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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 2008

OR

For the transition period from           to           

Commission File Number 0-191551

Atlantic Tele-Network, Inc.

(Exact name of registrant as specified in its charter)

10 Derby Square
Salem, MA 01970
(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 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 November 10, 2008, the registrant had outstanding 15,201,110 shares of its common stock ($.01 par value).

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ATLANTIC TELE-NETWORK, INC.

FORM 10-Q
Quarter Ended September 30, 2008

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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, the future financial performance and results of operations of ATN and its subsidiaries, including the relative contributions of Commnet, Sovernet and BDC; 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 realization of the benefits of these investments; and management’s plans and strategy for the future.  These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results.  Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1) significant political and regulatory risk facing our exclusive license to provide domestic local exchange and international long distance telephone services in Guyana; (2) any significant decline in the price or volume of international long distance calls to Guyana; (3) increased competition affecting our businesses; (4) the regulation of rates that GT&T may charge for local wireline telephone service; (5) significant tax disputes between GT&T and the Guyanese tax authorities; (6) the derivation of a significant portion of our U.S. wireless revenue from a small number of customers;  (7) our ability to maintain favorable roaming arrangements; (8) economic, political and other risks facing our foreign operations; (9) regulatory changes affecting our businesses; (10) rapid and significant technological changes in the telecommunications industry; (11) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (12) any loss of key members of management; (13) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (14) dependence of our wireless and wireline revenues on the reliability and performance of our network infrastructure; (15) the occurrence of severe weather and natural catastrophes; and (16) our ability to realize the value that we believe exists in businesses that we acquire. These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the forward-looking statements above are set forth more fully under Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”), which is on file with the SEC.  We undertake 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 “we,” “our,” “ours” and “us” refer to Atlantic Tele-Network, Inc. and its subsidiaries, unless the context indicates otherwise. ClearChoice™ is a service mark of one of our subsidiaries. This Report also contains other trademarks, service marks and trade names that are the property of others.

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

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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)

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

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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 and 2008

(Unaudited)

(Dollars in thousands, except per share amounts)

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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2008

(Unaudited)

(Dollars in thousands)

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

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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND BUSINESS OPERATIONS

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

·                    Guyana Telephone & Telegraph Company, Ltd. (“GT&T”), the national and international telephone company in the Republic of Guyana and the largest wireless service provider in that country. The Company has owned 80% of the stock of GT&T since January 1991.

·                     Commnet Wireless, LLC (“Commnet”), an owner and operator of wholesale wireless networks in rural areas of the United States. Commnet provides wireless voice and data communications roaming services primarily to national, regional and local wireless carriers. We acquired 95% of the equity of Commnet in September 2005 and the remaining 5% in January 2007.

·                    Bermuda Digital Communications, Ltd. (“BDC”), the largest wireless voice and data communications service provider in Bermuda, doing business under the name “Cellular One”. The Company acquired an equity interest in, and signed a management contract with, BDC in 1998.  On May 15, 2008, BDC completed a share repurchase of its common stock.  ATN did not tender any shares for repurchase, and, as a result of the transaction, increased its holdings from approximately 43% to approximately 58% of BDC’s outstanding common stock.  Prior to this increase in holdings, the Company accounted for its investment in BDC under the equity method and earnings from BDC did not appear in its income from operations, but were instead reflected in equity in earnings of unconsolidated affiliates.  Effective with the completion of that share repurchase, the Company began consolidating BDC’s balance sheet and results of operations. BDC also provides wireless services in Turks & Caicos through an investment made in the third quarter 2008.

·                    Sovernet, Inc. (“Sovernet”), a facilities-based integrated voice, broadband data communications and dial-up service provider in New England and New York State. Sovernet’s retail telecommunications services is delivered to business and residential customers in Vermont and New Hampshire.  Through an investment made in 2008, Sovernet also delivers wholesale transport services in New York State through ION. The Company has owned 96% of Sovernet since its acquisition in February 2006.

·                    Choice Communications, LLC (“Choice”), is a leading provider of fixed wireless broadband data, wireless digital television services and dial-up internet services to retail and business customers in the U.S. Virgin Islands. Choice is a wholly owned subsidiary of the Company.

ATN provides management, technical, financial, regulatory and marketing services for its subsidiaries and typically receives a management fee equal to approximately 3% to 6% of their respective revenues. Management fees from consolidated subsidiaries are eliminated in consolidation. Management fees from previously unconsolidated affiliates are included in “Other Income” in the accompanying statements of operations.

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 2007 Annual Report on Form 10-K.

Consolidation

The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and Commnet of Florida, LLC, which is consolidated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation on Accounting Research Bulletin No. 51 as revised in December 2003 since it was determined that the Company is the primary beneficiary of Commnet of Florida, LLC.

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Except for the Company’s investment in Commnet of Florida, LLC, the equity method of accounting is used for the Company’s investments in affiliated entities in which the Company has at least a 20% ownership but does not have management control. The Company accounts for investments of less than 20% for which the Company does not have the ability to exert significant influence over the operations by using the cost method of accounting.

Recent Accounting Pronouncements

In September 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP No. EITF 03-6-1”). Under the provisions of this standard, unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents are considered participating securities for purposes of calculating earnings per share. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. As our unvested awards of share-based payments’ rights to receive dividends or dividend equivalents are forfeitable, the adoption of FSP No. EITF 03-6-1 will not have an impact on our consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”), which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS 142. FSP 142-3 amends paragraph 11(d) of SFAS 142 to require an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. The FSP also requires the incremental disclosures for renewable intangible assets

FSP 142-3 is effective for financial statements for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Accordingly, FSP 142-3 would not serve as a basis to change the useful life of an intangible asset that was acquired prior to the effective date (January 1, 2009 for ATN). However, the incremental disclosure requirements described above would apply to all intangible assets, including those recognized in periods prior to the effective date of FSP 142-3. We are currently evaluating the impact that the adoption of FSP 142-3 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“SFAS 161”).  SFAS 161 amends and expands the disclosure requirements of Statement 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows.  SFAS 161 is effective for fiscal years beginning after November 15, 2008.  We do not expect that the adoption of SFAS 161 will have a material impact on our consolidated financial statements.

Effective January 1, 2008, we implemented Statement of Financial Accounting Standard No. 157, Fair Value Measurement (“SFAS 157”), for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FASB staff position No. FAS 157-2, Effective Date of FASB Statement No. 157, we have elected to defer implementation of SFAS 157 as it relates to all of our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are evaluating the impact, if any, this standard will have on our non-financial assets and liabilities. The adoption of SFAS 157 to our financial assets and liabilities and non-financial assets and liabilities that are re-measured and reported at fair value at least annually did not have a material impact on our consolidated financial results.

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Effective January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. Upon adoption, we did not elect the fair value option for any new items within the scope of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. SFAS 141R also establishes expanded disclosure requirements for business combinations. SFAS 141R is effective for us on January 1, 2009, and we will apply SFAS 141R prospectively to all business combinations subsequent to the effective date.  We are currently evaluating the impact that the adoption of SFAS 141R will have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling company’s balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that the adoption of SFAS 160 will have on our consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the 2007 statement of operations to conform to the 2008 presentation.  For the three months ended September 30, 2007, such reclassifications consisted of an increase to 2007 wireless revenue of $0.6 million; a decrease to 2007 local telephone and data revenue of $0.2 million; an increase to 2007 international long distance revenue of $0.7 million and an increase to 2007 termination and access fees expense of $1.1 million.  For the nine months ended September 30, 2007, such reclassifications consisted of an increase to 2007 wireless revenue of $1.9 million; a decrease to 2007 local telephone and data revenue of $0.9 million; an increase to 2007 international long distance revenue of $1.4 million and an increase to 2007 termination and access fees expense of $2.5 million.

3.  USE OF ESTIMATES

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

4.  ACQUISITIONS

During 2008, the Company completed the acquisitions of ION, and Islandcom Telecommunications and increased its ownership interest in BDC (collectively, the “2008 Acquisitions”).

Bermuda Digital Communications

On May 15, 2008, the Company’s equity interest in BDC increased from 43% to 58% as a result of BDC’s repurchase of $17.0 million of shares from other shareholders.  Prior to this increase in equity interest, the Company accounted for its investment in BDC under the equity method and earnings from BDC did not appear in its income from operations, but were instead reflected in equity in earnings of unconsolidated affiliates.  The Company began consolidating BDC’s balance sheet and results of operations from May 16, 2008, the date that we obtained control of BDC.

The transaction was accounted for using the purchase method and the $17.0 million of cash consideration, was allocated to the Company’s increased share of the assets acquired and liabilities assumed at their estimated fair values as of May 15, 2008.  The income approach was used to value each of these identifiable intangible assets which is an approach based upon the economic principle of anticipation in that the value of any property is the present value of the expected income that can be generated through ownership of that property.  Included in the allocation of the purchase price was $9.4 million of licenses, $0.9 million attributable to BDC’s relationships with its existing customers as of the date of acquisition and $6.0 million allocable to other acquired assets and liabilities at fair value. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed of $2.4 million has been recorded as

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goodwill. The value of the goodwill from this acquisition can be attributed to a number of business factors including, but not limited to, the reputation of BDC as a retail provider of wireless services as well as a network operator, BDC’s reputation for customer care, the skills and experience of its management and staff associated with the 2008 Acquisitions and the strategic position it holds in its marketplace.  The customer relationships will be amortized, on an accelerated basis, over the expected period during which their economic benefits are to be realized, which is expected to be ten years. For tax purposes, the goodwill and amortization of the customer relationships will not be deductible.

ION, LLC

On August 15, 2008, the Company, through its Sovernet subsidiary, completed its acquisition of 75% of the equity of ION, LLC (“ION”), an upstate New York provider of high capacity communications network transport services.  The acquisition of ION continues the Company’s strategy of providing high quality network services to underserved rural markets. Beginning with the acquisition date of August 15, 2008, the Company began consolidating ION’s balance sheet and the operating results of ION into its results of operations.

The transaction was accounted for using the purchase method and the $5.6 million of cash consideration was allocated to the Company’s share of the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The Company is in the process of completing a valuation of certain acquired tangible and intangible assets; thus, the allocation of the purchase price is preliminary as of September 30, 2008. Based upon the preliminary allocation, no goodwill or intangible assets have been recorded in connection with this transaction.

The results of ION are included in the Company’s “Integrated Telephony-Domestic” segment as reported in Note 11.

Islandcom Telecommunications

On September 1, 2008, the Company, through its BDC subsidiary, completed its acquisition of 42% of the equity of Islandcom Telecommunications (“Islandcom”), a provider of wireless telecommunication services in Turks & Caicos.  If current laws, which restrict foreign ownership of companies operating in Turks & Caicos, are changed, BDC will be able to increase its ownership in Islandcom from 42% to 76% through the exercise of a warrant received as a part of the acquisition.  The value of the warrant was determined based upon the estimated value of Islandcom’s shares and the likelihood that the current laws are changed.  The Company, through its majority representation on Islandcom’s board of directors exercises control and as a result, the Company has consolidated the balance sheet and operating results of Islandcom since the date of acquisition.

The transaction was accounted for using the purchase method and the $5.4 million of consideration was allocated to the Company’s share of the assets acquired and liabilities assumed at their estimated fair values as of the acquisitions date.  The preliminary allocation of the purchase price, as determined by management, included $6.4 million of telecommunications licenses.

Islandcom, which further expands the Company’s wireless networks into under-served markets, is included in the Company’s “Island Wireless” segment as reported in Note 11.

In accordance with current accounting standards, the goodwill and licenses will not be amortized and will be tested for impairment at least annually as required by SFAS No. 142, “Goodwill and Other Intangible Assets”.

The following table reflects unaudited pro forma results of operations of the Company for the three and nine months ended September 30, 2007 and 2008 assuming that the 2008 Acquisitions had occurred at the beginning of each period presented (in thousands, except per share data):

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5.  FAIR VALUE MEASUREMENTS

The following tables present information (in thousands) about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.  As of September 30, 2008, the Company did not have any level 3 assets or liabilities.

The fair value of the interest rate swap was determined using a pricing model predicated upon observable market inputs.  See Note 8.

6.  DEPOSIT FOR ACQUISITION OF SPECTRUM

During the first quarter of 2008, we were awarded the right to acquire, for $3.0 million, certain spectrum in connection with our participation in the FCC’s auction (FCC Auction No. 73) of 700 MHz spectrum being re-claimed by the FCC from the broadcast industry and sold by the FCC to wireless operators.  This amount is included in Other Assets in our Consolidated Balance Sheet as of September 30, 2008; it will be reclassified to Licenses, and considered a capital expenditure, upon the finalization of such award, expected to occur during the first quarter of 2009.

7.  CREDIT FACILITIES

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

2005 Loan Facility

On August 31, 2007, the Company, as borrower, amended and restated its credit agreement with CoBank, ACB and Banco Popular de Puerto Rico (the “2005 CoBank Credit Agreement”). The 2005 CoBank Credit Agreement provided a $50 million term loan (the “2005 Term Loan”) and a $20 million revolving credit facility (the “2005 Revolver Facility”, together with the 2005 Term Loan, the “2005 Credit Facility”). The 2005 Credit Facility was guaranteed by our Commnet and Sovernet subsidiaries and was collateralized by, among other things, a security interest in substantially all of the assets of and stock owned by ATN, Commnet and Sovernet. The 2005 Term Loan had principal repayments deferred until the maturity of the loan on October 31, 2010. Interest on the 2005 Term Loan was payable on a quarterly basis at a fixed annual interest rate of 5.85%, net of any patronage payments received by the Company from the bank. Amounts outstanding under the 2005 Revolver Facility (none as of September 30, 2008) accrued interest at a rate equal to (at the Company’s option): (i) LIBOR plus a margin ranging from 1.25% to 1.50% or (ii) a variable rate of interest as defined within the 2005 Revolver Facility plus 1%.

The 2005 CoBank Credit Agreement contained certain affirmative and negative covenants of ATN and its subsidiaries (including Commnet) that were typical for loan facilities of this type. Among other things, these covenants restricted ATN’s ability to

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incur additional debt in the future or to incur liens on its property. ATN also agreed to maintain certain financial ratios under the facilities, including a total leverage ratio (debt to EBITDA) of two to one or less; a debt service coverage ratio (EBITDA to debt service) of three to one or more; an equity to assets ratio of 0.4 to one or more; and a specified leverage ratio for Commnet of 5.00 to one or less.

2008 Loan Facility

On September 10, 2008, the Company, as borrower, entered into a credit agreement with CoBank, ACB and other lenders as referenced within the credit agreement (the “2008 CoBank Credit Agreement”).  The 2008 CoBank Credit Agreement replaced the 2005 Credit Agreement and provides a $75 million term loan (the “2008 Term Loan”) as well as a $75 million revolving credit facility (the “2008 Revolver Facility”, together with the 2008 Term Loan, the “2008 Credit Facility”).

The 2008 Term Loan matures on September 10, 2015 and requires quarterly repayments of principal of $0.2 million through June 30, 2013 and quarterly repayments of principal of $1.4 million from September 30, 2013 to June 30, 2015.  The remaining outstanding principal balance is to be repaid on September 10, 2015 when the 2008 Term Loan matures.  The 2008 Revolver Facility matures on September 10, 2014 and includes a $5 million letter of credit facility.  At September 30, 2008, no amounts have been drawn under the 2008 Revolver Facility.

All borrowings under the 2008 Credit Facility bear interest at a rate, selected by the Company from one of the options as defined within the agreement, plus a margin. Such interest rate options include i) a base rate, defined as the greater of the prime rate or the federal funds rate plus 0.5%, or ii) a LIBOR rate.  Margins for base rate borrowings range from 0% to 0.5%, depending upon the Company’s leverage ratio while margins for LIBOR borrowings range from 1.25% to 2% also depending upon the Company’s leverage ratio.  Borrowings as of September 30, 2008, including the interest rate swap agreement in Note 8, were bearing a weighted average interest rate of 5.50%.

The 2008 Credit Facility is guaranteed by the Company’s Commnet, Sovernet and choice subsidiaries, along with certain of the Company’s other domestic subsidiaries, and is collateralized by a security interest in substantially all of the assets of the Company and the guarantor subsidiaries, including Commnet, Sovernet and choice, and a pledge of the stock of certain of the Company’s direct and indirect, domestic and foreign, subsidiaries, including its principal operating subsidiaries, and stock owned by the Company.

The 2008 Credit Agreement contains certain affirmative and negative covenants of the Company and its subsidiaries.  Among other things, these covenants restrict the Company’s ability to incur additional debt in the future or to incur liens on its property.  The 2008 Credit Agreement also requires the Company to maintain certain financial ratios including a net leverage ratio of less than or equal to 3.0 to 1, an interest coverage ratio of greater than or equal to 3.5 to 1 and an equity to assets ratio of greater than or equal to 0.4 to 1.  As of September 30, 2008, the Company was in compliance with all of the covenants of the 2008 CoBank Credit Agreement.

See Note 8 for a discussion regarding the Company’s interest rate swap that corresponds to a portion of our variable rate debt in order to effectively hedge interest rate risk.

8.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

On September 23, 2008, the Company entered into a forward starting interest rate swap agreement to add stability to interest expense and to manage its exposure to adverse changes in interest rates. The interest rate swap agreement has an initial notional amount of $68 million, receives 1 month LIBOR, and pays a fixed rate of 4.42%.  The interest rate swap agreement effectively converts the variable interest payments on the first $68 million of the 2008 Term Loan to a fixed rate of 4.42% plus any credit spread, if applicable, over the life of the agreement.  The interest rate swap agreement has an effective date of October 15, 2008, and a maturity date of September 15, 2015.

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including hedging activities.  As required by SFAS 133, the Company records its interest rate swap derivative on the balance sheet at fair value.  The accounting for changes in the fair value depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows, such as our interest rate swap, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of the hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

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At September 30, 2008 the Company’s interest rate swap agreement, which qualifies as an effective cash flow hedge under SFAS 133, had a fair value of ($1,026,000) which was included in other liabilities.  The change in net unrealized losses on the cash flow hedge reported in the consolidated statements of changes in shareholders’ equity is $1,026,000, net of income tax benefit of $390,000.  Amounts reported in accumulated other comprehensive income related to the interest rate swap agreement will be reclassified to interest income as interest payments are received on the Company’s variable-rate loan assets.

The Company does not use derivatives for trading or speculative purposes.

9.  STOCK-BASED COMPENSATION

In May 2008, at the Company’s Annual Meeting of Stockholders, the Company’s stockholders approved the 2008 Equity Incentive Plan (the “2008 Plan”).  The 2008 Plan replaced the 1998 Stock Option Plan, the 2005 Restricted Stock Plan and the Director’s Remuneration Plan (collectively and including the 2008 Plan the “Share Based Plans”), under which no further awards will be made.  The 2008 Plan allows for the grant of stock options, restricted stock, restricted stock units, stock equivalents and awards of shares of common stock that are not subject to restrictions or forfeiture.

During the three months ended September 30, 2007 and 2008, the Company recognized $213,000 and $205,000, respectively, of non-cash compensation expense relating to grants under its Share Based Plans.  During the nine months ended September 30, 2007 and 2008, the Company recognized $631,000 and $755,000, respectively, of non-cash compensation expense relating to grants under its Share Based Plans.

10.  NET INCOME PER SHARE

For the three and nine months ended September 30, 2007 and 2008, stock options and restricted stock issued under the share based plans were the only potentially dilutive securities.

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

The following notes the number of common shares not included in the above calculation because the effects of such were anti-dilutive:

11.  SEGMENT REPORTING

The Company has five reportable segments which are considered material for separate disclosure under Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. Those five segments are: i) Integrated Telephony-International, which generates all of its revenues in Guyana and has all of its assets located in Guyana (“GT&T”), ii) Rural Wireless, which generates all of its revenues in the United States and has all of its assets located in the United States (“Commnet”), iii) Island Wireless, iv) Integrated Telephony-Domestic, which generates all of its revenues and has all of its assets located in the United States (“Sovernet”) and v) Wireless Television and Data, which generates all of its revenues in and has all of its assets located in the U.S Virgin Islands (“Choice”).  Island Wireless became a reportable segment upon completion of BDC’s share repurchase and resulting increase in the Company’s equity interest in BDC, effective May 15, 2008.  The Island Wireless segment generates its revenues in and has its assets in Bermuda (“Bermuda Digital Communications”) and Turks and Caicos (“Islandcom”). The operating segments are managed separately because each offers different services and serves different markets.

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Certain elements of the 2007 segment information have been revised to conform to the current format of financial information reviewed by the Company’s chief operating decision makers.

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

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