2.	RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restatement

On November 8, 2013, Alaska Communications Systems Group, Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “Form 10-Q”). That report disclosed (i) the Company’s gain (the “Gain on Sale/Contribution”) arising from the formation of The Alaska Wireless Network, LLC (“AWN”), a joint venture in which the Company holds a one-third equity interest, and (ii) certain amounts the Company classified as contingent consideration arising from the cumulative preferred distributions payable to the Company by AWN.

Prior to this amended filing we accounted for the excess preferred distribution as contingent consideration issued in connection with a business combination. The excess distribution represents four years of distributions that we will receive over and above what we would have been entitled to receive as a one-third owner of AWN. The contingent consideration was treated as a gain contingency by us to be recognized when realized or realizable.

The Company disclosed in the Form 10-Q that the above accounting treatment differed from AWN’s and indicated that the Company was working to resolve the difference. As a result of that work, on February 14, 2014, we amended that position and will be accounting for the excess distribution as a form of equity issued as part of the original transaction.

In addition to that change we have broken out our affiliate balances on the face of our financial statements and updated our initial estimate of the fair value of assets and liabilities on the Company’s balance sheet based upon the latest draft of the valuation schedules obtained by the national valuation firm engaged by both ACS and GCI. See Note 3 – Equity Method Investments for more information on the independent valuation.

A summary of the primary impacts and adjustments to the financial statements are as follows:

•

The gain on the sale/contribution and their carrying value of the equity investment were increased to reflect the value, as of the formation of AWN, of the AWN Excess Distributions

•

The amounts presented as AWN Excess Distributions for the three and nine months ended September 30, 2013, were eliminated

•

The tax effect of the increased gain was reflected in income tax expense

•

Going forward: AWN excess distributions will not be recorded in earnings but instead will decrease our investment in AWN. The cash amount of the distributions remains unchanged.

•

The balances due to and from affiliates and the activity between ACS and affiliates is now clearly shown on the face of our financial statements

•

The recording of the updated fair value of AWN impacted the Company’s balance sheet as follows:

•

Our investment in AWN increased by $63,133, of which, $61,950 is due to the fair value of excess preferred cash distributions, as preliminarily determined by a national valuation expert; the remainder pertains to adjustments to our preliminary fair value estimates

•

The tax effect of the increased gain resulted in a decrease in the non-current portion of our deferred income tax assets

•

Our initial estimate of Deferred AWN capacity revenue decreased to $68,182, and accordingly, amortization in future periods will decrease

The Company has set forth the following tables presenting the consolidated restated financial statements for the three and nine months ended September 30, 2013, together with reconciling information to the consolidated financial statements previously filed in the Company’s Report on 10-Q for that quarter. See notes 3, 4, and 8 for other disclosures impacted by the restatement. In addition to that change we have disaggregated our affiliate balances on the face of our financial statements and updated our preliminary estimate of the fair value of our investment in AWN, the deferred AWN capacity revenue and related taxes on the Company’s balance sheet based on the latest draft of the valuation schedules obtained by the national valuation firm engaged by both ACS and GCI.

Condensed Consolidated Balance Sheet Adjustments

The following is a summary of the adjustments to our previously issued consolidated balance sheet as of September 30, 2013:


	September 30, 2013
	As Reported			Adjustments			As Restated
Assets
Accounts receivable, non-affiliates	$	31,390		$	(17	)	$	31,373
Accounts receivable, affiliates		—			17			17
Deferred income taxes (non-current)		48,337			(29,718	)		18,619
Equity method investments		207,566			63,133			270,699
Total assets		714,897			33,415			748,312

Liabilities and Stockholders’ Equity (Deficit)
Accounts payable, accrued and other current liabilities, non-affiliates		61,033			(7,786	)		53,247
Accounts payable, accrued and other current liabilities, affiliates		—			7,342			7,342
Total current liabilities		82,735			(444	)		82,291
Other long-term liabilities		93,571			(72,486	)		21,085
Deferred AWN capacity revenue		—			64,036			64,036
Total liabilities		621,088			(8,894	)		612,194
Accumulated deficit		(51,519	)		42,309			(9,210	)
Total stockholders’ equity (deficit)		93,809			42,309			136,118
Total liabilities and stockholders’ equity (deficit)		714,897			33,415			748,312

Condensed Consolidated Statements of Comprehensive Income Adjustments

The following is a summary of the adjustments to our previously issued consolidated statements of comprehensive income for the three and nine months ended September 30, 2013:


	Three Months Ended									Nine Months Ended
	September 30, 2013									September 30, 2013
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated

Operating revenues, non-affiliates	$	83,841		$	(1,414	)	$	82,427		$	272,657		$	(1,535	)	$	271,122
Operating revenues, affiliates		—			1,414			1,414			—			1,535			1,535
Cost of services and sales, non-affiliates		44,720			(11,642	)		33,078			117,371			(11,959	)		105,412
Cost of services and sales, affiliates		—			11,642			11,642			—			11,959			11,959
(Gain) loss on disposal of assets, net		(132,109	)		(74,894	)		(207,003	)		(131,483	)		(74,894	)		(206,377	)
AWN excess distribution		(2,867	)		2,867			—			(2,867	)		2,867			—
Total operating expenses (income)		(59,855	)		(72,027	)		(131,882	)		91,968			(72,027	)		19,941

Operating income		143,696			72,027			215,723			180,689			72,027			252,716
Income before income tax expense		131,836			72,027			203,863			148,373			72,027			220,400
Income tax expense		(54,238	)		(29,718	)		(83,956	)		(29,613	)		(29,718	)		(59,331	)
Net income		77,598			42,309			119,907			118,760			42,309			161,069
Total comprehensive income		78,513			42,309			120,822			121,057			42,309			163,366
Net income per share:
Basic	$	1.65		$	0.89		$	2.54		$	2.55		$	0.91		$	3.46
Diluted	$	1.33		$	0.72		$	2.05		$	2.09		$	0.72		$	2.81

Condensed Consolidated Statements of Cash Flows Adjustments

The following is a summary of the adjustments to our previously issued consolidated statements of cash flows for the three and nine months ended September 30, 2013.


	Nine Months Ended
	September 30, 2013
	As Reported			Adjustments			As Restated
Cash Flows from Operating Activities:
Net income	$	118,760		$	42,309		$	161,069
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale/contribution of asset to AWN		(132,424	)		(74,894	)		(207,318	)
AWN excess distribution		(2,867	)		2,867			—
Deferred income taxes		29,015			29,718			58,733
Other non-cash expense, net		(1,710	)		2,867			1,157
Net cash provided by operating activities		56,741			2,867			59,608
Cash Flows from Investing Activities:
AWN excess distribution		2,867			(2,867	)		—
Net cash provided (used) by investing activities		77,818			(2,867	)		74,951