ATN International, Inc. - Quarter Report: 2013 June (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 June 30, 2013

 

OR

 

 

For the transition period from         to         

 

Commission File Number 001-12593

 

 

Atlantic Tele-Network, Inc.

(Exact name of registrant as specified in its charter)

 

 

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):

 

 

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 9, 2013, the registrant had outstanding 15,737,924 shares of its common stock ($.01 par value).

 

 

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ATLANTIC TELE-NETWORK, INC.

 

FORM 10-Q

 

Quarter Ended June 30, 2013

 

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, 2012 and June 30, 2013	4
	Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2012 and 2013	5
	Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2013	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2013	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8-16
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28
PART II—OTHER INFORMATION		29
Item 1	Legal Proceedings	29
Item1A	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6	Exhibits	30
SIGNATURES		31
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; the pending sale of certain assets used in our Alltel business; 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 receive the requisite regulatory consents and approvals and satisfy other conditions needed to complete our proposed sale of Alltel operations; (3) our ability to maintain favorable roaming arrangements; (4) increased competition; (5) economic, political and other risks facing our foreign operations; (6) the loss of certain FCC and other licenses, Universal Service Funds (“USF”)  or other regulatory changes affecting our businesses; (7) rapid and significant technological changes in the telecommunications industry; (8) any loss of any key members of management; (9) 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; (10) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (11) the occurrence of severe weather and natural catastrophes; (12) our continued access to capital and credit markets; and (13) 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, 2012, filed with the SEC on March 18, 2013. 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, 2012			June 30, 2013
ASSETS
Current Assets:
Cash and cash equivalents		$	136,647		$	111,438
Accounts receivable, net of allowances of $14.6 million and $13.5 million, respectively		73,091			75,150
Materials and supplies		27,080			29,075
Deferred income taxes		8,349			8,533
Prepayments and other current assets		10,984			17,517
Total current assets		256,151			241,713
Property, plant and equipment, net		450,547			450,832
Telecommunications licenses		90,458			90,054
Goodwill		45,077			45,077
Trade name license, net		12,534			12,295
Customer relationships, net		32,835			29,252
Other assets		23,273			23,289
Total assets		$	910,875		$	892,512
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt		$	15,680		$	19,600
Accounts payable and accrued liabilities		50,259			48,876
Dividends payable		—			3,943
Accrued taxes		30,153			4,839
Advance payments and deposits		18,998			20,297
Other current liabilities		44,115			38,256
Total current liabilities		159,205			135,811
Deferred income taxes		84,006			86,957
Other liabilities		22,524			15,727
Long-term debt, excluding current portion		250,900			243,632
Total liabilities		516,635			482,127
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; 16,090,544 and 16,319,698 shares issued, respectively, and 15,726,255 and 15,721,127 shares outstanding, respectively		160			162
Treasury stock, at cost; 513,823 and 593,443 shares, respectively		(5,286		)	(8,923		)
Additional paid-in capital		123,253			129,255
Retained earnings		224,316			234,084
Accumulated other comprehensive loss		(8,297		)	(5,032		)
Total Atlantic Tele-Network, Inc.’s stockholders’ equity		334,146			349,546
Non-controlling interests		60,094			60,839
Total equity		394,240			410,385
Total liabilities and equity		$	910,875		$	892,512

 

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 AND SIX MONTHS ENDED JUNE 30, 2012 and 2013

(Unaudited)

(Dollars in thousands, except per share amounts)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2012			2013			2012			2013
REVENUE:
U.S. wireless:
Retail		$	84,002		$	80,733		$	170,686		$	162,015
Wholesale		51,553			42,030			98,937			82,332
International wireless		20,271			21,837			39,171			43,267
Wireline		21,074			20,877			42,804			41,441
Equipment and other		8,596			9,595			16,985			18,885
Total revenue		185,496			175,072			368,583			347,940
OPERATING EXPENSES (excluding depreciation and amortization unless otherwise indicated):
Termination and access fees		38,994			32,857			79,536			67,093
Engineering and operations		22,469			21,781			44,434			43,932
Sales and marketing		31,026			28,612			63,031			58,114
Equipment expense		22,393			24,384			43,085			48,941
General and administrative		20,966			21,537			43,690			40,683
Transaction-related charges		—			310			5			1,092
Depreciation and amortization		26,582			25,454			53,606			51,255
Gain on disposition of long lived asset		—			—			—			(1,076		)
Total operating expenses		162,430			154,935			327,387			310,034
Income from operations		23,066			20,137			41,196			37,906
OTHER INCOME (EXPENSE):
Interest expense		(3,998		)	(2,814		)	(7,968		)	(5,174		)
Interest income		94			85			186			172
Equity in earnings of an unconsolidated affiliate		930			394			2,331			976
Other income (expense), net		(346		)	334			(282		)	536
Other income (expense), net		(3,320		)	(2,001		)	(5,733		)	(3,490		)
INCOME BEFORE INCOME TAXES		19,746			18,136			35,463			34,416
Income tax expense		7,979			6,715			14,759			13,077
NET INCOME		11,767			11,421			20,704			21,339
Net income attributable to non-controlling interests, net of tax of $0.5 million for the three months ended June 30, 2012 and 2013, and $1.1 million and $1.2 million for the six months ended June 30, 2012 and 2013, respectively		(1,237		)	(2,564		)	(853		)	(3,706		)
NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS		$	10,530		$	8,857		$	19,851		$	17,633
NET INCOME PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS
Basic		$	0.68		$	0.56		$	1.28		$	1.13
Diluted		$	0.67		$	0.56		$	1.27		$	1.12
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		15,535			15,706			15,495			15,647
Diluted		15,609			15,821			15,581			15,756
DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK		$	0.23		$	0.25		$	0.46		$	0.50

 

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 SIX MONTHS ENDED JUNE 30, 2012 AND 2013

(Unaudited)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2012			2013
Net income		$	20,704		$	21,339
Other comprehensive income:
Unrealized gain on interest rate swap, net of tax of $0.1 million and $2.2 million, respectively		149			3,265
Other comprehensive income, net of tax		149			3,265
Comprehensive income		20,853			24,604
Less: Comprehensive income attributable to non-controlling interests		(853		)	(3,706		)
Comprehensive income attributable to Atlantic Tele-Network, Inc.		$	20,000		$	20,898

 

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, 2012 AND 2013

(Unaudited)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2012			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	20,704		$	21,339
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		53,606			51,255
Provision for doubtful accounts		6,325			5,110
Amortization of debt discount and debt issuance costs		1,747			631
Stock-based compensation		1,908			2,071
Deferred income taxes		108			—
Equity in earnings of an unconsolidated affiliate		(2,331		)	(976		)
Gain on disposition of long-lived assets		—			(1,076		)
Changes in operating assets and liabilities:
Accounts receivable		(10,225		)	(7,169		)
Materials and supplies, prepayments, and other current assets		(3,401		)	(9,124		)
Income tax receivable		11,545			—
Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities		(5,054		)	(1,271		)
Accrued taxes		9,156			(24,723		)
Other		(4,480		)	(632		)
Net cash provided by operating activities		79,608			35,435
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(32,272		)	(52,183		)
Proceeds from disposition of long-lived assets		—			1,500
Net cash used in investing activities		(32,272		)	(50,683		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing under term loan		275,000			—
Proceeds from borrowings under revolver loan		46,378			—
Principal repayments of term loan		(252,953		)	(3,920		)
Principal repayments of revolver loan		(74,534		)	—
Proceeds from stock option exercises		946			1,232
Dividends paid on common stock		(7,119		)	(3,919		)
Distributions to non-controlling interests		(929		)	(2,562		)
Payments of debt issuance costs		(3,564		)	(12		)
Repurchase of non-controlling interests		(80		)	—
Investments made by non-controlling interests		805			135
Purchase of common stock		(184		)	(915		)
Net cash provided by (used in) financing activities		(16,234		)	(9,961		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		31,102			(25,209		)
CASH AND CASH EQUIVALENTS, beginning of the period		48,735			136,647
CASH AND CASH EQUIVALENTS, end of the period		$	79,837		$	111,438

 

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, local and selected international wireless carriers in rural markets located principally in the Southwest and Midwest United States. The Company also offers wireless voice and data services to retail customers in Bermuda, Guyana, the Caribbean and smaller markets in 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 Vermont and New York State.  In addition, the Company offers wholesale long-distance voice services to telecommunications carriers.

 

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 June 30, 2013:

 

Services		Segment		Markets		Tradenames
Wireless		U.S. Wireless		United States (rural markets)		Alltel, Commnet, 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 Condensed Consolidated Financial Statements.

 

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 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 2012 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.

 

Certain revisions to correct profit and loss classifications have been made in the prior period financial statements. The changes match the elimination of income with expenses for inter-company shared services and align subsidiary accounting practices for bad debt expense presentation. The changes were not material to prior periods and did not impact operating income. The aggregate impact of the changes included a $0.2 million and $0.4 million adjustment from wireline revenue to termination and access fees and an increase of engineering and operations expense of $0.8 million and $1.6 million with a corresponding decrease in general and administrative expense for each of the three and six month periods ended June 30, 2012, respectively.

 

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Recent Accounting Pronouncements

 

In February 2013, the FASB issued new guidance which requires companies to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. This new guidance is effective for fiscal periods beginning after December 15, 2012.  The adoption of the new guidance did not have an impact on the Company’s consolidated balance sheet, income statement or cash flows.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force),” which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a company does not have: (i) a net operating loss carryforward; (ii) a similar tax loss; or (iii) a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2013 and should be applied on a prospective basis. The Company does not expect that the adoption of this authoritative guidance will have a material impact on our consolidated financial statements.

 

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.

 

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4.  PENDING SALE OF U.S. RETAIL WIRELESS BUSINESS

 

On January 21, 2013, the Company and a subsidiary entered into a Purchase Agreement with AT&T Mobility LLC (“AT&T”) to sell certain of the wireless assets used in the Company’s Alltel business (the “Alltel Sale”). Under the terms of the agreement, AT&T will purchase the operations in an all-cash transaction valued at approximately $780 million. For the three and six months ended June 30, 2013, the Alltel business constituted approximately $103.4 million and $211.5 million, respectively, or 59% and 61%, respectively, of the Company’s consolidated revenues and $3.8 million and $9.1 million, respectively, or 19% and 24%, respectively, of the Company’s consolidated operating income. Although the consummation of the Alltel Sale is subject to customary closing conditions, including approval of the Federal Communications Commission, the required waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976 has expired and the Company anticipates completing the transaction in the second half of 2013. Since the Company’s application for FCC approval is still pending, the Company has reported the Alltel results in continuing operations.

 

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 certificates of deposit 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, 2012 and June 30, 2013 are summarized as follows (in thousands):

 

		December 31, 2012
Description		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Total
Certificates of deposit		$	—		$	363		$	363
Money market funds		1,755			—			1,755
Total assets measured at fair value		$	1,755		$	363		$	2,118
Interest rate derivative (Note 7)		$	—		$	11,142		$	11,142
Total liabilities measured at fair value		$	—		$	11,142		$	11,142

 

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		June 30, 2013
Description		Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Total
Certificates of deposit		$	—		$	363		$	363
Money market funds		1,927			—			1,927
Total assets measured at fair value		$	1,927		$	363		$	2,290
Interest rate derivative (Note 7)		$	—		$	5,701		$	5,701
Total liabilities measured at fair value		$	—		$	5,701		$	5,701

 

Certificate of Deposit

 

As of December 31, 2012 and June 30, 2013, this asset class consisted of a time deposit at a financial institution denominated in U.S. dollars. The asset class is classified within Level 2 of the fair value hierarchy because the fair value was based on observable market data.

 

Money Market Funds

 

As of December 31, 2012 and June 30, 2013, this asset class consisted of 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 December 31, 2012 and June 30, 2013.  The Company did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the six months ended June 30, 2013.

 

6.  LONG-TERM DEBT

 

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

 

		December 31, 2012			June 30, 2013
Notes payable - Bank
Term loans		$	268,000		$	264,500
Revolver loan		—			—
Note Payable — Other		4,072			3,716
Total outstanding debt		272,072			268,216
Less: current portion		(15,680		)	(19,600		)
Total long-term debt		256,392			248,616
Less: debt discount		(5,492		)	(4,984		)
Net carrying amount		$	250,900		$	243,632

 

Loan Facilities—Bank

 

On May 18, 2012, the Company amended and restated its existing credit facility with CoBank, ACB (the “Amended Credit Facility”) providing for $275.0 million in two 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 $100.0 million, subject to lender approval.

 

On October 29, 2012, the Company further amended its Amended Credit Facility to provide for an additional letter of credit sub-facility to its revolver loan, to be available for issuance in connection with the Company’s Mobility Fund Grant obligations. Under the amendment, the Company has the ability to use up to $55 million of its revolving credit facility for the issuance of letters of credit and currently has approximately $29.9 million of such letters of credit outstanding which will accrue a fee at a rate of 1.75% per annum on the outstanding amounts.  As of June 30, 2013, there were no draw downs against these letters of credit.

 

The term loan A-1 is $125 million and matures on June 30, 2017 (the “Term Loan A-1”). The term loan A-2 is $150 million and matures on June 30, 2019 (the “Term Loan A-2” and collectively with the Term Loan A-1, the “Term Loans”). Each of the Term Loans require certain quarterly repayment obligations. The revolver loan matures on June 30, 2017. The Company may prepay the Amended Credit Facility at any time without premium or penalty, other than customary fees for the breakage of London Interbank Offered Rate (LIBOR) loans.

 

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Amounts borrowed under the Term Loan A-1 and the revolver loan bear interest at a rate equal to, at the Company’s option, either (i) LIBOR plus an applicable margin ranging between 2.00% to 3.50% or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.50% (or, in the case of amounts borrowed under the swingline sub-facility, an applicable margin ranging from 0.50% to 2.00%). Amounts borrowed under the Term Loan A-2 bear interest at a rate equal to, at the Company’s option, either (i) the LIBOR plus an applicable margin ranging between 2.50% to 4.00% or (ii) a base rate plus an applicable margin ranging from 1.50% to 3.00%. The base rate is equal to the higher of (i) 1.50% plus the higher of (x) the one-week LIBOR and (y) the one-month LIBOR; and (ii) the prime rate (as defined in the Amended Credit Facility). The applicable margin is determined based on the ratio of the Company’s indebtedness (as defined in the Amended Credit Facility) to its EBITDA (as defined in the Amended Credit Facility).

 

Certain of the Company’s domestic subsidiaries, including our principal operating subsidiaries, are guarantors of the Company’s obligations under the Credit Agreement. Further, the Company’s obligations are secured by (i) a first priority, perfected lien on substantially all the property and assets of the Company and that of the guarantor subsidiaries, and (ii) a pledge of 100% of the Company’s equity interests in certain domestic subsidiaries and up to 65% of the equity interests outstanding of certain foreign subsidiaries, in each case, including the Company’s principal operating subsidiaries.

 

Borrowings as of June 30, 2013, after considering the effect of the interest rate swap agreements as described in Note 7, bore a weighted-average interest rate of 4.39%.  Availability under the revolver loan, net of outstanding letters of credit of $29.9 million, was $70.1 million as of June, 2013.

 

Under the terms of the Amended Credit Facility, the Company must also pay a fee ranging from 0.25% to 0.50% of the average daily unused portion of the revolver loan over each calendar quarter, in which the fee is payable in arrears on the last day of each calendar quarter.

 

The Amended 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 Amended Credit Facility contains financial covenants by the Company that (i) impose a maximum leverage ratio of indebtedness to EBITDA, (ii) require a minimum debt service ratio of EBITDA to principal, interest and taxes payments and (iii) require a minimum ratio of equity to consolidated assets. As of June 30, 2013, the Company was in compliance with all of the financial covenants of the Amended Credit Facility.

 

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.  As of June 30, 2013 the balance of the term loan was $3.7 million. This term loan was repaid in full during July 2013.

 

The Company believes that the carrying value of its debt approximates fair value which was based on quoted market prices and falls within Level 2 of the fair value measurement hierarchy. A level 2 hierarchy is applied based on level of trade activity associated with the Company’s debt.

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

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 $140.5 million as of June 30, 2013.

 

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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 June 30, 2014, the Company estimates that an additional $3.8 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 instruments as well as its classification on the consolidated balance sheet as of December 31, 2012 and June 30, 2013 (in thousands):

 

		Liability Derivatives
				Fair Value as of
		Balance Sheet Location		December 31, 2012			June 30, 2013
Derivatives designated as hedging instruments:
Interest Rate Swaps		Other liabilities		$	11,142		$	5,701
Total derivatives designated as hedging instruments				$	11,142		$	5,701

 

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three and six months ended June 30, 2012 and 2013 (in thousands):

 

Three Months Ended June 30,		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)
2012		Interest Rate Swap		$	(144	)	Interest expense		$	1,033
2013		Interest Rate Swap		4,373			Interest expense		1,039

 

Six Months Ended June 30,		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)
2012		Interest Rate Swap		$	301		Interest expense		$	(2,056	)
2013		Interest Rate Swap		5,441			Interest expense		(2,072		)

 

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 June 30, 2013, the fair value of the interest rate swaps liability position related to these agreements was $5.7 million. As of June 30, 2013, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2013, it would have been required to settle its obligations under these agreements at their termination values of $5.7 million.

 

8.  RECONCILIATION OF TOTAL EQUITY

 

Total equity was as follows (in thousands):

 

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		Six Months Ended June 30,
		2012									2013
		Atlantic Tele- Network, Inc.			Non-Controlling Interests			Total Equity			Atlantic Tele- Network, Inc.			Non-Controlling Interests			Total Equity
Equity, beginning of period		$	294,266		$	58,264		$	352,530		$	334,146		$	60,094		$	394,240
Stock-based compensation		1,908			—			1,908			2,071			—			2,071
Comprehensive income:
Net income		19,851			853			20,704			17,633			3,706			21,339
Other comprehensive income(loss)-Gain (loss) on interest rate swap (net of tax)		149			—			149			3,265			—			3,265
Total comprehensive income		20,000			853			20,853			20,898			3,706			24,604
Issuance of common stock upon exercise of stock options		946			—			946			3,955			—			3,955
Dividends declared on common stock		(7,119		)	—			(7,119		)	(7,884		)	—			(7,884		)
Distributions to non-controlling interests		—			(929		)	(929		)	—			(3,096		)	(3,096		)
Investments made by minority shareholders		—			805			805			—			135			135
Repurchase of non-controlling interests		—			(80		)	(80		)	—			—			—
Purchase of common shares		(184		)	—			(184		)	(3,640		)	—			(3,640		)
Equity, end of period		$	309,817		$	58,913		$	368,730		$	349,546		$	60,839		$	410,385

 

Changes in accumulated other comprehensive loss, by component, were as follows (in thousands):

 

		Interest Rate Swap Agreements			Projected Pension Benefit Obligation			Translation Adjustment			Total
Balance at December 31, 2012		$	(6,959	)	$	(1,318	)	$	(20	)	$	(8,297	)
Other comprehensive income before reclassifications, net of taxes of $2.2 million (1)		3,265			—			—			3,265
Balance at June 30, 2013		$	(3,694	)	$	(1,318	)	$	(20	)	$	(5,032	)

(1) Includes a reclassification to interest expense of $2.1 million, net of taxes.

 

9.  NET INCOME PER SHARE

 

For the three and six months ended June 30, 2012 and 2013, 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):

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2013		2012		2013
Basic weighted-average common shares outstanding		15,535		15,706		15,495		15,647
Stock options		74		115		86		109
Diluted weighted-average common shares outstanding		15,609		15,821		15,581		15,756

 

The above calculations for the three months ended June 30, 2012 and 2013 do not include 381,000 and 60,000 shares, respectively, related to certain stock options because the effects of such were anti-dilutive. For the six months ended June 30, 2012 and 2013, the calculation does not include 353,000 and 153,000 shares, respectively, related to certain stock options because the effect of such options was 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 its assets located in Guyana, iii) Island Wireless, which generates a majority of its revenues in and has a majority of its assets located in Bermuda and which also generates revenues in and has assets located in 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):

 

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		For the Three Months Ended June 30, 2012
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	84,002		$	—		$	—		$	—		$	—		$	84,002
Wholesale		51,553			—			—			—			—			51,553
International Wireless		—			6,705			13,566			—			—			20,271
Wireline		154			16,212			—			4,708			—			21,074
Equipment and Other		6,774			524			1,245			53			—			8,596
Total Revenue		142,483			23,441			14,811			4,761			—			185,496
Depreciation and amortization		18,324			4,490			2,783			693			292			26,582
Non-cash stock-based compensation		58			—			—			—			755			813
Operating income (loss)		23,978			4,141			279			(666		)	(4,666		)	23,066

 

		For the Six Months Ended June 30, 2012
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	170,686		$	—		$	—		$	—		$	—		$	170,686
Wholesale		98,937			—			—			—			—			98,937
International Wireless		—			13,052			26,119			—			—			39,171
Wireline		297			33,003			—			9,504			—			42,804
Equipment and Other		13,445			957			2,496			87			—			16,985
Total Revenue		283,365			47,012			28,615			9,591			—			368,583
Depreciation and amortization		37,026			9,017			5,569			1,438			556			53,606
Non-cash stock-based compensation		116			—			—			—			1,792			1,908
Operating income (loss)		42,900			10,377			(1,362		)	(1,089		)	(9,630		)	41,196

 

		For the Three Months Ended June 30, 2013
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	80,733		$	—		$	—		$	—		$	—		$	80,733
Wholesale		42,030			—			—			—			—			42,030
International Wireless		—			6,530			15,307			—			—			21,837
Wireline		152			15,170			—			6,738			(1,183		)	20,877
Equipment and Other		7,375			508			1,655			57			—			9,595
Total Revenue		130,290			22,208			16,962			6,795			(1,183		)	175,072
Depreciation and amortization		17,170			4,535			2,560			794			395			25,454
Non-cash stock-based compensation		60			—			—			—			1,166			1,226
Operating income (loss)		17,250			6,235			2,301			(124		)	(5,525		)	20,137

 

		For the Six Months Ended June 30, 2013
		U.S. Wireless			International Integrated Telephony			Island Wireless			U.S. Wireline			Reconciling Items			Consolidated
Revenue
U.S. Wireless:
Retail		$	162,015		$	—		$	—		$	—		$	—		$	162,015
Wholesale		82,332			—			—			—			—			82,332
International Wireless		—			13,284			29,983			—			—			43,267
Wireline		304			30,853			—			13,319			(3,035		)	41,441
Equipment and Other		15,142			763			2,873			107			—			18,885
Total Revenue		259,793			44,900			32,856			13,426			(3,035		)	347,940
Depreciation and amortization		34,985			8,925			5,155			1,436			754			51,255
Non-cash stock-based compensation		99			—			—			—			1,972			2,071
Operating income (loss)		32,267			12,568			3,935			(532		)	(10,332		)	37,906

 

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