ATN International, Inc.
ATLANTIC TELE NETWORK INC /DE (Form: 10-Q, Received: 11/09/2010 14:18:32)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission File Number 001-12593

 


 

Atlantic Tele-Network, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

47-0728886

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

600 Cummings Center

Beverly, MA 01915

(Address of principle 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  o No  o

 

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

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of November 9, 2010, the registrant had outstanding 15,379,137 shares of its common stock ($.01 par value).

 

 

 



Table of Contents

 

ATLANTIC TELE-NETWORK, INC.

 

FORM 10-Q

Quarter Ended September 30, 2010

 

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, 2009 and September 30, 2010

4

 

 

 

 

Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2009 and 2010

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2010

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7-19

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20-33

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4

Controls and Procedures

33

 

 

 

PART II—OTHER INFORMATION

34

 

 

 

Item 1

Legal Proceedings

34

 

 

 

Item1A

Risk Factors

34

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 6

Exhibits

35

 

 

 

SIGNATURES

 

 

 

 

CERTIFICATIONS

 

 

2



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (or the “Report”) contains forward-looking statements relating to, among other matters, our future financial performance and results of operations; the competitive environment in our key markets, demand for our services and industry trends; the outcome of litigation and regulatory matters; our continued access to the credit and capital markets; the pace of our network expansion and improvement, including our level of estimated future capital expenditures and our realization of the benefits of these investments; and management’s plans and strategy for the future.  These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results.  Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1) our ability to operate a large scale retail wireless business in the United States and integrate these operations into our existing operations; (2)  the general performance of our U.S. operations, including operating margins, and the future retention and turnover of the our subscriber base; (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 and 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) the current difficult global economic environment, along with difficult and volatile conditions in the capital and credit markets; and (13) our ability to realize the value that we believe exists in businesses that we may or have acquired. 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, 2009, filed with the SEC on March 16, 2010 and  the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, filed with the SEC on May 10, 2010. 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 ”, “ CellularOne ”, “ 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.

 

3



Table of Contents

 

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,
2009

 

September 30,
2010

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

90,247

 

$

61,810

 

Restricted cash

 

5,248

 

466

 

Accounts receivable, net of allowances of $4.2 million and $14.2 million, respectively

 

26,831

 

62,585

 

Materials and supplies

 

5,917

 

19,262

 

Deferred income taxes

 

3,046

 

3,331

 

Prepayments and other current assets

 

5,226

 

12,842

 

Total current assets

 

136,515

 

160,296

 

Property, plant and equipment, net

 

217,015

 

441,182

 

Telecommunications licenses

 

34,830

 

83,089

 

Goodwill

 

40,361

 

40,361

 

Trade name license, net

 

 

13,611

 

Customer relationships, net

 

1,848

 

51,807

 

Deferred income taxes

 

9,085

 

6,004

 

Other assets

 

6,900

 

16,864

 

Total assets

 

$

446,554

 

$

813,214

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

3,694

 

$

12,194

 

Accounts payable and accrued liabilities

 

29,717

 

42,231

 

Dividends payable

 

3,055

 

3,393

 

Accrued taxes

 

9,900

 

4,895

 

Advance payments and deposits

 

3,756

 

17,180

 

Other current liabilities

 

6,765

 

71,035

 

Total current liabilities

 

56,887

 

150,928

 

Deferred income taxes

 

32,171

 

49,555

 

Other liabilities

 

5,512

 

33,963

 

Long-term debt, excluding current portion

 

69,551

 

250,807

 

Total liabilities

 

164,121

 

485,253

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Atlantic Tele-Network, Inc.’s Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock, $0.01 par value per share; 50,000,000 shares authorized; 15,732,382 and 15,876,984 shares issued, respectively, and 15,233,745 and 15,379,137 shares outstanding, respectively

 

158

 

159

 

Treasury stock, at cost; 498,637 and 497,847 shares, respectively

 

(4,687

)

(4,680

)

Additional paid-in capital

 

108,720

 

111,799

 

Retained earnings

 

156,827

 

182,495

 

Accumulated other comprehensive loss

 

(5,272

)

(8,335

)

Total Atlantic Tele-Network, Inc.’s stockholders’ equity

 

255,746

 

281,438

 

Non-controlling interests

 

26,687

 

46,523

 

Total equity

 

282,433

 

327,961

 

Total liabilities and equity

 

$

446,554

 

$

813,214

 

 

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 NINE MONTHS ENDED SEPTEMBER
30, 2009 and 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2010

 

2009

 

2010

 

REVENUE:

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

 

$

108,828

 

$

 

$

190,331

 

Wholesale

 

31,837

 

49,952

 

79,276

 

112,437

 

International Wireless

 

11,684

 

14,220

 

33,725

 

37,712

 

Wireline

 

21,969

 

20,829

 

66,634

 

64,580

 

Equipment and Other

 

602

 

11,131

 

2,982

 

19,420

 

Total revenue

 

66,092

 

204,960

 

182,617

 

424,480

 

OPERATING EXPENSES ( excluding depreciation and amortization unless otherwise indicated ):

 

 

 

 

 

 

 

 

 

Termination and access fees

 

11,830

 

53,076

 

34,702

 

109,186

 

Engineering and operations

 

6,519

 

21,747

 

21,010

 

46,288

 

Sales and marketing

 

3,454

 

50,411

 

9,769

 

86,310

 

Equipment expense

 

615

 

12,700

 

1,697

 

22,321

 

General and administrative

 

8,690

 

29,179

 

26,166

 

62,887

 

Acquisition-related charges

 

2,072

 

47

 

2,479

 

15,881

 

Depreciation and amortization

 

9,763

 

23,974

 

28,756

 

52,585

 

Total operating expenses

 

42,943

 

191,134

 

124,579

 

395,458

 

Income from operations

 

23,149

 

13,826

 

58,038

 

29,022

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,228

)

(3,202

)

(3,582

)

(6,857

)

Interest income

 

354

 

90

 

1,063

 

329

 

Equity in earnings of unconsolidated affiliates

 

 

166

 

 

456

 

Gain on bargain purchase, net of deferred taxes of $18,016

 

 

 

 

27,024

 

Other income, net

 

13

 

204

 

48

 

435

 

Other income (expense), net

 

(861

)

(2,742

)

(2,471

)

21,387

 

INCOME BEFORE INCOME TAXES

 

22,288

 

11,084

 

55,567

 

50,409

 

Income tax expense

 

9,919

 

5,022

 

24,217

 

15,447

 

NET INCOME

 

12,369

 

6,062

 

31,350

 

34,962

 

Less: Net income attributable to non-controlling interests, net of tax of $0.7 million and $0.5 million for the three months ended September 30, 2009 and 2010, respectively, and $2.1 million and $1.8 million for the nine months ended September 30, 2009 and 2010, respectively

 

(433

)

303

 

(976

)

212

 

NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS

 

$

11,936

 

$

6,365

 

$

30,374

 

$

35,174

 

NET INCOME PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

0.41

 

$

1.99

 

$

2.30

 

Diluted

 

$

0.78

 

$

0.41

 

$

1.98

 

$

2.27

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

15,237

 

15,349

 

15,233

 

15,303

 

Diluted

 

15,398

 

15,502

 

15,304

 

15,476

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.20

 

$

0.22

 

$

0.56

 

$

0.62

 

 

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, 2009 AND 2010

(Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

31,350

 

$

34,962

 

Adjustments to reconcile net income to net cash flows provided by operating activities:

 

 

 

 

 

Bargain purchase gain, net of tax

 

 

(27,024

)

Depreciation and amortization

 

28,756

 

52,585

 

Provision for doubtful accounts

 

1,104

 

10,993

 

Amortization of debt discount and debt issuance costs

 

388

 

1,014

 

Stock-based compensation

 

1,019

 

1,536

 

Deferred income taxes

 

596

 

5,302

 

Changes in operating assets and liabilities, excluding the effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(6,251

)

(12,002

)

Materials and supplies, prepayments, and other current assets

 

1,736

 

(17,550

)

Prepaid income taxes

 

10,708

 

 

Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities

 

800

 

69,194

 

Accrued taxes

 

1,267

 

(9,971

)

Other

 

(672

)

(8,693

)

Net cash provided by operating activities

 

70,801

 

100,346

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisitions of businesses, net of cash acquired of $0 and $53 in the nine months ended September 30, 2009 and 2010, respectively

 

(24

)

(225,498

)

Capital expenditures

 

(40,273

)

(91,632

)

Acquisitions of assets

 

(25

)

(57

)

Maturity of short-term marketable securities

 

2,956

 

 

Decrease (increase) in restricted cash

 

(3,578

)

4,782

 

Net cash used in investing activities

 

(40,944

)

(312,405

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowings under term loan

 

 

200,000

 

Proceeds from borrowings under revolver loan

 

 

40,000

 

Dividends paid on common stock

 

(8,224

)

(9,186

)

Distributions to non-controlling interests

 

(5,543

)

(1,239

)

Payments of debt issuance costs

 

 

(4,322

)

Repayments of long-term debt

 

(564

)

(46,520

)

Investments made by non-controlling interests

 

200

 

3,338

 

Proceeds from stock option exercises

 

74

 

1,551

 

Purchase of common stock

 

(23

)

 

Net cash provided by (used in) financing activities

 

(14,080

)

183,622

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

15,777

 

(28,437

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

79,665

 

90,247

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

95,442

 

$

61,810

 

 

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 the following telecommunications services, through its operating subsidiaries, in North America, Bermuda and the Caribbean:

 

·                   Wireless.   In the United States, the Company offers wireless voice and data services to retail customers under the “Alltel” name in rural markets located principally in the Southeast and Midwest. Additionally, the Company offers wholesale wireless voice and data roaming services to national, regional and local wireless carriers 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 Guyana under the “Cellink” name, in Bermuda under the “CellularOne” name, in Turks and Caicos under the “Islandcom” name, in the U.S. Virgin Islands under the “Choice” name and in other smaller markets in the U.S. and the Caribbean.

 

·                   Wireline.   The Company’s wireline services include operations in Guyana under the “GT&T” name and in the United States under the “Sovernet” and “ION” names.  The Company is the exclusive licensed provider of domestic wireline local and international long distance telephone services in Guyana. The Company offers facilities-based integrated voice and data communications services to residential and business customers in New England, primarily in Vermont, and wholesale transport services in New York State.

 

ATN was incorporated in Delaware in 1987 and since that time, has engaged in strategic acquisitions and investments to grow the Company’s operations.  From 1998 through 2005, a significant majority of the Company’s revenue was derived from its wireless and wireline operations in Guyana, in which the Company has owned an 80% interest since 1991.  The Company also derived a portion of its revenue from a non-controlling investment made in 1998 in a voice and data services provider in Bermuda. The Company has been a provider of fixed and portable wireless broadband data and dial-up internet services through its U.S. Virgin Islands subsidiary, acquired in 1999, which provided a small portion of the Company’s annual revenues. In the past five years, the Company has added substantially to the diversity of its business and reduced its historical dependence on its Guyana operations for its financial results.  The Company entered the U.S. telecommunications market through the 2005 acquisition of an operator of a wholesale wireless network in rural portions of the Southwest and Midwest and the Company continued its U.S. expansion with the 2006 acquisition of a wireline voice, broadband data and dial-up service provider in New England.  In 2008, the Company increased its investment in its Bermuda business to a controlling 58% interest and entered into new U.S. and Caribbean markets with investments in two early stage businesses providing wholesale transport services in New York State and wireless voice and data services in Turks and Caicos.  In addition to the diversification of its business through acquisition, the Company has further accentuated its focus on its U.S. operations with increased capital investment in and growth of its wholesale wireless business, which was the single largest contributor to its revenue and operating income in 2009.

 

In the second quarter of 2010, the Company completed its acquisition of a U.S. retail wireless business, which provides wireless voice and data services in rural markets of the United States under the “Alltel” brand name.  Also during the quarter, the Company completed an investment in a wireless telecommunications provider in Aruba, in which it holds a controlling interest. With the completion of the Alltel asset acquisition, the Company continued its trend towards growth in U.S.-sourced revenue, with the U.S. wireless portion of its business now constituting a significant majority of the Company’s consolidated revenue.  The Company continues to actively evaluate additional investment and acquisition opportunities in the United States and the Caribbean that meet its return-on-investment and other acquisition criteria.

 

The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a management fee equal to approximately 3% to 5% of their respective revenue, along with other fees and transfer payments, where appropriate. Management fees from consolidated subsidiaries are eliminated in consolidation.

 

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 2009 Annual Report on Form 10-K.

 

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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 Financial Accounting Standards Board (“FASB”) authoritative guidance on the consolidation of variable interest entities since it is determined that the Company is the primary beneficiary of these entities. Revenue from these entities constitutes less than 1% of total Company revenue.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities in and out of Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update is effective for companies with interim and annual reporting periods after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for interim and annual reporting periods beginning after December 15, 2010. The Company adopted the updated guidance in the first quarter of 2010 and the adoption did not have an impact on the Company’s financial position, results of operations, or cash flows.  See Note 5 for more information.

 

In June 2009, the FASB issued new authoritative guidance that amends certain guidance for determining whether an entity is a variable interest entity (VIE). The guidance requires an enterprise to perform an analysis to determine whether the Company’s variable interests give it a controlling financial interest in a VIE. A company would be required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. In addition, this guidance amends earlier guidance requiring ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. The adoption of the provisions of this guidance, which was effective January 1, 2010, did not have a material impact on the 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 allowance for doubtful accounts, useful lives of the Company’s fixed and finite-lived intangible assets, allocation of purchase price to assets acquired and liabilities assumed in purchase business combinations, fair value of indefinite-lived intangible assets, goodwill and income taxes. Actual results could differ significantly from those estimates.

 

4.  ACQUISTION

 

Alltel Assets

 

On April 26, 2010, the Company completed its previously-announced acquisition of wireless assets from Cellco Partnership d/b/a Verizon Wireless (“Verizon”) pursuant to the Purchase Agreement, dated June 9, 2009, between the Company and Verizon (the “Alltel Acquisition”).  Pursuant to the Purchase Agreement, Verizon contributed certain licenses, network assets, tower and other leases and other assets and certain related liabilities to its wholly-owned subsidiary limited liability company, whose membership interests were acquired by Allied Wireless Communications Corporation (“AWCC”), the Company’s subsidiary.  In connection with the Alltel Acquisition, the Company and Verizon entered into roaming and transition services arrangements and the Company obtained the rights to use the Alltel brand and related service marks for up to twenty-eight years in connection with the continuing operation of the acquired assets.

 

The Company funded the purchase price of $221.4 million, which included the purchase of $21.4 million of net working capital, as defined in the Purchase Agreement, with cash-on-hand and borrowings under its available credit facility.  On April 26, 2010, the Company drew down a $150 million term loan under the Amended and Restated Credit Agreement, dated as of January 20, 2010, by and among the Company, certain of the Company’s subsidiaries, as Guarantors, CoBank, ACB, as Administrative Agent, Arranger, Issuer Lender and Lender, and the other Lenders named therein.  In addition, the Company also borrowed $40 million under its previously undrawn revolving credit facility.

 

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The Alltel Acquisition was accounted for using the purchase method and AWCC’s results of operations since April 26, 2010  have been included in the Company’s U.S. Wireless segment as reported in Note 10. The total purchase consideration of $221.4 million cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition as determined by management. The table below represents the preliminary assessment of the total acquisition cost to the tangible and intangible assets and liabilities of AWCC based on their acquisition date fair values:

 

Total cash consideration

 

$

221,359

 

 

 

 

 

Purchase price allocation:

 

 

 

Net working capital

 

$

15,817

 

Property, plant and equipment

 

176,393

 

Customer relationships

 

55,500

 

Telecommunications licenses

 

44,000

 

Trade name license

 

13,400

 

Other long term assets

 

11,500

 

Other long term liabilities

 

(34,211

)

Deferred tax liabilities

 

(18,016

)

Non-controlling interests

 

(16,000

)

Net assets acquired

 

$

248,383

 

 

 

 

 

Gain on bargain purchase, net of deferred taxes of $18,016

 

$

27,024

 

 

The gain related to the Alltel Acquisition was a result of a bargain purchase generated by the forced divesture of the assets that was required to be completed by Verizon within a required timeframe to a limited class of potential buyers that resulted in a favorable price to the Company for these assets.  This gain, recognized on the bargain purchase, is included in other income in the accompanying income statement for the nine months ended September 30, 2010.  For the three and nine months ended September 30, 2010, the Alltel Acquisition accounted for $140.3 million and $242.8 million of the Company’s revenue, respectively. The net income for the nine months ended September 30, 2010 includes the $27.0 million of bargain purchase gain discussed above. The weighted average amortization period of the amortizable intangible assets (customer relationships and trade name license) is 12.7 years.

 

The following table reflects the unaudited pro forma results of operations of the Company for the three and nine months ended September 30, 2009 and the nine months, ended September 30, 2010 as if the Alltel Acquisition had occurred on January 1, 2009 (presented in thousands, except per share data):

 

 

 

2009

 

 

 

Three Months Ended September 30,

 

Nine Months ended September 30,

 

 

 

As Reported

 

As Adjusted

 

As Reported

 

As Adjusted

 

Revenue

 

$

66,092

 

$

239,152

 

$

182,617

 

$

672,156

 

Net income

 

11,936

 

27,619

 

30,374

 

64,817

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

1.81

 

$

1.99

 

$

4.26

 

Diluted

 

0.78

 

1.79

 

1.98

 

4.24

 

 

 

 

Nine Months ended September 30, 2010

 

 

 

As Reported

 

As Adjusted

 

Revenue

 

$

424,480

 

$

678,092

 

Net income

 

35,174

 

51,914

 

Earnings per share:

 

 

 

 

 

Basic

 

$

2.30

 

$

3.39

 

Diluted

 

2.27

 

3.35

 

 

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

 

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5.  FAIR VALUE MEASUREMENTS

 

In accordance with the provisions of fair value accounting, a fair value measurement assumes that the 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 or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 assets and liabilities include 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 the 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 certain U.S. Government and Agency mortgage-backed debt securities, corporate debt securities, 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, 2009 are summarized as follows (in thousands):

 

December 31, 2009

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

8,362

 

$

 

$

8,362

 

Money market funds

 

13,091

 

 

13,091

 

Total assets measured at fair value

 

$

24,453

 

$

 

$

21,453

 

 

 

 

 

 

 

 

 

Interest rate swap (Note 7)

 

$

 

$

5,096

 

$

5,096

 

Total liabilities measured at fair value

 

$

 

$

5,096

 

$

5,096

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2010 are summarized as follows (in thousands):

 

September 30, 2010

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

3,360

 

$

 

$

3,360

 

Money market funds

 

7,420

 

 

7,420

 

Total assets measured at fair value

 

$

7,420

 

$

 

$

10,780

 

 

 

 

 

 

 

 

 

Interest rate swap (Note 7)

 

$

 

$

10,189

 

$

10,189

 

Total liabilities measured at fair value

 

$

 

$

10,189

 

$

10,189

 

 

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Money Market Funds

 

This asset class consisted of a money market portfolio that is comprised of securities classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

 

Certificates of Deposit

 

Certificates of deposit are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for similar assets.

 

Interest Rate Swap

 

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. The interest rate swap is valued using broker quotations.  As such, the interest rate swap is classified within Level 2.

 

6.  LONG-TERM DEBT

 

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

 

 

 

December 31,
2009

 

September 30,
2010

 

Notes payable:

 

 

 

 

 

Term loans

 

73,875

 

267,355

 

Revolver loan

 

 

 

Total outstanding debt

 

73,875

 

267,355

 

Less: current portion

 

(3,694

)

(12,194

)

Total long-term debt

 

70,181

 

255,161

 

Less: debt discount

 

(630

)

(4,354

)

Net carrying amount

 

$

69,551

 

$

250,807

 

 

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 provided 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 Revolver Facility included a $5 million letter of credit facility.

 

The 2008 Term Loan required 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 was to be repaid on September 10, 2015 when the 2008 Term Loan was to mature.

 

All borrowings under the 2008 Credit Facility were bearing 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 included (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 ranged from 0% to 0.5%, depending upon the Company’s leverage ratio while margins for LIBOR borrowings ranged from 1.25% to 2% also depending upon the Company’s leverage ratio.

 

The 2008 CoBank Credit Agreement contained certain affirmative and negative covenants of the Company and its subsidiaries. Among other things, these covenants restricted the Company’s ability to incur additional debt or to incur liens on its property. The 2008 Credit Agreement also required 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.

 

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Table of Contents

 

2010 Loan Facilities

 

On January 20, 2010, the Company amended and restated its 2008 Credit Facility with CoBank as Administrative Agent (the “2010 CoBank Credit Agreement”).  The 2010 CoBank Credit Agreement provided for a $298.9 million credit facility, consisting of i) a $73.9 million term loan (the “2010 Term Loan A”) which was the amount then outstanding under the 2008 Term Loan, ii) a new $150.0 million term loan (the “2010 Term Loan B”), iii)  a $75.0 million revolver loan (the “2010 Revolver Loan”) and iv) one or more additional term loans up to an aggregate $50.0 million, subject to lender and administrative agent approval (together with the 2010 Term Loan A, the 2010 Term Loan B and the 2010 Revolver Loan, the “2010 Credit Facility”).  As discussed in Note 4, the Company partially funded the purchase price of the Alltel Acquisition with the $150 million 2010 Term Loan B and borrowed $40 million under the 2010 Revolver Loan.

 

On September 30, 2010, the Company entered into a second amended and restated credit f acility with CoBank as Administrative Agent (the “ Amended 2010 CoBank Credit Agreement”).   The Amended 2010 CoBank Credit Agreement provides for a $ 370.2  million credit facility, consisting of i) a $ 72.0  million term loan (the “ Amended 2010 Term Loan A”), ii) a $ 148.1  million term loan (the “ Amended 2010 Term Loan B”) , iii) a new $50.0 million term loan (the “2010 Term Loan C”) and iv) an expanded $ 100 .0 million revolver loan of which the Company may use up to $10.0 million for standby or trade letters of credit and may use up to $10 million under a swingline sub-facility (the “ Amended 2010 Revolver Loan,” and together with the Amended 2010 Term Loan A, Amended 2010 Term Loan B and 2010 Term Loan C , the “ Amended 2010 Credit Facility”). The Amended 2010 Credit Facility also provides for one or more additional term loans up to an aggregate $50.0 million, subject to lender and administrative agent approval.

 

Upon the closing of the Amended 2010 Credit Facility, $72.0 million under the Amended 2010 Term Loan A and $148.1 million under the Amended 2010 Term Loan B remained outstanding from the Company’s prior credit facility.  Also upon the closing of the Amended 2010 Credit Facility, the Company drew down $50.0 million under the 2010 Term Loan C, a portion of which was used to repay outstanding borrowings under the Company’s prior revolving loan.  The Company currently has no borrowings outstanding under the Amended 2010 Revolver Loan.

 

The Amended 2010 Term Loan A, the Amended 2010 Term Loan B and the 2010 Term Loan C each mature on September 30, 2014, with certain quarterly repayment obligations described below, unless accelerated pursuant to an event of default, as described below.  The Amended 2010 Revolver Loan matures on September 10, 2014, unless accelerated pursuant to an event of default, as described below. Amounts borrowed under the Amended 2010 Term Loan A, Amended 2010 Term Loan B, 2010 Term Loan C and the Amended 2010 Revolver Loan bear interest at a rate equal to, at the Company’s option, either (i) the London Interbank Offered Rate (LIBOR) plus an applicable margin ranging between 3.50% to 4.75% or (ii) a base rate plus an applicable margin ranging from 2.50% to 3.75% (or, in the case of amounts borrowed under the swingline sub-facility to the Amended 2010 Revolver Loan, an applicable margin ranging from 2.00% to 3.25%).  The Company is not required to apply a minimum LIBOR percentage for any loans bearing interest at the LIBOR rate. The base rate is equal to the higher of either (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 credit agreement). The applicable margin is determined based on the ratio of the Company’s indebtedness (as defined in the credit agreement) to its EBITDA (as defined in the credit agreement).  Borrowings as of September 30, 2010, after considering the effect of the interest rate swap agreement as described in Note 7, were bearing a weighted-average interest rate of 5.26%.

 

All amounts outstanding under the Amended 2010 Revolver Loan will be due and payable on September 10, 2014 or the earlier acceleration of the loan upon an event of default.  Amounts outstanding under the Amended 2010 Term Loan A and the Amended 2010 Term Loan B became due and payable commencing on September 30, 2010, in quarterly payments equal to 1.25% of the initial principal amount outstanding under each loan, increasing to 2.50% of the initial principal amount outstanding commencing on March 31, 2012.  The 2010 Term Loan C will become due and payable commencing on December 31, 2010, in quarterly payments equal to $250,000. Remaining balances will be due and payable upon the final maturity date of September 30, 2014, unless the loans are earlier accelerated upon an event of default.  The Company may prepay the Amended 2010 Credit Facility at any time without premium or penalty, other than customary fees for the breakage of LIBOR loans.  Under the terms of the Amended 2010 Credit Facility, the Company must also pay a fee ranging from 0.50% to 0.75% of the average daily unused portion of the Amended 2010 Revolver Loan over each calendar quarter, which fee is payable in arrears on the last day of each calendar quarter.

 

Certain of our subsidiaries, including our principal wholly-owned domestic operating subsidiaries, are guarantors of our obligations under the Amended 2010 CoBank Credit Agreement. Further, our obligations are secured by (i) a first priority, perfected lien on substantially all of our property and assets 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.

 

The Amended 2010 CoBank Credit Agreement 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 2010 CoBank Credit Agreement contains financial covenants by the Company that (i) impose a maximum ratio of indebtedness (as defined in the credit agreement) to EBITDA (as defined in the credit agreement), (ii) require a minimum ratio of EBITDA to cash interest expense, (iii) require a minimum ratio of equity to consolidated assets and (iv) require a minimum ratio of EBITDA to fixed charges (as defined in the credit agreement). As of September 30, 2010, the Company was in compliance with all of the financial covenants of the Amended 2010 CoBank Credit Agreement.

 

The Amended 2010 CoBank Agreement provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy. After the occurrence of an event of default and for so long as it continues, the administrative agent or the requisite lenders (as defined in the credit agreement) may increase the interest rate then in effect on all outstanding obligations by 2.0%. Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Amended 2010 Credit Facility will become immediately due and payable and the lender commitments will be automatically terminated. Upon the occurrence and continuation of any other event of default, the administrative agent and/or the requisite lenders (as defined in the credit agreement) may accelerate payment of all obligations and terminate the lenders’ commitments under the Amended 2010 CoBank Agreement.

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

                                                As required by the FASB’s authoritative guidance on accounting for derivative instruments and hedging activities, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives

 

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designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. 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.

 

Cash Flow Hedge of Interest Rate Risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses an interest rate swap 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 the three and nine months ended September 30, 2009 and 2010.

 

As of December 31, 2009 the Company’s sole derivative instrument was an interest rate swap with a notional amount of $68 million that was designated as a cash flow hedge of interest rate risk. On July 26, 2010, the Company executed an additional interest rate swap with a notional amount of $30 million that was also designated as a cash flow hedge of interest rate risk bringing the total notional amount of cash flow hedges to $98 million as of September 30, 2010.

 

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 September 30, 2011, the Company estimates that an additional $3.2 million will be reclassified as an increase to interest expense due to the interest rate swaps since the hedge interest rate exceeds the variable interest rate on the debt.

 

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheet as of December 31, 2009 and September 30, 2010 (in thousands):

 

 

 

Liability Derivatives

 

 

 

 

 

Fair Value as of

 

 

 

Balance Sheet Location

 

December 31,
2009

 

September 30,
2010

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest Rate Swap

 

Other liabilities

 

$

5,096

 

$

10,189

 

Total derivatives designated as hedging instruments

 

 

 

$

5,096

 

$

10,189

 

 

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The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three months ended September 30, 2009 and 2010 (in thousands):

 

Three Months Ended September 30,

 

Derivative in Cash Flow
Hedging Relationships

 

Amount of Gain or
(Loss) Recognized
in OCI on Derivative
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

2009

 

Interest Rate Swap

 

$

(1,439

)

Interest expense

 

$

719

 

2010

 

Interest Rate Swap

 

(2,010

)

Interest expense

 

781

 

 

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the nine months ended September 30, 2009 and 2010 (in thousands):

 

Nine Months Ended September 30,

 

Derivative in Cash Flow
Hedging Relationships

 

Amount of Gain or
(Loss) Recognized
in OCI on Derivative
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

2009

 

Interest Rate Swap

 

$

1,652

 

Interest expense

 

$

2,067

 

2010

 

Interest Rate Swap

 

(5,093

)

Interest expense

 

2,203

 

 

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 September 30, 2010, the fair value of the interest rate swaps liability position related to these agreements was $10.2 million. As of September 30, 2010, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2010, it would have been required to settle its obligations under these agreements at their termination values of $10.2 million.

 

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8.  RECONCILIATION OF TOTAL EQUITY

 

Total equity was as follows (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2010

 

 

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total Equity

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total
Equity

 

Equity, beginning of period

 

$

228,873

 

$

32,787

 

$

261,660

 

$

255,746

 

$

26,687

 

$

282,433

 

Stock based compensation

 

1,019

 

 

1,019

 

1,537

 

 

1,537

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

30,374

 

976

 

31,350

 

35,174

 

(212

)

34,962

 

Other comprehensive income(loss)-

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustment

 

 

 

 

(8

)

 

(8

)

Gain (loss) on interest rate swap (net of tax)

 

1,036

 

 

1,036

 

(3,057

)

 

(3,057

)

Total comprehensive income

 

31,410

 

976

 

32,386

 

32,109

 

(212

)

31,899

 

Issuance of common stock upon exercise of stock options

 

74

 

 

74

 

1,552

 

 

1,552

 

Dividends on common stock

 

(8,531

)

 

(8,531

)

(9,506

)

 

(9,506

)

Non-controlling interests of acquired business

 

(23

)

(2

)

(25

)

 

17,947

 

17,947

 

Distributions to non-controlling interests

 

 

(5,543

)

(5,543

)

 

(1,237

)

(1,237

)

Investments made by minority shareholders

 

 

781

 

781

 

 

3,338

 

3,338

 

Purchase of common shares

 

(23

)

 

(23

)

 

 

 

Equity, end of period

 

$

252,799

 

$

28,999

 

$

281,798

 

$

281,438

 

$

46,523

 

$

327,961

 

 

9.  NET INCOME PER SHARE

 

For the three and nine months ended September 30, 2009 and 2010, 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2010

 

2009

 

2010

 

Basic weighted average common shares outstanding

 

15,237

 

15,349

 

15,233

 

15,303

 

Stock options

 

161

 

153

 

71

 

173

 

Diluted weighted average common shares outstanding

 

15,398

 

15,502

 

15,304

 

15,476

 

 

The above calculations for the three months ended September 30, 2010 do not include 156,000 shares related to certain stock options because the effects of such were anti-dilutive. For the nine months ended September 30, 2009 and 2010, the calculation does not include 219,000 and 111,000 shares, respectively, related to certain stock options because the effect of such options were anti-dilutive.

 

10. SEGMENT REPORTING

 

Upon the completion of the Alltel Acquisition, the Company restructured how it manages its business, and accordingly, modified its reportable segments.  The previously reported Rural Wireless segment has been combined with the operating results of Alltel and is now being reported as the U.S. Wireless segment, which generates all of its revenue and has all of its assets located in the United States.   In addition, the previously reported Wireless Data segment has been merged into the Island Wireless segment which generates its revenue, and has its assets, in Bermuda, Turks and Caicos, the U.S. Virgin Islands and Aruba.  Integrated Telephony — International has been renamed International Integrated

 

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Table of Contents

 

Telephony and has its assets located in Guyana.  Integrated Telephony — Domestic has been renamed U.S. Wireline, and has its assets located in the United States.  The operating segments are managed separately because each offers different services and serves different markets.  Reconciling items refer to corporate overhead matters including general and administrative expenses and acquisition-related charges.

 

The following tables provide information for each operating segment (in thousands).  Previously reported periods have been restated, showing the effects of the new segment structure:

 

 

 

For the Three Months Ended September 30, 2009

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

 

$

 

$

 

$

 

$

 

$

 

Wholesale

 

31,837

 

 

 

 

 

31,837

 

International Wireless

 

 

5,525

 

6,159

 

 

 

11,684

 

Wireline

 

 

17,185

 

 

4,784

 

 

21,969

 

Equipment and Other

 

 

 

602

 

 

 

602

 

Total Revenue

 

31,837

 

22,710

 

6,761

 

4,784

 

 

66,092

 

Depreciation and amortization

 

3,812

 

4,180

 

1,131

 

567

 

73

 

9,763

 

Non-cash stock-based compensation

 

 

 

 

 

32

 

332

 

364

 

Operating income (loss)

 

17,563

 

7,291

 

(334

)

(71

)

(1,300

)

23,149

 

 

 

 

For the Three Months Ended September 30, 2010

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

108,828

 

$

 

$

 

$

 

$

 

$

108,828

 

Wholesale

 

49,952

 

 

 

 

 

49,952

 

International Wireless

 

 

6,468

 

7,752

 

 

 

14,220

 

Wireline

 

139

 

15,668

 

 

5,022

 

 

20,829

 

Equipment and Other

 

10,537

 

 

594

 

 

 

11,131

 

Total Revenue

 

169,456

 

22,136

 

8,346

 

5,022

 

 

204,960

 

Depreciation and amortization

 

17,012

 

4,575

 

1,522

 

746

 

119

 

23,974

 

Non-cash stock-based compensation

 

 

 

 

 

556

 

556

 

Operating income (loss)

 

13,985

 

6,416

 

(2,126

)

1

 

(4,450

)

13,826

 

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30, 2009

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

 

$

 

$

 

$

 

$

 

$

 

Wholesale

 

79,276

 

 

 

 

 

79,276

 

International Wireless

 

 

15,628

 

18,097

 

 

 

33,725

 

Wireline

 

 

52,513

 

 

14,121

 

 

66,634

 

Equipment and Other

 

 

 

2,982

 

 

 

2,982

 

Total Revenue

 

79,276

 

68,141

 

21,079

 

14,121

 

 

182,617

 

Depreciation and amortization

 

10,661

 

12,560

 

3,349

 

1,966

 

220

 

28,756

 

Non-cash stock-based compensation

 

 

 

 

95

 

924

 

1,019

 

Operating income (loss)

 

39,381

 

22,767

 

(2,164

)

(1,106

)

(840

)

58,038

 

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30, 2010

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

190,331

 

$

 

$

 

$

 

$

 

$

190,331

 

Wholesale

 

112,437

 

 

 

 

 

112,437

 

International Wireless

 

 

18,342

 

19,370

 

 

 

37,712

 

Wireline

 

220

 

49,418

 

 

14,942

 

 

64,580

 

Equipment and Other

 

17,833

 

 

1,587

 

 

 

19,420

 

Total Revenue

 

320,821

 

67,760

 

20,957

 

14,942

 

 

424,480

 

Depreciation and amortization

 

33,610

 

13,102

 

3,463

 

2,172

 

238

 

52,585

 

Non-cash stock-based compensation

 

 

 

 

 

1,537

 

1,537

 

Operating income (loss)

 

38,946

 

21,771

 

(3,710

)

(110

)

(27,875

)

29,022

 

 

 

 

Segment Assets

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

68,560

 

$

117,931

 

$

20,749

 

$

8,829

 

$

946

 

$

217,015

 

Goodwill

 

32,148

 

 

722

 

7,491

 

 

40,361

 

Total assets

 

147,639

 

152,936

 

49,734

 

24,898

 

71,347

 

446,554

 

September 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

270,749

 

$

125,424

 

32,529

 

8,415

 

4,065

 

441,182

 

Goodwill

 

32,148

 

 

722

 

7,491

 

 

40,361

 

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

 

 

US Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

US
Wireline

 

Reconciling
Items

 

Consolidated

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

$

18,512

 

$

14,975

 

$

5,985

 

$

787

 

$

14

 

$

40,273

 

2010

 

54,269

 

20,225

 

12,393

 

1,388

 

3,357

 

91,632

 

 

11.  COMMITMENTS AND CONTINGENCIES

 

Regulatory and Litigation Matters

 

The Company and its subsidiaries are subject to certain regulatory and legal proceedings and other claims arising in the ordinary course of business, some of which involve claims for damages and taxes that are substantial in amount. The Company believes that, except for the items discussed below and those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, for which the Company is currently unable to predict the final outcome, the disposition of proceedings currently pending will not have a material adverse effect on the Company’s financial position or results of operations.

 

Regulatory

 

The Company’s wireless and wireline operations in the United States and in the U.S. Virgin Islands are governed by the Communications Act of 1934, as amended, the implementing regulations adopted thereunder by the Federal Communications Commission, judicial and regulatory decisions and other federal and state statutes.  In addition, certain of the Company’s subsidiaries are subject to additional regulation in the United States in connection with their acceptance of stimulus award grants pursuant to the American Recovery and Reinvestment Act of 2009.  The Company’s Bermuda operations are subject to Bermuda’s Telecommunications Act of 1986.  The Company’s Turks and Caicos operations are subject to the Turks and Caicos Islands Telecommunications Ordinance of 2004.

 

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  Table of Contents

 

The Company is subject to regulation in Guyana under the provisions of our licenses to provide telecommunications services in Guyana and under the Guyana Public Utilities Commission Act of 1999 and the Guyana Telecommunications Act of 1990.  The Company also has certain significant rights and obligations pursuant to the agreement with the Government of Guyana by which the Company acquired its interest in GT&T in 1991.  Finally, because of the large volume of traffic that our Guyana operations have with the United States, they can also be significantly affected by orders of U.S. regulatory agencies.

 

Currently, the Company holds an exclusive license to provide domestic fixed services and international voice and data services in Guyana.  The license, whose initial term of twenty years is scheduled to expire at the end of 2010, allows for the Company, at its option, to extend the term for an additional twenty years,  until December 2030.  The Company sent notice of the renewal of the license, in accordance with the terms of its agreement with the Government of Guyana, in November of 2009.  Since 2001, the Government of Guyana has stated its intention to introduce additional competition into Guyana’s telecommunications sector.  Since that time, the Company has met on several occasions with the Government of Guyana to discuss potential modifications of its exclusivity and other rights under the existing agreement.  In early October 2010, the Government of Guyana released to existing telecommunications providers in Guyana certain materials, including drafts of legislation, regulations, and licenses (“Draft Laws”), that, if enacted, would permit other telecommunications carriers to receive licenses to provide domestic fixed services and international voice and data services in Guyana, in contravention of the Company’s existing exclusive license.  The Draft Laws would also introduce material changes to many other features of Guyana’s existing telecommunications regulatory regime.  In exercising the Company’s option to renew its licenses in 2009, the Company reiterated to the Government that the Company would be willing to voluntarily relinquish the exclusivity aspect of our licenses, but only as part of an overall settlement agreement with the Government.  At this time, the Company does not know when or if the Draft Laws will be adopted by the Government of Guyana, or if changes will be made to the substance of the Draft Laws, including the termination of ATN’s exclusivity rights.  Although we believe that we would be entitled to damages or other compensation for any involuntary termination of the exclusive license, we cannot guarantee that we would prevail in a proceeding to enforce our rights or that our actions would effectively halt any unilateral action by the Government.

 

Litigation

 

We are involved in several legal claims regarding our tax filings with the Guyana Inland Revenue dating back to 1991 regarding the deductibility of intercompany advisory fees as well as other tax assessments. Should we be held liable for any of the disputed tax assessments, totaling $36.8 million (including an assessment for $13.3 million that we received in July 2010), we believe that the government of Guyana would then be obligated to reimburse us for any amounts that would reduce our return on investment to less than 15% per annum for the relevant periods.

 

In addition, we are currently involved in several legal challenges to our exclusive license under Guyana’s constitution, which have remained pending for anywhere from one to ten years.  We believe that any legal challenge to our exclusive license granted in 1990, including lawsuits filed in 2000 by Inet Communications, Inc., in 2002 by an individual and in 2009 by Digicel, are without merit, and we have and will continue to vigorously defend against such legal challenges.

 

For all of the above regulatory, litigation, or related matters, we believe some adverse outcome is probable and have accordingly accrued $5.0 million as of September 30, 2010.

 

Other

 

The Company is currently disputing certain invoices it received relating to certain acquisition-related charges.  A portion of these disputed invoices is included in the accompanying statements of operations for the three and nine months ended September 30, 2010.

 

12.  SUBSEQUENT EVENTS

 

In early October 2010, the Government of Guyana released to existing telecommunications providers in Guyana certain materials, including drafts of legislation, regulations, and licenses (“Draft Laws”), that, if enacted, would permit other telecommunications carriers to receive licenses to provide domestic fixed services and international voice and data services in Guyana, in contravention of the Company’s existing exclusive license.  The Draft Laws would also introduce material changes to many other features of Guyana’s existing telecommunications regulatory regime.  At this time, the Company does not know when or if the Draft Laws will be adopted by the Government of Guyana, or if changes will be made to the substance of the Draft Laws, including the termination of ATN’s exclusivity rights.

 

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Table of Contents

 

ITEM 2.  MANA GEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis of our financial condition and results of operations that follows are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our condensed consolidated financial statements herein and the accompanying notes thereto, and our Annual Report on Form 10-K for the year ended December 31, 2009, in particular, the information set forth therein under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

Overview

 

We provide the following telecommunications services, through our operating subsidiaries, in North America, Bermuda and the Caribbean:

 

·                   Wireless.   In the United States, we offer wireless voice and data services to retail customers under the “Alltel” name in rural markets located principally in the Southeast and Midwest.  Additionally, we offer wholesale wireless voice and data roaming services to national, regional and local wireless carriers in rural markets located principally in the Southwest and Midwest United States.  We also offer wireless voice and data services to retail customers in Guyana under the “Cellink” name, in Bermuda under the “CellularOne” name, in Turks and Caicos under the “Islandcom” name, in the U.S. Virgin Islands under the “Choice” name and in other smaller markets in the U.S. and Caribbean.

 

·                   Wireline.   Our local telephone and data services include our operations in Guyana under the “GT&T” name and in the United States under the “Sovernet” and “ION” names.  In Guyana, we are the exclusive provider of domestic wireline local and long distance telephone services and also provide international voice and data services. We offer facilities-based integrated voice and data communications services to residential and business customers in New England, primarily in Vermont, and wholesale transport services in New York State.

 

ATN was incorporated in Delaware in 1987, and since that time, has engaged in strategic acquisitions and investments to grow the Company’s operations.  From 1998 through 2005, a significant majority of our revenue was derived from our wireless and wireline operations in Guyana, in which we have owned an 80% interest since 1991.  We also derived a portion of our revenue from a non-controlling investment made in 1998 in a voice and data services provider in Bermuda.  The Company has been a provider of fixed and portable wireless broadband data and dial-up internet services through our U.S. Virgin Islands subsidiary, acquired in 1999, which provided a small portion of the Company’s annual revenues.  In the past five years, we have added substantially to the diversity of our business and reduced our historical dependence on our Guyana operations for our financial results.  We entered the U.S. telecommunications market through the 2005 acquisition of an operator of a wholesale wireless network in rural portions of the Southwest and Midwest and we continued our U.S. expansion with the 2006 acquisition of a wireline voice, broadband data and dial-up service provider in New England.  In 2008, we increased our investment in our Bermuda business to a controlling 58% interest and entered into new U.S. and Caribbean markets with investments in two early stage businesses providing wholesale transport services in New York State and wireless voice and data services in Turks and Caicos.  In addition to the diversification of our business through acquisition, we have further accentuated our focus on our U.S. operations with increased capital investment in and growth of our wholesale wireless business, which was the single largest contributor to our revenue and operating income in 2009.

 

In the second quarter of 2010, we completed the acquisition of our U.S. retail wireless business, which provides wireless voice and data services in rural markets of the United States under the “Alltel” brand name (the “Alltel Acquisition”).  Also during that quarter, we completed an investment in a wireless telecommunications provider in Aruba, in which we hold a controlling interest.  With the completion of the Alltel Acquisition, we continued our trend towards growth in U.S.-sourced revenue, with the U.S. wireless portion of our business now constituting a significant majority of the Company’s consolidated revenue.  Of course, we continue to actively evaluate additional investment and acquisition opportunities in the United States and the Caribbean that meet our return-on-investment and other acquisition criteria.

 

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Table of Contents

 

The following chart summarizes the operating activities of our principal subsidiaries, the segments in which we report their revenue and the markets they serve as of September 30, 2010:

 

Services

 

Segment

 

Markets

Wireless

 

U.S. Wireless

 

United States (rural markets)

 

 

International Integrated Telephony

 

Guyana

 

 

Island Wireless

 

Bermuda, Turks and Caicos, U.S. Virgin Islands, Aruba

Wireline

 

International Integrated Telephony

 

Guyana

 

 

U.S. Wireline

 

United States (New England and New York State)

 

We provide management, technical, financial, regulatory, and marketing services to our subsidiaries and typically receive a management fee equal to approximately 3% to 5% of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation.  For information about our business segments and geographical information about our revenue, operating income and long-lived assets, see Note 10 to the Consolidated Financial Statements included in this Report.

 

As discussed above, we have historically been dependent on our wholesale U.S. wireless business and International Integrated Telephony operations for a majority of our revenue and profits.  The addition of our retail U.S. wireless business following the Alltel Acquisition on April 26, 2010 has shifted our reliance substantially to our U.S. Wireless segment, which now includes both our wholesale and retail U.S. wireless businesses.  For the three months ended September 30, 2010, approximately 83% of our consolidated revenue was generated by our U.S. Wireless segment, while only 11% was generated by our International Integrated Telephony segment.  In comparison, for the three months ended September 30, 2009, approximately 48% of our consolidated revenue was generated by our U.S. Wireless segment (then our “Rural Wireless” segment), while 34% was generated by our International Integrated Telephony segment.

 

As of September 30, 2010, our U.S. retail wireless services were offered in six states to approximately 767,000 customers under the “Alltel” brand name.  Our wireless licenses provide mobile data and voice coverage to a network footprint covering a population of approximately six million people as of September 30, 2010.  Through the Alltel Acquisition, we acquired a regional, non-contiguous wireless network that we anticipate will require network expansion and improvements as well as roaming support to ensure ongoing nationwide coverage.  Our Alltel service offerings provide rate plans, advanced devices and features that include local and nationwide voice and data services on either a postpaid or prepaid basis.  We offer several rate plans designed for customers to choose the flexibility that they desire for their calling preferences, and believe that the ability to offer nationwide calling to our customers is a key factor in our ability to remain competitive in the telecommunications market.

 

The revenue of our U.S. retail wireless business is primarily driven by the number of wireless retail subscribers, their adoption of our enhanced service offerings and their related voice and data usage.  The number of our retail subscribers and their usage volumes and patterns also has a major impact on the profitability of our U.S. retail wireless operations.  Our customer activity may be influenced by traditional retail selling periods, which may be seasonal in nature, and other factors that arise in connection with our rural customer base.  We are currently in a transition period as we move from the legacy Alltel information technology systems and platforms to our own.  During this transition period, which we expect to continue into mid-2011, we anticipate that our U.S. retail wireless revenue will decline as our ability to drive subscriber additions, control churn and optimize our offerings is constrained. .  During this time, we also expect to experience higher economic-related churn as we eliminate certain sales and credit practices implemented by the management of the trust that operated the Alltel assets from 2009 through the completion of the Alltel Acquisition.  During this time, we may engage in sales and promotional activities designed to retain or increase our customer base, but may be affected by other factors, including general economic conditions, the roaming and usage of our existing customer base and actions by our competitors, which may reduce or outweigh the success of our marketing or promotional efforts.  Once this transition period expires, we expect that our churn will gradually improve as we are able to refine our service offerings. The mix of our customers and their patterns of usage, particularly usage outside our network footprint, will have a significant impact on the level of profits for our U.S. retail wireless business.  In general, we compete with national and regional wireless providers that offer both prepaid and postpaid services, whose scale, resources and U.S. network footprint are generally significantly greater than ours.  Our ability to remain competitive and to maintain reasonable profit margins will depend, in part, on our ability to provide competitive pricing for our customers, to provide the latest mobile voice and data services in all of the areas where they wish to access those services and to anticipate and respond to various competitive factors.

 

In addition, the revenue and profits of our U.S. wholesale wireless business contribute to our overall U.S. Wireless revenue and are primarily driven by the number of sites and base stations we operate, the amount of voice and data traffic that each of these

 

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Table of Contents

 

sites generates, and the rate we get paid from our carrier customers on that traffic. We also provide roaming services in a number of areas in the U.S. (mainly in the western United States) where we do not also operate a retail wireless business.  As a result of the Alltel Acquisition, our reported wholesale wireless revenue also includes roaming revenue generation in areas in which we have retail wireless operations.  Historically, the growth in same site voice and data volumes and the number of operated sites has outpaced the decline in data rates.  However, during 2010, a significant decrease in the data rates almost offset overall voice and data traffic growth.  The growth of wholesale wireless revenue has historically been driven mainly by the rate at which we expand the number of base stations we operate. We compete with other wireless service providers that operate networks in their markets and offer wholesale roaming services as well.

 

However, the most significant competitive factor we face in our U.S. wholesale wireless business is the extent to which our carrier customers elect to build or acquire their own infrastructure (including networks that we built out pursuant to certain roaming agreements) in a market in which they operate, reducing or eliminating their need for our services in those markets.  For example, the 2009 acquisition by Verizon Wireless of Alltel Corporation and subsequent 2010 acquisition of certain divested Alltel assets by AT&T will result in our wholesale customers having their own infrastructure in certain markets where they are currently served by us. This has already resulted in some loss, and is expected to continue to result in a significant loss, of wireless wholesale revenue and operating income in future periods, which, if not offset by growth in other wholesale revenue generated or other sources, could materially reduce our overall operating profits. While we are not able to forecast the extent of this revenue impact precisely, we expect that at the very least such loss may more than offset any growth in U.S. wholesale wireless revenue during these periods.

 

For more information regarding this segment, see the discussion of “U.S. Wireless” in Note 10 to our Consolidated Financial Statements included in this Report.

 

Acquisition of Alltel Assets

 

On April 26, 2010, we completed our previously-announced acquisition of wireless assets from Cellco Partnership d/b/a Verizon Wireless pursuant to the Purchase Agreement, dated June 9, 2009, by and between the Company and Verizon.  Pursuant to the Alltel Acquisition, Verizon contributed certain licenses, network assets, tower and other leases and other assets and certain related liabilities to a wholly-owned subsidiary limited liability company, whose membership interests were acquired by AWCC, our wholly-owned subsidiary.  In connection with the acquisition, the Company and Verizon entered into roaming and transition services arrangements and we obtained the rights to use the Alltel brand and related service marks for up to twenty eight years in connection with the continuing operation of the acquired assets.  The purchase price of the acquisition was $200 million, plus approximately $21 million in connection with a customary net working capital adjustment.

 

Stimulus Grants

 

In 2009 and 2010, we filed several applications for stimulus funds made available by the U.S. Government under provisions of the American Recovery and Reinvestment Act of 2009 intended to stimulate the deployment of broadband infrastructure and services to rural, unserved and underserved areas.

 

In December 2009, we were named to receive a $39.7 million federal stimulus grant to fund our ION Upstate New York Rural Broadband Initiative, which involves building ten new segments of fiber-optic, middle-mile broadband infrastructure, serving more than 70 rural communities in upstate New York and parts of Pennsylvania and Vermont. The new project is being undertaken through our public-private partnership with the Development Authority of the North Country (“DANC”), a New York State public benefit corporation that owns and operates 750 miles of fiber optic network and provides wholesale telecommunications transport services to voice, video, data and wireless service providers.  The $39.7 million grant, awarded to us by the National Telecommunications and Information Administration of the U.S. Department of Commerce (“NTIA”), under its Broadband Technology Opportunities Program, will be paid over the course of the three-year project period as expenses are incurred. An additional $9.9 million will be invested in the project by us and by DANC.  The funding and build of this new project began in the third quarter of 2010.   The results of our U.S. fiber optic transport business are included in the our “U.S. Wireline” segment.

 

On March 25, 2010 the NTIA awarded the Navajo Tribal Utility Authority (“NTUA”) a $32.1 million federal stimulus grant. The grant, along with partial matching funds, will provide broadband infrastructure access to the Navajo Nation across Arizona, New Mexico and Utah. As part of the project, we are proposing to partner with NTUA to provide last mile services through a 4G LTE network to be constructed as a part of this project. Our proposed partnership with NTUA will receive a portion of the total grant to build-out the last mile infrastructure. This network will allow NTUA to supply both fixed and mobile customers with high-speed broadband access. The funding of this project is not scheduled to begin until 2011, once the necessary environmental site work is completed.  Accordingly, we did not recognize any of the granted funds during the three or nine months ended September 30, 2010.  The results of our wholesale U.S. wireless

 

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Table of Contents

 

business are included in our “U.S. Wireless” segment.

 

On July 7, 2010, in partnership with the Vermont Telecommunications Authority (the “VTA”), we were awarded a $33.4 million federal stimulus grant by the NTIA.  The grant, along with partial matching funds to be contributed by us (through a Vermont subsidiary) and the VTA, will be invested in fiber-optic middle mile network in Vermont to provide broadband and wireless services to community schools, colleges, libraries and state-owned buildings in the area.  The funding of this project is not scheduled to occur until 2011, once the necessary environmental site work is completed.  Accordingly, we did not recognize any of the granted funds during the three or nine months ended September 30, 2010.  The results of our U.S. wireline business are included in the our “U.S. Wireline” segment.

 

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Table of Contents

 

Results of Operations

 

Three Months Ended September 30, 2009 and 2010

 

 

 

Three Months Ended
September 30,

 

Amount of
Increase

 

Percent
Increase

 

 

 

2009

 

2010

 

(Decrease)

 

(Decrease)

 

 

 

(In thousands)

 

REVENUE:

 

 

 

 

 

 

 

 

 

US Wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

 —

 

$

 108,828

 

$

 108,828

 

%

Wholesale

 

31,837

 

49,952

 

18,115

 

56.9

 

International Wireless

 

11,684

 

14,220

 

2,536

 

21.7

 

Wireline

 

21,969

 

20,829

 

(1,140

)

(5.2

)

Equipment and Other

 

602

 

11,131

 

10,529

 

1749

 

Total revenue

 

66,092

 

204,960

 

138,868

 

210.1

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Termination and access fees

 

11,830

 

53,076

 

41,246

 

348.7

 

Engineering and operations

 

6,519

 

21,747

 

15,228

 

233.6

 

Sales, Marketing and customer services

 

3,454

 

50,411

 

46,957

 

1359.5

 

Equipment Expense

 

615

 

12,700

 

12,085

 

1965

 

General and administrative

 

8,690

 

29,179

 

20,489

 

235.8

 

Acquisition-related charges

 

2,072

 

47

 

(2,025

)

(97.7

)

Depreciation and amortization

 

9,763

 

23,974

 

14,211

 

145.6

 

Total operating expenses

 

42,943

 

191,134

 

148,191

 

345.1

 

Income from operations

 

23,149

 

13,826

 

(9,323

)

(40.3

)

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,228

)

(3,202

)

(1,974

)

160.7

 

Interest income

 

354

 

90

 

(264

)

(74.6

)

Equity in earnings of unconsolidated affiliate

 

 

166

 

166

 

 

Other income (expense), net

 

13

 

204

 

191

 

1469.2

 

Other income, net

 

(861

)

(2,742

)

(1,881

)

218.5

 

INCOME BEFORE INCOME TAXES

 

22,288

 

11,084

 

(11,204

)

(50.3

)

Income taxes

 

9,919

 

5,022

 

(4,897

)

(49.4

)

NET INCOME

 

12,369

 

6,062

 

(6,307

)

(51

)

Net income attributable to non-controlling interests

 

(433

)

303

 

736

 

170

 

NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS

 

$

11,936

 

$

 6,365

 

$

 (5,571

)

(46.7

)%

 

U.S. Wireless revenue.   U.S. Wireless revenue includes voice and data services revenue from our prepaid and postpaid retail operations as well as our wholesale roaming operations.  Retail revenue is derived from access by our retail customers to and usage of our networks and facilities, including airtime, roaming and long distance as well as enhanced services such as caller identification, call waiting, voice mail and other features. Wholesale revenue is generated from providing mobile voice or data services to the customers of other wireless carriers and also includes revenue from other, related, wholesale services such as the provision of network switching services and certain wholesale transport services.

 

The retail portion of our U.S. Wireless revenue was $108.8 million for the three months ended September 30, 2010 all of which is attributable to revenue generated by assets we acquired in the Alltel Acquisition. Our U.S. Wireless post-paid subscriber base was approximately 550,000 and our prepaid subscriber base was approximately 217,000 at September 30, 2010.

 

 We are currently in a transition period as we move from the legacy Alltel information technology systems and platforms to our own.  During this transition period, which we expect to continue into mid-2011, we anticipate that our U.S. retail wireless revenue may decline as our ability to drive subscriber additions, control churn and optimize our offerings is constrained.

 

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The wholesale portion of our U.S. Wireless revenue increased to $50.0 million for the three months ended September 30, 2010 from $31.8 million for the three months ended September 30, 2009, an increase of $18.2 million. The increase in wireless wholesale revenue was due to the $20.9 million of roaming revenue generated by the networks we acquired in the Alltel Acquisition offset by a $2.7 million decrease in revenues from our legacy U.S. roaming network. Such decrease from our legacy U.S. roaming network was due to the scheduled decrease in rates which more than offset the increase in base stations from 564 as of September 30, 2009 to 601 as of September 30, 2010.

 

Verizon’s acquisition of Alltel in 2009 has caused some loss of wireless wholesale revenue and contributed to our lack of growth this quarter as certain network assets acquired by Verizon overlap geographically with areas of our legacy U.S. roaming network where we previously provided wholesale roaming services to Verizon.  Similarly, we expect that the AT&T acquisition of certain Alltel assets, which was completed in June 2010, will contribute to additional and larger decreases in wireless wholesale revenue, as early as the fourth quarter of 2010, when AT&T completes its previously announced UMTS network build in those areas overlapping our network in the southwestern United States.  This loss in wireless wholesale revenue could have a significant negative impact on our operating income if it is not offset or replaced by increased operating income from other sources.

 

While we expect to see some increase in wireless wholesale revenue from our U.S. wireless business in geographical areas not impacted by Verizon or AT&T’s acquisition of Alltel networks, the pace of that increase in non-Alltel overlap markets is currently expected to be slower as compared to the growth in previous periods due to a reduction in the number of new sites and base stations added and recent reductions in roaming rates.  Additional rate reductions, under previously contracted agreements, may affect our revenue growth in upcoming quarters.  We also expect to receive a portion of the $32.1 million grant from the NTIA to build on the Navajo Nation during 2011 through our proposed partnership with NTUA.

 

International Wireless revenue.   International Wireless revenue includes retail and wholesale voice and data wireless revenue from international operations in Bermuda and the Caribbean.

 

International Wireless revenue increased by $2.5 million to $14.2 million for the three months ended September 30, 2010, from $11.7 million for the three months ended September 30, 2009.  This increase was primarily generated by the assets of our recent acquisition in Aruba and increased minutes of use in Guyana. Wireless subscribers in Guyana increased 6%, from approximately 277,000 subscribers as of September 30, 2009 to approximately 293,000 subscribers as of September 30, 2010.

 

While we have experienced recent subscriber growth in Guyana, competition remains strong, and the largely pre-paid subscriber base means that subscribers and revenue could shift relatively quickly in future periods. In addition, the overall number of our wireless subscribers in Guyana could be reduced as a result of recent regulations imposed on Guyana telecommunications carriers, including our Guyana operations, to collect proof of address and photographic identification for all new and existing customers.

 

Wireline revenue.   Wireline revenue is generated by our wireline operations in Guyana, including international telephone calls into and out of Guyana, our integrated voice and data operations in New England and our wholesale transport operations in New York State and in the western United States. This revenue includes basic service fees, measured service revenue, and internet access fees, as well as installation charges for new lines, monthly line rental charges, long distance or toll charges, maintenance and equipment sales.

 

Wireline revenue decreased by $1.2 million to $20.8 million for the three months ended September 30, 2010 from $22.0 million for the three months ended September 30, 2009. A $1.7 million decrease in international long distance revenue was partially offset by an increase in U.S. revenue growth and growth generated by the July 2010 launch of our new fiber optic submarine cable in Guyana. Our access lines in Guyana grew from approximately 144,000 lines as of September 30, 2009 to approximately 149,000 lines as of September 30, 2010, an increase of 3%. Revenue from the growth in access lines has been partially offset by a decrease in usage of those lines that is likely due to wireless service alternatives.

 

We believe this decrease in international long distance revenue was a result of continued and considerable illegal bypass activities resulting in lost revenue opportunities, as well as an overall reduction in call volume into Guyana attributable to the current difficult global economic environment.  In the U.S., we saw increased revenue from our upstate New York network transport service business. We continue to add business customers in the U.S. for our voice and data services; however, the overall revenue increase is partially offset by the decline in the residential data business, particularly dial-up internet services.

 

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In future periods, we anticipate that wireline revenue from our international long distance business in Guyana may continue to decrease, but may be offset by increased revenue from local telephone and voice services in Guyana, as well as high-speed data sales in New York. We are in the process of expanding our network in New York and began receiving a portion of the $39.7 million stimulus grant during the third quarter of 2010.  We do not expect the network buildout to be completed during 2010 and, as such, do not expect any impact to our revenues until 2011.

 

Equipment and Other revenue.   Equipment revenue represents revenue from wireless equipment sales and other miscellaneous revenue items.

 

Equipment and Other revenue increased by $10.5 million to $11.1 million for the three months ended September 30, 2010, from $0.6 million for the three months ended September 30, 2009. The increase is due to equipment sales from our Alltel Acquisition.  We anticipate that equipment revenue will remain fairly consistent in future periods as a percentage of our U.S. retail wireless revenues.

 

Termination and access fee expenses .  Termination and access fee expenses are charges that we pay for voice and data transport circuits (in particular, the circuits between our wireless sites and our switches), internet capacity and other access fees we pay to terminate our calls as well as bad debt expense.  Termination and access fees increased by $41.3 million from $11.8 million for the three months ended September 30, 2009 to $53.1 million for the three months ended September 30, 2010. The Alltel Acquisition resulted in $39.0 million of the increase.  The remaining increase was due to the expansion of our legacy U.S. roaming network and international networks.

 

Termination and access fees are expected to increase in future periods, but remain fairly proportionate to their related revenue as our networks expand.

 

Engineering and operations expenses.   Engineering and operations expenses include the expenses associated with developing, operating, supporting and expanding our networks, including the salaries and benefits paid to employees directly involved in the development and operation of our networks.  Engineering and operations expenses increased by $15.2 million from $6.5 million for the three months ended September 30, 2009 to $21.7 million for the three months ended September 30, 2010 as a result of the Alltel Acquisition.  We expect that engineering and operations expenses will increase in the future as our networks expand and require additional support and as we continue to transition the network that we acquired as part of the Alltel Acquisition to our network.

 

Sales marketing and customer service expenses.   Sales and marketing expenses include salaries and benefits we pay to sales personnel, customer service expenses, sales commissions and the costs associated with the development and implementation of our promotion and marketing campaigns.

 

Sales and marketing expenses increased by $46.9 million from $3.5 million for the three months ended September 30, 2009 to $50.4 million for the three months ended September 30, 2010. The majority of this increase is the result of the Alltel Acquisition.  Sales and marketing expenses were particularly high in our U.S. wireless business as we incurred additional expenses primarily related to an accelerated pace of customer contract renewals and extensions.

 

We expect that sales and marketing expenses will increase in the short term as we continue to incur higher than normal customer transition and retention costs.

 

Equipment expenses.   Equipment expenses include the costs of our handset and customer resale equipment at our retail wireless businesses.

 

Equipment Expenses increased from $0.6 million for the three months ended September 30, 2009 to $12.7 million for the three months ended September 30, 2010 as a result of the Alltel Acquisition. We expect that these expenses will increase in future periods in line with our expanded operations but remain roughly proportionate to our equipment revenue.

 

General and administrative expenses.   General and administrative expenses include salaries, benefits and related costs for general corporate functions, including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources.  General and administrative expenses also include internal costs associated with our performance of due-diligence on our pending or completed acquisitions.

 

General and administrative expenses increased by $20.5 million from $8.7 million for the three months ended September 30, 2009 to $29.2 million for the three months ended September 30, 2010.  We are currently in a transition period as we integrate the new Alltel business.  During this transition period, which we expect to continue into mid-2011, we anticipate that we will incur higher than usual general and administrative expenses as certain significant costs continue to overlap with our already existing infrastructure.  Once this transition period concludes, we expect that general and administrative expenses, as a percentage of revenue, will decrease as we grow our U.S. retail wireless business.

 

Acquisition-related charges.   Acquisition-related charges include the external costs, such as legal, accounting, and consulting fees directly associated with acquisition related activities, which are expensed as incurred. Acquisition-related charges do not include internal costs,

 

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such as employee salary and travel-related expenses, incurred in connection with the Alltel Acquisition.

 

For the three months ended September 30, 2009, acquisition-related charges for legal, banking, consulting and accounting fees in connection with the Alltel Acquisition were $2.1 million.  Minimal acquisition-related charges were incurred during the three months ended September 30, 2010.  We expect that acquisition-related expenses will continue to be incurred from time to time as the Company continues to explore any additional acquisition opportunities that arise and may meet our investment objectives.

 

Depreciation and amortization expenses.   Depreciation and amortization expenses represent the depreciation and amortization charges we record on our property and equipment and on certain intangible assets.

 

Depreciation and amortization expenses increased by $14.2 million from $9.8 million for the three months ended September 30, 2009 to $24.0 million for the three months ended September 30, 2010. The increase is primarily due to the addition of the Alltel tangible and intangible assets as well as additional fixed assets from our network expansion in our U.S. Wireless business.

 

We expect depreciation expense on our tangible assets to continue to increase as a result of a future network expansion in the U.S. and elsewhere.  Such increase, however, will be partially offset by a future decrease in the amortization of our intangible assets which are being amortized using an accelerated amortization method.

 

Interest expense.   Interest expense represents interest incurred on our outstanding credit facilities including our interest rate swaps.

 

Interest expense increased from $1.2 million for the three months ended September 30, 2009 to $3.2 million for the three months ended September 30, 2010, due to the amendment of our prior credit agreement, which increased both our outstanding debt and applicable interest rates on such debt.   On September 30, 2010, the Company entered into its Amended 2010 Credit Facility, further increasing the amounts available for borrowing.  As of September 30, 2010, we had $71.1 million outstanding under our Amended 2010 Term Loan A facility, $146.3 million outstanding under our Amended 2010 Term Loan B facility, and $50.0 million outstanding under our 2010 Term Loan C facility.  We had no outstanding borrowings under our Amended 2010 Revolver Loan as of September 30, 2010.  For a discussion of the Company’s 2010 Credit Facility and Amended 2010 Credit Facility, see Note 6 to the Consolidated Financial Statements included in this Report and “—Liquidity and Capital Resources.”

 

Interest income.   Interest income represents interest earned on our cash and cash equivalents.

 

Interest income decreased to $0.1 million from $0.4 million for the three months ended September 30, 2010 and 2009, respectively. This decrease is a result of a decrease in our cash balances as well as the interest rates and subsequent amounts earned on our cash and investments.

 

Equity in earnings of unconsolidated affiliates.      Equity in earnings of unconsolidated affiliates included our share of the earnings of an unconsolidated affiliate of our U.S. Wireless segment. Equity in earnings of unconsolidated affiliates was $0.2 million for the three months ended September 30, 2010.

 

Other income (expense).  Other income (expense) represents miscellaneous non-operational income we earned or expenses we incurred. Other income was $0.2 million for the three months ended September 30, 2010.

 

Income taxes .  Income tax expense includes federal and state income taxes at their respective statutory rates as well as foreign income taxes in excess of the statutory U.S. income tax rates. Since we operate in jurisdictions that have a wide range of statutory tax rates, our consolidated effective tax rate is impacted by the mix of income generated in those jurisdictions as well as the receipt of dividends from our foreign subsidiaries. Our effective tax rate was 45% for the three months ended September 30, 2009.  For the three months ended September 30, 2010, our effective tax rate was 45%.  The tax expense for the three months ended September 30, 2010 included an adjustment of $xx to reconcile estimates made in our 2009 tax provision to the actual amounts upon filing our 2009 tax returns.  Without this adjustment, our effective tax rate for the three months ended September 30, 2010 was 53%.

 

Net Income Attributable to Non-Controlling Interests.    Net income attributable to non-controlling interests includes minority shareholders’ share of net income in our less than wholly owned subsidiaries.

 

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Net income attributable to non-controlling interests decreased from an expense of $0.4 million for the three months ended September 30, 2009 to income of $0.3 million for the three months ended September 30, 2010. This decrease was a result of the allocation of non-controlling shareholders’ share of losses at our early stage businesses.

 

Net income attributable to Atlantic Tele-Network, Inc. Stockholders.   As a result of the above factors, net income decreased to $6.4 million for the three months ended September 30, 2010 from $11.9 million for the three months ended September 30, 2009. On a per share basis, net income decreased from $0.78 per basic and diluted share to $0.41 per basic and diluted share for the three months ended September 30, 2009 to 2010, respectively.

 

Segment results.   We currently have four material operating segments, which we manage and evaluate separately: (1) U.S. Wireless; (2) International Integrated Telephony; (3) Island Wireless; and (4) U.S. Wireline. Segment results are set forth in Note 10 to the Consolidated Financial Statements included in this Report.

 

Nine Months Ended September 30, 2009 and 2010

 

 

 

Nine Months Ended
September 30,

 

Amount of
Increase

 

Percent
Increase

 

 

 

2009

 

2010

 

(Decrease)

 

(Decrease)

 

 

 

(In thousands)

 

REVENUE:

 

 

 

 

 

 

 

 

 

US Wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

 

$

190,331

 

$

190,331

 

%

Wholesale

 

79,276

 

112,437

 

33,161

 

41.8

 

International Wireless

 

33,725

 

37,712

 

3,987

 

11.8