UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 000-28167

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		52-2126573 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

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.

 

 

TABLE OF CONTENTS

		Page
		Number
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets Unaudited As of September 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations Unaudited For the Three and Nine Months Ended September 30, 2010 and 2009			4
Consolidated Statements of Stockholders’ Equity (Deficit) Unaudited For the Nine Months Ended September 30, 2010			5
Consolidated Statements of Cash Flows Unaudited For the Nine Months Ended September 30, 2010 and 2009			6
Notes to Consolidated Financial Statements Unaudited			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			25
Item 4. Controls and Procedures			25
PART II. Other Information
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults upon Senior Securities			27
Item 5. Other Information			27
Item 6. Exhibits			27
Signatures			28
EX-31.1
EX-31.2
EX-32.1
EX-32.2

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

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

		September 30,				December 31,
		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	17,276			$	6,271
Restricted cash			4,889				5,843
Accounts receivable-trade, net of allowance of $7,283 and $6,066			39,403				35,414
Materials and supplies			7,713				7,109
Prepayments and other current assets			5,336				4,489
Deferred income taxes			11,036				13,814
Total current assets			85,653				72,940
Property, plant and equipment			1,432,739				1,416,359
Less: accumulated depreciation and amortization			(1,012,040	)			(965,470	)
Property, plant and equipment, net			420,699				450,889
Non-current investments			355				855
Goodwill			8,850				8,850
Intangible assets, net			21,517				21,517
Debt issuance costs			4,019				5,960
Deferred income taxes			78,345				113,994
Investment in unconsolidated affiliate			2,060				—
Other assets			3,305				293
Total assets		$	624,803			$	675,298
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term obligations		$	12,049			$	793
Accounts payable, accrued and other current liabilities			61,860				68,651
Advance billings and customer deposits			9,150				9,351
Total current liabilities			83,059				78,795
Long-term obligations, net of current portion			541,614				538,557
Other long-term liabilities			15,423				27,906
Total liabilities			640,096				645,258
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $.01 par value; 145,000 authorized, 44,658 and 44,484 issued and outstanding, respectively			447				445
Additional paid in capital			174,013				198,979
Accumulated deficit			(186,893	)			(157,472	)
Accumulated other comprehensive loss			(2,860	)			(11,912	)
Total stockholders’ equity (deficit)			(15,293	)			30,040
Total liabilities and stockholders’ equity		$	624,803			$	675,298

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Statements of Operations
(Unaudited, In Thousands except Per Share Amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Operating revenues		$	89,768			$	91,145			$	256,747			$	263,088
Operating expenses:
Cost of services and sales			33,157				35,318				97,623				101,886
Selling, general and administrative			23,200				21,910				66,022				66,392
Depreciation and amortization			18,606				23,724				55,974				59,784
(Gain) loss on disposal of assets, net			9				(15	)			(479	)			454
Total operating expenses			74,972				80,937				219,140				228,516
Operating income			14,796				10,208				37,607				34,572
Other income and expense:
Interest expense			(19,723	)			(9,642	)			(36,567	)			(28,284	)
Interest income			8				30				31				81
Total other income and expense			(19,715	)			(9,612	)			(36,536	)			(28,203	)
Income (loss) before income tax benefit (expense)			(4,919	)			596				1,071				6,369
Income tax benefit (expense)			1,901				(340	)			(30,492	)			(2,874	)
Income (loss) before extraordinary item			(3,018	)			256				(29,421	)			3,495
Extraordinary item, net of taxes			—				37,346				—				37,346
Net income (loss)		$	(3,018	)		$	37,602			$	(29,421	)		$	40,841
Net income (loss) per share:
Basic
Income (loss) on continuing operations		$	(0.07	)		$	0.01			$	(0.66	)		$	0.08
Extraordinary item			—				0.84				—				0.85
Net income (loss)		$	(0.07	)		$	0.85			$	(0.66	)		$	0.93
Weighted average shares outstanding			44,628				44,354				44,564				44,100
Diluted
Income (loss) on continuing operations		$	(0.07	)		$	0.01			$	(0.66	)		$	0.08
Extraordinary item			—				0.82				—				0.83
Net income (loss)		$	(0.07	)		$	0.83			$	(0.66	)		$	0.91
Weighted average shares outstanding			44,628				45,136				44,564				44,873

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)
Nine Months Ended September 30, 2010
(Unaudited, In Thousands except Per Share Amounts)

																		Accumulated
										Additional								Other
						Common				Paid in				Accumulated				Comprehensive				Stockholders’
		Shares				Stock				Capital				Deficit				Loss				Equity (Deficit)
Balance, December 31, 2009			44,484			$	445			$	198,979			$	(157,472	)		$	(11,912	)		$	30,040
Total comprehensive income (loss)			—				—				—				(29,421	)			9,052				(20,369	)
Dividends declared			—				—				(28,818	)			—				—				(28,818	)
Stock-based compensation			—				—				2,665				—				—				2,665
Tax benefit of convertible bond call options			—				—				1,165				—				—				1,165
Surrender of 39 shares to cover withholding taxes on stock-based compensation			—				—				(326	)			—				—				(326	)
Issuance of shares of common stock pursuant to stock plans, $.01 par			174				2				348				—				—				350
Balance, September 30, 2010			44,658			$	447			$	174,013			$	(186,893	)		$	(2,860	)		$	(15,293	)

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

Consolidated Statements of Cash Flows
(Unaudited, In Thousands)

		Nine Months Ended
		September 30,
		2010				2009
Cash Flows from Operating Activities:
Net income (loss)		$	(29,421	)		$	40,841
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization			55,974				59,784
Gain on extraordinary item, net of taxes			—				(37,346	)
Unrealized loss on ineffective hedge adjustment			11,258				—
Amortization of debt issuance costs and debt discount			5,580				5,205
Stock-based compensation			2,665				3,416
Deferred income taxes			33,273				2,874
Provision for uncollectible accounts			2,308				3,632
Other non-cash expenses			84				1,242
Changes in operating assets and liabilities			(12,267	)			(6,641	)
Net cash provided by operating activities			69,454				73,007
Cash Flows from Investing Activities:
Investment in construction and capital expenditures			(25,040	)			(37,258	)
Change in unsettled construction and capital expenditures			(3,505	)			(9,450	)
Investment in unconsolidated affiliate			(2,060	)			—
Change in unsettled acquisition costs			—				(250	)
Net change in non-current investments			500				150
Net change in restricted cash			954				14,527
Net cash used by investing activities			(29,151	)			(32,281	)
Cash Flows from Financing Activities:
Repayments of long-term debt			(12,545	)			(30,185	)
Proceeds from the issuance of long-term debt			12,000				24,500
Payment of cash dividend on common stock			(28,777	)			(28,534	)
Payment of withholding taxes on stock-based compensation			(326	)			(1,823	)
Proceeds from issuance of common stock			350				1,117
Net cash used by financing activities			(29,298	)			(34,925	)
Change in cash and cash equivalents			11,005				5,801
Cash and cash equivalents, beginning of period			6,271				1,326
Cash and cash equivalents, end of period		$	17,276			$	7,127
Supplemental Cash Flow Data:
Interest paid		$	22,816			$	28,371
Income taxes paid, net of refunds		$	36			$	(669	)
Supplemental Non-cash Transactions:
Property acquired under capital leases		$	1,295			$	890
Dividend declared, but not paid		$	9,617			$	9,555
Additions to ARO asset		$	71			$	291

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

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

1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Alaska Communications Systems Group, Inc. and Subsidiaries (“we”, “our”, “us”, the “Company”, “ACS Group” or “ACS”), a Delaware corporation, provides wireline, wireless and other telecommunications and network services to consumer, business and enterprise customers in the State of Alaska and beyond using its statewide and interstate telecommunications network. The Company was formed in October of 1998 for the purpose of acquiring and operating telecommunications properties.

          The accompanying consolidated financial statements for the Company represent the consolidated financial position, results of operations and cash flows of ACS Group and the following wholly owned subsidiaries:

		•		Alaska Communications Systems		•		Crest Communications Corporation (“Crest”)
				Holdings, Inc. (“ACS Holdings”)		•		WCI Cable, Inc.
		•		ACS of Alaska, Inc. (“ACSAK”)		•		WCIC Hillsboro, LLC.
		•		ACS of the Northland, Inc. (“ACSN”)		•		Alaska Northstar Communications, LLC.
		•		ACS of Fairbanks, Inc. (“ACSF”)		•		WCI Lightpoint, LLC.
		•		ACS of Anchorage, Inc. (“ACSA”)		•		Worldnet Communications, Inc.
		•		ACS Wireless, Inc. (“ACSW”)		•		Alaska Fiber Star, LLC.
		•		ACS Long Distance, Inc. (“ACSLD”)
		•		ACS Internet, Inc. (“ACSI”)
		•		ACS Messaging, Inc. (“ACSM”)
		•		ACS Cable Systems, Inc. (“ACSC”)

          In addition to the wholly owned subsidiaries, the Company has a 49% interest in TekMate, LLC (“TekMate”) which is represented in the Company’s consolidated financial statements as an equity method investment.

Basis of Presentation

          The consolidated financial statements and footnotes included in this Quarterly Report on 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, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). However, the Company believes the disclosures made are adequate to make the information presented not misleading.

          In the opinion of management, the consolidated financial statements contain all normal, recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations for the three and nine months ended September 30, 2010, are not necessarily indicative of the results of operations which might be expected for the entire year or any other interim periods.

Use of Estimates

          The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes, including estimates of probable losses and expenses. Actual results could differ materially from those estimates.

Significant Changes in Accounting Practice, Reclassifications and Correction of Immaterial Errors

          As previously reported in the Company’s quarterly filing for the three months ended March 31, 2010, the Company identified a cumulative adjustment which reduced wireline revenue by $5,764 and wireline income tax expense of $2,369 over a five year period beginning January 1, 2005. The adjustment was determined to be an immaterial error in the calculation of a regulatory liability payable to the Universal Service Administration Company (“USAC”) for high cost loop support, and the related income tax expense. The Company concluded that these errors were not material to any of its prior period financial statements under the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99 Materiality. Although the errors were and continue to be immaterial to prior periods, because of the significance of the out-of-period correction in the first quarter of 2010, the Company applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, and revised its prior period financial statements.

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

1.

DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          In addition to an increase of $3,118 in the Company’s accumulated deficit on December 31, 2008, the schedules that follow recast the immaterial error to reflect the balances as if they had been recorded in the proper periods.

          The following schedule presents a reconciliation of the effects of the adjustments made to the Company’s previously reported balance sheet line items for December 31, 2009:

		December 31, 2009
		As Reported				Adj				As Revised
Deferred income taxes		$	111,625			$	2,369			$	113,994
Total assets			672,929				2,369				675,298
Accounts payable, accrued and other current liabilities			62,887				5,764				68,651
Total current liabilities			73,031				5,764				78,795
Total liabilities			639,494				5,764				645,258
Accumulated deficit			(154,077	)			(3,395	)			(157,472	)
Total stockholders’ equity (deficit)			33,435				(3,395	)			30,040
Total liabilities and stockholders’ equity			672,929				2,369				675,298

          The following schedule presents a reconciliation of the effects of the adjustments made to the Company’s previously reported quarterly consolidated statements of operations for the three and nine months ended September 30, 2009:

		Three Months ended												Nine Months ended
		September 30, 2009												September 30, 2009
		As Reported				Adj				As Revised				As Reported				Adj				As Revised
Operating revenues		$	91,262			$	(117	)		$	91,145			$	263,439			$	(351	)		$	263,088
Operating income			10,325				(117	)			10,208				34,923				(351	)			34,572
Income before income tax expense			713				(117	)			596				6,720				(351	)			6,369
Income tax expense			(388	)			48				(340	)			(3,018	)			144				(2,874	)
Income before extraordinary item, net of taxes			325				(69	)			256				3,702				(207	)			3,495
Net income			37,671				(69	)			37,602				41,048				(207	)			40,841

          The following schedule presents a reconciliation of the effects of the adjustments made to the Company’s previously reported consolidated statements of cash flows for the nine months ended September 30, 2009:

		Nine Months Ended
		September 30. 2009
		As Reported				Adj				As Revised
Net income		$	41,048			$	(207	)		$	40,841
Deferred income taxes			3,018				(144	)			2,874
Changes in operating assets and liabilities			(6,992	)			351				(6,641	)

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

2. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)

          The following table describes the components of comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2010 and 2009, respectively:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss)		$	(3,018	)		$	37,602			$	(29,421	)		$	40,841
Minimum pension liability adjustment			113				146				339				437
Interest rate swap marked to market			447				679				2,083				3,079
Unrealized loss on ineffective hedge adjustment			6,630				—				6,630				—
Total comprehensive income (loss)		$	4,172			$	38,427			$	(20,369	)		$	44,357

3. INVESTMENT IN UNCONSOLIDATED AFFILIATE

          On August 31, 2010, the Company completed the purchase of a 49% interest in TekMate, LLC, Alaska’s largest privately owned information technology services company, for a purchase price of $2,060. The price paid to acquire the Company’s share of the net assets of TekMate differs from the underlying book value of such net assets. This premium of $1,641 is accounted for as equity method goodwill and is included within the Investment in unconsolidated affiliates on the balance sheet. The purchase agreement included a preferred distribution to the sellers of $698 which is payable from future earnings. When the subsequent earnings of TekMate exceed $698, the Company will begin to realize its share of TekMate’s earnings in Revenue on the statement of operations. The investment represents the Company’s maximum exposure to loss as a result of the Company’s ownership interest.

          The investment in unconsolidated affiliate is accounted for under the equity method, and consisted of the following at September 30, 2010:

		Percent owned				Investment
TekMate, LLC.			49	%		$	2,060

4. FAIR VALUE MEASUREMENTS

          The Company has developed valuation techniques based upon observable and unobservable inputs to calculate the fair value of non-short-term monetary assets and liabilities. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

	•		Level 1- Quoted prices for identical instruments in active markets;
	•		Level 2- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and
	•		Level 3- Significant inputs to the valuation model are unobservable.

          The fair values of cash and cash equivalents restricted stock, net accounts receivable, and payable, other short-term monetary assets and liabilities and capital leases, approximate carrying values due to their nature. The fair value of the Company’s 2005 senior credit facility, convertible notes, and other long-term obligations of $546,673 at September 30, 2010 was estimated based on quoted market prices. The carrying values of these liabilities were $553,663 at September 30, 2010.

Fair Value Measurements on a Recurring Basis

          Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured, as well as their level within the fair value hierarchy.

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

4. FAIR VALUE MEASURES (Continued)

          The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, at each hierarchical level:

		September 30, 2010																December 31, 2009
		Total				Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3
Assets:
Non-current investments in auction rate securities		$	355			$	—			$	—			$	355			$	855			$	—			$	—			$	855
Liabilities:
Interest rate swaps		$	(11,258	)		$	—			$	(11,258	)		$	—			$	(14,796	)		$	—			$	(14,796	)		$	—

          Non-current investments consist of Auction Rate Securities (“ARS”) that have maturity dates greater than one year from September 30, 2010. The investments in ARS are included in Level 3 as no active market or significant other observable inputs exist. The Company assigned a value to its ARS portfolio by reviewing the value assigned to similar securities by brokerages, relative yields and assessing credit risk. On July 6, 2010 and May 27, 2010, $100 and $400, respectively, of auction rate securities were redeemed by the issuer at face value.

          Interest rate swaps were comprised of out-of-the-money interest rate swaps that are valued using models based on readily observable market parameters for all substantial terms of the derivative contracts are classified within Level 2. This balance was reclassified from long term liabilities to current liabilities at September 30, 2010 when the swaps and related debt were scheduled to be extinguished in the subsequent quarter.

          On October 21, 2010 the Company extinguished its 2005 Senior Secured Credit Facility and entered into a new credit arrangement. The existing swaps are expected to be settled in December of 2010 and no material difference in the fair value of the interest rate swaps at September 30, 2010 and the time of the settlement is expected. See Note 10, Subsequent Events, for more information on this transaction.

5. STOCK INCENTIVE PLANS

          Total compensation cost for share-based payments was $2,665 and $3,416 for the nine months ended September 30, 2010 and 2009, respectively. Included in accrued compensation expense was $50 and $74 associated with employee stock purchase plan (“ESPP”) shares yet to be awarded for the three months ended September 30, 2010 and 2009, respectively.

          There were 770 and 841 restricted stock units granted during the nine months ended September 30, 2010 and 2009, respectively. There were no stock-settled appreciation rights (“SSARs”) granted during the nine months ended September 30, 2010 and 775 granted in the nine months ended September 30, 2009.

          The following table describes the assumptions used for valuation of equity instruments awarded during the nine months ended September 30, 2010 and 2009, respectively:

		Nine Months Ended
		September 30,
		2010				2009
Restricted stock:
Risk free rate			0.00	%			0.00% — 0.25	%
Quarterly dividend		$	0.215			$	0.215
Expected per annum, forfeiture rate			0.00% — 6.47	%			0.00% — 5.47	%
Stock Options:
Risk free rate			—				0.25	%
Dividend yield			—				9.27	%
Expected volatility factor			—				36.27	%
Expected option life (years)			—				3.2

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

6. EARNINGS PER SHARE

          Earnings per share are based on the weighted average number of shares of common stock and dilutive potential common share equivalents outstanding. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The Company includes dilutive stock options based on the “treasury stock method”. Due to the Company’s net losses for the three and nine months ended September 30, 2010, 2,764 and 2,551 potential common share equivalents, which consisted of options, restricted stock and SSARs granted to employees, and deferred shares granted to directors, were anti-dilutive. Also excluded from the calculation were shares related to the Company’s convertible debt which were anti-dilutive for the three and nine month periods ended September 30, 2010 and 2009.

          Earnings per share for the three and nine months ended September 30, 2010 and 2009 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Basic earnings per share:
Income (loss) before extraordinary item		$	(3,018	)		$	256			$	(29,421	)		$	3,495
Extraordinary item, net of taxes			—				37,346				—				37,346
Net income (loss) applicable to common shares		$	(3,018	)		$	37,602			$	(29,421	)		$	40,841
Weighted average common shares outstanding			44,628				44,354				44,564				44,100
Basic earnings per share
Income (loss) on continuing operations		$	(0.07	)		$	0.01			$	(0.66	)		$	0.08
Extraordinary item, net of taxes			—				0.84				—				0.85
Net income (loss)		$	(0.07	)		$	0.85			$	(0.66	)		$	0.93

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Diluted earnings per share:
Dilutive shares
Weighted average shares outstanding:			44,628				44,354				44,564				44,100
Restricted stock, options and deferred shares			—				782				—				773
Weighted average diluted shares outstanding			44,628				45,136				44,564				44,873
Diluted earnings per share
Income (loss) on continuing operations		$	(0.07	)		$	0.01			$	(0.66	)		$	0.08
Extraordinary item, net of taxes			—				0.82				—				0.83
Net income (loss)		$	(0.07	)		$	0.83			$	(0.66	)		$	0.91

7. RETIREMENT PLANS

          Pension benefits for substantially all of the Company’s employees are provided through the Alaska Electrical Pension Fund (“AEPF”). The Company pays a contractual hourly amount based on employee classification or base compensation. As a multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined for, or allocated separately to, the individual employer. The Company can not accurately project any change in the plan status in future years given the uncertainty of economic conditions or the effect of actuarial valuations versus actual performance in the market.

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

7. RETIREMENT PLANS (Continued)

          The Company also provides a 401(k) retirement savings plan covering substantially all of its employees.

          The Company has a separate defined benefit plan that covers certain employees previously employed by Century Telephone Enterprise, Inc. (“CenturyTel Plan”). This plan was transferred to the Company in connection with the acquisition of CenturyTel, Inc.’s Alaska properties. Existing plan assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan (“Plan”) on September 1, 1999. Accrued benefits under the Plan were determined in accordance with the provisions of the CenturyTel Plan and upon completion of the transfer to the Company, covered employees ceased to accrue benefits under the CenturyTel Plan. On November 1, 2000, the Plan was amended to conform early retirement reduction factors and various other terms to those provided by the AEPF. As a result of this amendment, prior service cost of $1,992 was recorded and will be amortized over the expected service life of the plan participants at the date of the amendment. The Company uses the traditional unit credit method for the determination of pension cost for financial reporting and funding purposes and complies with the funding requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Company uses a December 31 measurement date for the Plan. The Company made zero and $35 contributions to the Plan in the three and nine months of 2010 and 2009, respectively. No additional contribution is expected in the remainder of 2010.

          The following table represents the net periodic pension expense for the ACS Retirement Plan for the three and nine months ended September 30, 2010 and 2009, respectively:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest cost		$	201			$	210			$	604			$	630
Expected return on plan assets			(207	)			(182	)			(620	)			(547	)
Amortization of loss			159				195				478				587
Amortization of prior service cost			33				51				97				152
Net periodic pension expense		$	186			$	274			$	559			$	822

8. BUSINESS SEGMENTS

          The Company’s segments and their principal activities consist of the following:

          Wireline — Wireline provides communication services including voice, broadband and data, next generation Internet protocol (“IP”) network services, network access, long distance and other services to consumer, carrier, business and government customers.

          Wireless — Wireless products and services include voice and data products, other value-added services and equipment sales.

          The Company also incurs interest expense, interest income and other operating and non-operating income and expense at the corporate level which are not allocated to the business segments, nor are they evaluated by the chief operating decision maker in analyzing the performance of the business segments. These non-operating income and expense items are provided in the accompanying table under the caption “All Other” in order to assist the users of these financial statements in reconciling the operating results and total assets of the business segments to the consolidated financial statements. Common use assets are held at ACS Holdings and are allocated to the business segments based on operating revenue. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies.

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts

8. BUSINESS SEGMENTS (Continued)

          The following tables illustrate selected financial data for each segment as of and for the three months ended September 30, 2010 and 2009, respectively:

		Three Months Ended September 30, 2010
		Wireline				Wireless				All Other				Eliminations				Total
Operating revenues		$	66,160			$	39,091			$	1,747			$	(17,230	)		$	89,768
Intersegment revenue			15,145				338				1,747				—				17,230
Income (loss) before income tax benefit (expense)			1,819				12,043				(18,781	)			—				(4,919	)
Income tax benefit (expense)			(130	)			(4,949	)			6,980				—				1,901
Net income (loss)			1,689				7,094				(11,801	)			—				(3,018	)
Total assets			451,222				172,019				1,562				—				624,803

		Three Months Ended September 30, 2009
		Wireline				Wireless				All Other				Eliminations				Total
Operating revenues		$	69,797			$	37,516			$	2,337			$	(18,505	)		$	91,145
Intersegment revenue			15,544				624				2,337				—				18,505
Income (loss) before income tax benefit (expense)			(1,949	)			12,056				(9,511	)			—				596
Income tax benefit (expense)			(26,162	)			(4,890	)			30,712				—				(340	)
Net income (loss) from continuing operations			(28,111	)			7,166				21,201				—				256
Extraordinary item, net of taxes			37,442				(96	)			—				—				37,346
Net income			9,331				7,070				21,201				—				37,602
Total assets			498,693				183,326				4,512				—				686,531

          The following tables illustrate selected financial data for each segment as of and for the nine months ended September 30, 2010 and 2009, respectively:

		Nine Months Ended September 30, 2010
		Wireline				Wireless				All Other				Eliminations				Total
Operating revenues		$	192,294			$	107,376			$	4,636			$	(47,559	)		$	256,747
Intersegment revenue			41,702				1,221				4,636				—				47,559
Income (loss) before income tax benefit (expense)			2,759				32,678				(34,366	)			—				1,071
Income tax expense			(159	)			(13,436	)			(16,897	)			—				(30,492	)
Net income (loss)			2,600				19,242				(51,263	)			—				(29,421	)
Total assets			451,222				172,019				1,562				—				624,803

		Nine Months Ended September 30, 2009
		Wireline				Wireless				All Other				Eliminations				Total
Operating revenues		$	198,557			$	109,212			$	8,938			$	(53,619	)		$	263,088
Intersegment revenue			42,798				1,883				8,938				—				53,619
Income (loss) before income tax benefit (expense)			(2,044	)			36,875				(28,462	)			—				6,369
Income tax benefit (expense)			(26,536	)			(15,096	)			38,758				—				(2,874	)
Net income (loss) from continuing operations			(28,580	)			21,779				10,296				—				3,495
Extraordinary item, net of taxes			37,442				(96	)			—				—				37,346
Net income			8,862				21,683				10,296				—				40,841
Total assets			498,693				183,326				4,512				—				686,531

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts

9. COMMITMENTS AND CONTINGENCIES

          The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business and has recorded litigation reserves of approximately $835 at September 30, 2010 against certain current claims and legal actions. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

          On April 19, 2010, the Internal Revenue Service (the “Service”) issued a Notice of Proposed Adjustment (the “NOPA”) with respect to the 2006, 2007 and 2008 taxable years of Crest Communications Corporation (“Crest”), which was acquired by the Company on October 30, 2008. Crest had acquired certain entities out of bankruptcy in 2002. The original majority stockholder of these entities, an Australian insurance company, AMP, had made certain advances to the entities. These entities entered into bankruptcy in 2001, and the bankruptcy court approved a plan which effectively subordinated these advances to all other creditors. Upon acquiring the entities in 2002, Crest characterized the advances as equity for tax purposes. The Service is now asserting that characterization of the AMP advances as equity was incorrect, and that Crest had additional income due to the cancellation of debt. The cancellation of indebtedness income at the amounts set out in the NOPA could result in a charge to income tax expense of approximately $67,000, $28,000 of which would be a result of additional taxes payable and $39,000 of which would be a result of the reduction in recognized deferred tax assets.

          The Company believes there are errors within the adjustments asserted by the Service. If the Service accepts the corrections the Company believes are appropriate, but still prevails on the underlying issue, the result is expected to be a receivable from the IRS for the overpayment of Alternative Minimum Tax of $2,743, a charge to income tax expense of approximately $29,683, and a net reduction in recognized deferred tax assets. The Company believes it is more likely than not that it will prevail on the factual errors included in the NOPA; however it is unable to say it is more likely than not it will prevail on the underlying debt vs. equity issue. Therefore, in accordance with the guidance in ASC Topic 740, Income Taxes the Company recorded $29,683 in additional income tax expense, and $2,743 receivable, pending resolution with the IRS.

          The additional income tax expense is made up of two components: the first representing $11,018 for the tax effect of losing net operating losses (“NOLs”) while the remaining $18,665 represents a deferred tax liability for the difference in outside basis in certain Crest subsidiaries. Through enforcing indemnification rights, preserving the corporate structure of the Crest subsidiaries and other proactive steps, it should be possible to mitigate most or all of the cash impact of the $18,665 deferred tax liability for as long as the Company remains a going concern. ASC 740 requires recognition of a deferred tax liability for outside basis differences. An outside basis difference represents the amount by which the book basis of an investment in a domestic subsidiary for financial reporting purposes exceeds the tax basis in such subsidiary. If under applicable tax law, the outside basis difference in a domestic subsidiary can be recovered tax-free and the Company expects to avail itself of such law, the outside tax basis difference is not a temporary difference since no taxes are expected to result upon its reversal. However, for certain Crest subsidiaries, the cancellation of debt created a difference in outside basis that the Company cannot recover in a tax-free manner and as such, a deferred liability was established.

          The Stock Purchase Agreement (“SPA”) underlying the Company’s acquisition of Crest provides for indemnification for the Company by the former stockholders (“Selling Stockholders”) of Crest. This indemnity was entered into with the intent to mitigate the impact on the Company of potential tax exposure items such as those raised by the NOPA. The Company and the selling stockholders intend to contest all issues raised by the NOPA through various avenues of appeal. However, should the appeals process fail to overturn the NOPA; should the Company be unable to preserve the corporate structure of the Crest subsidiaries; and should the Company prove unable to effectively enforce the indemnification provisions in the SPA, this could have a material effect on the Company’s consolidated financial position, results of operations and cash flows.

10. SUBSEQUENT EVENTS

          On October 21, 2010, the Company entered into a new $470,000 bank credit facility (the “2010 Senior Secured Credit Facility”) which consists of a drawn term loan of $440,000 and an undrawn revolver of $30,000. The 2010 Senior Secured Credit Facility generated net proceeds of approximately $2,413 after repaying in full, and retiring, the Company’s 2005 Senior Secured Credit Facility and deducting fees and expenses associated with the debt issuance of approximately $6,670. The $440,000 term loan generally bears interest at LIBOR plus 4.0% per annum or 5.5%, whichever is greater, has a term of six years and shall be repayable in quarterly installments equal to 0.25% of the original principal amount of the term loan, with the remainder to be paid on the term maturity date. The revolver has a term of five years and to the extent it is drawn, also generally bears interest at LIBOR plus 4.0% per annum or 5.5%, whichever is greater, and, to the extent

ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts

10. SUBSEQUENT EVENTS (Continued)

undrawn, has commitment fees equal to 0.625% per annum. The term loan matures on October 21, 2016 and the revolver matures on October 21, 2015 and both are collateralized by substantially all assets of the Company.

          In addition to the approximately $6,670 of fees and expenses inclusive in the refinancing transaction, we also recorded a liability of $512 for debt issuance costs not settled in the transaction. The total $7,182 in debt issuance costs will be amortized to interest expense over the term of the 2010 Senior Secured Credit Facility, using the straight line method which approximates the effective interest method. The $440,000 term portion of the facility was recorded net of a 1.0% discount, or $4,400, of the debt issuance. The discount is being accreted to interest expense using the straight line method which approximates the effective interest method. The credit agreement requires that we maintain certain financial ratios. Specifically it requires the senior secured to adjusted EBITDA ratio not exceed 4.4:1.00, the total leverage to adjusted EBITDA ratio not exceed 5.25:1.00, and the adjusted EBITDA to fixed charges ratio not exceed 2.75:1.00. Further, the credit agreement calls for a suspension of dividends if, for the most recently ended period of four consecutive fiscal quarters, the total leverage ratio is equal to or greater than 5.00:1.00.

          In connection with the 2010 Senior Secured Credit Facility, the Company entered into forward floating-to-fixed interest rate swaps and a buy back of the 1.5% LIBOR floor, as a component of its cash flow hedging strategy. The notional amounts of the swaps are $192,500, $115,500 and $77,000, respectively with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a 4% LIBOR spread. The swaps begin on June 30, 2012 and continue through September 30, 2015. In order to protect against extreme movements in LIBOR prior to the start of the swaps, the Company has acquired an interest rate cap at a cost of $119 for the period between January 1, 2001 and June 30, 2012, capping LIBOR at 3% on a notional principle amount of $385,000.

          The net proceeds of the 2010 Senior Secured Credit Facility were used to repay in full, and retire, the 2005 Senior Secured Credit Facility. As a result, the Company will incur a charge of approximately $2,182 by of writing off unamortized debt issuance costs in association with the early extinguishments of debt during the fourth quarter of 2010.

          At September 30, 2010, due to the expected extinguishment of debt coincident with the new debt transaction, three interest rate swaps with a total notional balance of $207,900 ceased to be highly effective, and as such, the Company discontinued prospective hedge accounting and concluded it was appropriate to reclassify amounts previously recorded in accumulated other comprehensive income related to the affected derivatives. The amount reclassed in the third quarter of 2010 from Other comprehensive income to the Interest expense line of the Consolidated Statements of Operations, as a result of the hedges becoming ineffective, was $11,258. The Company expects to settle this amount with cash on hand during the fourth quarter of 2010.

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 our future filings on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”), as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should” and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):

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

          In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we have not identified or that we currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.

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

Important Changes to Presentation

          As previously reported in our quarterly filing for the three months ended March 31, 2010, management identified a cumulative adjustment which reduced wireline revenue by $5.8 million and wireline income tax expense by $2.4 million over a five year period beginning January 1, 2005. The adjustment was determined to be an immaterial error in the calculation of a regulatory liability payable to USAC for high cost loop support, and the related income tax expense. Management concluded that these errors were not material to any of its prior period financial statements under the guidance of SAB No. 99 Materiality. Although the errors were and continue to be immaterial to prior periods, because of the significance of the out-of-period correction in the first quarter of 2010, we applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, and revised our prior period financial statements.

          The discussion that follows in this “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”, unless otherwise specifically indicated, takes these foregoing adjustments into account.

Overview

          We provide leading integrated communications services in Alaska. Our wireline business comprises one of the most expansive end-to-end IP networks in Alaska, and we operate the largest local exchange carrier network in the state. We believe our wireless business comprises the most extensive, reliable wireless network in Alaska with third generation (“3G”) data transmission capabilities.

          The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating our own performance and allocating our resources. We also monitor the state of the economy in general. In doing so, we compare Alaskan economic activity with broader economic conditions. In general, we believe that the Alaskan telecommunications market, as well as general economic activity in Alaska, is affected by certain economic factors, which include:

	•		activity in the oil and gas markets, including regulatory activity;
	•		tourism levels;
	•		military activity;
	•		the cost of long-haul telecommunications bandwidth;
	•		local customer preferences;
	•		average usage of Internet technology;
	•		unemployment levels; and
	•		housing activity.

          We have observed variances in the factors affecting the Alaskan economy as compared to the U.S. as a whole. Some factors, particularly the price of oil and gas, may have the opposite effect on the Alaskan economy than the U.S. economy as a whole. In forecasting the local economic conditions that affect us, we take particular note of these factors.

Strategy

          Our results of operations, financial position and sources and uses of cash in the current and future periods continue to reflect our focus on the following strategic imperatives:

•

Emphasis on Top-Line Growth: We emphasize revenue growth as well as growth in net cash provided by operating activities. We devote more resources to higher growth markets such as wireless, including wireless data and wireline broadband, including our interstate MPLS network comprising redundant long-haul undersea fiber optic cables and other managed data services to businesses.

	•		Investment with Discipline: We focus on gaining market share in those markets that contain high revenue producing customers. In our wireline business, we focus on deploying reliable and redundant data connectivity in each market covered by our network underpinned by high-speed fiber links within and between Alaska’s urban centers. We have increasingly targeted commercial and government customers of all sizes that demand managed or other sophisticated data solutions. In our wireless business, we have directed resources towards enhancing and expanding our 3G coverage and marketing wireless plans that encourage customer adoption of smart phones and mobile plans.
	•		Process Improvement to Achieve Operational Excellence: While focusing resources on revenue growth and market share gains, we continually challenge our management team and employees at all levels of the organization to lower expenses and improve the customer experience through process improvements. We expect to continue to invest in technology-assisted process improvement. We expect efforts such as deploying enhanced self-service tools to customers on our web site to improve our cost structure and maintain or improve operating income margins. As a result of past successes, we have been able to serve more customers while maintaining our workforce at or below prior levels.
	•		Pay for Performance: We embrace a culture of urgency and accountability. We establish goals for all of our employees that are tied to the imperatives described above. We seek to provide our non-represented employees cash incentives and equity compensation tied to these goals. We design executive compensation programs carefully to align executives’ and stockholders’ long-term interests.
	•		Continuous Enhancement of Products and Services: We intend to continue to introduce new services that draw upon our core competencies that we believe will be attractive to our target customers. In considering new services, we look for market opportunities that we believe present significant growth opportunities such as, our investments in our AKORN and Northstar fiber optic cable systems and our first-to-market deployment of 3G wireless services. In July, we launched a new suite of services that make use of our data centers in Anchorage, Alaska and Hillsboro, Oregon. In addition we recently acquired a 49% interest in TekMate, LLC., Alaska’s largest privately-owned information technology services company. With this investment and a partnership operating agreement, we believe we will bring broader managed IT solutions and professional services to the market.

          We aim to create value for our shareholders by carefully investing cash flows generated by the business in specific opportunities and transactions that support these imperatives. Under our current $0.86 per share annual dividend policy, the company returned approximately $28.8 million in cash dividends to our stockholders during the nine months ended September 30, 2010.

RESULTS OF OPERATIONS

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

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

		Three Months ended September 30,
		2010				2009				Change				% Change
Operating revenues:
Retail		$	20,650			$	21,967			$	(1,317	)			-6.0	%
Wholesale			2,248				2,836				(588	)			-20.7	%
Access			16,108				18,003				(1,895	)			-10.5	%
Enterprise			12,009				11,447				562				4.9	%
Wireline			51,015				54,253				(3,238	)			-6.0	%
Wireless			38,753				36,892				1,861				5.0	%
Total operating revenues			89,768				91,145				(1,377	)			-1.5	%
Operating expenses:
Wireline
Cost of services and sales			18,998				21,031				(2,033	)			-9.7	%
Selling, general and administrative			17,166				15,890				1,276				8.0	%
Wireless
Cost of services and sales			14,159				14,287				(128	)			-0.9	%
Selling, general and administrative			6,034				6,020				14				0.2	%
Depreciation and amortization			18,606				23,724				(5,118	)			-21.6	%
Loss on disposal of assets			9				(15	)			24				-160.0	%
Total operating expenses			74,972				80,937				(5,965	)			-7.4	%
Operating income			14,796				10,208				4,588				44.9	%
Operating margin			16.5	%			11.2	%
Other income and expense:
Interest expense			(19,723	)			(9,642	)			(10,081	)			104.6	%
Interest income			8				30				(22	)			-73.3	%
Total other income and expense			(19,715	)			(9,612	)			(10,103	)			105.1	%
Income (loss) before income tax benefit (expense)			(4,919	)			596				(5,515	)			-925.3	%
Income tax benefit (expense)			1,901				(340	)			2,241				-659.1	%
Income (loss) before extraordinary item			(3,018	)			256				(3,274	)			-1278.9	%
Extraordinary item, net of taxes			—				37,346				(37,346	)			-100.0	%
Net income (loss)		$	(3,018	)		$	37,602			$	(40,620	)			-108.0	%

Revenue Sources by Segment

          We have two reportable business segments, wireline and wireless, which conduct the following principal activities:

•

Wireline: We provide communications services including voice, data, broadband, multi-protocol label switching services, network access, long distance and other services to consumer, carrier, business and government customers throughout Alaska and to and from Alaska.

•

Wireless: We provide wireless voice and data services, products, other value-added services and equipment sales across Alaska.

Operating Revenue

     Wireline

          Retail: Declines in retail switched access lines in service during 2010 were concentrated in the residential market which we believe was impacted by wireless substitution and the turndown of payphone lines as part of a business rationalization initiative. Retail revenue decreased $1.3 million in the three months ended September 30, 2010 over September 30, 2009, primarily due to a $0.7 million decline in local exchange revenue associated with residential line losses, a $0.5 million net decrease in revenue associated with the prior year policy change and release of company liabilities for commercial developer deposits, and a $0.4 million decline in long distance sales. These losses were offset, in part, by a $0.3 million increase in revenue from our Internet Service Provider (“ISP”) subscriber base.

          Wholesale: Wholesale revenues decreased $0.6 million from the prior year quarter due to continued decline in leases of our unbundled network elements (“UNEs”). We believe this decline is primarily attributable to the ongoing migration of lines by our key competitor to its propriety cable telephony plant and the decision of another competitor, and wholesale customer, to exit the market. We expect wholesale revenue will continue to decline.

          Access: Access revenue declined $1.9 million from the prior year quarter primarily due to higher out-of-period settlements in 2009.

          Enterprise: Enterprise revenue increased $0.6 million from the prior year quarter with higher data revenue of $0.9 million net of $0.3 million from an expired capacity exchange agreement in 2009, offset in part, by a $0.4 million reduction in carrier voice revenue.

     Wireless

          Wireless revenue increased $1.9 million in the three months ended September 30, 2010, as compared to the prior year period ended September 30, 2009, driven by a $3.1 million increase in roaming revenue, which benefited from the expansion of our 3G data network; and a $1.0 million increase in Competitive Eligible Telecommunications Carrier (“CETC”) revenue. These increases were offset, in part, by a decrease of $1.7 million in recurring service plan revenue attributable to lower subscribers and a $0.5 million decline in handset and accessory sales.

Operating Expense

     Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange and cable systems operating costs, decreased $0.8 million for the quarter ended September 30, 2010 over September 30, 2009.

          Cost of Services and Sales — Wireline cost of services and sales decreased $2.0 million due to declines of $1.9 million in labor resulting from the overall reduction in our general work force, $0.5 million in maintenance contracts, $0.2 million in ISP access and leased circuits, and $0.1 million in land and building related charges. These decreases are partially offset by increases of $0.5 million in LD COGS and $0.2 million in advanced network services expense.

          Selling, General and Administrative — Wireline SG&A expenses increased $1.3 million driven by a $1.0 million increase in labor costs for higher cash and stock compensation expense, and increases of $0.8 million in advertising associated with our re-branding initiative and $0.4 million in legal, IT and other consulting costs. Offsetting these increases was a $0.8 million decrease in bad debt expense in the current year.

     Wireless

          Cost of Services and Sales — Wireless cost of services and sales decreased $0.1 million primarily due to a $0.4 million decrease in network costs, partially offset by a $0.2 million increase in handset, accessory and data content expenses.

          Selling, General and Administrative — SG&A expenses remained flat with a decrease in advertising expense of $0.3 million offset by an increase in labor expense.

     Depreciation and Amortization: Depreciation and amortization expense decreased $5.1 million in the three months ended September 30, 2010, from the same period in the prior year, due primarily to a number of pooled asset classes reaching their maximum depreciable lives and a reduction in depreciable value in the assets purchased from Crest Communications resulting from the reallocation of purchase price from fixed assets to deferred tax assets under purchase accounting. These declines were partially offset by the acceleration of depreciation on certain Wireless assets and other additions to our asset base.

     Other Income and Expense: Other income and expense for the three months ended September 30, 2010 is a net expense of $19.7 million. The net increase of $10.1 million in expense over the same period in the prior year is primarily due to the discontinuance of hedge accounting on our interest rate swaps which, in anticipation of our October 2010 refinancing of our

2005 Senior Credit Facility, resulted in an $11.3 million increase in interest expense. See Note 10, Subsequent Events for more information on this transaction.

     Income Taxes: For the three months ended September 30, 2010 our estimated effective tax rate was 38.62%. At September 30, 2010 we had federal tax NOL carry forwards of approximately $143.4 million. Income tax expense will not involve a significant cash outflow until these NOLs are exhausted.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

		Nine Months ended September 30,
		2010				2009				Change				% Change
Operating revenues:
Retail		$	62,012			$	64,480			$	(2,468	)			-3.8	%
Wholesale			7,280				8,795				(1,515	)			-17.2	%
Access			45,774				48,237				(2,463	)			-5.1	%
Enterprise			35,526				34,247				1,279				3.7	%
Wireline			150,592				155,759				(5,167	)			-3.3	%
Wireless			106,155				107,329				(1,174	)			-1.1	%
Total operating revenues			256,747				263,088				(6,341	)			-2.4	%
Operating expenses:
Wireline
Cost of services and sales			57,327				61,913				(4,586	)			-7.4	%
Selling, general and administrative			49,143				48,766				377				0.8	%
Wireless
Cost of services and sales			40,296				39,973				323				0.8	%
Selling, general and administrative			16,879				17,626				(747	)			-4.2	%
Depreciation and amortization			55,974				59,784				(3,810	)			-6.4	%
(Gain) loss on disposal of assets			(479	)			454				(933	)			-205.5	%
Total operating expenses			219,140				228,516				(9,376	)			-4.1	%
Operating income			37,607				34,572				3,035				8.8	%
Operating margin			14.6	%			13.1	%
Other income and expense:
Interest expense			(36,567	)			(28,284	)			(8,283	)			29.3	%
Interest income			31				81				(50	)			-61.7	%
Total other income and expense			(36,536	)			(28,203	)			(8,333	)			29.5	%
Income before income tax expense			1,071				6,369				(5,298	)			-83.2	%
Income tax expense			(30,492	)			(2,874	)			(27,618	)			961.0	%
Income (loss) before extraordinary item			(29,421	)			3,495				(32,916	)			-941.8	%
Extraordinary item, net of taxes			—				37,346				(37,346	)			-100.0	%
Net income (loss)		$	(29,421	)		$	40,841			$	(70,262	)			-172.0	%