ATN International, Inc.
ATLANTIC TELE NETWORK INC /DE (Form: 10-Q, Received: 11/12/2013 16:27:30)

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, 2013

 

OR

 

o

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

 

For the transition period from           to             

 

Commission File Number 001-12593

 


 

Atlantic Tele-Network, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

47-0728886

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

600 Cummings Center

Beverly, MA 01915

(Address of principal executive offices, including zip code)

 

(978) 619-1300

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x   No   o

 

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

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of November 12, 2013, the registrant had outstanding 15,756,840 shares of its common stock ($.01 par value).

 

 

 



Table of Contents

 

ATLANTIC TELE-NETWORK, INC.

 

FORM 10-Q

 

Quarter Ended September 30, 2013

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

3

 

 

 

PART I—FINANCIAL INFORMATION

4

 

 

 

Item 1

Unaudited Condensed Consolidated Financial Statements

4

 

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2012 and September 30, 2013

4

 

 

 

 

Condensed Consolidated Income Statements for the Three and Nine Months Ended September 30, 2012 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2012 and 2013

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2013

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8-18

 

 

 

Item 2

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

18-29

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4

Controls and Procedures

30

 

 

 

PART II—OTHER INFORMATION

30

 

 

 

Item 1

Legal Proceedings

30

 

 

 

Item 1A

Risk Factors

30

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 6

Exhibits

31

 

 

 

SIGNATURES

32

 

 

 

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)  the general performance of our operations, including operating margins, wholesale revenues, and the future retention and turnover of our subscriber base; (2) our ability to maintain favorable roaming arrangements; (3) increased competition; (4) economic, political and other risks facing our foreign operations; (5) the loss of certain FCC and other licenses  or other regulatory changes affecting our businesses; (6) rapid and significant technological changes in the telecommunications industry; (7) any loss of any key members of management; (8) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure and retail wireless business; (9) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (10) the occurrence of severe weather and natural catastrophes; (11) our continued access to capital and credit markets; (12) our ability to find investment or acquisition or disposition opportunities that fit our strategic goals for the Company;  and (13) our ability to realize the value that we believe exists in our businesses. These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the forward-looking statements above are set forth more fully under Item 1A “Risk Factors” of this Report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 18, 2013 and the other reports we file from time to time with the SEC. The Company undertakes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements.

 

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

 

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

 

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,
2012

 

September 30,
2013

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

136,647

 

$

594,340

 

Restricted cash

 

 

39,000

 

Accounts receivable, net of allowances of $7.9 million and $8.6 million, respectively

 

38,867

 

44,818

 

Materials and supplies

 

8,033

 

8,963

 

Deferred income taxes

 

8,349

 

1,466

 

Prepayments and other current assets

 

5,597

 

9,813

 

Assets of discontinued operations

 

380,765

 

4,923

 

Total current assets

 

578,258

 

703,323

 

Property, plant and equipment, net

 

238,324

 

253,210

 

Telecommunications licenses

 

39,905

 

39,501

 

Goodwill

 

45,077

 

45,077

 

Trade name license

 

417

 

417

 

Customer relationships, net

 

2,206

 

1,905

 

Restricted cash

 

 

39,000

 

Other assets

 

6,688

 

6,733

 

Total assets

 

$

910,875

 

$

1,089,166

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

15,680

 

$

 

Accounts payable and accrued liabilities

 

29,773

 

44,307

 

Dividends payable

 

 

4,266

 

Accrued taxes

 

26,678

 

251,257

 

Advance payments and deposits

 

7,563

 

7,916

 

Other current liabilities

 

16,673

 

20,778

 

Liabilities of discontinued operations

 

73,910

 

17,719

 

Total current liabilities

 

170,277

 

346,243

 

Deferred income taxes

 

84,006

 

33,275

 

Other liabilities

 

11,452

 

6,761

 

Long-term debt, excluding current portion

 

250,900

 

 

Total liabilities

 

516,635

 

386,279

 

Commitments and contingencies (Note 12)

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value per share; 50,000,000 shares authorized; 16,090,544 and 16,407,422 shares issued, respectively, and 15,576,721 and 15,755,340 shares outstanding, respectively

 

160

 

163

 

Treasury stock, at cost; 513,823 and 652,082 shares, respectively

 

(5,286

)

(11,901

)

Additional paid-in capital

 

123,253

 

133,576

 

Retained earnings

 

224,316

 

506,064

 

Accumulated other comprehensive loss

 

(8,297

)

(1,312

)

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

 

334,146

 

626,590

 

Non-controlling interests

 

60,094

 

76,297

 

Total equity

 

394,240

 

702,887

 

Total liabilities and equity

 

$

910,875

 

$

1,089,166

 

 

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

 

4



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2013

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

REVENUE:

 

 

 

 

 

 

 

 

 

U.S. wireless

 

$

29,042

 

32,796

 

$

77,970

 

80,597

 

International wireless

 

21,014

 

22,895

 

60,186

 

66,162

 

Wireline

 

21,289

 

21,504

 

64,094

 

62,945

 

Equipment and other

 

1,967

 

2,155

 

5,634

 

6,103

 

Total revenue

 

73,312

 

79,350

 

207,884

 

215,807

 

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

 

 

 

 

 

 

 

 

 

Termination and access fees

 

14,435

 

14,112

 

42,404

 

40,768

 

Engineering and operations

 

9,903

 

9,509

 

29,834

 

28,349

 

Sales and marketing

 

4,299

 

4,370

 

14,877

 

13,646

 

Equipment expense

 

3,129

 

2,549

 

9,149

 

8,050

 

General and administrative

 

12,952

 

13,827

 

37,791

 

38,856

 

Transaction-related charges

 

2

 

2,610

 

7

 

2,674

 

Depreciation and amortization

 

12,421

 

12,335

 

38,304

 

36,517

 

Gain on disposition of long lived asset

 

 

 

 

(1,076

)

Total operating expenses

 

57,141

 

59,312

 

172,366

 

167,784

 

Income from operations

 

16,171

 

20,038

 

35,518

 

48,023

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(2,985

)

(7,141

)

(10,755

)

(12,126

)

Unrealized loss on interest rate derivative contracts

 

 

(5,675

)

 

(5,675

)

Other income (expense), net

 

49

 

(226

)

(442

)

(198

)

Other income (expense), net

 

(2,936

)

(13,042

)

(11,197

)

(17,999

)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

13,235

 

6,996

 

24,321

 

30,024

 

Income tax expense

 

4,145

 

2,481

 

9,032

 

11,294

 

INCOME FROM CONTINUING OPERATIONS

 

9,090

 

4,515

 

15,289

 

18,730

 

INCOME FROM DISCONTINUED OPERATIONS:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

8,922

 

(1,960

)

23,428

 

5,166

 

Gain on sale of discontinued operations, net of tax

 

 

305,197

 

 

305,197

 

Income from discontinued operations, net of tax

 

8,922

 

303,237

 

23,428

 

310,363

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

18,012

 

307,752

 

38,717

 

329,093

 

Net income attributable to non-controlling interests, net of tax:

 

 

 

 

 

 

 

 

 

Continuing operations

 

(1,681

)

(2,945

)

(2,015

)

(5,934

)

Discontinued operations

 

(365

)

116

 

(885

)

(601

)

Disposal of discontinued operations

 

 

(28,699

)

 

(28,699

)

 

 

(2,046

)

(31,528

)

(2,900

)

(35,234

)

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

 

$

15,966

 

$

276,224

 

$

35,817

 

$

293,859

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.10

 

$

0.86

 

$

0.82

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Discontinued operations

 

$

0.55

 

$

(0.12

)

$

1.45

 

$

0.29

 

Gain on sale of discontinued operations

 

 

17.57

 

 

17.64

 

Total discontinued operations

 

$

0.55

 

$

17.45

 

$

1.45

 

$

17.93

 

Total

 

$

1.03

 

$

17.55

 

$

2.31

 

$

18.75

 

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

 

 

 

 

 

 

 

 

 

Continued operations

 

$

0.47

 

$

0.10

 

$

0.85

 

$

0.81

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Discontinued operations

 

$

0.55

 

(0.12

)

$

1.44

 

0.29

 

Gain on sale of discontinued operations

 

 

17.45

 

 

$

17.51

 

Total discontinued operations

 

$

0.55

 

$

17.33

 

$

1.44

 

$

17.80

 

Total

 

$

1.02

 

$

17.43

 

$

2.29

 

$

18.61

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

15,560

 

15,738

 

15,517

 

15,678

 

Diluted

 

15,651

 

15,845

 

15,605

 

15,789

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.25

 

$

0.27

 

$

0.71

 

$

0.77

 

 

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

 

5



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2013

(Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2013

 

 

 

 

 

 

 

Net income

 

$

38,717

 

$

329,093

 

Other comprehensive income:

 

 

 

 

 

Unrealized (loss) gain on interest rate derivative, net of tax (benefit) of $(0.4) million and $2.0 million, respectively

 

(535

)

6,985

 

Other comprehensive income, net of tax

 

(535

)

6,985

 

Comprehensive income

 

38,182

 

336,078

 

Less: Comprehensive income attributable to non-controlling interests

 

(2,900

)

(35,234

)

Comprehensive income attributable to Atlantic Tele-Network, Inc.

 

$

35,282

 

$

300,844

 

 

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

 

6



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2013

(Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

38,717

 

$

329,093

 

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

 

 

 

 

 

Depreciation and amortization

 

38,304

 

36,517

 

Provision for doubtful accounts

 

1,006

 

880

 

Amortization of debt discount and debt issuance costs

 

2,068

 

6,657

 

Stock-based compensation

 

2,585

 

3,419

 

Unrealized loss on interest rate derivative contracts

 

 

5,675

 

Deferred income taxes

 

136

 

 

Income from discontinued operations

 

(23,428

)

(5,166

)

Gain on disposition of long-lived assets

 

 

(1,076

)

Gain on sale of discontinued operations

 

 

(305,197

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(5,944

)

(3,832

)

Materials and supplies, prepayments, and other current assets

 

(2,268

)

(3,470

)

Income tax receivable

 

11,545

 

 

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

 

(52

)

11,623

 

Accrued taxes

 

17,181

 

(23,668

)

Other

 

2,545

 

7,307

 

Net cash provided by operating activities of continuing operations

 

82,395

 

58,762

 

Net cash provided by operating activities of discontinued operations

 

55,080

 

25,751

 

Net cash provided by operating activities

 

137,475

 

84,513

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(28,575

)

(55,171

)

Proceeds from disposition of assets

 

 

1,500

 

Net cash used in investing activities of continuing operations

 

(28,575

)

(53,671

)

Net cash provided by (used in) investing activities of discontinued operations, net

 

(21,930

)

711,541

 

Net cash provided by (used in) investing activities

 

(50,505

)

657,870

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowing under term loan

 

275,000

 

 

Proceeds from borrowings under revolver loan

 

46,378

 

 

Principal repayments of term loan

 

(256,873

)

(272,137

)

Principal repayments of revolver loan

 

(74,534

)

 

Proceeds from stock option exercises

 

1,240

 

1,450

 

Dividends paid on common stock

 

(10,692

)

(7,839

)

Distributions to non-controlling interests

 

(1,294

)

(3,321

)

Payments of debt issuance costs

 

(3,564

)

(12

)

Repurchase of non-controlling interests

 

(80

)

 

Investments made by non-controlling interests

 

1,040

 

135

 

Purchase of common stock

 

(202

)

(1,288

)

Net cash used in financing activities of continuing operations

 

(23,581

)

(283,012

)

Net cash used in financing activities of discontinued operations, net

 

(716

)

(1,678

)

Net cash used in financing activities

 

(24,297

)

(284,690

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

62,673

 

457,693

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

48,735

 

136,647

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

111,408

 

$

594,340

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Interest paid

 

 

10,096

 

 

6,642

 

Taxes paid, net of refunds

 

 

6,225

 

 

37,597

 

 

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

 

7



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND BUSINESS OPERATIONS

 

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

 

·                   Wireless.   In the United States, the Company offers wholesale wireless voice and data roaming services to national, regional, local and selected international wireless carriers in rural markets located principally in the Southwest and Midwest. The Company also offers wireless voice and data services to retail customers in Bermuda, Guyana, the Caribbean and smaller markets in the United States.

 

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

 

The following chart summarizes the operating activities of the Company’s principal subsidiaries, the segments in which the Company reports its revenue and the markets it served as of September 30, 2013:

 

Services

 

Segment

 

Markets

 

Tradenames

Wireless

 

U.S. Wireless

 

United States (rural markets)

 

Commnet, Choice

 

 

Island Wireless

 

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

 

Mio, CellOne, Islandcom, Choice

 

 

International Integrated Telephony

 

Guyana

 

Cellink

Wireline

 

International Integrated Telephony

 

Guyana

 

GT&T, eMagine

 

 

U.S. Wireline

 

United States (New England and New York State)

 

Sovernet, ION

 

The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a management fee equal to a percentage of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation. For information about the Company’s business segments and geographical information about its revenue, operating income and long-lived assets, see Note 11 to the Condensed Consolidated Financial Statements.

 

2.  BASIS OF PRESENTATION

 

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information included herein is unaudited; however, the Company believes such information and the disclosures herein are adequate to make the information presented not misleading and reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial position and results of operations for such periods. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  Results of interim periods may not be indicative of results for the full year.  These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s 2012 Annual Report on Form 10-K.

 

On September 20, 2013, the Federal Communications Commission announced its approval of the previously announced proposed sale of the Company’s U.S. retail wireless business operated under the Alltel name to AT&T Mobility (“AT&T” or “AT&T Mobility”) for approximately $780 million in cash plus a sale price adjustment based on the working capital of the business.  The working capital payment is subject to adjustment based on the final working capital amount at the time of the sale.  As a result of that approval, the Company completed the sale on that date.

 

The operations of the Alltel business, which were previously included in the Company’s U.S. Wireless segment, have been classified as discontinued operations in all periods presented.  The gain on the sale of the Alltel business recognized during the three months ended September 30, 2013, is also included in discontinued operations.

 

See Note 4 for additional information.  Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our continuing operations.

 

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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 the Financial Accounting Standards Board’s (“FASB”) authoritative guidance on the consolidation of variable interest entities since it is determined that the Company is the primary beneficiary of these entities.

 

Certain revisions to correct profit and loss classifications have been made in the prior period financial statements. The changes match the elimination of income with expenses for inter-company shared services and align subsidiary accounting practices for bad debt expense presentation. The changes were not material to prior periods and did not impact operating income. The aggregate impact of the changes included a $0.4 million and $0.8 million adjustment from wireline revenue to termination and access fees and an increase of engineering and operations expense of $0.8 million and $2.4 million with a corresponding decrease in general and administrative expense for each of the three and nine month periods ended September 30, 2012, respectively.

 

Additionally, during the three months ended September 30, 2013, the Company recognized approximately $0.6 million in Other Income to correct for an overstatement of prepaid calling card liabilities recorded in advance payments and deposits.   The Company determined that the impact of the correction of this error was not material to the current or any prior period financial statements.

 

Our effective tax rates for the three months ended September 30, 2012 and 2013 were 31.3% and 35.5%, respectively. The three months ended September 30, 2012 includes a tax benefit of $1.3 million related to certain non-recurring tax credits.

 

Recent Accounting Pronouncements

 

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

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force),” which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a company does not have: (i) a net operating loss carryforward; (ii) a similar tax loss; or (iii) a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2013 and should be applied on a prospective basis. The Company does not expect that the adoption of this authoritative guidance will have a material impact on its consolidated financial statements.  See Note 9 for disclosure of reclassification adjustments from accumulated other comprehensive income.

 

3.  USE OF ESTIMATES

 

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

 

4.  DISCONTINUED OPERATIONS — SALE OF U.S. RETAIL WIRELESS BUSINESS

 

On September 20, 2013, the Federal Communications Commission announced its approval of the previously announced proposed sale of the Company’s U.S. retail wireless business operated under the Alltel name to AT&T for approximately $780.0 million in cash plus $17.4 million in working capital adjustments.  The Company previously reported the operations of this business within its U.S. Wireless segment.  As a result of that approval, the Company completed the sale of certain U.S. retail wireless assets on that date and recorded a gain of approximately $305.2 million calculated as follows (in thousands):

 

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Proceeds:

 

 

 

 

 

Received

 

 

 

$

702,000

 

Escrowed

 

 

 

78,000

 

Working capital- preliminary

 

 

 

24,138

 

Working capital- adjusted

 

 

 

(6,703

)

Adjust proceeds

 

 

 

797,435

 

Less: Net assets sold or impaired:

 

 

 

 

 

 

 

 

 

 

 

Assets sold or impaired:

 

 

 

 

 

Current assets

 

51,597

 

 

 

Property, plant and equipment, net

 

190,970

 

 

 

Telecommunications licenses

 

50,553

 

 

 

Other intangible assets

 

37,434

 

 

 

Other assets

 

13,202

 

 

 

 

 

 

 

 

 

Liabilities sold:

 

 

 

 

 

Current liabilities

 

(40,674

)

 

 

Other liabilities

 

(22,796

)

 

 

 

 

 

 

 

 

Net assets sold or impaired

 

 

 

280,286

 

 

 

 

 

 

 

Less: Transaction related costs

 

 

 

13,517

 

 

 

 

 

 

 

Pre-tax gain

 

 

 

503,632

 

 

 

 

 

 

 

Less: Income taxes at effective rate

 

 

 

198,435

 

 

 

 

 

 

 

Net gain on sale

 

 

 

$

305,197

 

 

The $797.4 million in cash proceeds includes $78.0 million of cash being held in a general indemnity escrow account which, subject to the terms and conditions of the purchase agreement between AT&T Mobility and the Company governing the sale, this escrow will be released to the Company over the next eighteen months as follows; $19.5 million after 180 days; $19.5 million after 360 days; and the remaining $39.0 million after 18 months.  The Company has recorded the $78.0 million as restricted cash on its September 30, 2013 balance sheet with $39.0 million classified as a current asset and the remaining $39.0 million classified as long-term based on the timing of the expected cash proceeds.

 

The Alltel trade name was not sold to AT&T Mobility. Due to trade name assignment restrictions, and no planned use through operations, the trade name was fully impaired. As a result, an impairment of $11.9 million was recorded as a part of the disposal and included in the net gain calculation.

 

The Company also recorded $28.7 million for the minority shareholders’ interests in the sold operation which is based on the estimated final distribution to the minority shareholders and included in non-controlling interests on its September 30, 2013 balance sheet.

 

The Company has reclassified the assets and liabilities of its Alltel operations to assets of discontinued operations and liabilities of discontinued operations within its December 31, 2012 and September 30, 2013 balance sheets. Those assets and liabilities consist of the following (in thousands):

 

 

 

December 31,
2012

 

September 30,
2013

 

 

 

 

 

 

 

Accounts receivable, net

 

$

34,225

 

$

 

Materials and supplies

 

19,047

 

 

Prepayments and other current assets

 

5,386

 

4,923

 

Property, plant and equipment, net

 

212,222

 

 

Telecommunications licenses

 

50,553

 

 

Other intangible assets

 

42,746

 

 

Other assets

 

16,586

 

 

 

 

 

 

 

 

Assets of discontinued operations

 

$

380,765

 

$

4,923

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

20,486

 

$

17,719

 

Accrued taxes

 

3,475

 

 

Advance payments and deposits

 

11,435

 

 

Other current liabilities

 

27,440

 

 

Other liabilities

 

11,074

 

 

 

 

 

 

 

 

Liabilities of discontinued operations

 

$

73,910

 

$

17,719

 

 

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Revenues and income from discontinued operations related to the Alltel business for the three and nine months ended September 30, 2012 and 2013 were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

2012

 

2013

 

 

 

 

 

 

 

Revenue from discontinued operations

 

$

115,692

 

$

88,036

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax expense (benefit) of $5,369 and $(1,020), respectively

 

8,922

 

(1,960

)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2013

 

 

 

 

 

 

 

Revenue from discontinued operations

 

$

349,703

 

$

299,519

 

 

 

 

 

 

 

Income from discontinued operations, net of tax expense of $15,241 and $3,244, respectively

 

23,428

 

5,166

 

 

5.  FAIR VALUE MEASUREMENTS

 

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

 

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

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 assets and liabilities include money market funds, debt and equity securities and derivative contracts that are traded in an active exchange market.

 

 

 

Level 2

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

 

 

 

 

 

This category generally includes certificates of deposit and non-exchange traded derivative contracts.

 

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2012 and September 30, 2013 are summarized as follows (in thousands):

 

 

 

December 31, 2012

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

 

$

363

 

$

363

 

Money market funds

 

1,755

 

 

1,755

 

Total assets measured at fair value

 

$

1,755

 

$

363

 

$

2,118

 

Interest rate derivative (Note 7)

 

$

 

$

11,142

 

$

11,142

 

Total liabilities measured at fair value

 

$

 

$

11,142

 

$

11,142

 

 

 

 

September 30, 2013

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

 

$

363

 

$

363

 

Money market funds (1)

 

80,806

 

 

80,806

 

Total assets measured at fair value

 

$

80,806

 

$

363

 

$

81,169

 

Interest rate derivative (Note 7)

 

$

 

$

5,651

 

$

5,651

 

Total liabilities measured at fair value

 

$

 

$

5,651

 

$

5,651

 

 


(1)   Includes $78.0 million classified as restricted cash on the Company’s balance sheet.

 

Certificate of Deposit

 

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

 

Money Market Funds

 

As of December 31, 2012 and September 30, 2013, this asset class consisted of a money market portfolio that comprises Federal government and U.S. Treasury securities. The asset class is classified within Level 1 of the fair value hierarchy because its underlying investments are valued using quoted market prices in active markets for identical assets.

 

Derivatives

 

The Company is exposed to certain risks arising from both its business operations and economic conditions. When deemed appropriate, the Company manages economic risks related to interest rates primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to the Company’s borrowings.  These derivatives were settled at approximately their September 30, 2013 carrying value on October 2, 2013.

 

We did not have any significant nonfinancial assets or nonfinancial liabilities that would be recognized or disclosed at fair value on a recurring basis as of December 31, 2012 and September 30, 2013.  The Company did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2013.

 

6.  LONG-TERM DEBT

 

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

 

 

 

December 31,
2012

 

September 30,
2013

 

Notes payable - Bank

 

 

 

 

 

Term loans

 

$

268,000

 

$

 

Revolver loan

 

 

 

Note Payable — Other

 

4,072

 

 

Total outstanding debt

 

272,072

 

 

Less: current portion

 

(15,680

)

 

Total long-term debt

 

256,392

 

 

Less: debt discount

 

(5,492

)

 

Net carrying amount

 

$

250,900

 

$

 

 

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Loan Facilities—Bank

 

On May 18, 2012, the Company amended and restated its existing credit facility with CoBank, ACB (the “Amended Credit Facility”) providing for $275.0 million in two term loans and a revolver loan of up to $100.0 million (which includes a $10.0 million swingline sub-facility) and the capacity for additional term loans up to an aggregate of $100.0 million, subject to lender approval.

 

On October 29, 2012, the Company further amended its Amended Credit Facility to provide for an additional letter of credit sub-facility to its revolver loan, to be available for issuance in connection with its Mobility Fund Support obligations. Under the amendment, the Company has the ability to use up to $55 million of its revolving credit facility for the issuance of letters of credit and currently has approximately $29.9 million of such Mobility Fund letters of credit outstanding which accrue a fee at a rate of 1.75% per annum on the outstanding amounts.  As of September 30, 2013, there were no draw-downs against these letters of credit.  If we fail to comply with certain terms and conditions upon which the Mobility Fund Support is granted, USAC will be entitled to draw the entire amount of the letter of credit applicable to the affected project, which includes penalty amounts.  The results of our Mobility Fund projects, once initiated, will be included in the Company’s “U.S. Wireless” segment. See Note 8 for additional information regarding the Mobility Fund.

 

On September 20, 2013 the two term loans under the Company’s Amended Credit Facility were repaid in full.  The Company incurred nominal fees for the breakage of the term loans that were incurring interest at the London Interbank Offered Rate (LIBOR) .  In addition, the Company recorded approximately $5.5 million, including $4.7 million of debt discounts,  in interest expense during the three months ended September 30, 2013 related to accelerated amortization of deferred financing costs associated with the term loans.

 

Amounts borrowed under the term loans bore interest through September 20, 2013 at a rate equal to, at the Company’s option, either (i) LIBOR plus an applicable margin ranging between 2.00% to 4.00% or (ii) a base rate plus an applicable margin ranging from 1.00% to 3.00%.  The base rate was equal to the higher of (i) 1.50% plus the higher of (x) the one-week LIBOR and (y) the one-month LIBOR; or (ii) the prime rate (as defined in the Amended Credit Facility). The applicable margin was determined based on the ratio of our indebtedness (as defined in the Amended Credit Facility) to our EBITDA (as defined in the Amended Credit Facility).

 

Amounts borrowed under the revolver loan bear interest at a rate equal to, at our option, either (i) LIBOR plus an applicable margin ranging between 2.00% to 3.50% or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.50% (or, in the case of amounts borrowed under the swing-line sub-facility, an applicable margin ranging from 1.50% to 3.00%.)  We must also pay a fee ranging from 0.25% to 0.50% of the average daily unused portion of the revolver loan over each calendar quarter, which fee is payable in arrears on the last day of each calendar quarter.

 

The Amended Credit Facility contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Amended Credit Facility contains financial covenants by the Company that (i) impose a maximum leverage ratio of indebtedness to EBITDA, (ii) require a minimum debt service ratio of EBITDA to principal, interest and taxes payments and (iii) require a minimum ratio of equity to consolidated assets. As of September 30, 2013, we were in compliance with all of the financial covenants of the Amended Credit Facility as amended.

 

Note Payable—Other

 

In connection with the CellOne Merger with M3 Wireless, Ltd., the Company assumed a term loan of approximately $7.0 million owed to Keytech Ltd., the former parent company of M3 and current 42% minority shareholder in the Company’s Bermuda operations. This term loan, which bore interest at 7% per annum, was repaid in full in July 2013.

 

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

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company’s objective in using interest rate derivatives was to add stability to interest expense and to manage its exposure to the interest rate movements of its variable-rate debt. To accomplish this objective, the Company primarily used interest rate derivatives as part of its interest rate risk management strategy. Interest rate derivatives designated as cash flow hedges involved the

 

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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 derivatives designated and that qualified as cash flow hedges was recorded in accumulated other comprehensive income and was subsequently reclassified into earnings in the period that the hedged forecasted transaction affected earnings.

 

The total outstanding notional amount of cash flow hedges was $140.5 million as of September 30, 2013.  As a result of the repayment of its variable-rate debt on September 20, 2013, the Company’s interest rate derivatives were determined to be ineffective and a loss of $5.7 million was recorded during the three months ending September 30, 2013.  On October 2, 2013, the Company terminated its interest rate derivatives and paid $5.4 million, the net fair value of those derivatives, to its counterparties.

 

Amounts reported in accumulated other comprehensive income related to the interest rate derivatives were reclassified to “Unrealized loss on interest rate derivative contracts” as of the date of the prepayment of the Company’s outstanding term notes.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheet as of December 31, 2012 and September 30, 2013 (in thousands):

 

 

 

Liability Derivatives

 

 

 

 

 

Fair Value as of

 

 

 

Balance Sheet
Location

 

December 31,
2012

 

September 30,
2013

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest Rate Derivatives

 

Other liabilities

 

$

11,142

 

$

5,651

 

Total derivatives designated as hedging instruments

 

 

 

$

11,142

 

$

5,651

 

 

The table below presents the effect of the Company’s interest rate derivatives, it’s only derivative financial instruments, on the consolidated income statements for the three and nine months ended September 30, 2012 and 2013 (in thousands):

 

 

 

Effective Portion

 

Ineffective Portion

 

Three Months
Ended
September 30, 

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

2012

 

$

(1,192

)

Interest expense

 

$

1,044

 

$

 

Interest expense

 

$

 

2013

 

 

Interest expense

 

 

 

Interest expense

 

 

 

 

 

Effective Portion

 

Ineffective Portion

 

Nine Months
Ended
September 30,

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income

 

2012

 

$

(892

)

Interest expense

 

$

3,100

 

$

 

Interest expense

 

$

 

2013

 

6,255

 

Interest expense

 

6,255

 

 

Interest expense

 

764

 

 

8.  MOBILITY FUND

 

As part of the Federal Communications Commission’s (“FCC”) reform of its Universal Service Fund (“USF”) program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households, the FCC created two new funds, including the Mobility Fund, a one-time award meant to support wireless coverage in underserved geographic areas in the United States. In August 2013, the Company received FCC final approval for approximately $47.0 million of Mobility Fund support to its Alltel business (the “Alltel Mobility Funds”) and $21.7 million of Mobility Fund support to its wholesale wireless business (the “Wholesale Mobility Funds” and collectively with the Alltel Mobility Funds, the “Mobility Funds”), to expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the receipt of the Mobility Funds, the Company committed to comply with certain additional FCC construction and other requirements. In connection with the Company’s application for the Mobility Funds, the Company issued approximately $29.9 million in letters of credit to the Universal Service Administrative Company (“USAC”) in June 2013 to secure these obligations. If the

 

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Company fails to comply with any of the terms and conditions upon which the Mobility Funds were granted, or if it loses eligibility for the Mobility Funds, the FCC will be entitled to draw the entire amount of the letter of credit applicable to the affected project plus penalties and may disqualify the Company from the receipt of additional Mobility Fund support.

 

In connection with the Company’s sale of its Alltel business on September 20, 2013, it notified the FCC and USAC that it would no longer be eligible to perform under the terms and conditions of the Alltel Mobility Funds. At that time, USAC chose not to draw any amounts under our letter of credit securing the Alltel Mobility Funds and the Company made a cash payment of approximately $4.6 million in penalty fees to USAC. The Company expects to be reimbursed for these penalty fees by AT&T Mobility. The Company expects to terminate the letters of credit securing our Alltel Mobility Funds upon receipt of the returned letters of credit from USAC.

 

The Company began the construction of its Wholesale Mobility Funds projects during the third quarter of 2013  and its results are included in the Company’s “U.S. Wireless” segment. As of September 30, 2013, the Company has received approximately $7.3 million in Wholesale Mobility Funds. Of these funds, $3.1 million is recorded within other current liabilities while the remaining $4.2 million is recorded within other long-term liabilities in the Company’s consolidated balance sheet as of September 30, 2013. The presentation is based on the timing of the expected usage of the funds.

 

9.  RECONCILIATION OF TOTAL EQUITY

 

Total equity was as follows (in thousands):

 

 

 

Nine months Ended September 30,

 

 

 

2012

 

2013

 

 

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total Equity

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total
Equity

 

Equity, beginning of period

 

$

294,266

 

$

58,264

 

$

352,530

 

$

334,146

 

$

60,094

 

$

394,240

 

Stock-based compensation

 

2,585

 

 

2,585

 

3,419

 

 

3,419

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

35,817

 

2,900

 

38,717

 

293,859

 

35,234

 

329,093

 

Other comprehensive income(loss)-Gain (loss) on interest rate derivative (net of tax)

 

(535

)

 

(535

)

6,985

 

 

6,985

 

Total comprehensive income

 

35,282

 

2,900

 

38,182

 

300,844

 

35,234

 

336,078

 

Issuance of common stock upon exercise of stock options

 

1,240

 

 

1,240

 

6,778

 

 

6,778

 

Dividends declared on common stock

 

(11,068

)

 

(11,068

)

(11,982

)

 

(11,982

)

Distributions to non-controlling interests

 

 

(1,294

)

(1,294

)

 

(5,532

)

(5,532

)

Investments made by minority shareholders

 

 

1,040

 

1,040

 

 

135

 

135

 

Sale of non-controlling interests

 

 

 

 

 

(13,634

)

(13,634

)

Repurchase of non-controlling interests

 

 

(80

)

(80

)

 

 

 

Purchase of common shares

 

(202

)

 

(202

)

(6,615

)

 

(6,615

)

Equity, end of period

 

$

322,103

 

$

60,830

 

$

382,933

 

$

626,590

 

$

76,297

 

$

702,887

 

 

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

 

 

 

Interest
Rate Derivative
Agreements

 

Projected
Pension
Benefit
Obligation

 

Translation
Adjustment

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

(6,959

)

$

(1,318

)

$

(20

)

$

(8,297

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications, net of taxes of $2.5 million (1)

 

3,753

 

 

 

3,735

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income, net of taxes of $2.0 million

 

3,206

 

 

 

3,206

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

 

$

 

$

(1,318

)

$

(20

)

$

(1,312

)

 


(1) Includes a reclassification unrealized loss on interest rate derivative contracts of $3.1 million.

 

10.  NET INCOME PER SHARE

 

For the three and nine months ended September 30, 2012 and 2013, outstanding stock options were the only potentially dilutive securities. The reconciliation from basic to diluted weighted average common shares outstanding is as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine months Ended
September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

Basic weighted-average common shares outstanding

 

15,560

 

15,738

 

15,517

 

15,678

 

Stock options

 

91

 

107

 

88

 

111

 

Diluted weighted-average common shares outstanding

 

15,651

 

15,845

 

15,605

 

15,789

 

 

The above calculations for the three months ended September 30, 2012 and 2013 do not include 322,000 and 29,000 shares, respectively, related to certain stock options because the effects of such were anti-dilutive. For the nine months ended September 30, 2012 and 2013, the calculation does not include 362,000 and 80,000 shares, respectively, related to certain stock options because the effect of such options was anti-dilutive.

 

11. SEGMENT REPORTING

 

The Company has four reportable segments for separate disclosure in accordance with the FASB’s authoritative guidance on disclosures about segments of an enterprise. Those four segments are: i) U.S. Wireless, which generates all of its revenues in and has all of its assets located in the United States, ii) International Integrated Telephony, which generates all of its revenues in and has its assets located in Guyana, iii) Island Wireless, which generates a majority of its revenues in and has a majority of its assets located in Bermuda and which also generates revenues in and has assets located in the U.S. Virgin Islands, Aruba and Turks and Caicos and iv) U.S. Wireline, which generates all of its revenues in and has all of its assets located in the United States. The operating segments are managed separately because each offers different services and serves different markets.

 

The following tables provide information for each operating segment.  Previous periods have been restated to remove our discontinued operations which were previously reported within our U.S. Wireless segment (in thousands):

 

 

 

For the Three Months Ended September 30, 2012

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. wireless

 

$

29,042

 

$

 

$

 

$

 

$

 

$

29,042

 

International wireless

 

 

6,838

 

14,176

 

 

 

21,014

 

Wireline

 

152

 

16,351

 

 

4,786

 

 

21,289

 

Equipment and other

 

85

 

377

 

1,451

 

54

 

 

1,967

 

Total Revenue

 

29,279

 

23,566

 

15,627

 

4,840

 

 

73,312

 

Depreciation and amortization

 

4,200

 

4,406

 

2,875

 

697

 

243

 

12,421

 

Non-cash stock-based compensation

 

 

 

 

 

774

 

774

 

Operating income (loss)

 

14,879

 

6,596

 

1,043

 

(566

)

(5,781

)

16,171

 

 

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Table of Contents

 

 

 

For the Nine months Ended September 30, 2012

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. wireless

 

$

77,970

 

$

 

$

 

$

 

$

 

$

77,970

 

International wireless

 

 

19,891

 

40,295

 

 

 

60,186

 

Wireline

 

450

 

49,354

 

 

14,290

 

 

64,094

 

Equipment and other

 

212

 

1,334

 

3,947

 

141

 

 

5,634

 

Total Revenue

 

78,632

 

70,579

 

44,242

 

14,431

 

 

207,884

 

Depreciation and amortization

 

13,634

 

13,424

 

8,444

 

2,135

 

667

 

38,304

 

Non-cash stock-based compensation

 

 

 

 

 

2,566

 

2,566

 

Operating income (loss)

 

35,799

 

16,973

 

(319

)

(1,655

)

(15,280

)

35,518

 

 

 

 

For the Three Months Ended September 30, 2013

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless

 

$

32,796

 

$

 

$

 

$

 

$

 

$

32,796

 

International wireless

 

 

7,046

 

15,849

 

 

 

22,895

 

Wireline

 

152

 

15,640

 

 

5,712

 

 

21,504

 

Equipment and other

 

109

 

388

 

1,594

 

64

 

 

2,155

 

Total revenue

 

33,057

 

23,074

 

17,443

 

5,776

 

 

79,350

 

Depreciation and amortization

 

4,039

 

4,551

 

2,551

 

816

 

378

 

12,335

 

Non-cash stock-based compensation

 

 

 

 

 

926

 

926

 

Operating income (loss)

 

18,293

 

7,028

 

3,292

 

(255

)

(8,320

)

20,038

 

 

 

 

For the Nine months Ended September 30, 2013

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. wireless

 

$

80,597

 

$

 

$

 

$

 

$

 

$

80,597

 

International wireless

 

 

20,330

 

45,832

 

 

 

66,162

 

Wireline

 

457

 

46,493

 

 

15,995

 

 

62,945

 

Equipment and other

 

313

 

1,151

 

4,468

 

171

 

 

6,103

 

Total revenue

 

81,367

 

67,974

 

50,300

 

16,166

 

 

215,807

 

Depreciation and amortization

 

12,119

 

13,476

 

7,705

 

2,252

 

965

 

36,517

 

Non-cash stock-based compensation

 

 

 

 

 

2,898

 

2,898

 

Operating income (loss)

 

40,472

 

19,596

 

7,226

 

(786

)

(18,485

)

48,023

 

 

 

 

Segment Assets

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

52,944

 

$

126,532

 

$

33,745

 

$

17,489

 

$

7,614

 

$

238,324

 

Goodwill

 

32,148

 

 

5,438

 

7,491

 

 

45,077

 

Total assets (1)

 

161,038

 

191,314

 

77,120

 

30,888

 

69,750

 

530,110

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

69,291

 

$

118,143

 

$

30,568

 

$

25,858

 

$

9,350

 

$

253,210

 

Goodwill

 

32,148

 

 

5,438

 

7,491

 

 

45,077

 

Total assets (1)

 

725,836

 

195,412

 

79,343

 

43,859

 

44,716

 

1,089,166

 

 


(1)    Total assets do not include $380,765 and $4,923 of assets associated with our discontinued operations as of December 31, 2012 and September 30, 2013, respectively.

 

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Table of Contents

 

 

 

Capital Expenditures

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Nine months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

$

7,516

 

$

7,362

 

$

3,915

 

$

7,280

 

$

2,502

 

$

28,575

 

2013

 

27,736

 

9,039

 

4,014

 

11,231

 

3,151

 

55,171

 

 

12.  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 in our Annual Report on Form 10-K for the year ended December 31, 2012, 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.

 

In August 2013, the Company received FCC final approval for approximately $47.0 million of Mobility Fund support to its Alltel business (the “Alltel Mobility Funds”) and $21.7 million of Mobility Fund support to its wholesale wireless business.  See Note 8 for further discussion.

 

In November 2007, Caribbean Telecommunications Limited (“CTL”) filed a complaint in the U.S. District Court for the District of New Jersey against GT&T and ATN claiming breach of an interconnection agreement for domestic cellular services in Guyana and related claims. CTL asserted over $200 million in damages. GT&T and ATN moved to dismiss the complaint on procedural and jurisdictional grounds. On January 26, 2009, the court granted the motions to dismiss the complaint on the grounds asserted. On April 4, 2013 CTL filed a similar claim against GT&T and the PUC in the High Court of Guyana. The Company believes the claim is without merit and is duplicative of a previous claim filed by CTL in Guyana that was dismissed. There has been no action on this matter since the April 2013 filing.

 

The Guyana Parliament is continuing to consider the telecommunications legislation originally introduced in August 2012, which, if passed and assented to by the President, would, among other things, effectively terminate GT&T’s exclusive right to provide international long distance services.

 

Historically, the Company has been subject to litigation proceedings and other disputes in Guyana that while not conclusively resolved, to the Company’s knowledge have not been the subject of other discussions or other significant activity in the last five years. It is possible, but not likely, that these disputes may be revived. The Company believes that none of these additional proceedings would, in the event of an adverse outcome, have a material impact on its consolidated financial position, results of operation or liquidity.  For all of the regulatory, litigation, or related matters listed above and in our Form 10-K for the year ended December 31, 2012, the Company believes some adverse outcome is probable and has accordingly accrued $5.0 million as of September 30, 2013.

 

13.  SUBSEQUENT EVENT

 

See Note 7 for the termination of our interest rate derivates on October 2, 2013.

 

ITEM 2.  MANAGEMENT’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, 2012, 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 wireless and wireline telecommunications services in North America, Bermuda and the Caribbean. Through our operating subsidiaries, we offer the following principal services:

 

·                   Wireless.  In the United States, we offer wholesale wireless voice and data roaming services to national, regional, local and selected international wireless carriers in rural markets located principally in the Southwest and Midwest United States. We also offer wireless voice and data services to retail customers in Bermuda, Guyana, the Caribbean and smaller markets in the United States.

 

·                   Wireline.  Our local telephone and data services include our operations in Guyana and the mainland United States. We are the exclusive licensed provider of domestic wireline local and long distance telephone services in Guyana and international voice and data communications into and out of Guyana. We also offer facilities-based integrated voice and

 

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data communications services to enterprise and residential customers in New England, primarily in Vermont, and wholesale transport services in Vermont and New York State.  In addition, we offer wholesale long-distance voice services to telecommunications carriers.

 

The following chart summarizes the operating activities of our principal subsidiaries, the segments in which we report our revenue and the markets we served as of September 30, 2013:

 

Services

 

Segment

 

Markets

 

Tradenames

Wireless

 

U.S. Wireless

 

United States (rural markets)

 

Commnet, Choice

 

 

Island Wireless

 

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

 

Mio, CellOne, Islandcom, Choice

 

 

International Integrated Telephony

 

Guyana

 

Cellink

Wireline

 

International Integrated Telephony

 

Guyana

 

GT&T, eMagine

 

 

U.S. Wireline

 

United States (New England and New York State)

 

Sovernet, ION

 

We provide management, technical, financial, regulatory, and marketing services to our subsidiaries and typically receive a management fee equal to a percentage of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation.

 

Discontinued Operations — Sale of U.S. Retail Wireless Business

 

On September 20, 2013, the Federal Communications Commission announced its approval of the previously announced proposed sale of our U.S. retail wireless business operated under the Alltel name to AT&T for approximately $780 million in cash plus a sale price adjustment based on the working capital of the business.  The working capital payment is subject to adjustment based on the final working capital amount at the time of the sale.  As a result of that approval, we completed the sale on that date.

 

The operations of the Alltel business, which were previously included in our U.S. Wireless segment, have been classified as discontinued operations in all periods presented.  The gain on the sale of the Alltel business recognized during the three months ended September 30, 2013, is also included in discontinued operations.  Unless indicated otherwise, the information in this Management’s Discussion and Analysis relates to our continuing operations.

 

Stimulus Grants

 

We were awarded several federal stimulus grants in 2009 and 2010 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. As of September 30, 2013, we have spent (i) $34.8 million in capital expenditures (of which $27.5 million has been or will be funded by the federal stimulus grant) in connection with our ION Upstate New York Rural Broadband Initiative, which involves building ten new segments of fiber-optic, middle-mile broadband infrastructure in upstate New York and parts of Pennsylvania and Vermont; (ii) $7.4 million in capital expenditures (of which $5.2 million has been or will be funded by the federal stimulus grant) in connection with our last-mile broadband infrastructure buildout in the Navajo Nation across Arizona, New Mexico and Utah; and (iii) $39.4 million in capital expenditures (of which $27.6 million has been or will be funded by the federal stimulus grant) in connection with our fiber-optic middle mile network buildout to provide broadband and transport services to over 340 community anchor institutions in Vermont. The results of our New York and Vermont stimulus projects are included in our “U.S. Wireline” segment and the results of our Navajo stimulus project are included in our “U.S. Wireless” segment. We anticipate that the remaining capital expenditures for all three projects are $9.5 million, of which $5.6 million is expected to be funded by the federal stimulus grants.  All of our stimulus projects are anticipated to be completed by the end of 2013.

 

Mobility Funds

 

As part of the Federal Communications Commission’s (“FCC”) reform of its Universal Service Fund (“USF”) program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households, the FCC created two new funds, including the Mobility Fund, a one-time award meant to support wireless coverage in underserved geographic areas in the United States. In August 2013, we received FCC final approval for approximately $47.0 million of Mobility Fund support to our Alltel business (the “Alltel Mobility Funds”) and $21.7 million of Mobility Fund support to our wholesale wireless business (the “Wholesale Mobility Funds” and collectively with the Alltel Mobility Funds, the “Mobility Funds”), to expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the receipt of the Mobility Funds, we committed to comply with certain additional FCC construction and other requirements. In connection with

 

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our application for the Mobility Funds, we issued approximately $29.8 million in letters of credit to the Universal Service Administrative Company (“USAC”) in June 2013 to secure these obligations. If we fail to comply with any of the terms and conditions upon which the Mobility Funds were granted, or if we lose eligibility for the Mobility Funds, the FCC will be entitled to draw the entire amount of the letter of credit applicable to the affected project plus penalties and may disqualify us from the receipt of additional Mobility Fund support.

 

In connection with our sale of our Alltel business on September 20, 2013, we notified the FCC and USAC that we would no longer be eligible to perform under the terms and conditions of the Alltel Mobility Funds. At that time, USAC chose not to draw any amounts under our letter of credit securing the Alltel Mobility Funds and we made a cash payment of approximately $4.6 million in penalty fees to USAC. We expect to be reimbursed for these penalty fees by AT&T Mobility. We expect to terminate the letters of credit securing our Alltel Mobility Funds upon receipt of the returned letters of credit from USAC.

 

The Company began the construction of its Wholesale Mobility Funds projects during the third quarter of 2013  and its results are included in the Company’s “U.S. Wireless” segment. As of September 30, 2013, the Company has received approximately $7.3 million in Wholesale Mobility Funds. Of these funds, $3.1 million is recorded within other current liabilities while the remaining $4.2 million is recorded within other long-term liabilities in the Company’s consolidated balance sheet as of September 30, 2013. The presentation is based on the timing of the expected usage of the funds.

 

Results of Operations (in thousands)

 

Three Months Ended September 30, 2012 and 2013

 

 

 

Three Months Ended
September 30,

 

Amount of

 

Percent

 

 

 

2012

 

2013

 

Increase (Decrease)

 

Increase (Decrease)

 

REVENUE:

 

 

 

 

 

 

 

 

 

U.S. wireless

 

$

29,042

 

$

32,796

 

$

3,754

 

12.9

%

International wireless

 

21,014

 

22,895

 

1,881

 

9.0

 

Wireline

 

21,289

 

21,504

 

215

 

1.0

 

Equipment and other