ATN International, Inc. - Quarter Report: 2006 June (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

x				QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
o				TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

 

Commission File Number 0-191551

 

 

Atlantic Tele-Network, Inc.

(exact name of registrant as specified in its charter)

Delaware		47-0728886
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

10 Derby Square
Salem, MA 01970
(978) 619-1300

 

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  x    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 filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):

Large accelerated filer  o            Accelerated filer  o            Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes  o    No  x

As of August 14, 2006, the registrant had outstanding 14,886,957 shares of its common stock ($.01 par value).

 

ATLANTIC TELE-NETWORK, INC.

FORM 10-Q
Quarter Ended June 30, 2006

				PAGE No:
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS				2
PART I FINANCIAL INFORMATION				4
Item 1		Unaudited Condensed Consolidated Financial Statements		4
		Condensed Consolidated Balance Sheets at December 31, 2005 and June 30, 2006		4
		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2006		5
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2006		6
		Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3		Quantitative and Qualitative Disclosures about Market Risk		28
Item 4		Controls and Procedures		29
PART II OTHER INFORMATION				30
Item 1.		Legal Proceedings		30
Item1A		Risk Factors		30
Item 2.		Unregistered Sales of Equity Securities and Use of Process		30
Item 4.		Submission of Matters to a Vote of Security Holders		30
Item 6.		Exhibits		30
SIGNATURES				31
CERTIFICATIONS

 

Special Note Regarding Forward-Looking Statements

This Report contains forward-looking statements relating to, among other matters, the future financial performance and results of operations of ATN and its subsidiaries, including the relative contributions of Commnet and Sovernet; demand for our services and industry trends; the outcome of litigation and regulatory matters; our continued access to the credit and capital markets; the pace of our network expansion and improvement, including our realization of the benefits of these investments; and management’s plans and strategy for the future.  These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results.  Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1) significant political and regulatory risk facing our exclusive license to provide local exchange and long distance telephone services in Guyana; (2) any significant decline in the price or volume of international long distance calls to Guyana; (3) increased competition affecting our businesses; (4) the regulation of rates that GT&T may charge for local wireline telephone service; (5) significant tax disputes between GT&T and the Guyanese tax authorities; (6) a significant portion of our U.S. wireless revenue is derived from a small number of customers;  (7) our failure to maintain favorable roaming arrangements; (8) economic, political and other risks facing our foreign political operations; (9) regulatory changes affecting our businesses; (10) rapid and significant technological changes in the telecommunications industry; (11) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (12) loss of any key members of management; (13) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (14) dependence of our wireless and wireline revenues on the reliability and performance of our network infrastructure; (15) the occurrence of severe weather and natural catastrophes; (16) our economic interest in our Bermuda affiliate may be reduced in 2008; and (17) our ability to realize the value that we believe exists in businesses that we acquire. These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the  forward-looking statements above are set forth more fully under Item 1A “Risk Factors” of ATN’s 2005 Form 10-K, which is on file with the SEC.  ATN undertakes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements.

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In this Report the words “we,” “our,” “ours” and “us” refer to Atlantic Tele-Network, Inc. and its subsidiaries, unless the context indicates otherwise. Also ClearChoice™ is a service mark of one of our subsidiaries. This Report also contains other trademarks, service marks and trade names that are the property of others.

Reference to dollars ($) refer to U.S. dollars unless otherwise specifically indicated.

Information regarding shares of our Common Stock set forth in this Report has been retroactively adjusted to reflect our 5-for-2 stock split on March 31, 2006.

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PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

		December 31, 2005			June 30, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	26,493		$	23,497
Accounts receivable, net of allowances		15,613			19,227
Materials and supplies		4,744			6,192
Prepayments and other current assets		1,822			2,304
Total current assets		48,672			51,220
FIXED ASSETS:
Property, plant, and equipment		204,297			218,723
Less accumulated depreciation		(78,588		)	(88,753		)
Net fixed assets		125,709			129,970
INTANGIBLE ASSETS:
Customer relationships, net		—			4,344
Licenses		11,246			13,782
Goodwill		29,031			41,387
LONG-TERM MARKETABLE SECURITIES		1,991			—
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES		13,045			11,433
OTHER ASSETS		4,137			4,728
Total assets		$	233,831		$	256,864
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	165		$	172
Accounts payable and accrued liabilities		16,930			18,534
Dividends payable		1,522			—
Accrued taxes		9,411			9,608
Advance payments and deposits		3,114			3,292
Other current liabilities		2,985			3,959
Total current liabilities		34,127			35,565
DEFERRED INCOME TAXES		6,469			9,901
LONG-TERM DEBT, excluding current portion		55,585			67,499
Total liabilities		96,181			112,965
MINORITY INTERESTS		21,940			22,275
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value per share; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value per share; 50,000,000 shares authorized; 12,949,810 and 12,967,268 shares issued, respectively and 12,463,748 and 12,486,957 shares outstanding on December 31, 2005 and June 30, 2006, respectively.		129			130
Treasury stock, at cost		(3,532		)	(3,557		)
Additional paid-in capital		57,069			56,971
Retained earnings		62,044			68,080
Total stockholders’ equity		115,710			121,624
Total liabilities and stockholders’ equity		$	233,831		$	256,864

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2006

(Unaudited)

(Dollars in thousands, except per share amounts)

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2006			2005			2006
REVENUE:
Wireless		$	4,340		14,233			$	8,126		$	27,545
Local telephone and data		7,005			10,850			13,783			20,042
International long distance		11,224			11,508			22,589			22,679
Other		815			904			1,576			1,751
Total revenues		23,384			37,495			46,074			72,017
OPERATING EXPENSES:
Termination and access fees		1,403			5,931			2,773			11,201
Internet and programming		612			881			1,266			1,631
Engineering and operations		3,623			4,664			7,110			9,024
Sales and marketing		1,615			1,912			3,130			3,841
General and administrative		4,026			5,970			7,569			10,815
Depreciation and amortization		4,035			6,105			8,219			11,900
Total operating expenses		15,314			25,463			30,067			48,412
Income from operations		8,070			12,032			16,007			23,605
OTHER INCOME (EXPENSE):
Interest expense		(198		)	(1,022		)	(333		)	(1,889		)
Interest income		264			202			536			406
Other, net		266			322			565			597
Other income (expense), net		332			(498		)	768			(886		)
INCOME BEFORE INCOME TAXES, MINORITY INTERESTS AND EQUITY IN EARNING OF UNCONSOLIDATED AFFILIATES		8,402			11,534			16,775			22,719
Income taxes		5,025			6,225			10,041			12,690
INCOME BEFORE MINORITY INTERESTS AND EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES		3,377			5,309			6,734			10,029
Minority interests, net of tax of $0.9 million and $1.0 million for the three months ended June 30, 2005 and 2006, respectively and $1.8 million and $2.0 million for the six months ended June 30, 2005 and 2006, respectively		(945		)	(1,210		)	(1,846		)	(2,307		)
Equity in earnings of unconsolidated affiliates		795			836			1,385			1,302
NET INCOME		$	3,227		$	4,935		$	6,273		$	9,024
NET INCOME PER SHARE:
Basic		$	0.26		$	0.40		$	0.50		$	0.73
Diluted		$	0.26		$	0.39		$	0.50		$	0.72
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		12,470			12,440			12,503			12,445
Diluted		12,478			12,575			12,508			12,540
DIVIDENDS APPLICABLE TO COMMON STOCK		$	0.11		$	0.12		$	0.22		$	0.24

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2006

(Unaudited)

(Dollars in thousands)

		For the Six Months Ended June 30,
		2005 (revised)			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,273		$	9,024
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		8,219			11,900
Equity based compensation		270			415
Deferred income taxes		660			724
Minority interests		1,846			2,307
Equity in earnings of unconsolidated affiliates		(1,385		)	(1,302		)
Dividends received from Bermuda Digital Communications		760			829
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable, net		(3,651		)	(1,963		)
Amounts due from unconsolidated affiliates		(22		)	(130		)
Materials and supplies, prepayments, and other current assets		(686		)	(1,002		)
Other assets		(752		)	(575		)
Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities		(3,622		)	1,080
Accrued taxes		(1,958		)	429
Net cash provided by operating activities		5,952			21,736
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(7,051		)	(12,403		)
Cash paid for acquisitions, net of cash acquired of $1,687		—			(19,163		)
Advances to Bridge International Communications		(731		)	—
Purchase of long term marketable securities		(1,996		)	—
Proceeds from sales of marketable securities		8,081			1,991
Net cash used in investing activities		(1,697		)	(29,575		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		—			14,000
Repayment of long-term debt		(565		)	(2,079		)
Purchase of common stock		(749		)	(85		)
Investments made by minority shareholders in consolidated subsidiaries		—			400
Distributions to minority shareholders		—			(2,880		)
Dividends paid on common stock		(2,741		)	(4,513		)
Net cash (used in) provided by financing activities		(4,055		)	4,843
NET CHANGE IN CASH AND CASH EQUIVALENTS		200			(2,996		)
CASH AND CASH EQUIVALENTS, beginning of the period		39,900			26,493
CASH AND CASH EQUIVALENTS, end of the period		$	40,100		$	23,497

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS OPERATIONS

Atlantic Tele-Network, Inc. (“ATN” or “Company”) provides wireless and wireline telecommunication services in the Caribbean and North America through the following operating subsidiaries and affiliates:

·                  Guyana Telephone & Telegraph Company, Ltd. (“GT&T”), the national and international telephone company in the Republic of Guyana and the largest wireless service provider in that country. The Company has owned 80% of the stock of GT&T since January 1991. GT&T generated approximately 94% and 61% of the Company’s consolidated revenues for the three months ended June 30, 2005 and 2006, respectively.  For the six months ended June 30, 2005 and 2006, GT&T generated approximately 94% and 62% of the Company’s consolidated revenues, respectively.  The reduction in these percentages is due to the acquisitions noted below.

·                  Commnet Wireless, LLC (“Commnet”), an owner and operator of wholesale wireless networks in rural areas of the United States. Commnet provides wireless service providers with voice and data roaming services. The Company completed its acquisition of 95% of Commnet on September 15, 2005.

·                  Sovernet, Inc., a facilities-based provider of communications services to business and residential customers in Vermont, including bundled voice and high-speed Internet access, as well as traditional dial-up Internet services. ATN acquired all of the outstanding common stock of Sovernet, Inc. on February 10, 2006 for approximately $13.2 million, including the repayment of approximately $1.4 million in Sovernet debt and the payment of transaction expenses. The Company funded the transaction through a combination of cash on hand and borrowings on its existing credit facility (see Note 5), and, at closing of the transaction, issued shares of common stock of Sovernet, Inc. amounting to 4% of Sovernet’s outstanding capital stock to Sovernet’s new chief executive, subject to vesting requirements and other restrictions.

·                  Choice Communications, LLC (“Choice Communications” or “Choice”), a provider of wireless digital television services, wireless broadband access services, dial-up Internet services and certain other communications services in the U.S. Virgin Islands. Choice Communications, a wholly owned subsidiary of the Company, acquired its Internet service business in 1999 and its television business in March 2000.

·                  Bermuda Digital Communications, Ltd. (“BDC”), the largest wireless voice and data communications service provider in Bermuda, doing business under the name “Cellular One”. The Company acquired an equity interest in, and signed a management contract with, BDC in 1998. The Company currently owns 44% of the equity of BDC.

ATN provides management, technical, financial, regulatory, and marketing services for its subsidiaries and affiliates and typically receives a management fee equal to approximately 6% of their respective revenues. Management fees from consolidated subsidiaries are eliminated in consolidation. Management fees from unconsolidated affiliates are included in “Other Income” in the accompanying statements of operations.

In July, 2006, the Company completed the sale of 3.6 million shares of common stock at $19.00 per share in an underwritten public offering, consisting of 2.4 million shares offered by the Company and 1.2 million shares offered by Chairman Cornelius B. Prior, Jr. and related entities. The net proceeds to the Company of this offering, which were approximately $42.4 million, will be used to repay a portion of the Company’s outstanding indebtedness, to fund capital expenditures, acquisitions and/or strategic investments and for general corporate purposes. The Company did not receive any proceeds from the sale of shares of the selling stockholders.  The underwriters have an option, which expires on August 20, 2006, to purchase an additional 540,000 shares of common stock from the Company at the offering price.  If the underwriters exercise their option, the Company will receive additional net proceeds of approximately $9.7 million.

2. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information included herein is unaudited; however, the Company believes such information and the disclosures herein are adequate to make the information presented not misleading and reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial position and results of operations for such periods. Results of interim periods may not be indicative of results for the full year. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s 2005 Annual Report on Form 10-K.

The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Except for its investment in Commnet of Florida, LLC, which is consolidated in accordance with the provisions of FIN No. 46, the Company uses the equity method of accounting for its investments in affiliated entities in which the Company has at least 20% ownership but does not have management control. The Company accounts for investments of less than 20% for which the Company does not have the ability to exert significant influence over the operations using the cost method of accounting.

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As a result of its acquisitions of Commnet and Sovernet, the Company has changed the way it presents its statements of operations data. In prior periods, the GT&T subsidiary represented a substantial majority of the Company’s revenue, expense and profit, and the statement of operations followed the traditional regulated telecommunications business presentation. Now that the Company has added substantial non-regulated businesses in Commnet and Sovernet and experienced significant growth in its non-exclusive wireless business in Guyana, management believes it is important to report the revenue and expenses together for all of the Company’s consolidated subsidiaries. The Company has reclassified the components of its consolidated revenues into categories that are more representative of its operations. The Company has also grouped depreciation and amortization for all consolidated businesses into one line item on the Statements of Operations. Prior periods have been reclassified to conform to the current period presentation. The reclassification of prior period results had no effect on reported net income or earnings per share.

On March 31, 2006, the Company completed a 5-for-2 split of its common stock which was effectuated as a stock dividend. ATN stockholders, as of the record date, received three additional shares of common stock for every two shares of common stock held on that date. The additional shares were distributed to stockholders on March 31, 2006. The stockholders of the Company also approved a proportional increase in the number of authorized shares of common stock from 20,000,000 to 50,000,000, in May 2006. On August 14, 2006 the Company amended its restated certificate of incorporation to reflect this increase in the authorized shares of common stock. Accordingly the Company’s dividend per share amount was reduced to proportionately reflect the 5-for-2 split. The accompanying financial statements have been retroactively adjusted to reflect the stock split.

The Company revised its presentation of dividends received from Bermuda Digital Communications of $760,000 for the six months ended June 30, 2005 to properly reflect the dividends as an operating activity as they represented a return on the Company’s investment.

3. USE OF ESTIMATES

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 contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates relate to revenue recognition, allowance for doubtful accounts, useful lives of the Company’s fixed assets, and income taxes. Actual results could differ significantly from those estimates.

4. ACQUISITIONS

a)            Sovernet, Inc.

On February 10, 2006, the Company completed the acquisition of Sovernet, Inc., a facilities-based provider of communications services to business and residential customers in Vermont, including bundled voice and high-speed Internet access, as well as traditional dial-up Internet services. In connection with the acquisition, ATN acquired all of the outstanding common stock of Sovernet, Inc. for approximately $13.2 million, including the repayment of approximately $1.4 million in Sovernet debt and the payment of transaction expenses of $0.5 million. At closing of the transaction, the Company issued shares of Sovernet’s common stock amounting to 4% of Sovernet’s outstanding capital stock to Sovernet’s new chief executive, subject to vesting requirements and other restrictions. The Company funded the transaction through a combination of cash on hand and borrowings on its existing credit facility (see Note 5).  The acquisition of Sovernet allows the Company to expand its local telephone and data business into the under-served, smaller markets of Vermont and northern New England.

The acquisition of Sovernet was accounted for using the purchase method and Sovernet’s results of operations since February 10, 2006, the date of acquisition, have been included in the financial statements of the Company. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition as determined by management. Included in this allocation was $5.0 million attributable to Sovernet’s relationships with its existing customers as of the date of acquisition. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The Company originally recorded $8.1 million of goodwill in connection with the acquisition of Sovernet.  However, such amount was reduced by $0.7 million (net of tax) during the three months ended June 30, 2006 as a result of the Company’s recording of certain transactions which related to a pre-acquisition period.  The value of the goodwill from this acquisition can be attributed to a number of business factors including, but not limited to the reputation of Sovernet as a retail provider of Internet and telephone services as well as a network operator, Sovernet’s reputation for customer care, the skills and experience of its management and staff and the strategic position it holds in its marketplace.  In accordance with current accounting standards, the goodwill will not be amortized and will be tested for impairment at least annually as required by SFAS No. 142, “Goodwill and Other Intangible Assets”. The customer relationships will be amortized, on an accelerated basis, over the expected period during which their economic benefits are to be realized. For tax purposes, the goodwill and amortization of the customer relationships will not be deductible for tax purposes.

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b)            Commnet Wireless, LLC

On September 15, 2005, the Company completed the acquisition of 95% of the equity of Commnet Wireless, LCC, a provider of roaming services in rural areas of the United States. The aggregate purchase price was approximately $59.3 million, which consisted of $58.7 million in cash and legal, financial and other costs of $0.6 million. The acquisition was financed through a new credit facility as discussed in Note 5. The acquisition of Commnet allows the Company to expand its emphasis on its wireless operations in smaller, niche markets with a manageable competitive environment.

In connection with the Commnet merger agreement, the Company placed $7.4 million of the purchase price in escrow. Of this amount, $2.0 million was released to the sellers in November 2005 after Commnet met certain working capital requirements. The remaining $5.4 million will be released to the sellers in September 2006 assuming no indemnification claims are presented by ATN.

The acquisition of Commnet was accounted for using the purchase method and Commnet’s results of operations since September 15, 2005, the date of acquisition, have been included in the financial statements of the Company. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition as determined by management. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The value of the goodwill from this acquisition can be attributed to a number of business factors including, but not limited to the reputation of Commnet as a network builder and operator, the skills and experience of its management and staff and the strategic position it holds in its marketplace. In accordance with current accounting standards, the goodwill and licenses will not be amortized and will be tested for impairment at least annually as required by SFAS No. 142, “Goodwill and Other Intangible Assets”. For tax purposes, the Company elected to step up the basis of Commnet’s assets to fair market value, and therefore, the goodwill and licenses will be deductible for tax purposes.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Investments in unconsolidated entities of $2.6 million primarily represents Commnet’s 35.0% ownership of MoCelCo, LLC (“MoCelCo”) which has historically been accounted for using the equity method of accounting. In January 2006, Commnet acquired the remaining 65.0% interest in MoCelCo for $6.2 million (see Note 4(c) for additional information).

In July 2006, and in accordance with the Commnet merger agreement, the Company, as required, purchased an additional 12.375% interest in Commnet of Florida, LLC for $1.5 million. Subsequent to the investment, the Company owns 49% of Commnet of Florida.  Commnet of Florida is consolidated for financial reporting purposes, under the provisions of FIN No. 46.

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Minority interests represent minority members’ interests in Commnet’s majority owned subsidiaries as well as a minority member’s 5% interest in Commnet. Assuming a put and call agreement entered into in connection with the Commnet merger agreement is exercised, the Company will be obligated to acquire the remaining 5% ownership interest in Commnet from the minority member between April 15, 2007 and October 15, 2007. The purchase price is contractually set at a fixed multiple to a predefined earnings number based on Commnet’s financial results during the 12 month period prior to the exercise of the put and call. No value was ascribed to the put/call agreement at the time of purchase as the exercise price is expected to reflect fair value at the exercise date. Based on Commnet’s results, the purchase price of the remaining 5%, as of June 30, 2006, would approximate $5.0 million.

As part of the acquisition of Commnet, the Company also acquired certain carrier contracts which have remaining contractual lives of one to three years. There is no renewal history of the contracts since none of these contracts have been subject to renewal. Based upon a discounted cash flow valuation through the current expiration dates of these contracts, the Company has determined that the fair value of these contracts is insignificant and has therefore not allocated any of the purchase price to them.

The following table reflects unaudited pro forma results of operations of the Company for the three and six months ended June 30, 2005 assuming that the Commnet acquisition had occurred on January 1, 2005 (in thousands, except per share data):

 

The above table does not include the pro forma effects on revenue or net income for any other acquisition other than Commnet as only Commnet has been determined to be a ‘significant’ acquisition for financial reporting purposes.

c)             Additional acquisitions

On January 1, 2006, Commnet completed two acquisitions of wireless roaming networks located in Northeast Missouri and Central Arizona. Commnet acquired the 65% of MoCelCo, LLC that it did not previously own for $6.2 million in cash (see Note 4(b)) and all the assets of a privately held network in Gila County, Arizona, that it previously managed, for $1.7 million in cash. The two acquisitions consist of a cellular license, a PCS license and 22 GSM cell sites. The Commnet acquisitions were funded with cash on hand and borrowings on ATN’s revolving credit facility (see Note 5).

These acquisitions were accounted for using the purchase method and their results of operations since January 1, 2006, the effective date of the acquisitions, have been included in the financial statements of the Company. The total purchase consideration was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition as determined by management. Included in this allocation was $2.5 million attributable to certain telecommunications licenses. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed of $5.0 million has been recorded as goodwill. In accordance with current accounting standards, the goodwill and licenses will not be amortized and will be tested for impairment at least annually as required by SFAS No. 142, “Goodwill and Other Intangible Assets”.  For tax purposes, the Company elected to step up the basis of these two acquisitions’ assets to fair market value, and therefore, the goodwill and licenses will be deductible for tax purposes.

d)            Goodwill

The following table summarizes goodwill activity for the six months ended June 30, 2006:

Final balance at December 31, 2005		$	29,031
Acquisitions completed by Commnet		5,028
Acquisition of Sovernet, including deferred taxes of $1,817		8,065
Pre-acquisition transactions, net of deferred taxes of $491		(737		)
Final balance at June 30, 2006		$	41,387

 

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5. CREDIT FACILITIES

Long-term debt includes the following (in thousands):

		December 31, 2005			June 30, 2006
Note payable to CoBank, ACB by ATN under a $50 million term loan		$	50,000		$	50,000
Line of Credit, payable to CoBank under a $20 million revolving credit facility		4,000			16,000
Note payable to U.S. Bancorp Equipment Finance, Inc. by ATN under a $2.5 million equipment financing agreement		1,750			1,671
		55,750			67,671
Less: Current portion		165			172
Total long term debt		$	55,585		$	67,499

 

On September 15, 2005, ATN, as borrower, entered into a Credit Agreement with CoBank, ACB (the “CoBank Credit Agreement”). The CoBank Credit Agreement provides a $50 million term loan (the “Term Loan”) and a $20 million revolving credit facility (the “Revolver Facility”). The credit facility is guaranteed by our Commnet subsidiary and is collateralized by, among other things a security interest in substantially all of the assets of and stock owned by ATN and Commnet. The Term Loan has principal repayments deferred until the maturity of the loan on October 31, 2010. Interest on the Term Loan is payable on a quarterly basis at a fixed annual interest rate of 5.85%, net of any patronage payments received by the Company from the bank. Amounts outstanding under the Revolver Facility accrue interest at a rate equal to (at the Company’s option): (i) LIBOR plus a margin ranging from 1.25% to 1.50% or (ii) a variable rate of interest as defined within the Revolver Facility plus 1%.

As of June 30, 2006 the amounts drawn under the Revolver Facility bear interest at a weighted average rate of 6.16%.

The CoBank Credit Agreement contains certain affirmative and negative covenants of ATN and its subsidiaries (including Commnet) that are typical for loan facilities of this type. Among other things, these covenants restrict ATN’s ability to incur additional debt in the future or to incur liens on its property. ATN has also agreed to maintain certain financial ratios under the facilities, including a total leverage ratio (debt to EBITDA) of two to one or less; a debt service coverage ratio (EBITDA to debt service) of three to one or more; an equity to assets ratio of 0.4 to one or more; and a specified leverage ratio for Commnet that changes over time. As of June 30, 2006 the Company was in compliance with the covenants of the CoBank Credit Facilities.

In December 2001, ATN entered into a $2.5 million financing agreement with U.S. Bancorp Equipment Finance, Inc., which is collateralized by property of ATN and its subsidiaries. The loan requires monthly principal and interest payments, with all outstanding balances maturing in 2008. Interest is payable on the outstanding principal balance at a variable floating rate based on three-month LIBOR plus 3.36%. As of June 30, 2006, the interest rate was 8.87%.

6. NET INCOME PER SHARE

Net income per share is computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period and does not include any other potentially dilutive securities. Diluted net income per share gives effect to all potentially dilutive securities. For the three and six months ended June 30, 2005 unvested shares of restricted stock were the only potentially outstanding dilutive securities and were included in the calculation of diluted net income per share.  For the three and six months ended June 30, 2006, unvested shares of restricted stock as well as outstanding stock options, which were included in the calculation of diluted net income per share using the treasury stock method, were the only potentially outstanding dilutive securities.

The reconciliation from basic to diluted weighted average common shares outstanding is as follows (in thousands):

		Three Months Ended June 30,				Six Months Ended June 30,
		2005		2006		2005		2006
Basic weighted average common shares outstanding		12,470		12,440		12,503		12,445
Unvested shares issued under the Company’s 2005 Restricted Stock Plan		8		58		5		49
Stock options		—		77		—		46
Diluted weighted average common shares outstanding		12,478		12,575		12,508		12,540

 

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7. SEGMENT REPORTING

The Company manages and evaluates its operations in seven segments of which three are considered material for separate disclosure under SFAS 131, “Disclosures About Segments of and Enterprise Related Information.” Those three segments are: i) Integrated Telephony, which generates its revenues and has its assets located in Guyana and in the United States (as a result of our acquisition of Sovernet in February 2006), ii) Wireless Television and Data, which generates all of its revenues in and has all of its assets located in the U.S Virgin Islands, and iii) Rural Wireless, which, as a result of the acquisition of Commnet, generates all of its revenues in the United States and has all of its assets located in the United States. The operating segments are managed separately because each offers different services and serves different markets. The accounting policies of the operating segments are the same as those described in the Company’s 2005 Annual Report on Form 10K, as filed with the SEC.

The following tables provide information for each operating segment (in thousands):

		For the Three Months Ended June 30, 2005
		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
		International			Domestic			and Data			Wireless			Corporate			Eliminations			Consolidated
Revenues		$	21,875		$	—		$	1,347		$	—		$	1,821		$	(1,659	)	$	23,384
Depreciation and amortization		3,336			—			595			—			104			—			4,035
Operating income (loss)		10,029			—			(1,311		)	—			(387		)	(261		)	8,070
Interest expense		—			—			(434		)	—			(198		)	434			(198		)
Interest income		147			—			—			—			551			(434		)	264
Income taxes		4,912			—			(698		)	—			811			—			5,025
Net income (loss)		4,324			—			(1,746		)	—			3,030			(2,381		)	3,227

 

		For the Three Months Ended June 30, 2006
		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
		International			Domestic			and Data			Wireless			Corporate			Eliminations			Consolidated
Revenues		$	22,703		$	3,618		$	1,647		$	9,527		$	1,771		$	(1,771	)	$	37,495
Depreciation and amortization		3,419			567			588			1,379			152			—			6,105
Operating income (loss)		10,812			516			(879		)	2,829			(938		)	(308		)	12,032
Interest expense		—			—			(747		)	(153		)	(1,022		)	900			(1,022		)
Interest income		137			13			—			29			923			(900		)	202
Income taxes		4,614			140			(651		)	1,086			1,036			—			6,225
Net income (loss)		5,274			373			(1,627		)	1,496			4,369			(4,950		)	4,935

 

		For the Six Months Ended June 30, 2005
		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
		International			Domestic			and Data			Wireless			Corporate			Eliminations			Consolidated
Revenues		$	43,140		$	—		$	2,638		$	—		$	3,607		$	(3,311	)	$	46,074
Depreciation and amortization		6,707			—			1,172			—			340			—			8,219
Operating income (loss)		19,662			—			(2,649		)	—			(453		)	(553		)	16,007
Interest expense		—			—			(814		)	—			(333		)	814			(333		)
Interest income		311			—			—			—			1,039			(814		)	536
Income taxes		9,670			—			(1,386		)	—			1,757			—			10,041
Net income (loss)		8,471			—			(3,465		)	—			5,758			(4,491		)	6,273

 

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		For the Six Months Ended June 30, 2006
		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
		International			Domestic			and Data			Wireless			Corporate			Eliminations			Consolidated
Revenues		$	44,534		$	5,748		$	3,207		$	18,528		$	3,425		$	(3,425	)	$	72,017
Depreciation and amortization		6,824			860			1,180			2,730			306			—			11,900
Operating income (loss)		20,596			1,007			(1,794		)	5,519			(1,167		)	(556		)	23,605
Interest expense		—			—			(1,443		)	(257		)	(1,888		)	1,699			(1,889		)
Interest income		283			13			—			56			1,753			(1,699		)	406
Income taxes		9,358			415			(698		)	2,132			1,483			—			12,690
Net income (loss)		9,538			580			(3,237		)	2,924			8,457			(9,238		)	9,024

 

		Assets
		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
As of		International			Domestic			and Data			Wireless			Corporate			Eliminations			Consolidated
December 31, 2005		$	127,305		$	—		$	13,091		$	70,254		$	141,633		$	(118,452	)	$	233,831
June 30, 2006		126,630			18,301			12,405			79,863			151,019			(131,354		)	256,864

 

Total assets for the Integrated Telephony- Domestic and Rural Wireless segments include $7.3 million and $34.1 million of goodwill, respectively.

		Capital Expenditures
Six Months		Integrated Telephony						Wireless Television			Rural			Non-Reportable Segments and
Ended June 30,		International			Domestic			and Data			Wireless			Corporate			Consolidated
2005		$	6,174		$	—		$	877		$	—		$	—		$	7,051
2006		6,813			156			438			4,993			3			12,403

 

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8. STOCK-BASED COMPENSATION

Effective January 1, 2006 the Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under this transition method, stock-based compensation expense recognized during the three and six months ended June 30, 2006 includes stock options and restricted stock shares granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and stock options and restricted stock shares granted subsequent to December 31, 2005, based on the grant-date fair value, in accordance with the provisions of SFAS No. 123(R). Since the Company was applying the fair value recognition provisions of SFAS No. 123 prior to January 1, 2006 and was expensing the estimated fair value of such grants over the employees’ requisite service period, the adoption of SFAS No. 123(R) had no impact on the Company’s statements of operations for three or six months ended June 30, 2005 and 2006.

Stock Options

In 1998, the Board of Directors of the Company adopted the 1998 Stock Option Plan for the Company and reserved 625,000 shares of common stock for options to be granted under the option plan. The options have terms of ten years and vest ratably over a period of four years.

The following table summarizes stock option activity under the 1998 Stock Option plan:

 

The outstanding options as of June 30, 2006 had an weighted average remaining life of 3.48 years.  None of these options, however,  were available to be exercised.

The Company applies the fair value recognition provisions of SFAS No. 123 and is expensing the estimated fair value of such grants over the vesting period of four years. The estimated fair value of the options was determined using a Black-Scholes option pricing model, based on the following assumptions:

 

During the three and six months ended June 30, 2006, the Company recognized $83,000 and $156,000 of non-cash equity based stock compensation expense, included in general and administrative expenses in the accompanying statements of operations, relating to the grant of stock options.  As of June 30, 2006, the Company had $1.2 million of deferred compensation cost which will be recognized over the weighted average period of 3.48 years.

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Restricted Stock

During 2005, the Company’s Board of Directors approved the 2005 Atlantic Tele-Network Restricted Stock and Incentive Plan (the “Restricted Stock Plan”) which provides for the issuance of up to 625,000 shares of the Company’s common stock to eligible employees.   The shares vest ratably over a period of three or four years.  The Company has agreed, if applicable, to immediately vest and repurchase from the recipient one-third of the granted shares in order to assist the recipient in their personal tax obligations.

The following table summarizes activity under the Restricted Stock Plan:

 

As of June 30, 2006, the weighted average remaining life of the unvested shares issued under the Restricted Stock Plan was 3.27 years.  The fair value of the shares was based upon the closing price of the Company’s common stock as of the grant date.

During the three and six months ended June 30, 2006, the Company recognized $66,000 and $121,000 of non-cash equity based stock compensation expense, included in general and administrative expenses in the accompanying statements of operations, relating to the grant of restricted stock shares.  As of June 30, 2006, the Company had $0.6 million of deferred compensation cost which will be recognized over the weighted average period of 3.27 years.

9. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

GT&T launched its 900 MHz Global System for Mobile Communications (“GSM”) service on September 25, 2004, after confirming with the Government of Guyana, GT&T’s right to use certain assigned frequencies. In March 2006, the National Frequency Management Unit (“NFMU”) reallocated the GSM 900 MHz spectrum, which was previously divided into two 24 MHz bands (awarded to GT&T and CelStar Guyana, Inc.), into four 12 MHz bands, with the expectation of licensing two additional wireless providers. Analysis undertaken by GT&T, in consultation with its GSM equipment vendors and other outside experts, indicated that GT&T might be required to incur substantial expense, in the form of new cell sites and equipment, as a result of being limited to 25% of the GSM 900 MHz band, and the quality of GSM service could suffer from higher congestion levels, particularly in the higher volume metropolitan areas or during events that create higher than ordinary traffic volume. In an effort to alleviate these consequences, GT&T proposed to the Government that it be allocated 33% of the GSM 900 MHz spectrum, but that proposal was rejected. However, in correspondence dated May 3, 2006, and amended on May 9, 2006, the NFMU assigned a quarter of the 1800 MHz band into the Company totaling approximately 37 MHz. The Company has contacted its GSM equipment suppliers and they have begun assembling equipment in this spectrum band that is being utilized, along with other solutions, to alleviate the congestion experienced by GT&T’s subscribers.

As a result of extensive discussions with the Guyana NFMU, on October 25, 2005, GT&T submitted its final spectrum fee payment to the NFMU for 2005, while the NFMU continues to develop a methodology for calculating GSM spectrum

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fees for wireless market participants in Guyana. At this time, the Company does not expect the final determination of the amount of the fee payment in 2005 to have a material adverse effect on its financial condition or results of operations. The NFMU has notified GT&T that it expects GT&T to pay additional, unspecified spectrum fees for the 1800 MHz frequencies assigned to GT&T. The Company has contacted the Prime Minister with responsibility for telecommunications to express GT&T’s position that the assignment of the 1800 MHz frequencies merely offsets the decrease in the 900 MHz band and there should be no additional fees being remitted.

In April 2006, the National Assembly of Guyana enacted the Competition and Fair Trading Act as part of an effort to promote fair trading practices among businesses in Guyana and the Caribbean region. This Act prohibits anti-competitive business conduct which prevents, restricts or distorts competition or constitutes the abuse of a dominant position in the market. Because the Act specifically does not apply to activities expressly approved under any treaty or agreement to which Guyana is a party, we do not believe that it has any impact on the continued effectiveness of the exclusive license held by GT&T, which was granted pursuant to an agreement with Guyana. However, we do expect that the Act would apply to any abuse by us of our market position. The Act contemplates the establishment of a Competition Commission to oversee the enforcement of the Act, including investigating conduct that may constitute an abuse of a dominant market position. This new Competition Commission would have authority over public utilities, including GT&T, with respect only to the provisions of the Act and would be required to consult with the Public Utilities Commission before taking any actions against a public utility.

In July 2004, the FCC released an order revising the spectrum band plan applicable to the Broadband Radio Service (“BRS”) and Educational Broadband Service (“EBS”). These are the spectrum bands through which Choice operates its video and broadband data services. The new rules restructure these spectrum bands and could impact Choice customers and operations. Choice objected to the new rules and requested an opportunity to opt-out of the new band plan. In April, 2006, the FCC released orders clarifying the rules and their applicability. Although the FCC did not grant requests for an opt-out provision, it stated that it will consider requests for waiver of the new band plan requirements on a case-by-case basis and described the circumstances under which waivers would be granted. Choice believes it is within the class of providers for which the FCC would favorably consider a waiver request.

In September 2005, the FCC released an order reallocating certain spectrum currently used by Choice for its broadband data service and potentially reducing the amount of spectrum available to Choice. Choice will be required to relocate certain operations to different frequencies; however, the FCC has proposed that any such transition may take up to five years with the costs borne by the party precipitating the move. In April, the FCC released rules for the auction of Choice spectrum that will be reallocated to Advanced Wireless Services (“AWS”). That auction took place on June 29, 2006. The FCC also released orders addressing the relocation procedures and compensation for current licensees that may be displaced by new AWS licensees. Choice believes any disruption to its operations will be mitigated by the FCC’s relocation and compensation rules which specify a mandatory, multi-year negotiation period and relocation to comparable facilities. Furthermore, Choice has mitigated or eliminated the possibility of a net reduction of its spectrum due to these rules by obtaining an additional 24 MHz of spectrum from the FCC.

On June 6 2006, BDC received a favorable court ruling in its dispute over the scope of its mobile license related to data activities.  While the court invalidated a ministry restriction on the sale of BDC’s EV-DO “Bull” wireless modem service, the ministry may appeal.

Litigation Matters

The Company is subject to lawsuits and claims that arise in the normal course of business, some of which involve claims for damages and taxes that are substantial in amount. The Company believes that, except for the items discussed below  it is currently unable to predict the final outcome, the disposition of claims currently pending will not have a material adverse effect on the Company’s financial position or results of operations.

In July 2002 an individual sued the Attorney General of Guyana in the Guyana courts asking, among other things, for a declaration that the section of the Company’s 1990 contract with the Government of Guyana granting to GT&T an exclusive right to operate a telecommunications system in Guyana was null and void as contrary to law and to the Constitution of Guyana. GT&T has joined the suit to contest these claims and this proceeding remains pending. Although there has been no activity in this suit, the Government of Guyana continues its efforts to introduce and pass legislation that would allow for competition in areas (such as long distance) that are precluded by the exclusivity terms of GT&T’s license and the investment agreement with the Company.

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Upon the acquisition of GT&T in January 1991, ATN entered into an agreement with the Government of Guyana to significantly expand GT&T’s existing facilities and telecommunications operations and to improve service within a three-year period pursuant to an expansion and service improvement plan (the “Plan”). The Government agreed to permit rate increases in the event of currency devaluation within the three-year period, but GT&T was unable to get timely increases when the Guyanese currency suffered a sharp decline in March 1991. The Plan was modified in certain respects, and the date for completion of the Plan was extended to February 1995. Since 1995, the PUC has had pending a proceeding initiated by the minister of telecommunications of Guyana with regard to the failure of GT&T to complete the Plan by February 1995. The PUC last held hearings on this matter in 1998. It is GT&T’s position that its failure to receive timely rate increases in compensation for the devaluation of currency in 1991 provides legal justification for GT&T’s delay in completing the Plan. If the PUC were to find that GT&T was not excused from fulfilling the terms of the Plan by February 1995, GT&T could be subject to monetary penalties, cancellation of its license, or other action by the PUC or the government that could have a material adverse effect on the Company’s business and prospects. The requirements of the Plan were substantially completed more than four years ago. GT&T believes that its obligations have been fulfilled and it has continued to aggressively develop the telecommunications infrastructure in all areas including landline, wireless and data.

GT&T is contesting income tax assessments of approximately $7.3 million that it has received from the commissioner of Inland Revenue for the years 1991 — 1996 based on the disallowance as a deduction for income tax purposes of five-sixths of the advisory fees payable by GT&T to the Company. The deductibility of these advisory fees was upheld for one of these years by a decision of the High Court in August 1995. The Guyana Commission of Inland Revenue has filed a High Court Writ seeking an order setting aside that decision on the grounds that the Commissioner did not have a proper hearing. GT&T has contested that Writ. The assessments for the other years are being held in abeyance pending decision on the Writ and GT&T motions to strike. Subsequent to December 31, 2001, GT&T received assessments for the years 1997 — 2000 in the aggregate amount of approximately $6.5 million raising the same issues. GT&T expects that proceedings on these assessments will also be held in abeyance pending the Court’s decision.

In November 1997, GT&T received assessments of the current equivalent of approximately $9.7 million from the commissioner of Inland Revenue for taxes for the years 1991 through 1996. It is GT&T’s understanding that these assessments stem from an audit that the Guyana High Court stayed before it was completed. Apparently, because the audit was cut short as a result of the High Court’s order, GT&T did not receive notice of, and an opportunity to respond to, the proposed assessments as is the customary practice in Guyana, and substantially all of the issues raised in the assessments appear to be based on mistaken facts. GT&T has applied to the Guyana High Court for an order prohibiting the commissioner of Inland Revenue from enforcing the assessments on the grounds that the origin of the audit and the failure to give GT&T notice of, and opportunity to respond to, the proposed assessments violated Guyanese law. The Guyana High Court has issued an order effectively prohibiting any action on the assessments pending the determination by the High Court of the merits of GT&T’s application.

Should GT&T be held liable for any of the above tax liabilities, totaling $23.5 million, the Company believes that the government of Guyana would be obligated to reimburse GT&T for any amounts that would reduce GT&T’s return on investment to less than 15% per annum for the relevant periods.

Additional Investment in Commnet

In July 2006, and in accordance with the Commnet merger agreement, the Company, as required, purchased an additional 12.375% interest in Commnet of Florida, LLC for $1.5 million. Subsequent to the investment, the Company owns 49% of Commnet of Florida. Commnet of Florida is consolidated for financial reporting purposes, under the provisions of FIN No. 46.

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