ATN International, Inc. - Quarter Report: 2016 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

For the quarterly period ended June 30, 2016

 

OR

 

 

For the transition period from           to             

 

Commission File Number 001-12593

 

 

ATN INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

500 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  ☒  No  ☐

 

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  ☒  No  ☐

 

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  ☐  No  ☒

 

As of August 9, 2016, the registrant had outstanding 16,151,535 shares of its common stock ($.01 par value).

 

 

 

ATN INTERNATIONAL, INC.

FORM 10-Q

 

Quarter Ended June 30, 2016

 

 

 

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 regulatory matters; changes to governmental regulations and laws affecting our business; 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; our recent acquisitions; 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, revenues, and the future growth and retention of our subscriber base and consumer demand for solar power; (2) government regulation of our businesses, which may impact our FCC and other telecommunications licenses or our renewables business; (3) economic, political and other risks facing our operations, including in various jurisdictions outside the United States where we have operations; (4) our ability to maintain favorable roaming arrangements; (5) our ability to efficiently and cost-effectively upgrade our networks and IT platforms to address  rapid and significant technological changes in the telecommunications industry; (6) the loss of or an inability to recruit skilled personnel in our various jurisdictions, including key members of management; (7) our ability to find investment or acquisition or disposition opportunities that fit our strategic goals for the Company; (8) increased competition; (9) our ability to operate in the renewable energy industry; (10) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (11) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (12) the occurrence of weather events and natural catastrophes; (13) our continued access to capital and credit markets; (14) our ability to integrate our acquired businesses; (15) our ability to realize the value that we believe exists in our businesses; and (16) our ability to receive requisite regulatory consents and approvals and satisfy other conditions needed to complete our pending sale. 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 in Item 1A of this Report under the caption “Risk Factors” and under Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016 and of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the SEC on May 10, 2016  and the other reports we file from time to time with the SEC.  The Company undertakes no obligation and has no intention 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 ATN International, Inc. and its subsidiaries. This Report contains trademarks, service marks and trade names that are the property of, or licensed by, ATN, and its subsidiaries.

 

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

 

 

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

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

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 and 2015

(Unaudited)

(In thousands, except per share amounts)

 

 

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

 

 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Unaudited)

(In thousands)

 

 

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

 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30 , 2016 AND 2015

(Unaudited)

(In thousands)

 

 

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

 

 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.ORGANIZATION AND BUSINESS OPERATIONS

 

The Company is a holding company that, through its operating subsidiaries, (i) provides wireless and wireline telecommunications services in North America, Bermuda and the Caribbean, (ii) develops, owns and operates commercial distributed generation solar power systems in the United States and India, and (iii) owns and operates terrestrial and submarine fiber optic transport systems in the United States and the Caribbean, respectively.

 

The Company offers the following principal services:

 

 

 

 

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, 2016:

 

 

The Company actively evaluates potential acquisitions, investment opportunities and other strategic transactions, both domestic and international, that meet its return on investment and other criteria. 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 subsidiaries are eliminated in consolidation.

To be consistent with how management allocates resources and assesses the performance of its business operations in 2016, the Company updated its reportable operating segments to consist of the following: i) U.S. Telecom, consisting of the Company’s former U.S. Wireless and U.S. Wireline segments, ii) International Telecom, consisting of the Company’s former Island Wireless and International Integrated Telephony segments, and iii) Renewable Energy, consisting of its former Renewable Energy segment.  The prior period segment information has been recast to conform to the current year’s segment presentation.

 

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 2015 Annual Report on Form 10-K.

 

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 reclassifications have been made in the prior period financial statements to conform the Company’s consolidated income statements to how management analyzes its operations in the current period.  The changes did not impact operating income.  For the three months ended June 30, 2015 the aggregate impact of the changes included an increase to termination and access fees of $0.1 million, an increase to engineering and operations expenses of $0.3 million, a decrease to sales and marketing expenses of $0.2 million and a decrease to general and administrative expenses of $0.2 million. For the six months ended June 30, 2015 the aggregate impact of the changes included an increase to termination and access fees of $0.2 million, an increase to engineering and operations expenses of $0.4 million, a decrease to sales and marketing expenses of $0.3 million and a decrease to general and administrative expenses of $0.3 million.

 

During the six months ended June 30, 2016, the Company’s other assets increased primarily due to a deposit to purchase spectrum licenses of $10.9 million, a $2.0 million purchase of securities in an unaffiliated entity, and $0.9 of loan commitment fees related to the Innovative Transaction.

 

The Company’s effective tax rates for the three months ended June 30, 2016 and 2015 were 278.2% and 46.4%, respectively.  The Company’s effective tax rates for the six months ended June 30, 2016 and 2015 were 46.0% and 47.0%, respectively.  The effective tax rate for the three months ended June 30, 2016 was impacted by the following items: (i) certain transactional charges incurred in connection with our recent acquisitions that had no tax benefit, (ii) an impairment charge to write down the value of assets related to our U.S. Wireline business, (iii) the cumulative rate impact resulting from a change to the annual forecasted rate, applied against a lower Q2 2016 pretax book income, and  (iv) the mix of income generated among the jurisdictions in which we operate.  The effective tax rate for the three months ended June 30, 2015 was impacted by the following items:  (i) the $19.9 million loss on deconsolidation within its International Telecom business that had no tax benefit and (ii) the mix of income generated among the jurisdictions in which we operate.  The effective tax rate for the six months ended June 30, 2016 was impacted by the following items: (i) certain transactional charges incurred in connection with our recent acquisitions that had no tax benefit, (ii) an impairment charge to write down the value of assets related to our U.S. Wireline business, and (iii) the mix of income generated among the jurisdictions in which we operate. The effective tax rate for the six months ended June 30, 2015 was impacted by the following items:  (i) the $19.9 million loss on deconsolidation within its International Telecom business that had no tax benefit and (ii) the mix of income generated among the jurisdictions in which we operate. 

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which provides a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. On July 9, 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard is now effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.   The Company is currently evaluating the adoption method options and the impact of the new guidance on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which amends the presentation of debt issuance costs on the consolidated balance sheet. Under the new guidance, debt issuance costs are presented as a direct deduction from the carrying amount of the debt liability rather than as an asset. The Company adopted ASU 2015-03 on January 1, 2016 and has determined that its adoption did not have a material impact on its consolidated financial statements and related disclosures.

 

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes software and how to account for that software license.  The new guidance does not change the accounting for a customer’s accounting for service contracts.  The standard is effective beginning January 1, 2017, with early adoption permitted, and may be applied prospectively or retrospectively.  The Company does not expect ASU 2015-05 to have a material impact on its consolidated financial position, results of operations or cash flows. 

   

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, which provides updated guidance related to simplifying the accounting for measurement period adjustments related to business combinations.  The amended guidance eliminates the requirement to retrospectively account for adjustments made during the measurement period. The standard was adopted January 1, 2016, and did not have a material impact on its consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which provides comprehensive lease accounting guidance.  The standard requires entities to recognize lease assets and liabilities on the balance sheet as well as disclosure of key information about leasing arrangements.   ASU 2016-02 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its 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 business combinations, fair value of indefinite-lived intangible assets, goodwill and income taxes. Actual results could differ significantly from those estimates.

 

4. ACQUISITIONS

 

Completed Acquisitions

 

Vibrant Energy

 

On April 7, 2016, the Company completed its acquisition of a solar power development portfolio in India from Armstrong Energy Global Limited (“Armstrong”), a well-known developer, builder, and owner of solar farms (the “Vibrant Energy Acquisition”). The business operates under the name Vibrant Energy.  The Company also retained several Armstrong employees in the UK and India who are employed by the Company to oversee the development, construction and operation of the India solar projects. The projects to be developed initially are located in the states of Andhra Pradesh and Telangana and are based on a commercial and industrial business model, similar to the Company’s existing renewable energy operations in the United States.  As of April 7, 2016, the Company began consolidating the results of Vibrant Energy in its financial statements within its Renewable Energy segment.

 

The Vibrant Energy Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”).  The total purchase consideration of $6.2 million cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.  The table below represents the preliminary allocation of the consideration transferred to the net assets of Vibrant Energy based on their acquisition date fair values (in thousands):

 

 

  The consideration transferred includes $3.5 million paid and $2.7 million to be paid, which relates to the passage of time and achievement of initial production milestones which are considered probable.  The acquired property, plant and equipment is comprise of solar equipment and the accounts payable and accrued liabilities consists mainly of amounts payable for certain asset purchases.  The fair value of the property, plant, and equipment was based on recent acquisition costs for the assets, given their recent purchase dates from third parties.  The goodwill in the transaction relates to the assembled workforce of the business acquired.

 

For the six months ended June 30, 2016 the Vibrant Energy Acquisition accounted for $0.1 million of the Company’s revenue.  The Company incurred $10.2 million of transaction related charges pertaining to legal, accounting and consulting services associated with the transaction, of which $9.0 million were incurred during the six months ended June 30, 2016.  The pro forma financial information assuming the acquisition had occurred as of the beginning of the calendar year prior to the year of acquisition, as well as the revenues and earnings generated during the current year, were not material for disclosure purposes.      

 

KeyTech Limited

 

On May 3, 2016, the Company completed its acquisition of a controlling interest in KeyTech Limited  (“KeyTech”), a publicly held Bermuda company listed on the Bermuda Stock Exchange (“BSX”) that provides broadband and cable television services and other telecommunications services to residential and enterprise customers

under the “Logic” name in Bermuda and the Cayman Islands (the “KeyTech Transaction”). KeyTech also owned a minority interest of approximately 43% in the Company’s consolidated subsidiary, Bermuda Digital Communications Ltd. (“BDC”), which provides wireless services in Bermuda under the “CellOne” name. As part of the transaction, the Company contributed its ownership interest of approximately 43% in BDC and $41.6 million in cash in exchange for a 51% ownership interest in KeyTech. As part of the transaction, BDC was merged with and into a company within the KeyTech group and the approximate 15% interest in BDC held, in the aggregate, by BDC’s minority shareholders was converted into the right to receive common shares in KeyTech. Following the transaction, BDC is now wholly owned by KeyTech, and KeyTech continues to be listed on the BSX. A portion of the cash proceeds that KeyTech received upon closing was used to fund a one-time special dividend to KeyTech's pre-transaction shareholders and to retire KeyTech’ s subordinated debt. On May 3, 2016, the Company began consolidating the results of KeyTech within its financial statements in its International Telecom segment.

 

The KeyTech Transaction was accounted for as a business combination of a controlling interest in KeyTech in accordance with ASC 805 and the acquisition of an incremental ownership interest in BDC in accordance with ASC 810, Consolidation.  The total purchase consideration of $41.6 million of cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.  The table below represents the preliminary allocation of the consideration transferred to the net assets of KeyTech and incremental interest acquired in BDC based on their acquisition date fair values (in thousands):

 

 

The acquired property, plant and equipment is comprised of telecommunication equipment located in Bermuda and the Cayman Islands.   The property, plant and equipment was valued using the income and cost approaches.  Cash flows were discounted at approximately 15% rate to determine fair value under the income approach.  The property, plant and equipment have useful lives ranging from 3 to 18 years and the customer relationships acquired have average useful lives of 9 to 12 years.  The fair value of the non-controlling interest was determined using the income approach and a discount rate of approximately 15%.  The acquired receivables consist of trade receivables incurred in the ordinary course of business.  The Company currently expects to collect the full amount of the receivables.

 

The purchase price and resulting bargain purchase gain are the result of the market conditions and competitive environment in which KeyTech operates along with the Company's strategic position and resources in those same markets.  Both companies realized that their combined resources would accelerate the transformation of both companies to better serve customers in these markets.  The bargain purchase gain is included in operating income in the accompanying income statement for the three and six months ended June 30, 2016. 

 

The Company’s statement of operations for the six months ended June 30, 2016 includes $14.0 million of revenue and $3.0 million of income before taxes attributable to the KeyTech Transaction.  The Company incurred $4.1 million of transaction related charges pertaining to legal, accounting and consulting services associated with the transaction, of which $3.2 million were incurred during the six months ended June 30, 2016.

 

The following table reflects unaudited pro forma operating results of the Company for the three and six month periods ended June 30, 2016 and June 30, 2015 assuming that the KeyTech Transaction occurred at the beginning of each period presented.  The pro forma amounts adjust KeyTech’s results to reflect the depreciation and amortization that would have been recorded assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2015.  Also, KeyTech’s results are adjusted to reflect the retirement of $24.7 million of debt as of January 1, 2015.  ATN’s results were adjusted to reflect ATN’s incremental ownership in BDC.  Amounts are presented in thousands, except per share data:

 

 

Acquisition Completed Subsequent to Quarter End

 

Innovative

 

On July 1, 2016, the Company completed its acquisition of all of the membership interests of Caribbean Asset Holdings LLC, the holding company for the Innovative group of companies operating cable television, Internet, wireless and landline services in the U.S. Virgin Islands, British Virgin Islands and St. Maarten (“Innovative”), from the National Rural Utilities Cooperative Finance Corporation (“CFC”). The Company acquired the Innovative operations for a purchase price of approximately $145 million, subject to certain purchase price adjustments (the “Innovative Transaction”).  In connection with the transaction, the Company financed $60 million of the purchase price with a loan from an affiliate of CFC, the Rural Telephone Finance Cooperative (“RTFC”) on the terms and conditions of a Loan Agreement by and among RTFC, CAH and ATN VI Holdings, LLC, the parent entity of CAH and a wholly-owned subsidiary of the Company.  The Company funded the remaining approximately $85.0 million of the purchase price in cash. Following the purchase, the Company’s current operations in the U.S. Virgin Islands under the “Choice” name will

be combined with Innovative to deliver residential and business subscribers a full range of telecommunications and media services.

 

Beginning July 1, 2016, the results of the Innovative Transaction will be included in the Company’s International Telecom segment.

 

5. LOSS ON DECONSOLIDATION OF SUBSIDIARY

 

During March 2015, the Company sold certain assets and liabilities of its Turks and Caicos business in its International Telecom segment.  As a result, the Company recorded a loss of approximately $19.9 million arising from the deconsolidation of non-controlling interests of $20.0 million and a gain of $0.1 million arising from an excess of sales proceeds over the carrying value of net assets disposed of.  The net loss on disposition is included within other income (expense) and does not relate to a strategic shift in the Company’s operations.  As a result, the subsidiary’s historical results and financial position are presented with continuing operations.

 

6. IMPAIRMENT OF LONG LIVED ASSETS AND GOODWILL

 

During June 2016, as a result of recent industry consolidation activities and a review of strategic alternatives for our U.S. Wireline business in the Northeast, the Company identified factors indicating the carrying amount of certain assets may not be recoverable.  More specifically, the factors included the competitive environment, recent industry consolidation, and the Company’s view of future opportunities in the market which began to evolve in the second quarter of 2016.  As a result of these factors, on August 4, 2016, the Company entered into a stock purchase agreement to sell a portion of its U.S. Wireline business.  The transaction is subject to certain regulatory approvals.  As a result of this transaction and the recent developments in the market, the Company determined that carrying value exceeded the fair value of certain assets.  Therefore, the Company recorded an impairment charge of $11.1 million, including $7.5 million related to goodwill, to reduce the carrying value of these assets to the estimated fair value.  The impairment charge is included in income from operations for the three months ended June 30, 2016.

 

7. 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:

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):

 

 

 

 

Certificate of Deposit

 

As of June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015, 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.

 

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments. 

The fair value of marketable securities is estimated using Level 2 inputs.  At June 30, 2016, the fair value of marketable securities was equal to its carrying amount of $2.0 million and is included in other assets on the condensed consolidated balance sheet.

The fair value of long-term debt is estimated using Level 2 inputs.  At June 30, 2016, the fair value, in thousands, of long-term debt, including the current portion, was equal to its carrying amount of $63.5 million.  At December 31, 2015, the fair value of the long-term debt, including the current portion, was equal to its carrying amount of $32.9 million.

 

8. LONG-TERM DEBT

 

On December 19, 2014, the Company amended and restated its then existing credit facility with CoBank, ACB and a syndicate of other lenders to provide for a $225 million revolving credit facility (the “Credit Facility”) that includes (i) up to $10 million under the Credit Facility for standby or trade letters of credit, (ii) up to $25 million under the Credit Facility for letters of credit that are necessary or desirable to qualify for disbursements from the FCC’s mobility fund and (iii) up to $10 million under a swingline sub-facility.

Amounts the Company may borrow under the Credit Facility bear interest at a rate equal to, at its option, either (i) the London Interbank Offered Rate (LIBOR) plus an applicable margin ranging between 1.50% to 1.75% or (ii) a base rate plus an applicable margin ranging from 0.50% to 0.75%.  Swingline loans will bear interest at the base rate plus the applicable margin for base rate loans.  The base rate is equal to the higher of (i) 1.00% plus the higher of (x) the one-week LIBOR and (y) the one-month LIBOR; (ii) the federal funds effective rate (as defined in the Credit Facility) plus 0.50% per annum; and (iii) the prime rate (as defined in the Credit Facility). The applicable margin is determined based on the ratio (as further defined in the Credit Facility) of the Company’s indebtedness to EBITDA. Under the terms of the Credit Facility, the Company must also pay a fee ranging from 0.175% to 0.250% of the average daily unused portion of the Credit Facility over each calendar quarter.

 

On January 11, 2016, the Company amended the Credit Facility (the “Amendment”) to provide for lender consent to, among other actions, (i) the contribution by the Company of all of its equity interests in ATN Bermuda Holdings, Ltd. to ATN Overseas Holdings, Ltd. in connection with the KeyTech Transaction, and subject to the closing of the KeyTech Transaction, a one-time, non-pro rata cash distribution by KeyTech in an aggregate amount not to exceed $13.0 million to certain of KeyTech’s shareholders; and (ii) the incurrence by certain subsidiaries of the Company of secured debt in an aggregate principal amount not to exceed $60.0 million in connection with the Company’s option to finance a portion of the Innovative Transaction. The Amendment increases the amount the Company is permitted to invest in “unrestricted” subsidiaries of the Company, which are not subject to the covenants of the Credit Facility, from $275.0 million to $400.0 million (as such increased amount shall be reduced from time to time by the aggregate amount of certain dividend payments to the Company’s stockholders).    The Amendment also provides for the incurrence by the Company of incremental term loan facilities, when combined with increases to revolving loan commitments under the Credit Facility, in an aggregate amount not to exceed $200.0 million, which facilities shall be subject to certain conditions, including pro forma compliance with the total net leverage ratio financial covenant under the Credit Facility.

The Credit Facility contains customary representations, warranties and covenants, including a financial covenant that imposes a maximum ratio of indebtedness to EBITDA as well as 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 a financial covenant by us that imposes a maximum ratio of indebtedness to EBITDA. As of June 30, 2016, the Company was in compliance with all of the financial covenants of the Credit Facility.

As of June 30, 2016, the Company had no borrowings under the Credit Facility and approximately $10.6 million of outstanding letters of credit.

Ahana Debt

In connection with the Ahana Acquisition on December 24, 2014, the Company assumed $38.9 million in long-term debt (the “Ahana Debt”).  The Ahana Debt includes multiple loan agreements with banks that bear interest at rates between 4.5% and 6.0 %, mature at various times between 2018 and 2023 and are secured by certain solar facilities.  Repayment of the Ahana Debt with the banks is made on a monthly basis until maturity.

 

The Ahana Debt also includes a loan from Public Service Electric & Gas (PSE&G).  The note payable to PSE&G bears interest at 11.3%, matures in 2027, and is secured by certain solar facilities.  Repayment of the Ahana Debt with PSE&G can be made in either cash or solar renewable energy credits (“SRECs”), at the Company’s discretion,

with the value of the SRECs being fixed at the time of the loan’s closing.  Historically, the Company has made all repayments of the note payable to PSE&G using SRECs.

 

As of June 30, 2016, $29.7 million of the Ahana Debt remained outstanding.

 

KeyTech Debt

In connection with the KeyTech Transaction on May 3, 2016, the Company assumed $35.4 million in debt (the “KeyTech Debt”).  The KeyTech Debt matures in 2021, bears interest of the three-month LIBOR plus a margin of 3.25%, and repayment is made quarterly until maturity.  The debt is secured by the property and assets of certain KeyTech subsidiaries. 

As of June 30, 2016, $33.8 million of the KeyTech Debt remained outstanding.

 

9. GOVERNMENT GRANTS

 

The Company has received funding from the U.S. Government and its agencies under Stimulus and Universal Services Fund programs.  These are generally designed to fund telecommunications infrastructure expansion into rural or underserved areas of the United States.  The fund programs are evaluated to determine if they represent funding related to capital expenditures (capital grants) or operating activities (income grants).

 

Phase I Mobility Fund Grants

 

As part of the Federal Communications Commission’s (“FCC”) reform of its Universal Service Fund (“USF”) program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households, the FCC created two new funds, including the Phase I Mobility Fund (“Mobility Fund”), a one-time award meant to support wireless coverage in underserved geographic areas in the United States. In August 2013 and October 2014, the Company received FCC final approvals  for $21.7 million and $2.4 million, respectively, of Mobility Fund support to its wholesale wireless business (the “Mobility Funds”), to expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the receipt of the Mobility Funds, the Company committed to comply with certain additional FCC construction and other requirements. A portion of these funds will be used to offset network capital costs and a portion is used to offset the costs of supporting the networks for a period of five years from the award date. In connection with the Company’s application for the Mobility Funds, the Company has issued approximately $10.6 million in letters of credit to the Universal Service Administrative Company (“USAC”) to secure these obligations. If the Company fails to comply with any of the terms and conditions upon which the Mobility Funds were granted, or if the Company loses eligibility for the Mobility Funds, USAC will be entitled to draw the entire amount of the letter of credit applicable to the affected project plus penalties and may disqualify the Company from the receipt of additional Mobility Fund support.

 

The Mobility Funds projects and their results are included within the Company’s U.S. Telecom segment. As of June 30, 2016, the Company had received approximately $8.1 million in Mobility Funds. Of these funds, $2.2 million was recorded as an offset to operating expenses, $5.8 million was recorded as an offset to the cost of the property, plant, and equipment associated with these projects and, consequentially, a reduction of future depreciation expense and the remaining $0.1 million of future operating costs is recorded within current liabilities in the Company’s consolidated balance sheet as of June 30, 2016. The balance sheet presentation is based on the timing of the expected usage of the funds which will reduce future operations expenses.

 

10. EQUITY

 

Stockholders’ equity was as follows (in thousands):

 

 

 

 

(1) During the six months ended June 30, 2016, the holder of a non-controlling interest in one of ATN’s U.S. Telecom subsidiaries contributed $21.7 million of cash to the subsidiary.  ATN maintained a controlling interest in the subsidiary both before and after the contribution.

 

 

 

 

 

 

11. NET INCOME (LOSS) PER SHARE

 

For the three and six months ended June 30, 2016 and 2015, outstanding stock options were the only potentially dilutive securities. The reconciliation from basic to diluted weighted average shares of common stock outstanding is as follows (in thousands):

 

 

The above calculation does not include approximately 105,000 shares and 5,000 shares related to certain stock options because the effects of such options were anti-dilutive during the three and six months ended June 30, 2016, respectively. There were no anti-dilutive options for the three months ended June 30, 2015 or the six months ended June 30, 2015.

 

12. SEGMENT REPORTING

 

For the three and six months ended June 30, 2015, the Company had five reportable segments for separate disclosure in accordance with the FASB’s authoritative guidance on disclosures about segments of an enterprise. Those five segments were: i) U.S. Wireless, which generated all of its revenues in and had all of its assets located in the United States, ii) International Integrated Telephony, which generated all of its revenues in and had all of its assets located in Guyana, iii) Island Wireless, which generated a majority of its revenues in, and had a majority of its assets located in, Bermuda and which also generated revenues in and had assets located in the U.S. Virgin Islands, Aruba and Turks and Caicos (through March 23, 2015),  iv) U.S. Wireline, which generated all of its revenues in and had all of its assets located in the United States, and v) Renewable Energy, which generated all of its revenues in and had all of its assets located in the United States.  The operating segments were managed separately because each offers different services and serves different markets. 

 

To be consistent with how management allocates resources and assesses the performance of its business operations in 2016, the Company updated its reportable operating segments to consist of the following: i) U.S. Telecom, consisting of the Company’s former U.S. Wireless and U.S. Wireline segments, ii) International Telecom, consisting of the Company’s former Island Wireless and International Integrated Telephony segments and the results of its KeyTech Transaction, and iii) Renewable Energy, consisting of the Company’s former Renewable Energy segment and the results of its Vibrant Energy Acquisition.  The prior period segment information has been recast to conform to the current year’s segment presentation.

 

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