ~~maturities~~cash. As of aSeptember 30, ~~portion~~2003, of the Company’s ~~debt~~had ~~facilities~~$50.0 million ~~and~~of ~~may~~remaining ~~include~~capacity ~~increasing~~under ~~the~~its ~~Company’s~~revolving ~~total~~credit ~~indebtedness~~facility, byrepresenting ~~approximately $50 million~~100% of available capacity.

The Company has outstanding a $200.0 million bank credit agreement (“Senior Credit Facility”), $150.0 million in 9.375% senior subordinated notes due 2009 and $182.0 million in 9.875% senior notes due 2011 representing substantially all of the Company’s long-term debt of $535.9 million as of September 30, 2003. In addition, $17.3 million in senior discount debentures are recorded at ACS Group and are collateralized by substantially all assets of the Company. Interest on the Company’s senior subordinated notes, senior notes and ACS Group’s senior discount debentures is payable semiannually. Interest on borrowings under the Senior Credit Facility is payable monthly, bi-monthly, quarterly or semi-annually at the Company’s option. The Senior Credit Facility requires $500,000 quarterly principal payments that commence on March 31, 2004, with the balance due in 2010. The Senior Credit Facility contains a number of restrictive covenants and events of default, including covenants limiting capital expenditures, incurrence of debt, and the payment of dividends, and requires the Company to achieve certain financial ratios. The Company is in compliance with all of its debt covenants.

The Company employs an interest rate hedge transaction, which fixes at 5.99% the underlying variable rate on $217.5 million of the borrowings under the Senior Credit Facility, expiring in June 2004. The underlying variable rate for the Senior Credit Facility is based on the London Interbank Offer Rate (“LIBOR”), which is adjusted at each monthly, quarterly or semi-annual rollover date.

In On ~~December 2001~~July 15, 2002 the Company ~~entered~~fulfilled ~~into~~ a ~~material~~commitment ~~contract~~to ~~with~~Neptune ~~the~~to provide ~~State~~a loan for the aggregate principal amount of ~~Alaska~~$15 million toin ~~provide~~return for certain consideration. The Company has an agreement that enables it ~~with~~to ~~comprehensive~~purchase additional ~~telecommunications~~fiber ~~services~~optic capacity in future years from Neptune, the expenditures for awhich ~~period~~are ofexpected ~~five~~to be significant and may exceed $25 million over the next four years. ~~This~~While ~~contract~~the ~~obligates~~Company has an agreement with Neptune, certain material terms of the ~~Company~~agreement remain subject to continued renegotiation. The significant provisions of this agreement are: i) purchase commitments by the Company for capacity in 2005 and 2007, ~~among~~the ~~other~~final price and quantity of which ~~things~~are subject to future events, ~~provide~~ii) onNeptune’s restoration of the ~~state~~Company’s traffic ~~behalf~~carried ~~customer~~on ~~premise~~another ~~equipment~~cable system, iii) and ~~other~~specific interconnection ~~capital~~arrangements ~~assets~~between ~~which~~the Company and Neptune, should the Company ~~believes~~exercise ~~will~~its option ~~range~~to ~~between~~purchase ~~$45 million~~certain network assets from Neptune. The Company is currently negotiating open elements of its agreement with Neptune and ~~$55 million~~renegotiating ~~over~~other ~~the~~terms ~~term~~and conditions of the agreement,. ofIt ~~which~~is ~~approximately~~impossible ~~$14.2~~to ~~million~~determine ~~has~~the ~~been~~ultimate ~~expended~~outcome ~~through~~of ~~June 30,~~these ~~2003~~negotiations at this time. The ~~Company~~loan ~~intends~~was written down to ~~fund~~its estimated fair value during the quarter ended September 30, ~~this~~2003 ~~commitment~~as ~~with~~described ~~cash~~in onNote ~~hand~~6 ~~and~~of ~~cash~~the ~~flows~~financial ~~from~~statements ~~operations~~attached hereto.

On The ~~July 15,~~local ~~2002~~telephone ~~the~~network ~~Company~~requires ~~fulfilled a commitment to Neptune to provide to that party a loan in~~ the ~~form~~timely maintenance of anplant ~~unsecured note receivable totaling $15.0~~and ~~million in return for certain consideration~~infrastructure. The ~~note~~Company’s ~~bears~~historical ~~interest~~capital atexpenditures ~~the applicable~~have ~~federal rate, which was 4~~been significant.~~84%~~ atThe ~~June 30,~~construction ~~2003~~ and ~~matures~~geographic onexpansion ~~July 15,~~of ~~2022. Interest is payable semiannually, but~~ the ~~borrower may elect to add~~Company’s ~~the~~wireless ~~interest~~network tohas ~~the~~required ~~principal~~significant ~~in lieu of cash payments~~capital. The ~~commitment~~implementation ~~was funded~~of ~~with cash on hand. In connection with this note, Neptune has granted~~ the Company’s aninterexchange ~~option to purchase certain~~ network ~~assets~~and ofdata ~~Neptune,~~services nostrategy ~~later~~is ~~than January 2,~~also ~~2006, at a price equal to the then outstanding loan balance~~capital intensive. The Company ~~has~~anticipates ~~also~~capital ~~entered~~spending ~~into a strategic agreement with Neptune for the life~~ of ~~the~~between ~~fiber~~$45 million ~~optic cable system owned by Neptune. The significant provisions of~~and ~~this~~$50 million ~~agreement are: i) purchase commitments by the Company~~ for ~~capacity in 2005 and 2007~~2003, ~~the final price~~ and ~~quantity~~has ofspent ~~which~~$32.1 million ~~are~~in ~~subject to future events, ii) Neptune’s restoration of~~ the ~~Company’s~~nine ~~traffic~~months ~~carried on another cable~~ended ~~system~~September 30, ~~iii)~~2003, ~~and~~including ~~specific~~property ~~interconnection~~acquired ~~arrangements~~under ~~between~~a ~~the~~mortgage ~~Company~~of ~~and~~$2.3 ~~Neptune,~~million. ~~should~~The ~~the~~ Company ~~exercise~~intends ~~its option~~ to ~~purchase~~fund ~~certain~~its ~~network assets~~future ~~from~~capital ~~Neptune.~~expenditures ~~The~~with ~~Company~~cash on ishand, ~~currently~~through ~~renegotiating~~internally ~~the~~generated ~~terms~~cash ~~and conditions~~flows, ~~of this agreement~~ and itif isnecessary, ~~not~~through borrowings ~~possible~~under ~~to determine~~ the ~~ultimate outcome~~revolving ofcredit ~~these negotiations at this time~~facility.

~~The~~ On ~~local~~May 8, ~~telephone~~2003 ~~network requires~~ the ~~timely maintenance of plant and infrastructure. The~~ Company’s ~~historical~~completed ~~capital expenditures have been significant. The construction and geographic expansion of~~ the ~~Company’s wireless~~sale ~~network has required significant capital. The implementation~~ of ~~the Company’s~~a ~~interexchange~~majority ~~network~~interest ~~and data services strategy is also capital~~in ~~intensive. In 1999,~~ the ~~Company~~newly ~~purchased~~formed ~~fiber~~ACS ~~capacity for $19.5 million~~Media, ~~which~~ ~~was~~LLC ~~funded~~(the ~~with~~“Directories ~~monies~~Business”) ~~borrowed~~ to ~~finance~~ the ~~1999~~ACS ~~acquisitions. Capital~~Media ~~expenditures~~Income ~~for~~Fund ~~fiscal~~(the ~~year~~“Fund”). ~~2000~~The ~~were~~Fund ~~$72.3 million,~~sold ~~including $3~~17.25 million ~~in capital~~units ~~leases.~~on ~~Capital~~May 8, ~~expenditures~~2003 for net ~~fiscal~~proceeds ~~year~~of ~~2001 were~~ $87110.64 million, ~~including~~ ~~$19.5 million~~after ~~for~~deducting ~~additional~~its ~~fiber~~underwriters’ ~~capacity~~fees and ~~$15.0 million for an~~ IPtransaction ~~based~~expenses ~~network~~of ~~and service center. Capital expenditures for fiscal year 2002 were~~ $7110.~~4 million, including $4.~~2 million ~~in capital leases, approximately $12~~.~~4 million~~ ~~necessary~~The toFund’s ~~meet~~net ~~its~~proceeds ~~obligations~~were ~~under~~used ato acquire ~~contract~~from ~~with~~ the ~~State of~~Company ~~Alaska~~an ~~and approximately $5~~87.~~0 million~~42% ~~for~~interest in the ~~first~~Directories ~~phase of its build out of PCS licenses~~Business. The Company ~~anticipates~~received ~~capital~~net ~~spending~~proceeds of ~~between~~ $50 105.1 million ~~and~~after ~~$60 million~~deducting ~~for~~its ~~2003,~~fees and expenses ~~has~~associated ~~spent~~with ~~$17.6 million in~~ the ~~six~~transaction ~~months ended June 30, 2003, including property acquired under a mortgage~~ of $25.3 million. ~~The Company intends to fund its future capital expenditures with cash~~ ~~on hand, through internally generated cash flows, and if necessary, through~~ ~~borrowings under the revolving credit facility.~~

3640

On May 8, 2003 the Company completed the sale of a majority interest in the newly formed ACS Media, LLC (the “Directories Business”) to the ACS Media Income Fund (the “Fund”). The Fund sold 17,500 units on May 8, 2003 for net proceeds of $110.4 million, after deducting its underwriters’ fees and transaction expenses of $10.2 million. The Fund’s net proceeds were used to acquire from the Company an 87.42% interest in the Directories Business. The Company received net proceeds of $105.1 million after deducting its fees and expenses associated with the transaction of $5.3 million.

The Company entered into an arrangement with the Metropolitan Life Insurance Company (MetLife) to provide a credit facility to its Directories Business on May 8, 2003 immediately prior to the sale of its Directories Business to the Fund. The Directories Business then drew $35.0 million of term loans against the facility, using $1.5 million to pay fees and expenses related to the debt issuance and $0.1 million to prepay an annual agency fee to MetLife. Of the $33.4 million in net cash proceeds, $0.4 million was deposited into the Directories Business as cash working capital and $33.0 million was distributed to the Company as a dividend. The credit facility is non-recourse to the Company.

As Subsequently, ~~discussed~~on ~~above~~August 27, as2003, athe ~~condition~~Company ofwas ~~obtaining~~released anfrom ~~amendment~~a ~~and~~lockup agreement ~~waiver~~relating to the ~~Company’s~~remaining ~~senior~~interest ~~bank~~in ~~credit~~the ~~facility~~Directories ~~obtained~~Business toand the ~~permit~~Company ~~the~~disposed ~~sale~~of substantially all of its remaining interest in the Directories Business, through the ~~Company~~exercise ~~was~~of ~~required~~its right to ~~use~~convert a99.23% ~~specified amount~~ of ~~the~~its ~~proceeds~~then toremaining ~~prepay~~12.58% ainterest ~~portion~~in of the ~~outstanding~~Directories ~~term~~Business ~~loans~~to ~~under~~2.5 million units of the ~~facility. To~~ACS ~~fulfill~~Media ~~this~~Income ~~requirement~~Fund, ~~the~~which ~~Company~~were ~~prepaid~~then ~~$106.7 million~~sold ofin ~~outstanding~~an underwritten offering. ~~bank~~The ~~debt~~transaction settled on ~~May~~September 134, 2003, generating $17.1 in net proceeds.

During the first quarter of 2003, the Company’s lenders approved an amendment and waiver to its Senior Credit Facility that, among other things, permitted the Company to sell its directory business and required that in the event the sale was completed, 75% of proceeds would be used to repay outstanding Senior Credit Facility term loans. This amendment and waiver became effective on May 8, 2003, and on May 13, 2003, the Company paid down $106.7 million of the outstanding Senior Credit Facility term loans.

On August 26, 2003, the Company completed the refinancing of its Senior Credit Facility term loans. The Company entered into a new $250.0 million Senior Credit Facility consisting of a term loan facility in an aggregate principal amount of $200.0 million and an undrawn revolving credit facility in an aggregate principal amount of $50.0 million. The Company simultaneously issued $182.0 million aggregate principal amount of 9 7/8% senior unsecured notes due 2011 at an issue price of approximately 96.7% for net proceeds of $176.0 million. From these proceeds, the Company paid off $320.7 million of its then existing credit facility.

The Company’s capital requirements may change due to, among other things, impacts of regulatory decisions that affect the Company’s ability to recover its investments, changes in technology, the effects of competition, changes in the Company’s business strategy, and the Company’s decision to pursue specific acquisition opportunities.

The Company believes that it will have sufficient working capital provided by operations and available borrowing capacity under the existing revolving credit facility to service its debt and fund its operations, capital expenditures and other obligations over the next 12 months. The Company’s ability to service its debt and fund its operations, capital expenditures and other obligations will be dependent upon its 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 the Company’s control.

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

Management is responsible for the financial statements presented elsewhere in this Form 10-Q and has evaluated the accounting policies used in their preparation. Management believes these policies to be reasonable and appropriate. The Company’s significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The following discussion identifies those accounting policies that management believes are critical in the preparation of the Company’s 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 revenue and expense 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, income taxes and network access revenue reserves. Actual results may differ from those estimates.~~

~~Access revenue is recognized when earned. The Company participates in toll~~41 ~~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 about achieved rates of

~~return~~period. ~~These~~Among ~~estimates~~the ~~are~~significant ~~subject~~estimates toaffecting ~~adjustment~~the infinancial ~~future accounting periods~~statements asare ~~additional~~those ~~operational~~related ~~information~~to ~~becomes available. To~~ the ~~extent~~realizable ~~that disputes~~value ~~arise~~of ~~over~~accounts ~~revenue settlements~~receivable, ~~the~~impairment ~~Company’s policy is to defer~~of ~~revenue~~long-lived ~~collected~~assets, ~~until~~income ~~settlement~~taxes ~~methodologies are resolved~~ and ~~finalized.~~network ~~At June 30, 2003, the Company had recorded liabilities of $15.4 million related to its estimate of refundable~~ access revenue reserves. Actual results ~~could~~may ~~vary~~differ from ~~this estimate~~those estimates.

Access revenue is recognized when earned. The Company ~~utilizes~~participates ~~the~~in ~~liability~~toll revenue ~~method~~pools ofwith ~~accounting~~other ~~for~~telephone ~~income taxes~~companies. ~~Under~~ ~~the~~Such ~~liability~~pools ~~method,~~are ~~deferred~~funded ~~taxes~~by ~~reflect~~toll revenue and/or access charges regulated by the ~~temporary~~RCA ~~differences between~~within the ~~financial~~intrastate jurisdiction and ~~tax~~the ~~basis~~FCC ofwithin ~~assets~~the ~~and~~interstate ~~liabilities~~jurisdiction. ~~using~~Much of the interstate ~~enacted~~access revenue is initially recorded based on estimates. These ~~tax~~estimates ~~rates~~are inderived ~~effect~~from ininterim ~~the~~financial ~~years~~statements, inavailable ~~which~~separations studies and the ~~differences~~most ~~are~~recent ~~expected~~information toavailable about achieved rates of ~~reverse~~return. ~~Deferred~~These ~~tax~~estimates ~~assets~~ are ~~reduced~~subject byto aadjustment ~~valuation~~in ~~allowance~~future toaccounting periods as additional operational information becomes available. To the extent that disputes itarise isover ~~more~~revenue ~~likely~~settlements, ~~than~~the ~~not~~Company’s ~~that~~policy ~~such~~is ~~deferred~~to ~~tax~~defer revenue ~~assets~~collected ~~will~~until ~~not~~settlement ~~be realized~~methodologies are resolved and finalized. ~~The~~At September 30, ~~cumulative~~2003, ~~valuation~~the ~~allowance~~Company ~~against~~had ~~deferred~~recorded ~~tax~~liabilities ~~assets~~of is $5716.14 million related asto its estimate of ~~June 30,~~refundable ~~2003~~access revenue. Actual results could vary from this estimate.

The ~~local~~Company ~~telephone~~utilizes ~~exchange operations of~~ the ~~Company~~liability ~~account~~method ~~for~~of ~~costs in accordance with the~~ accounting ~~principles~~ for ~~regulated~~income ~~enterprises~~taxes. ~~prescribed~~Under bythe ~~SFAS~~liability ~~No. 71~~method, ~~Accounting~~deferred ~~for~~taxes reflect the ~~Effects~~temporary ~~of Certain Types of~~differences ~~Regulation.~~between ~~This~~the ~~accounting~~financial ~~recognizes~~and ~~the~~tax ~~economic~~basis ~~effects~~ of ~~rate~~assets ~~regulation by recording cost~~ and aliabilities ~~return~~using onthe ~~investment as such amounts are recovered~~enacted ~~through~~tax rates ~~authorized~~in byeffect ~~regulatory~~in ~~authorities.~~the ~~Accordingly,~~years ~~under~~in ~~SFAS~~which ~~No. 71,~~the ~~plant~~differences ~~and equipment is depreciated over lives approved by regulators and certain costs and obligations~~ are ~~deferred~~expected ~~based upon approvals received from regulators~~ to ~~permit recovery of such amounts in future years. Historically,~~ ~~lives approved for regulatory purposes have approximated economically useful lives~~reverse. OnDeferred ~~July 21,~~tax ~~2002, the Company received an order from the RCA which extended lives approved for ratemaking purposes beyond the economically useful lives of the underlying~~ assets. ~~Management~~are ~~petitioned~~reduced ~~for~~by ~~reconsideration and the RCA has accepted additional testimony and held~~ a ~~hearing~~valuation inallowance ~~June~~to ofthe ~~2003. A~~extent ~~final~~that ~~order~~it onis ~~the~~more ~~matter~~likely isthan not ~~expected~~that ~~until~~such ~~the~~deferred ~~second~~tax ~~half~~assets ofwill ~~2003.~~not ~~The~~be ~~Company implemented, effective January 1, 2003, higher depreciation rates for its regulated telephone plant for the interstate jurisdiction~~realized. AsThe acumulative ~~result,~~valuation ~~the Company~~allowance ~~has~~against ~~recorded~~deferred atax ~~regulatory~~assets ~~asset under SFAS No. 71 of~~ is $587.56 million as of ~~June 30,~~ ~~2003. The Company has also deferred as a regulatory asset $0.9~~September 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 $0.8 million at June 30, 2003. ~~If the Company were not~~ ~~following SFAS No. 71, it would have recorded additional depreciation expense~~ ~~of $5.5 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.~~

~~Effective~~ The ~~January 1,~~local ~~2002,~~telephone exchange operations of the Company ~~adopted~~account for costs in accordance with the accounting principles for regulated enterprises prescribed by SFAS No. ~~142~~71, ~~Goodwill~~Accounting ~~and Other~~for ~~Intangible~~the ~~Assets~~Effects of Certain Types of Regulation. InThis ~~accordance~~accounting ~~with~~recognizes the ~~guidelines~~economic effects of ~~this~~rate ~~accounting~~regulation ~~principle,~~by ~~goodwill~~recording cost and ~~indefinite-lived~~a ~~intangible~~return ~~assets~~on ~~are~~investment noas ~~longer amortized~~such ~~but~~amounts ~~will~~are berecovered through ~~assessed~~rates ~~for~~authorized ~~impairment~~by onregulatory atauthorities. ~~least~~Accordingly, anunder ~~annual basis.~~ SFAS No. ~~142~~ 71, ~~requires~~plant ~~that~~and ~~goodwill~~equipment beis ~~tested~~depreciated ~~for~~over ~~impairment~~lives atapproved ~~the~~by ~~reporting~~regulators ~~unit~~and ~~level~~certain costs and obligations are deferred based upon ~~adoption~~approvals ~~and~~received atfrom regulators ~~least~~to ~~annually~~permit ~~thereafter~~recovery of such amounts in future years. Historically, lives ~~utilizing~~approved afor ~~two-step~~regulatory purposes have approximated economically useful ~~methodology~~lives. ~~The~~On ~~initial~~July 22, ~~step~~2002, ~~requires~~ the Company toreceived ~~determine~~an order from the ~~fair~~RCA ~~value~~which ofextended ~~each~~lives ~~reporting~~approved ~~unit~~for ~~and~~ratemaking ~~compare~~purposes itbeyond to the ~~carrying~~economically ~~value, including~~useful ~~goodwill,~~lives of ~~such~~the ~~unit~~underlying assets. IfManagement petitioned for reconsideration on the ~~fair~~ACSA ~~value~~order ~~exceeds~~and the ~~carrying~~RCA ~~value,~~has ~~no impairment~~accepted ~~loss~~additional ~~would~~testimony beand ~~recognized.~~held ~~However,~~a ifhearing in ~~the~~May ~~carrying~~of ~~value~~2003. ofThe ~~the reporting~~RCA ~~unit~~subsequently ~~exceeds~~reconsidered its ~~fair~~order ~~value,~~and ~~the~~adopted ~~goodwill~~service lives ofthat more closely approximate the ~~unit~~actual ~~may~~economic ~~be impaired.~~lives of the assets. The ~~amount~~Company implemented, ifeffective ~~any~~January 1, of2003, ~~the~~higher ~~impairment~~depreciation isrates for ~~then~~its ~~measured~~regulated intelephone plant for the ~~second step~~interstate jurisdiction. ~~The~~As a result, the Company ~~determines~~has ~~the~~recorded ~~fair~~a ~~value~~regulatory ofasset ~~each~~under ~~reporting~~SFAS ~~unit~~No. 71 ~~for~~of ~~purposes~~$8.3 million as of ~~this~~September 30, ~~test~~2003. ~~primarily~~The byCompany ~~using~~has aalso ~~discounted~~deferred ~~cash~~as ~~flow~~a ~~valuation~~regulatory ~~technique.~~asset ~~Significant~~$0.9 million ~~estimates~~of ~~used~~costs incurred in ~~the~~connection ~~valuation~~with ~~include~~regulatory ~~estimates~~rate ~~of future cash~~making ~~flows~~proceedings, ~~both~~which ~~future~~is ~~short-term~~being ~~and~~amortized ~~long-term~~over ~~growth~~three ~~rates,~~years ~~and~~starting ~~estimated~~in ~~cost~~2003. ofThe ~~capital~~balance ~~for~~of ~~purposes~~this ofregulatory ~~arriving~~asset atwas a$0.7 million ~~discount~~at ~~factor~~September 30, 2003. ~~The~~If the Company ~~recognized in~~were ~~the~~not ~~first~~following ~~quarter~~SFAS ofNo. 71, ~~2002~~it awould ~~transitional~~have ~~impairment~~recorded ~~loss~~additional depreciation expense of $~~105~~8.43 million ~~under~~ ~~SFAS~~for ~~No. 142 as~~ the ~~cumulative~~intrastate ~~effect~~and oflocal ajurisdictions and ~~change~~the indeferred ~~accounting~~costs ~~principle~~ incurred in ~~the~~connection ~~consolidated~~with ~~statement~~regulatory ofrate ~~operations.~~making proceedings Atwould ~~June 30,~~have ~~2003,~~been ~~the~~charged ~~Company~~to ~~had recorded~~expense ~~goodwill~~as ~~of $38~~incurred.~~4 million.~~

Effective January 1, 2002, the Company 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 the Company 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. The Company determines 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. The Company recognized in the first quarter of 2002 a transitional impairment loss of $105.4 million under SFAS No. 142 as the cumulative effect of a change in accounting principle in the

consolidated statement of operations. At September 30, 2003, the Company had recorded goodwill of $38.4 million.

On September 15, 2003, the Company received notification from the State of Alaska that it intended to terminate the TPA with the Company and disentangle. Subsequently, the Company and the State negotiated and agreed to a definitive Settlement Agreement and Mutual Release (the “Settlement Agreement”) effective October 14, 2003, outlining the terms of disentanglement between the parties. Under the terms of the Settlement Agreement, the Company agreed to pay to the State of Alaska $3.4 million in cash, one half of which was due upon effectiveness and one half of which will be due upon completion of disentanglement. The Company also agreed to transfer to the State title to certain assets used in providing services under the TPA which resulted in a net loss on disposal of those assets of $5.6 million. Based on terms of the Settlement Agreement, the Company determined that certain accounts receivable and working capital associated with the TPA will not be fully recoverable and has written them down to their estimated net realizable value, resulting in a charge of $3.3 million during the quarter. The estimated net realizable value of the working capital and which assets are ultimately transferred to the State could change as the Company completes disentanglement.

The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company was prompted to conduct an asset impairment review of its fiber optic IRUs that were acquired in 1999 and 2001 and certain IP network and certain service center assets due to the termination of the TPA as discussed above (which was a significant customer using these assets), indications that market pricing of similar assets were significantly below the Company’s carrying value, and significant industry and economic trends affecting the Company’s ability to generate positive cash flow from these assets in its interexchange and Internet segments. This review was conducted under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result of its review, the Company determined that its carrying value of IRUs exceeded their fair value by $27.1 million and its carrying value of the IP network and service center assets exceeded their fair value by $15.1 million. Accordingly, the Company recorded a $42.2 million impairment charge and wrote the assets down to their fair value during the third quarter of 2003.

The Company also periodically evaluates the fair value of its investments and other non-operating assets against their carrying value. During the third quarter of 2003, impairment charges were taken as a result of changes in market and economic conditions, a notice of termination of the TPA, and the Company’s reassessment of the net realizable value of its note receivable from Neptune Communications, L.L.C. As a result of this analysis, the Company recorded in Interest income and other in the Consolidated Statement of Operations an impairment charge of $15.9 million.

OUTLOOK

The Company expects that, overall, the demand for telecommunications services in Alaska to grow, particularly as a result of:

	•		increasing demand for private network services by government and business on a statewide basis on either a circuit switched or IP basis,

	•		increasing demand for wireless voice and data services, and

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

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

There are currently a number of regulatory proceedings underway at the state and federal levels that could have a significant impact on the Company’s operations. The Company cannot predict with certainty the impact of current or future regulatory developments on any of its businesses.

The telecommunications industry is extremely competitive, and the Company expects competition to intensify in the future. As an incumbent local exchange carrier (“ILEC”), the Company faces competition mainly from resellers, local providers who lease its UNEs and, to a lesser degree, from facilities-based providers of local telephone services. In addition, as a result of the RCA’s recent affirmation of the APUC’s termination of the Company’s rural exemptions, the Company may be required to provide interconnection elements and/or wholesale discounted services to competitors in all or some of its rural service areas. Moreover, while wireless telephone services have historically complemented traditional LEC services, the Company anticipates that existing and emerging wireless technologies may increasingly compete with LEC services. In wireless services, the Company currently competes with at least one other wireless provider in each of its wireless service areas. In the highly competitive business for Internet access services, the Company currently competes with a number of established online service companies, interexchange carriers and cable companies. In the interexchange market, the Company believes it currently has less than 10% of total revenue in Alaska and faces competition from the two major interexchange providers.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has issued senior subordinated notes, senior notes and has entered into a bank credit facility. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose the Company to interest rate risk, with the primary interest rate risk exposure resulting from changes in LIBOR or the prime rate, which are used to determine the interest rates that are applicable to borrowings under the Company’s bank ~~credit~~ credit facilities. The Company uses derivative financial instruments, in particular an interest rate swap agreement, to partially hedge variable ~~interest~~ interest transactions. The Company’s derivative financial instrument transaction has been entered into for hedging purposes. The terms and characteristics of the derivative financial instruments are matched with the underlying on-balance sheet instrument or anticipated transactions and do not constitute speculative or leveraged positions independent of these exposures. During the quarter ended June 30, 2003, the Company prepaid $106.7 million of its bank credit facility. During the quarter ended September 30, 2003, the asCompany ~~disclosed~~entered into a new $250.0 million Senior Credit Facility consisting of a term loan facility in an aggregate principal amount of $200.0 million and an undrawn revolving credit facility of $50.0 million. The Company simultaneously issued $182.0 million aggregate principal amount of 9 7/8% senior unsecured notes due 2011 at an issue price of approximately 96.7% for net proceeds of $176.0 million. From these proceeds, the Company paid off $320.7 million of its then existing credit facility. See Note 3 of the financial statements attached hereto for more information on these transactions.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Within the 90 days prior to the date of this report, the Company 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-14(c) and 15d-14(c)) under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company 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 our disclosure controls and procedures subsequent to the date the Company carried out this evaluation.

4045

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As previously reported, the Company filed a formal appeal of the RCA’s order terminating the rural ~~exemption~~exemptions for Fairbanks, Juneau and the rural communities in the Glacier State study area on November 10, 1999. This matter has been fully briefed and argued and is currently pending before the Alaska Supreme Court.

The Company’s LECs (ACSN, ACSF, ACSAK and ACSA) are currently negotiating and seeking arbitration of new interconnections agreements with General Communication, Inc. (“GCI”). A hearing is scheduled in the ~~Anchorage~~ACSA matter for November 2003. The Company’s ispetition ~~seeking~~to ~~consolidation~~consolidate the arbitration of ~~the~~new interconnection ~~arbitrations~~agreements for the ~~other~~ rural companies (ACSN, ACSF, and ACSAK) with the Anchorage arbitration was denied and they were assigned to an arbitrator with direction to complete these proceedings by February 2004. The Company and GCI have discussed delaying the proceedings until the Anchorage arbitration is completed. In light of the pending arbitrations for new interconnection agreements for Fairbanks and Juneau, the Company dismissed its district court actions concerning the existing Fairbanks and Juneau interconnection agreements on October 14, 2003.

On Following the RCA’s March 25, 2003, ~~the RCA issued an~~ order approving new revenue requirements for ACSF, ACSAK, and ACSN., ~~The~~these ~~order~~entities ~~reduces~~filed ~~the~~cost ~~revenue~~of service ~~requirements~~and ~~for~~rate ~~ACSF~~design ~~and~~studies ~~ACSN~~on ~~while~~May 23, ~~slightly~~2003. ~~increasing~~A ~~the~~hearing ~~revenue requirement~~in ~~for~~this ~~ACSAK.~~proceeding ~~During~~is ~~the~~now scheduled ~~second~~for ~~quarter~~February 9, ~~the~~2004, ~~Company~~and ~~filed~~new ~~its~~rates ~~cost~~are ~~of service~~not ~~and~~expected ~~rate~~to ~~designs~~go ~~and~~into effect ~~testimony~~until ~~for~~ the ~~three~~second ~~rural~~or ~~LECs~~third quarter of 2004. In ~~addition, in~~ May 2003, the RCA held a limited rehearing in the revenue requirement phase of ~~the hearing~~ for ACSA. The ~~ACSA hearing reviewed the~~ RCA’s subsequently ~~decision~~reconsidered toits ~~reduce the~~order ~~revenue~~and ~~requirement~~adopted ~~for~~service ~~ACSA~~lives bythat ~~lengthening~~more closely approximate the ~~service~~actual economic lives of ~~specific~~ the assets, ~~and~~increasing ~~thereby reducing~~ ACSA’s depreciation expense., ~~The~~thereby ~~RCA~~increasing ACSA’s ~~decision~~revenue onrequirement. ~~revenue requirements~~The RCA will ~~have~~issue aits ~~direct~~final ~~impact~~revenue onrequirement order before the ~~retail~~end ~~rates~~of ~~and~~the ~~intrastate~~fourth ~~access~~quarter ~~rates~~of ~~that~~2003, ACSA iswill ~~allowed~~then have 60 days to ~~charge.~~file ~~Once~~its acost ~~revenue~~of ~~requirements~~service ~~order~~and israte ~~issued~~design bystudy ~~the~~consistent ~~RCA,~~with that order. A hearing on the ACSA ~~will~~rate ~~file~~design is ~~cost~~expected in second quarter of ~~service~~2004 and ~~rate~~new ~~design~~rates ~~studies~~should be expected by the ~~consistent~~second ~~with~~or ~~that~~third ~~order~~quarter of 2004.

The Company ~~previously~~has ~~reported~~been ~~that~~involved itwith ~~had~~ a ~~dispute~~number of service-oriented disputes with GCI. ~~pending~~The RCA has ordered the Company to, amongst other things, construct ~~before~~new facilities for GCI to serve GCI customers and to provide GCI with query access to the Company’s LEC provisioning system. The Company is currently seeking review of that portion of the RCA’s decision that orders ACS LECs to construct new facilities for GCI to serve GCI customers. In May 2003, however, GCI filed a complaint against the Company with the FCC concerning ~~interstate~~service issues. ~~access~~The ~~charges~~Company is vigorously defending its actions before the FCC. ~~This~~While the ~~matter~~potential ~~has~~for ~~been~~some liability exists from GCI’s complaint before the FCC, ~~resolved~~the Company cannot predict the final outcome of this proceeding.

The Company has been involved with a number of service-oriented disputes with GCI. The RCA has ordered the Company to, amongst other things, construct new facilities for GCI to serve GCI customers and to provide GCI with access to the ACS ordering and provisioning systems. The Company is currently seeking review of these decisions. In May 2003, however, GCI filed a complaint against the Company with the FCC concerning service issues. While the Company intends to vigorously defend its actions, the potential for some liability exists and the Company cannot predict the final outcome of this proceeding.

On May 14, 2001, the Company was served with a class action lawsuit concerning its interstate Infinite Minutes long distance plan. A trial is scheduled for September 2004. It is impossible to determine at this time the actual number of plaintiffs or the claims that will actually continue to be in dispute. The Company believes this suit is without merit and intends to vigorously defend its position.

~~ACSW~~ On ~~has~~September 15, ~~petitioned~~2003, the ~~RCA~~Company ~~for~~received ~~Eligible~~notification ~~Telecommunications~~that ~~Carrier~~the State of ~~(“ETC”)~~Alaska ~~status~~was interminating ~~two~~the ~~high~~TPA, ~~cost~~a ~~areas~~contract ofunder ~~Alaska.~~which ~~The~~the ~~RCA~~Company ~~has~~was ~~yet~~obliged to provide comprehensive telecommunications services to ~~take~~the ~~action~~State of Alaska for ona ~~this~~period ~~petition~~of five years. ~~Meanwhile~~On October 1, ~~Dobson~~2003, ~~Communications~~the ~~has~~Company ~~also~~announced ~~petitioned~~that it had entered into a voluntary settlement agreement with the ~~RCA~~State of Alaska under ~~for~~which ~~ETC~~the ~~status~~Company inmakes ~~various~~a ~~parts~~cash payment to the State of Alaska of approximately $3.4 million and ~~has~~transfers ~~further~~to ~~sought~~the State of Alaska title to ~~have~~certain ~~the~~capital ~~RCA~~equipment. ~~redefine~~The ~~ILEC~~parties ~~service~~have ~~areas~~agreed ~~based~~to oncooperate ~~wire~~to ~~centers~~complete disentanglement by December 31, 2003.

~~The~~ On ~~Company~~October 28, is2003, ~~involved~~ACSW inwas ~~various~~served ~~other~~with ~~claims,~~a ~~legal~~complaint ~~actions~~filed ~~and~~by the Alaska ~~regulatory~~Attorney ~~proceedings~~General ~~arising~~for inviolations of the ~~ordinary~~Alaska ~~course~~Consumer ofProtection ~~business~~Act. ~~See Note 12,~~The ~~Commitments~~complaint ~~and~~alleges ~~Contingencies,~~the in“opt ~~the~~out” ~~footnotes~~campaign tofor the ~~financial~~“Voice ~~statements~~Connect” ~~for~~product ~~additional~~violates ~~information~~the law. ~~The~~ACSW ~~Company~~disagrees ~~believes~~with ~~that~~ the ~~disposition~~allegations ofand ~~these matters~~intends ~~will~~to ~~not~~vigorously defend ~~have~~its aactions. ~~material~~The ~~adverse effect on the~~ Company’s, ~~consolidated financial position~~however, ~~results~~cannot ofpredict ~~operations~~the orfinal ~~cash~~outcome ~~flows~~of this proceeding.

4146

ACSW has petitioned the RCA for Eligible Telecommunications Carrier (“ETC”) status in two high cost areas of Alaska. The RCA has yet to take action on this petition. Meanwhile, Dobson Communications has also petitioned the RCA for ETC status in various parts of Alaska and has further sought to have the RCA redefine ILEC study areas, including those served by ACS LECs, based on wire centers for the purpose of targeting subsets of the existing study areas for CETC status and receipt of universal service funding.

The Company has also been named as a defendant in an action brought by Fireweed Communications regarding its use of the Company’s Eagles Nest communications tower. The Company denies any liability and is defending its actions.

The Company is involved in various other claims, legal actions and regulatory proceedings arising in the ordinary course of business. See Note 13, Commitments and Contingencies, in the footnotes to the financial statements for additional information. 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.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

10.16		Directory Publication and Distribution Agreement, dated May 8, 2003 effective as of January 1, 2001 by and among ACS of Anchorage, Inc., ACS of Fairbanks, Inc., ACS of Alaska, Inc., and ACS of the Northland, Inc.
31.1	Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1		Certification of Charles R. Robinson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Kevin P. Hemenway, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Kevin P. Hemenway, 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.
32.1		Certification of Charles R. Robinson, 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 Kevin P. Hemenway, Chief Financial 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 Kevin P. Hemenway, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

The following item was reported on Form 8-K, filed May 13, 2003 and amended on July 7, 2003: Item 2. Acquisition or Disposition of Assets —- On April 28, 2003, the Company entered into an underwriting agreement with a syndicate of Canadian investment banks to complete the sale of a majority interest in the newly formed ACS Media, LLC, the Company’s directory business. The Company subsequently filed on April 29, 2003, a final prospectus with Canadian securities regulators to sell a majority interest in ACS Media, LLC in a public offering in Canada to the ACS Media Income Fund, which is a Canadian income fund. The offering was sponsored by the Company. The transaction closed on May 8, 2003, with the Company selling an 87.42% interest and retaining a 12.58% interest in ACS Media, LLC. The following item was reported on Form 8-K, filed August 8, 2003: Item 5. Other Events- On August 7, 2003, Alaska Communications Systems Holdings, Inc. a announced that it was proposing to offer $175 million of senior notes due 2011 through a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended.

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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: ~~July~~November 3113, 2003 ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

/s/ ~~Charles~~Liane E.Pelletier ~~Robinson~~Liane ~~Charles~~Pelletier ~~E. Robinson~~ Chief Executive Officer and ~~Chairman~~President ~~of the Board~~ /s/ Kevin P. Hemenway Kevin P. Hemenway Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

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Filing Compare · ALASKA COMMUNICATIONS SYSTEMS HOLDINGS INC