ATN International, Inc. - Quarter Report: 2012 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

For the quarterly period ended March 31, 2012

 

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 001-12593

 

 

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)

 

600 Cummings Center

Beverly, MA 01915

(Address of principal executive offices, including zip code)

 

(978) 619-1300

(Registrant’s telephone number, including area code)

 

 

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 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

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 May 10, 2012, the registrant had outstanding 15,514,337 shares of its common stock ($.01 par value).

 

 

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ATLANTIC TELE-NETWORK, INC.

 

FORM 10-Q

 

Quarter Ended March 31, 2012

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS		3
PART I—FINANCIAL INFORMATION		4
Item 1	Unaudited Condensed Consolidated Financial Statements	4
	Condensed Consolidated Balance Sheets at December 31, 2011 and March 31, 2012	4
	Condensed Consolidated Income Statements for the Three Months Ended March 31, 2011 and 2012	5
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2011 and 2012	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2012	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-24
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24
PART II—OTHER INFORMATION		25
Item 1	Legal Proceedings	25
Item1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 5	Other Information	29
Item 6	Exhibits	26
SIGNATURES		27
CERTIFICATIONS

 

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Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (or the “Report”) contains forward-looking statements relating to, among other matters, our future financial performance and results of operations; the competitive environment in our key markets, 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 level of estimated future capital expenditures and 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)  the general performance of our operations, including operating margins, wholesale revenues, and the future retention and turnover of our subscriber base; (2) our ability to maintain favorable roaming arrangements; (3) increased competition; (4) economic, political and other risks facing our foreign operations; (5) the loss of certain FCC and other licenses, USF funds or other regulatory changes affecting our businesses; (6) rapid and significant technological changes in the telecommunications industry; (7) any loss of any key members of management; (8) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure and retail wireless business; (9) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (10) the occurrence of severe weather and natural catastrophes; (11) our continued access to capital and credit markets; and (12) our ability to realize the value that we believe exists in our businesses. 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 this Report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012. The Company 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.

 

In this Report, the words “the Company”, “we,” “our,” “ours,” “us” and “ATN” refer to Atlantic Tele-Network, Inc. and its subsidiaries, unless the context indicates otherwise. This Report contains trademarks, service marks and trade names such as “Alltel”, “CellOne”, “Cellink”, “Islandcom”, “Choice”, “Sovernet” and “ION” that are the property of, or licensed by, ATN, and its subsidiaries.

 

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

 

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PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

		December 31, 2011			March 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents		$	48,735		$	53,693
Accounts receivable, net of allowances of $15.3 million and $14.8 million, respectively		71,159			70,359
Materials and supplies		20,802			20,502
Deferred income taxes		21,921			21,921
Income tax receivable		11,545			11,545
Prepayments and other current assets		9,738			15,223
Total current assets		183,900			193,243
Property, plant and equipment, net		483,203			469,972
Telecommunications licenses		87,468			87,525
Goodwill		45,077			45,077
Trade name license, net		13,013			12,893
Customer relationships, net		41,314			39,001
Other assets		19,756			23,163
Total assets		$	873,731		$	870,874
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt		$	25,068		$	25,068
Accounts payable and accrued liabilities		57,262			41,071
Dividends payable		3,548			3,551
Accrued taxes		7,739			12,246
Advance payments and deposits		15,834			18,270
Other current liabilities		36,327			31,067
Total current liabilities		145,778			131,273
Deferred income taxes		88,906			89,107
Other liabilities		29,371			27,218
Long-term debt, excluding current portion		257,146			264,071
Total liabilities		521,201			511,669
Commitments and contingencies (Note 11)
Atlantic Tele-Network, Inc.’s Stockholders’ Equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value per share; 50,000,000 shares authorized; 15,955,886 and 16,023,036 shares issued, respectively, and 15,451,238 and 15,513,962 shares outstanding, respectively		160			160
Treasury stock, at cost; 504,648 and 509,074 shares, respectively		(4,942		)	(5,112		)
Additional paid-in capital		118,620			119,819
Retained earnings		190,327			196,092
Accumulated other comprehensive loss		(9,899		)	(9,660		)
Total Atlantic Tele-Network, Inc.’s stockholders’ equity		294,266			301,299
Non-controlling interests		58,264			57,906
Total equity		352,530			359,205
Total liabilities and equity		$	873,731		$	870,874

 

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 INCOME STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2012

(Unaudited)

(Dollars in thousands, except per share amounts)

 

		Three Months Ended March  31,
		2011			2012
REVENUE:
U.S. Wireless:
Retail		$	99,669		$	86,750
Wholesale		44,697			47,384
International Wireless		14,063			18,955
Wireline		20,670			21,548
Equipment and Other		9,055			8,253
Total revenue		188,154			182,890
OPERATING EXPENSES (excluding depreciation and amortization unless otherwise indicated):
Termination and access fees		51,774			40,483
Engineering and operations		21,905			21,336
Sales and marketing		31,830			32,175
Equipment expense		21,582			20,350
General and administrative		25,615			23,358
Acquisition-related charges		250			5
Depreciation and amortization		24,808			27,024
Total operating expenses		177,764			164,731
Income from operations		10,390			18,159
OTHER INCOME (EXPENSE):
Interest expense		(4,072		)	(3,970		)
Interest income		380			91
Equity in earnings of an unconsolidated affiliate		516			1,402
Other income, net		595			36
Other income (expense), net		(2,581		)	(2,441		)
INCOME BEFORE INCOME TAXES		7,809			15,718
Income tax expense		3,830			6,781
NET INCOME		3,979			8,937
Net loss attributable to non-controlling interests, net of tax of $0.4 million and $0.6 million, respectively		518			384
NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS		$	4,497		$	9,321
NET INCOME PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS
Basic		$	0.29		$	0.60
Diluted		$	0.29		$	0.60
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		15,384			15,456
Diluted		15,485			15,554
DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK		$	0.22		$	0.23

 

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 COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended March 31,
		2011			2012
Net income		$	3,979		$	8,937
Other comprehensive income:
Foreign currency translation adjustment		12			—
Unrealized gain on interest rate swap, net of tax of $0.6 million and $0.2 million respectively		870			236
Other comprehensive income, net of tax		882			236
Comprehensive income		4,861			9,173
Less: Comprehensive income attributable to non-controlling interests		518			384
Comprehensive income attributable to Atlantic Tele-Network, Inc.		$	5,379		$	9,557

 

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 THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended March 31,
		2011			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,979		$	8,937
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		24,808			27,024
Provision for doubtful accounts		3,468			3,190
Amortization of debt discount and debt issuance costs		391			552
Stock-based compensation		1,078			1,095
Deferred income taxes		59			41
Equity in earnings of an unconsolidated affiliate		(516		)	(1,402		)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		4,412			(2,390		)
Materials and supplies, prepayments, and other current assets		7,810			(5,184		)
Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities		(21,115		)	(11,313		)
Accrued taxes		(1,138		)	4,507
Other		(2,242		)	(4,029		)
Net cash provided by operating activities		20,994			21,028
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(16,270		)	(19,055		)
Decrease in restricted cash		467			—
Net cash used in investing activities		(15,803		)	(19,055		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolver loan		11,000			27,925
Principal repayments of revolver loan		—			(15,079		)
Proceeds from stock option exercises		—			103
Principal repayments of term loan		(3,048		)	(6,267		)
Dividends paid on common stock		(3,384		)	(3,553		)
Distributions to non-controlling interests		(462		)	(424		)
Investments made by non-controlling interests		507			450
Purchase of common stock		(91		)	(170		)
Net cash (used in) provided by financing activities		4,522			2,985
NET CHANGE IN CASH AND CASH EQUIVALENTS		9,713			4,958
CASH AND CASH EQUIVALENTS, beginning of the period		37,330			48,735
CASH AND CASH EQUIVALENTS, end of the period		$	47,043		$	53,693

 

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

 

The Company provides wireless and wireline telecommunications services in North America, Bermuda and the Caribbean. Through its operating subsidiaries, the Company offers the following principal services:

 

·                  Wireless.  In the United States, the Company offers wireless voice and data services to retail customers under the “Alltel” name in rural markets located principally in the Southeast and Midwest. Additionally, the Company offers wholesale wireless voice and data roaming services to national, regional and local wireless carriers and selected international wireless carriers in rural markets located principally in the Southwest and Midwest. The Company also offers wireless voice and data services to retail customers in Bermuda under the “CellOne” name, in Guyana under the “Cellink” name, and in other smaller markets in the Caribbean and the United States.

 

·                  Wireline.  The Company’s local telephone and data services include its operations in Guyana and the mainland United States. The Company is the exclusive licensed provider of domestic wireline local and long distance telephone services in Guyana and international voice and data communications into and out of Guyana. The Company also offers facilities-based integrated voice and data communications services to enterprise and residential customers in New England, primarily in Vermont, and wholesale transport services in New York State.

 

In the second quarter of 2011, the Company completed the merger of its Bermuda operations with M3 Wireless, Ltd., a leading retail wireless provider in Bermuda. For more information on the merger in Bermuda, see Note 4. The Company actively evaluates additional investment and acquisition opportunities in the United States and the Caribbean that meet the Company’s return-on-investment and other acquisition criteria.

 

The following chart summarizes the operating activities of the Company’s principal subsidiaries, the segments in which the Company reports its revenue and the markets it served as of March 31, 2012:

 

Services		Segment		Markets		Tradenames
Wireless		U.S. Wireless		United States (rural markets)		Alltel, Choice
		Island Wireless		Aruba, Bermuda, Turks and Caicos, U.S. Virgin Islands		Mio, CellOne, Islandcom, Choice
		International Integrated Telephony		Guyana		Cellink
Wireline		International Integrated Telephony		Guyana		GT&T, Emagine
		U.S. Wireline		United States (New England and New York State)		Sovernet, ION

 

The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a management fee equal to a percentage of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation. For information about the Company’s business segments and geographical information about its revenue, operating income and long-lived assets, see Note 10 to the Consolidated Financial Statements included in this Report.

 

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. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United

 

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States of America.  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 2011 Annual Report on Form 10-K.

 

Consolidation

 

The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and certain entities, which are consolidated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) authoritative guidance on the consolidation of variable interest entities since it is determined that the Company is the primary beneficiary of these entities.

 

Recent Accounting Pronouncements

 

In June 2011, the FASB issued a new accounting standard that requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or in two separate, but consecutive, statements. The standard also requires that items reclassified from OCI to net income be presented on the face of the financial statements. The standard, which the company adopted during the first quarter of 2012, did not have a material impact on our financial position, results of operations or liquidity.

 

In May 2011, the FASB issued amended guidance that clarifies the application of existing fair value measurement and increases certain related disclosure requirements about measuring fair value. The standard, which the Company adopted during the first quarter of 2012, did not have a material impact on its financial position, results of operations or liquidity.

 

Other new pronouncements issued but not effective until after March 31, 2012, are not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

3.   USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting periods. The most significant estimates relate to the allowance for doubtful accounts, useful lives of the Company’s fixed and finite-lived intangible assets, allocation of purchase price to assets acquired and liabilities assumed in purchase business combinations, fair value of indefinite-lived intangible assets, goodwill and income taxes. Actual results could differ significantly from those estimates.

 

4.   ACQUISITIONS

 

Merger with M3 Wireless, Ltd.

 

On May 2, 2011, the Company completed the merger of its Bermuda wireless operations, Bermuda Digital Communications, Ltd. (“BDC”), with that of M3 Wireless, Ltd. (“M3”), a wireless provider in Bermuda (the “CellOne Merger”). As part of the CellOne Merger, M3 merged with and into BDC, and the combined entity will continue to operate under BDC’s CellOne brand. As a result of the CellOne Merger, the Company’s 58% ownership interest in BDC was reduced to a controlling 42% interest in the combined entity. Since the Company has the right to designate the majority of seats on the combined entity’s board of directors and therefore controls its management and policies, the Company has consolidated the results of the combined entity in its consolidated financial statements effective on the date of the CellOne Merger.

 

The CellOne Merger was accounted for using the purchase method and M3’s results of operations since May 2, 2011 have been included in the Company’s Island Wireless segment as reported in Note 10. The total consideration of the CellOne Merger was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the CellOne Merger as determined by management. The consideration paid for M3 was determined based on the estimated fair value of the equity of M3. The table below represents the assignment of the total consideration to the tangible and intangible assets and liabilities of M3 based on their merger date fair values (in thousands) noting that Bermuda is a non-taxable jurisdiction:

 

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Total consideration		$	6,655
Purchase price allocation:
Net working capital		$	675
Property, plant and equipment		10,577
Customer relationships		2,600
Telecommunications licenses		6,100
Goodwill		3,105
Note payable-affiliate (see Note 7)		(7,012		)
Other long term liabilities		(200		)
Non-controlling interests		(9,190		)
Net assets acquired		$	6,655

 

The amortization period of the customer relationships is 12.0 years. The value of the goodwill from the CellOne Merger can be attributed to a number of business factors including, but not limited to, the reputation of M3 as a retail provider of wireless services and a network operator, M3’s reputation for customer care and the strategic position M3 holds in Bermuda.

 

The following table reflects unaudited pro forma results of operations of the Company for the three months ended March 31, 2011 assuming that the merger of M3 had occurred at the beginning of the earliest period presented (in thousands, except per share data):

 

		Three Months Ended March 31, 2011
		As Reported			As Adjusted
Revenue		$	188,154		$	192,749
Net income attributable to ATN stockholders		$	4,497		$	5,059
Earnings per share:
Basic		$	0.29		$	0.33
Diluted		$	0.29		$	0.33

 

The unaudited pro forma data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the merger had been consummated on these dates or of future operating results of the combined company following this transaction.

 

5.   FAIR VALUE MEASUREMENTS

 

In accordance with the provisions of fair value accounting, a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

 

The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1	Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 assets and liabilities include money market funds, debt and equity securities and derivative contracts that are traded in an active exchange market.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
	This category generally includes corporate obligations and non-exchange traded derivative contracts.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2011 and March 31, 2012 are summarized as follows:

 

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		December 31, 2011
Description		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Total
Certificates of deposit		$	3,366		$	—		$	3,366
Money market funds		3,847			—			3,847
Total assets measured at fair value		$	7,213		$	—		$	7,213
Interest rate derivative (Note 7)		$	—		$	11,337		$	11,337
Total liabilities measured at fair value		$	—		$	11,337		$	11,337

 

		March 31, 2012
Description		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Total
Certificates of deposit		$	3,360		$	—		$	3,360
Money market funds		3,004			—			3,004
Total assets measured at fair value		$	6,364		$	—		$	6,364
Interest rate derivative (Note 7)		$	—		$	10,938		$	10,938
Total liabilities measured at fair value		$	—		$	10,938		$	10,938

 

Money Market Funds and Certificates of Deposit

 

As of December 31, 2011 and March 31, 2012, this asset class consisted of time deposits at financial institutions denominated in U.S. dollars and a money market portfolio that comprises Federal government and U.S. Treasury securities. The asset class is classified within Level 1 of the fair value hierarchy because its underlying investments are valued using quoted market prices in active markets for identical assets.

 

Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. When deemed appropriate, the Company manages economic risks related to interest rates primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to the Company’s borrowings.

 

We did not have any significant nonfinancial assets or nonfinancial liabilities that would be recognized or disclosed at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.  We did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the three months ended March 31, 2012 and December 31, 2011.

 

6.   LONG-TERM DEBT

 

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

 

		December 31, 2011			March 31, 2012
Notes payable - Bank
Term loans		$	252,311		$	246,266
Revolver loan		28,156			41,002
Note Payable — Other		5,752			5,332
Total outstanding debt		286,021			292,600
Less: current portion		(25,068		)	(25,068		)
Total long-term debt		260,953			267,532
Less: debt discount		(3,807		)	(3,461		)
Net carrying amount		$	257,146		$	264,071

 

Loan Facilities—Bank

 

The Company amended and restated its existing credit facility with CoBank, ACB on September 30, 2010 (the “Credit Facility”) providing for $275.0 million in term loans and a revolver loan of up to $100.0 million (which includes a $10.0 million swingline sub-facility) and additional term loans up to an aggregate of $50.0 million, subject to lender approval. As of March 31, 2012, $246.3 million was outstanding under the term loans and $41.0 million was outstanding under the revolver loan.

 

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The term loans mature on September 30, 2014 and require certain quarterly repayment obligations. The revolver loan matures on September 10, 2014. The Company may prepay the Credit Facility at any time without premium or penalty, other than customary fees for the breakage of London Interbank Offered Rate (LIBOR) loans.

 

As a result of an amendment entered into on September 16, 2011, amounts borrowed under the Credit Facility bear interest at a rate equal to, at the Company’s option, either (i) LIBOR plus an applicable margin ranging between 2.75% to 4.25% or (ii) a base rate plus an applicable margin ranging from 1.75% to 3.25% (or, in the case of amounts borrowed under the swingline sub-facility, an applicable margin ranging from 1.25% to 2.75%). The applicable margin is determined based on the ratio of the Company’s indebtedness to its EBITDA (each as defined in the Credit Facility agreement). Borrowings as of March 31, 2012, after considering the effect of the interest rate swap agreements as described in Note 7, bore a weighted-average interest rate of 4.97%.

 

Under the terms of the Credit Facility, as amended, the Company must also pay a commitment fee ranging from 0.375% to 0.50% of the average daily unused portion of the revolver loan over each calendar quarter.

 

The Credit Facility contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Credit Facility contains financial covenants by the Company that (i) impose a maximum ratio of indebtedness to EBITDA, (ii) require a minimum ratio of EBITDA to cash interest expense, (iii) require a minimum ratio of equity to consolidated assets and (iv) require a minimum ratio of EBITDA to fixed charges. As previously disclosed, on June 30, 2011 the Company amended certain of these financial covenants to allow an increased ratio of indebtedness to EBITDA and amended the definition of fixed charges. As of March 31, 2012, the Company was in compliance with all of the financial covenants of the Credit Facility, as amended.

 

Note Payable—Other

 

In connection with the CellOne Merger with M3 Wireless, Ltd., the Company assumed a term loan of approximately $7.0 million owed to Keytech Ltd., the former parent company of M3 and current 42% minority shareholder in the Company’s Bermuda operations. The term loan requires quarterly repayments of principal, matures on March 15, 2015 and bears interest at a rate of 7% per annum.

 

The Company believes that the carrying value of its debt approximates fair value which was based on quoted market prices and falls within Level 1 of the fair value measurement hierarchy.

 

7.   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Cash Flow Hedge of Interest Rate Risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. No hedge ineffectiveness was recognized during any of the periods presented.

 

The total outstanding notional amount of cash flow hedges was $143.0 million as of March 31, 2012.

 

Amounts reported in accumulated other comprehensive income related to the interest rate swaps are reclassified to interest expense as interest payments are accrued on the Company’s variable-rate debt. Through March 31, 2013, the Company estimates that an additional $3.9 million will be reclassified as an increase to interest expense due to the interest rate swaps since the hedge interest rate exceeds the variable interest rate on the debt.

 

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheet as of December 31, 2010 and March 31, 2012 (in thousands):

 

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		Liability Derivatives
				Fair Value as of
		Balance Sheet Location		December 31, 2011			March 31, 2012
Derivatives designated as hedging instruments:
Interest Rate Swaps		Other liabilities		$	11,337		$	10,938
Total derivatives designated as hedging instruments				$	11,337		$	10,938

 

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three months ended March 31, 2011 and 2012 (in thousands):

 

Three Months Ended March 31,		Derivative in Cash Flow Hedging Relationships		Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
2011		Interest Rate Swap		$	(1,524	)	Interest expense		$	1,030
2012		Interest Rate Swap		(445		)	Interest expense		1,023

 

Credit-risk-related Contingent Features

 

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

As of March 31, 2012, the fair value of the interest rate swaps liability position related to these agreements was $10.9 million. As of March 31, 2012, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2012, it would have been required to settle its obligations under these agreements at their termination values of $10.9 million.

 

8.   RECONCILIATION OF TOTAL EQUITY

 

Total equity was as follows (in thousands):

 

		Three Months Ended March 31,
		2011									2012
		Atlantic Tele- Network, Inc.			Non-Controlling Interests			Total Equity			Atlantic Tele- Network, Inc.			Non-Controlling Interests			Total Equity
Equity, beginning of period		$	283,768		$	45,268		$	329,036		$	294,266		$	58,264		$	352,530
Stock-based compensation		1,078			—			1,078			1,095			—			1,095
Comprehensive income:
Net income		4,497			(518		)	3,979			9,321			(384		)	8,937
Other comprehensive income(loss)-
Translation Adjustment		12			—			12			—			—			—
Gain (loss) on interest rate swap (net of tax)		870			—			870			236			—			236
Total comprehensive income		5,379			(518		)	4,861			9,557			(384		)	9,173
Issuance of common stock upon exercise of stock options		—			—			—			103			—			103
Dividends declared on common stock		(3,384		)	—			(3,384		)	(3,552		)	—			(3,552		)
Distributions to non-controlling interests		—			(462		)	(462		)	—			(424		)	(424		)
Investments made by minority shareholders		—			507			507			—			450			450
Purchase of common shares		(91		)	—			(91		)	(170		)	—			(170		)
Equity, end of period		$	286,750		$	44,795		$	331,545		$	301,299		$	57,906		$	359,205

 

9.   NET INCOME PER SHARE

 

For the three months ended March 31, 2011 and 2012, outstanding stock options were the only potentially dilutive securities.

 

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

 

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		Three Months Ended March 31,
		2011		2012
Basic weighted average common shares outstanding		15,384		15,456
Stock options		101		98
Diluted weighted average common shares outstanding		15,485		15,554

 

The above calculations for the three months ended March 31, 2011 and 2012 do not include 195,000 and 324,000 shares, respectively, related to certain stock options because the effects of such were anti-dilutive.

 

10.  SEGMENT REPORTING

 

The Company has four reportable segments for separate disclosure in accordance with the FASB’s authoritative guidance on disclosures about segments of an enterprise. Those four segments are: i) U.S. Wireless, which generates all of its revenues in and has all of its assets located in the United States, ii) International Integrated Telephony, which generates all of its revenues in and has all of its assets located in Guyana, iii) Island Wireless, which generates all of its revenues in and has all of its assets located in Bermuda, the U.S. Virgin Islands, Aruba and Turks and Caicos and iv) U.S. Wireline, which generates all of its revenues in 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 following tables provide information for each operating segment (in thousands):

 

		For the Three Months Ended March 31, 2011
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	99,669		$	—		$	—		$	—		$	—		$	99,669
Wholesale		44,697			—			—			—			—			44,697
International Wireless		—			6,661			7,402			—			—			14,063
Wireline		139			15,502			—			5,030			—			20,671
Equipment and Other		7,601			86			1,367			—			—			9,054
Total Revenue		152,106			22,249			8,769			5,030			—			188,154
Depreciation and amortization		17,408			4,547			1,870			786			197			24,808
Non-cash stock-based compensation		308			—			—			—			770			1,078
Operating income (loss)		10,427			6,244			(1,663		)	(40		)	(4,578		)	10,390

 

		For the Three Months Ended March 31, 2012
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	86,750		$	—		$	—		$	—		$	—		$	86,750
Wholesale		47,384			—			—			—			—			47,384
International Wireless		—			6,348			12,607			—			—			18,955
Wireline		144			16,574			—			4,830			—			21,548
Equipment and Other		6,604			432			1,217			—			—			8,253
Total Revenue		140,882			23,354			13,824			4,830			—			182,890
Depreciation and amortization		18,701			4,528			2,786			746			263			27,024
Non-cash stock-based compensation		58			—			—			—			1,037			1,095
Operating income (loss)		18,922			6,236			(1,611		)	(423		)	(4,965		)	18,159

 

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		Segment Assets
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
December 31, 2011:
Net fixed assets		$	296,279		$	129,069		$	40,446		$	9,126		$	8,283		$	483,203
Goodwill		32,148			—			5,438			7,491			—			45,077
Total assets		544,388			171,676			84,057			22,790			50,820			873,731
March 31, 2012:
Net fixed assets		$	285,588		126,591			38,375			10,310			9,108			469,972
Goodwill		32,148			—			5,438			7,491			—			45,077
Total assets		537,306			175,703			81,077			23,257			53,531			870,874

 

		Capital Expenditures
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Three Months Ended March 31,
2011		$	10,940		$	2,167		$	1,692		$	586		$	885		$	16,270
2012		12,547			2,561			1,430			1,859			658			19,055

 

11.  COMMITMENTS AND CONTINGENCIES

 

Regulatory and Litigation Matters

 

The Company and its subsidiaries are subject to certain regulatory and legal proceedings and other claims arising in the ordinary 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 in our Annual Report on Form 10-K for the year ended December 31, 2011, for which the Company is currently unable to predict the final outcome, the disposition of proceedings currently pending will not have a material adverse effect on the Company’s financial position or results of operations.

 

Historically, the Company has been subject to litigation proceedings and other disputes in Guyana that while not conclusively resolved, to its knowledge have not been the subject of discussions or other significant activity in the last five years. It is possible, but not likely, that these disputes may be revived. The Company believes that none of these additional proceedings would, in the event of an adverse outcome, have a material impact on its consolidated financial position, results of operation or liquidity.  For all of the regulatory, litigation, or related matters listed in our Form 10-K for the year ended December 31, 2011, the Company believes some adverse outcome is probable and has accordingly accrued $5.0 million as of March 31, 2012.

 

12.  SUBSEQUENT EVENTS

 

In May 2012, the Company was notified that a roaming partner exercised its previously existing call option to purchase a portion of the Company’s roaming network comprised of spectrum and certain related cell sites for approximately $15.6 million.  These cell sites generated approximately $15 million in wholesale revenue during the 2011 fiscal year. The Company expects to enter into definitive documentation for the purchase by the end of the second quarter of 2012, and currently expects to close the purchase in late 2012 or early 2013.

 

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