ATN International, Inc.
ATN International, Inc. (Form: 10-Q, Received: 11/09/2017 13:34:38)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

 

 

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

 

For the quarterly period ended September 30, 2017

 

OR

 

 

 

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

 


 

ATN INTERNATIONAL, 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)

 

500 Cummings Center

Beverly, MA 01915

(Address of principal executive offices, including zip code)

 

(978) 619-1300

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of November 9, 2017, the registrant had outstanding 16,016, 566 shares of its common stock ($.01 par value).

 

 

 


 

Table of Contents

ATN INTERNATIONAL, INC.

FORM 10-Q

 

Quarter Ended September 30, 2017

 

 

 

 

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 September 30, 2017 and December 31, 2016  

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2  

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

32-62

 

 

 

Item 3  

Quantitative and Qualitative Disclosures About Market Risk

62

 

 

 

Item 4  

Controls and Procedures

62

 

 

 

PART II—OTHER INFORMATION  

63

 

 

 

Item 1  

Legal Proceedings

63

 

 

 

Item1A  

Risk Factors

63

 

 

 

Item 2  

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 6  

Exhibits

64

 

 

 

SIGNATURES  

65

 

 

 

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 estimated timeline for restoration of our U.S. Virgin Islands operations; our estimates of total losses due to Hurricanes Irma and Maria; the competitive environment in our key markets, demand for our services and industry trends; the pace of expansion and improvement of our telecommunications network and renewable energy operations including our level of estimated future capital expenditures and our realization of the benefits of these investments; the anticipated timing of our build schedule and the commencement of energy production of our India renewable energy projects; 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 conduct and complete a full assessment of damage in the U.S. Virgin Islands; (2) our ability to restore our networks and services to our customers in the U.S. Virgin Islands in an efficient and timely manner; (3) our ability to operate our newly acquired businesses in Bermuda and the U.S. Virgin Islands and both integrate these operations into our existing operations and execute planned network expansions and upgrades; (4) the general performance of our operations, including operating margins, revenues, capital expenditures, and the future growth and retention of our major customers and subscriber base and consumer demand for solar power; (5) government regulation of our businesses, which may impact our FCC and other telecommunications licenses or our renewables business; (6) economic, political and other risks facing our operations; (7) our ability to maintain favorable roaming arrangements; (8) our ability to efficiently and cost-effectively upgrade our networks and IT platforms to address  rapid and significant technological changes in the telecommunications industry; (9) the loss of or an inability to recruit skilled personnel in our various jurisdictions, including key members of management; (10) our ability to find investment or acquisition or disposition opportunities that fit our strategic goals for the Company; (11) increased competition; (12) our ability to expand our renewable energy business; (13) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (14) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (15) the occurrence of weather events and natural catastrophes; (16) our continued access to capital and credit markets; (17) the risk of currency fluctuation for those markets in which we operate and (18) 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017 and the other reports we file from time to time with the SEC.  The Company undertakes no obligation and has no intention to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements.

 

In this Report, the words “the Company”, “we,” “our,” “ours,” “us” and “ATN” refer to ATN International, Inc. and its subsidiaries. This Report contains trademarks, service marks and trade names that are the property of, or licensed by, ATN and its subsidiaries.

 

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

 

 

3


 

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

224,597

 

$

269,721

 

Restricted cash

 

 

833

 

 

524

 

Short-term investments

 

 

7,857

 

 

9,237

 

Accounts receivable, net of allowances of $16.1 million and $13.1 million, respectively

 

 

48,829

 

 

45,419

 

Materials and supplies

 

 

14,809

 

 

14,365

 

Prepayments and other current assets

 

 

37,813

 

 

28,103

 

Total current assets

 

 

334,738

 

 

367,369

 

Fixed Assets:

 

 

 

 

 

 

 

Property, plant and equipment

 

 

1,130,117

 

 

1,138,362

 

Less accumulated depreciation

 

 

(505,522)

 

 

(490,650)

 

Net fixed assets

 

 

624,595

 

 

647,712

 

Telecommunication licenses, net

 

 

95,952

 

 

48,291

 

Goodwill

 

 

63,969

 

 

62,873

 

Customer relationships, net

 

 

12,310

 

 

15,029

 

Restricted cash

 

 

16,206

 

 

18,113

 

Other assets

 

 

36,248

 

 

38,831

 

Total assets

 

$

1,184,018

 

$

1,198,218

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

13,944

 

$

12,440

 

Accounts payable and accrued liabilities

 

 

129,016

 

 

92,708

 

Dividends payable

 

 

3,110

 

 

5,487

 

Accrued taxes

 

 

9,370

 

 

13,531

 

Advance payments and deposits

 

 

18,161

 

 

25,529

 

Other current liabilities

 

 

76

 

 

410

 

Total current liabilities

 

 

173,677

 

 

150,105

 

Deferred income taxes

 

 

45,655

 

 

46,622

 

Other liabilities

 

 

32,245

 

 

47,939

 

Long-term debt, excluding current portion

 

 

145,707

 

 

144,383

 

Total liabilities

 

 

397,284

 

 

389,049

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

ATN International, Inc. 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; 17,093,351 and 16,971,634 shares issued, respectively, and 16,016,860 and 16,138,983 shares outstanding respectively

 

 

169

 

 

169

 

Treasury stock, at cost; 1,076,491 and 832,652 shares, respectively

 

 

(36,095)

 

 

(23,127)

 

Additional paid-in capital

 

 

166,326

 

 

160,176

 

Retained earnings

 

 

512,175

 

 

538,109

 

Accumulated other comprehensive income

 

 

2,053

 

 

1,728

 

Total ATN International, Inc. stockholders’ equity

 

 

644,628

 

 

677,055

 

Non-controlling interests

 

 

142,106

 

 

132,114

 

Total equity

 

 

786,734

 

 

809,169

 

Total liabilities and equity

 

$

1,184,018

 

$

1,198,218

 

 

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

4


 

Table of Contents

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireless

 

$

57,254

 

$

61,151

 

$

167,945

 

$

177,300

 

Wireline

 

 

56,309

 

 

66,129

 

 

181,568

 

 

122,190

 

Renewable energy

 

 

4,974

 

 

5,784

 

 

14,765

 

 

16,935

 

Equipment and other

 

 

3,595

 

 

5,731

 

 

9,214

 

 

12,046

 

Total revenue

 

 

122,132

 

 

138,795

 

 

373,492

 

 

328,471

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination and access fees

 

 

27,387

 

 

34,359

 

 

85,758

 

 

77,872

 

Engineering and operations

 

 

18,852

 

 

19,372

 

 

57,881

 

 

40,621

 

Sales, marketing and customer service

 

 

8,440

 

 

8,377

 

 

26,176

 

 

21,814

 

Equipment expense

 

 

3,167

 

 

3,390

 

 

8,720

 

 

10,751

 

General and administrative

 

 

26,620

 

 

26,854

 

 

76,969

 

 

62,525

 

Transaction-related charges

 

 

61

 

 

2,091

 

 

887

 

 

16,156

 

Restructuring charges

 

 

 —

 

 

 —

 

 

 —

 

 

1,785

 

Depreciation and amortization

 

 

21,157

 

 

21,866

 

 

65,904

 

 

52,913

 

Impairment of  long-lived assets

 

 

 —

 

 

349

 

 

 —

 

 

11,425

 

Bargain purchase gain

 

 

 —

 

 

 —

 

 

 —

 

 

(7,304)

 

(Gain) loss on disposition of long-lived assets

 

 

(593)

 

 

56

 

 

513

 

 

27

 

Loss on damaged assets and other hurricane related charges

 

 

36,566

 

 

 —

 

 

36,566

 

 

 —

 

Total operating expenses

 

 

141,657

 

 

116,714

 

 

359,374

 

 

288,585

 

Income from operations

 

 

(19,525)

 

 

22,081

 

 

14,118

 

 

39,886

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

453

 

 

236

 

 

1,087

 

 

929

 

Interest expense

 

 

(2,098)

 

 

(1,787)

 

 

(6,567)

 

 

(3,674)

 

Loss on deconsolidation of subsidiary

 

 

 —

 

 

 —

 

 

(529)

 

 

 —

 

Other income (expense)

 

 

(690)

 

 

766

 

 

(1,751)

 

 

643

 

Other expense, net

 

 

(2,335)

 

 

(785)

 

 

(7,760)

 

 

(2,102)

 

INCOME BEFORE INCOME TAXES

 

 

(21,860)

 

 

21,296

 

 

6,358

 

 

37,784

 

Income taxes

 

 

(884)

 

 

9,602

 

 

4,839

 

 

17,178

 

NET INCOME (LOSS)

 

 

(20,976)

 

 

11,694

 

 

1,519

 

 

20,606

 

Net income attributable to non-controlling interests, net of tax expense of $0.3 million, $0.6 million, $0.7 million, and $1.0 million, respectively.

 

 

(3,784)

 

 

(4,523)

 

 

(13,535)

 

 

(10,400)

 

NET INCOME (LOSS) ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS

 

$

(24,760)

 

$

7,171

 

$

(12,016)

 

$

10,206

 

NET INCOME (LOSS) PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.53)

 

$

0.44

 

$

(0.74)

 

$

0.63

 

Diluted

 

$

(1.53)

 

$

0.44

 

 

(0.74)

 

 

0.63

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,178

 

 

16,148

 

 

16,177

 

 

16,128

 

Diluted

 

 

16,178

 

 

16,241

 

 

16,177

 

 

16,228

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.17

 

$

0.34

 

$

0.85

 

$

0.98

 

 

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

 

 

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Table of Contents

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
September 30, 

 

Nine Months Ended
September 30, 

 

2017

    

2016

 

2017

    

2016

Net income (loss)

$

(20,976)

 

$

11,694

 

$

1,519

 

$

20,606

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(1,311)

 

 

(164)

 

 

921

 

 

(200)

Reclassifications of gains on sale of marketable securities to net income

 

 —

 

 

 —

 

 

(1,044)

 

 

 —

Unrealized gain (loss) on securities

 

67

 

 

 —

 

 

(65)

 

 

 —

Projected pension benefit obligation

 

 —

 

 

 —

 

 

513

 

 

 —

Other comprehensive income (loss), net of tax

 

(1,244)

 

 

(164)

 

 

325

 

 

(200)

Comprehensive income (loss)

 

(22,220)

 

 

11,530

 

 

1,844

 

 

20,406

Less: Comprehensive income attributable to non-controlling interests

 

(3,784)

 

 

(4,523)

 

 

(13,535)

 

 

(10,400)

Comprehensive income (loss) attributable to ATN International, Inc.

$

(26,004)

 

$

7,007

 

$

(11,691)

 

$

10,006

 

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

6


 

Table of Contents

 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

Net income

$

1,519

 

$

20,606

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

 

 

 

 

 

Depreciation and amortization

 

65,904

 

 

52,913

Provision for doubtful accounts

 

3,041

 

 

1,058

Amortization and write off of debt discount and debt issuance costs

 

458

 

 

372

Stock-based compensation

 

5,437

 

 

5,032

Deferred income taxes

 

1,456

 

 

(8,775)

Loss in equity method investments

 

2,033

 

 

 —

Bargain purchase gain

 

 —

 

 

(7,304)

Loss on disposition of long-lived assets

 

513

 

 

27

Loss on damaged assets from hurricanes

 

35,213

 

 

 —

Gain on sale of investments

 

(1,055)

 

 

 —

Impairment of long-lived assets

 

 —

 

 

11,425

Loss on deconsolidation of subsidiary

 

529

 

 

 —

Other non-cash activity

 

512

 

 

 —

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

 

 

 

 

 

Accounts receivable

 

(8,456)

 

 

(2,234)

Materials and supplies, prepayments, and other current assets

 

(1,875)

 

 

(9,471)

Prepaid income taxes

 

995

 

 

 —

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

 

13,642

 

 

(2,854)

Accrued taxes

 

(8,966)

 

 

21,886

Other assets

 

3,794

 

 

(2,169)

Other liabilities

 

7,294

 

 

11,593

Net cash provided by operating activities

 

121,988

 

 

92,105

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(108,276)

 

 

(78,455)

Strategic investments

 

(18,107)

 

 

(2,000)

Divestiture of businesses,  net of transferred cash of $2.1 million

 

22,381

 

 

 —

Acquisition of businesses,  net of acquired cash of  $0 and $12.6 million

 

(2,363)

 

 

(145,454)

Purchases of spectrum licenses and other intangible assets, including deposits

 

(36,832)

 

 

(10,860)

Acquisition of non-controlling interest in subsidiary

 

 —

 

 

(7,045)

Purchase of short-term investments

 

 —

 

 

(7,422)

Proceeds from sale of investments

 

2,761

 

 

 —

Change in restricted cash

 

1,598

 

 

(28,287)

Proceeds from disposition of long-lived assets

 

 —

 

 

1,424

Net cash used in investing activities

 

(138,838)

 

 

(278,099)

Cash flows from financing activities:

 

 

 

 

 

Dividends paid on common stock

 

(16,502)

 

 

(15,469)

Proceeds from new borrowings

 

8,571

 

 

60,000

Distribution to non-controlling interests

 

(3,583)

 

 

(7,667)

Payment of debt issuance costs

 

(326)

 

 

(494)

Proceeds from stock option exercises

 

933

 

 

612

Principal repayments of term loan

 

(5,447)

 

 

(7,982)

Purchase of common stock

 

(11,139)

 

 

(3,997)

Repurchases of non-controlling interests

 

(1,103)

 

 

(767)

Investments made by minority shareholders in consolidated affiliates

 

122

 

 

22,409

Net cash (used in) provided by financing activities

 

(28,474)

 

 

46,645

Effect of foreign currency exchange rates on cash and cash equivalents

 

200

 

 

(263)

Net change in cash and cash equivalents

 

(45,124)

 

 

(139,612)

Cash and cash equivalents, beginning of period

 

269,721

 

 

392,045

Cash and cash equivalents, end of period

$

224,597

 

$

252,433

Supplemental cash flow information:

 

 

 

 

 

Noncash investing activity:

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable and accrued expenses

$

15,668

 

$

10,632

 

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

 

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Table of Contents

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BUSINESS OPERATIONS

 

The Company is a holding company that, through its operating subsidiaries, (i) provides wireless and wireline telecommunications services in North America, Bermuda and the Caribbean, (ii) develops, owns and operates commercial distributed generation solar power systems in the United States and India, and (iii) owns and operates terrestrial and submarine fiber optic transport systems in the United States and in the Caribbean. The Company was incorporated in Delaware in 1987 and began trading publicly in 1991. Since that time, the Company has engaged in strategic acquisitions and investments to grow its operations. The Company actively evaluates additional domestic and international acquisition, divestiture, and investment opportunities and other strategic transactions in the telecommunications, energy-related and other industries that meet its return-on-investment and other acquisition criteria.

 

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 United States. The Company also offers wireless voice and data services to retail and wholesale customers in Bermuda, Guyana, the U.S. Virgin Islands, and the United States.

 

·

Wireline.  The Company’s wireline services include local telephone and data services in Bermuda, the Cayman Islands, Guyana, the U.S. Virgin Islands, and the United States.  The Company’s wireline services also include video services in Bermuda, the Cayman Islands, and the U.S Virgin Islands.  In addition, the Company offers wholesale long‑distance voice services to telecommunications carriers. Through March 8, 2017, the Company also offered facilities‑based integrated voice and data communications services and wholesale transport services to enterprise and residential customers in New England, primarily Vermont, and in New York State.

·

Renewable Energy.   In the United States, the Company provides distributed generation solar power to corporate and municipal customers. The Company also owns and develops projects in India providing distributed generation solar power to corporate customers. 

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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, 2017:

 

 

 

 

 

 

 

 

 

Segment

   

Services

   

Markets

   

Tradenames

 

U.S. Telecom

 

Wireless

 

United States (rural markets)

 

Commnet, Choice, Choice NTUA Wireless

 

 

 

Wireline

 

United States

 

Essextel

 

International Telecom

 

Wireline

 

Bermuda, Guyana, U.S. Virgin Islands, Cayman Islands

 

One (formerly Logic in Bermuda), GTT+, Viya (formerly Innovative), Logic

 

 

 

Wireless

 

Bermuda, Guyana, U.S. Virgin Islands

 

One (formerly CellOne), GTT+, Viya (formerly Innovative and Choice)

 

 

 

Video Services

 

Bermuda, U.S. Virgin Islands, Cayman Islands

 

One (formerly Bermuda CableVision), Viya (formerly Innovative), Logic

 

Renewable   Energy

 

Solar

 

United States (Massachusetts, California, and New Jersey), India

 

Ahana Renewables, Vibrant Energy

 

 

The Company actively evaluates potential acquisitions, investment opportunities and other strategic transactions, both domestic and international, that meet its return on investment and other criteria. The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a management fee equal to a percentage of their respective revenue. Management fees from subsidiaries are eliminated in consolidation.

 

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 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017.

 

The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and certain entities, which are consolidated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) authoritative guidance on the consolidation of variable interest entities, since it is determined that the Company is the primary beneficiary of these entities.

 

Certain reclassifications have been made in the prior period financial statements to conform the Company’s consolidated income statements to how management analyzes its operations in the current period.  The changes did not impact operating income.  For the three months ended September 30, 2016 the aggregate impact of the changes included

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a decrease to termination and access fees of $2.4  million, an increase to engineering and operations expenses of $3.1 million, a decrease to sales and marketing expenses of $0.6  million, an increase in equipment expense of $0.3  million, and a decrease to general and administrative expenses of $0.4  million. For the nine months ended September 30, 2016 the aggregate impact of the changes included a decrease to termination and access fees of $2.8 million, an increase to engineering and operations expenses of $4.4 million, a decrease to sales and marketing expenses of $0.6 million, an increase in equipment expense of $0.4  million, and a decrease to general and administrative expenses of $1.4 million.

 

The Company’s effective tax rate for the three months ended September 30, 2017 and 2016 was 4.0% and 45.1%, respectively.  When a company operates in a jurisdiction that generates ordinary losses but does not expect to realize them, ASC 740-270-30-36(a) requires the exclusion of the respective jurisdiction from the overall annual effective tax rate (“AETR”) calculation and instead, a separate AETR should be computed.  The effective tax rate for the three months ended September 30, 2017 was primarily impacted by the following items: (i) the exclusion of losses in jurisdictions where the Company cannot benefit from those losses as required by ASC 740-270-30-36(a), primarily in the U.S. Virgin Islands, (ii) a $3.4 million benefit for the net capital loss due to the stock sales of our businesses in New England, New York and St. Maarten, (iii) a $3.4 million amended return refund claim filed for tax year 2013 recognized discretely, (iv) a $228 thousand increase (net) in unrecognized tax benefits recognized discretely, (v) a $536 thousand benefit (net) to record a return to accrual adjustment recognized discretely and, (vi) the mix of income generated among the jurisdictions in which it operates.  The effective tax rate for the three months ended September 30, 2016 was impacted by the following items: (i) certain transactional charges incurred in connection with the Company’s acquisitions that had no tax benefit, (ii) the mix of income generated among the jurisdictions in which we operate, and (iii) $1.6 million provision (net) to record multiple discrete items. The Company’s effective tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax contingencies. The Company’s consolidated tax rate will continue to be impacted by the mix of income generated among the jurisdictions in which it operates.  The Company’s effective tax rate for the nine months ended September 30, 2017 and 2016 was 76.1% and 45.5%, respectively.  The effective tax rate for the nine months ended September 30, 2017 was primarily impacted by the following items: (i) the exclusion of losses in jurisdictions where the Company cannot benefit from those losses as required by ASC 740-270-30-36(a), primarily in the U.S. Virgin Islands, (ii) a $3.4 million benefit for the net capital loss due to the stock sales of its businesses in New England, New York and St. Maarten, (iii) a $3.4 million amended return refund claim filed for tax year 2013 recognized discretely in the third quarter, (iv) a $683 thousand increase (net) in unrecognized tax benefits related to current year and prior year positions recognized discretely in respective quarters, (v) a $367 thousand benefit (net) to record  return to accrual adjustments recognized discretely in the respective quarter and, (vi) the mix of income generated among the jurisdictions in which it operates.  The effective tax rate for the nine months ended September 30, 2016 was impacted by the following items: (i) certain transactional charges incurred in connection with the Company’s acquisitions that had no tax benefit, (ii) an impairment charge to write down the value of assets related to the Company’s wireline business, (iii) the mix of income generated among the jurisdictions in which we operate, and (iv) $2.2 million provision (net) to record multiple discrete items. The Company’s effective tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax contingencies. The Company’s consolidated tax rate will continue to be impacted by the mix of income generated among the jurisdictions in which it operates.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which provides a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The FASB has since modified the standard with several ASU’s which must be adopted concurrently. The Company’s evaluation currently identifies the impacted areas to include, but not be limited to, the following:  

 

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·

The timing of revenue recognition and the allocation of revenue between equipment and services.  The reallocation and timing impacts generally arise when bundle discounts are provided in a contract arrangement that includes equipment and service performance obligations.  In these cases, the revenue will be allocated according to the relative stand-alone selling prices of the performance obligations included in the bundle and this may be different that how the products and services are billed to the customer and recognized under current guidance.  The Company also notes that a large majority of its products and services are sold to customers at stand-alone selling prices and bundle discounts are limited to certain geographic markets and services.   

 

·

Contract cost assets will be established to defer incremental contract acquisition costs.  These costs generally relate to commissions paid to sales associates.  The Company expects to utilize the practical expedient which allows expensing of contract acquisition costs when the expected amortization period is one year or less.

 

·

The new standard will require certain amounts be recorded as contract assets and liabilities on the balance sheet as well as enhanced disclosures around performance obligations.

 

·

Overall, with the exception of the impacts mentioned above, we do not expect the standard will result in a substantive change to the method or allocation of revenues between services and equipment or the timing of revenue recognition.

 

The Company is in the process of determining quantitative information related to the impact of the new standard and our initial assessment may change due to changes in contractual terms or new service and product offerings.  The Company has identified, and is in the process of implementing, new systems, processes and controls which are required to implement ASU 2014-09.  The Company will adopt the standard on January 1, 2018.  The Company will use the modified retrospective adoption method which requires it to apply the standard only to the most current period presented with the cumulative effect of applying the standard being recognized through retained earnings at the adoption date.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40),” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016. Early application is permitted. The Company adopted this guidance for the fourth quarter ended December 31, 2016. The adoption of this guidance did not impact The Company’s Consolidated Financial Statements.

 

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes software and how to account for the license for software.  The new guidance does not change the accounting for a customer’s accounting for service contracts.  The adoption of ASU 2015-05 by the Company on January 1, 2017 did not have a material impact on the Company’s financial position, result of operations or cash flows.

 

In January 2016, the FASB issued ASU 2016-01,  Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities  (ASU 2016-01), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective January 1, 2018, with early adoption permitted under certain circumstances.  At September 30, 2017, the Company holds approximately $20.1 million of equity investments accounted for under the cost method.  The Company is continuing to evaluate the overall impact of this guidance and currently does not expect the adoption of ASU 2016-01 will have a material effect on our Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which provides comprehensive lease accounting guidance.  The standard requires entities to recognize lease assets and liabilities on the balance sheet as well as disclosure of key information about leasing arrangements.  ASU 2016-02 will become effective for fiscal years, and

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interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted ASU 2016-09 on January 1, 2017. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. This had no impact on the Company’s historical results.  Also as a result of the adoption, the Company changed its policy election to account for forfeitures as they occur rather than on an estimated basis. The change resulted in the Company reclassifying $0.3 million from additional paid-in capital to retained earnings for the net cumulative-effect adjustment in stock compensation expense related to prior periods.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides further clarification on eight cash flow classification issues. The standard further clarifies the classification of several elements of the statement of cash flows with the following being relevant to the company:

 

·

debt prepayment or debt extinguishment costs are classified as cash outflows from financing activities.   This is consistent with the Company’s current accounting policy.

 

·

contingent consideration payments made three months or less after a business combination are classified as investing activities and those made after that time are classified as financing activities.  The Company currently classifies all payments made in a business combination as investing activities.  When adopted, the Company will reclassify $1.2 million of cash payments to financing activities for the nine months ended September 30, 2017. 

 

·

proceeds from the settlement of insurance claims are classified on the basis of the nature of the loss.  This is consistent with the Company’s current accounting policy. 

 

·

distributions received from equity method investees are classified using either a cumulative earning or nature of distribution approach.  The Company is currently evaluating both methods of adoption.

 

·

separately identifiable cash flows and application of the predominance principle. This is consistent with the Company’s current accounting policy.

 

ASU 2016-15 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2016-15 is to be applied using a retrospective transition method for each period presented. The Company will adopt this standard on January 1, 2018.  

 

In October 2016 the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory”. The new standard eliminates all intra-entity sales of assets other than inventory, the exception under current standards that permits the tax effects of intra-entity asset transfers to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new standard will be effective for the Company on January 1, 2018. The Company does not expect the impact of the new standard to be material to its Consolidated Financial Statements.

 

 In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” or ASU 2016-18. The amendments in ASU 2016-18 are intended to reduce diversity in practice related to the classification and presentation of changes in restricted or restricted cash equivalents on the statement of cash flows. The amendments in ASU 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period

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total amounts shown on the statement of cash flows. At September 30, 2017, the Company held $17.0 million of restricted cash. ASU 2016-18 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The Company will adopt this standard on January 1, 2018.  Upon adoption of ASU 2016-18 the restricted cash balance at that time will be included in cash and cash equivalents in the statement of cash flows.

 

In January 2017, the FASB issued Accounting Standards Update 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” or ASU 2017-01. The amendments in ASU 2017-01 provide a screen to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under ASU 2017-01, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business and the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 also narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. ASU 2017-01 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The Company prospectively adopted ASU 2017-01 in the fourth quarter of 2016.  The standard will result in the Company accounting for more transactions as asset acquisitions as opposed to business combination.

 

 In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” or ASU 2017-04. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities. Instead, under the amendments in ASU 2017-04, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not more than the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard in the third quarter of 2017.  Refer to Note 4 for discussion of impairment tests performed during 2017.

 

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). The new guidance requires the service cost component to be presented separately from the other components of net benefit costs. Service cost will be presented with other employee compensation cost within operations. The other components of net benefit cost, such as interest cost, amortization of prior service cost and gains or losses are required to be presented outside of operations. This is a change from the Company’s current accounting policy in which all components of net periodic pension and postretirement benefit costs are included within operating income.  The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The guidance should be applied retrospectively for the presentation of the service cost component in the income statement and allows a practical expedient for the estimation basis for applying the retrospective presentation requirements. The Company will adopt ASU 2017-07 on January 1, 2018 and we are currently in the process of evaluating the impact of this guidance on our Consolidated Financial Statements.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The standard: (a) expands and refines hedge accounting for both financial and non-financial risk components, (b) aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and (c) includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including the adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance related to cash flow and net investment hedges existing at the date of adoption should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The

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guidance related to presentation and disclosure should be applied prospectively. The Company is currently assessing the impact of ASU 2017-12 on its Consolidated Financial Statements.

 

3. USE OF ESTIMATES

 

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

 

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4.  IMPACT OF HURRICANES IRMA AND MARIA 

 

During September 2017, the Company’s operations and customers in the U.S. Virgin Islands were severely impacted by both Hurricane Irma and subsequently Hurricane Maria (collectively, the “Hurricanes”).  Both its wireless and wireline networks and commercial operations were severely damaged by these storms.  As a result of the significant damage to its wireline network and the ongoing lack of consistent commercial power in the territory since the Hurricanes, the Company has been unable to provide most of its wireline services, which comprise the majority of revenue, in the business.  Accordingly, it issued approximately $4.4  million of service credits to its subscribers in September, which are reflected as a reduction of its wireline revenue within our International Telecom segment.  Due to of the ongoing poor conditions on the islands, the continued lack of consistent commercial power, and the damage to its wireline infrastructure, the Company currently expects this impact to wireline revenue to continue for the next several quarters and estimates that it will be most pronounced in the fourth quarter of 2017.

 

As of November 9, 2017, the Company’s preliminary assessment of the level of wireline and wireless network damage by the Hurricanes and corresponding loss on the disposal of network has been estimated as $35.2 million.  This amount, along with $1.4 million of additional operating expenses that it specifically incurred during the quarter to address the impact of the Hurricanes, has been recorded in its statement of operations for the three and nine months ended September 30, 2017.  The level of network damage assessment and losses on damaged assets is based on information known as of the filing of this Form 10-Q.  Given the current conditions in the USVI, including curfews, limited access to areas of the islands and the lack of consistent commercial power, additional damages may be discovered upon being able to fully access these areas and/or once commercial power is restored and the Company can bring its networks fully online.  This assessment will continue to be updated in subsequent quarters as more information becomes available.   

 

The Company has insurance coverage for a combination of replacement costs of damaged property, extra expenses and business interruption and could potentially receive proceeds up to an aggregate of approximately $34.0 million against these insurance claims but it believes that total losses for these items will exceed these aggregate proceeds.  The Company does not expect to record any insurance recovery, however, until 2018, when its assessment is complete and the Company can determine the amount and nature of its claims under its insurance policies.

 

In connection with the above, the Company also determined there was a triggering event to assess the related reporting unit’s goodwill and indefinite lived intangible assets for impairment.  After consideration of the write-downs of other assets within the reporting unit described above, the impairment test for goodwill and indefinite lived intangible assets was performed by comparing the fair value of the reporting unit to its carrying amount. The Company calculated the fair value of the reporting unit by utilizing an income approach, with Level 3 valuation inputs, including a cash flow discount rate of 14.5%.  Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. The discount rate was based on a weighted‑average cost of capital, which represents the average rate the business would pay its providers of debt and equity. The cash flows employed in the discounted cash flow analysis were derived from internal and external forecasts.  The impairment assessment concluded that no impairment was required for the goodwill and indefinite lived intangible assets because the fair value of the reporting unit exceeded its carrying amount. 

 

 

5. ACQUISITIONS AND DISPOSITIONS

 

International Telecom

 

Acquisitions

 

One Communications (formerly KeyTech Limited) Acquisition

 

On May 3, 2016, the Company completed its acquisition of a controlling interest in One Communications Ltd. (formerly known as KeyTech Limited, “One Communications”), a publicly held Bermuda company listed on the Bermuda Stock Exchange (“BSX”) that provides broadband and video services and other telecommunications services to

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residential and enterprise customers in Bermuda and the Cayman Islands (the “One Communications Acquisition”).   Subsequent to the completion of the Company’s acquisition, One Communications changed its legal name from KeyTech Limited and changed its “CellOne” and “Logic” trade names in Bermuda to “One Communications”.   Prior to the Company’s acquisition, One Communications also owned a minority interest of approximately 43% in the Company’s previously held and consolidated subsidiary, Bermuda Digital Communications Ltd. (“BDC”), that provides wireless services in Bermuda. As part of the transaction, the Company contributed its ownership interest of approximately 43% in BDC and approximately $42 million in cash in exchange for a 51% ownership interest in One Communications. As part of the transaction, BDC was merged with and into a company within the One Communications group.  The approximate 15% interest in BDC held in the aggregate by BDC’s minority shareholders was converted into the right to receive common shares in One Communications. Following the transaction, BDC became wholly owned by One Communications, and One Communications continues to be listed on the BSX. A portion of the cash proceeds that One Communications received upon closing was used to fund a one-time special dividend to One Communications’ existing shareholders and to retire One Communications’ subordinated debt. On May 3, 2016, the Company began consolidating the results of One Communications within our financial statements in our International Telecom segment.

 

The One Communications Acquisition was accounted for as a business combination of a controlling interest in One Communications in accordance with ASC 805, Business Combinations , and the acquisition of an incremental ownership interest in BDC in accordance with ASC 810,  Consolidation .  The total purchase consideration of $41.6 million of cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition. 

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Consideration Transferred

 

 

 

Cash consideration - One Communications

$

34,518

 

Cash consideration - BDC

 

7,045

 

Total consideration transferred

 

41,563

 

Non-controlling interests - One Communications

 

32,909

 

Total value to allocate

$

74,472

 

Value to allocate - One Communications

 

67,427

 

Value to allocate - BDC

 

7,045

 

 

 

 

 

Purchase price allocation One Communications:

 

 

 

Cash

 

8,185

 

Accounts receivable

 

6,451

 

Other current assets

 

3,241

 

Property, plant and equipment

 

100,892

 

Identifiable intangible assets

 

10,590

 

Other long term assets

 

3,464

 

Accounts payable and accrued liabilities

 

(16,051)

 

Advance payments and deposits

 

(6,683)

 

Current debt

 

(6,429)

 

Long term debt

 

(28,929)

 

Net assets acquired

 

74,731

 

 

 

 

 

Gain on One Communications bargain purchase

$

7,304

 

 

 

 

 

Purchase price allocation BDC:

 

 

 

Carrying value of BDC non-controlling interest acquired

 

2,940

 

 

 

 

 

Excess of purchase price paid over carrying value of non-controlling interest acquired

$

4,105

 

 

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

 

The purchase price and resulting bargain purchase gain are the result of the market conditions and competitive environment in which One Communications operates along with the Company's strategic position and resources in those same markets.  Each of the Company and One Communications realized that their combined resources could better serve customers in Bermuda.  The bargain purchase gain is included in operating income for the nine months ended September 30, 2016.

 

Viya (formerly Innovative) Transaction

 

On July 1, 2016, the Company completed its acquisition of all of the membership interests of Caribbean Asset Holdings LLC (“CAH”), the holding company for the group of companies operating video services, Internet, wireless and landline services in the U.S. Virgin Islands, British Virgin Islands and St. Maarten (collectively, “Viya”), from

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the  National Rural Utilities Cooperative Finance Corporation  (“CFC”).  In April 2017, the U.S. Virgin Islands operations and the Company’s existing wireless operations rebranded their tradenames from “Innovative” and “Choice”, respectively, to “Viya.” The Company acquired the Viya operations for a contractual purchase price of $145.0 million, reduced by purchase price adjustments of $5.3 million (the “Viya Transaction”).  In connection with the transaction, the Company financed $60.0 million of the purchase price with a loan from an affiliate of CFC, the Rural Telephone Finance Cooperative (“RTFC”) on the terms and conditions of a Loan Agreement by and among RTFC, CAH and ATN VI Holdings, LLC, the parent entity of CAH and a wholly-owned subsidiary of the Company.  The Company funded the remaining purchase price with (i) $51.9 million in cash paid to CFC, (ii) $22.5 million in additional cash paid directly to fund Viya’ s pension in the fourth quarter of 2016, and (iii) $5.3 million recorded as restricted cash to satisfy Viya’ s other postretirement benefit plans.  On July 1, 2016, the Company began consolidating the results of Viya within its financial statements in its International Telecom segment.  Subsequent to the Viya Transaction, the Company sold the acquired businesses in St. Maarten and the British Virgin Islands, as further described in “Dispositions” below.

 

The Viya Transaction was accounted as a business combination in accordance with ASC 805.  The consideration transferred to CFC of $111.9 million, and used for the purchase price allocation, differed from the contractual purchase price of $145.0 million due to certain GAAP purchase price adjustments including a reduction of $5.3 million related to working capital adjustments and the Company assuming pension and other postretirement benefit liabilities of $27.8 million as discussed above.  The Company transferred $51.9 million in cash and $60.0 million in loan proceeds to CFC for total consideration of $111.9 million that was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.  The table below represents the allocation of the consideration transferred to the net assets of Viya based on their acquisition date fair values:

 

 

 

 

 

Consideration Transferred

$

111,860

 

Non-controlling interests

 

221

 

Total value to allocate

 

112,081

 

 

 

 

 

Purchase price allocation:

 

 

 

Cash

 

4,229

 

Accounts receivable

 

6,553

 

Materials & supplies

 

6,533

 

Other current assets

 

1,927

 

Property, plant and equipment

 

108,284

 

Telecommunication licenses

 

7,623

 

Goodwill

 

20,586

 

Intangible assets

 

7,800

 

Other assets

 

4,394

 

Accounts payable and accrued liabilities

 

(15,971)

 

Advance payments and deposits

 

(7,793)

 

Deferred tax liability

 

(2,935)

 

Pension and other postretirement benefit liabilities

 

(29,149)

 

Net assets acquired

$

112,081

 

 

The acquired property, plant and equipment is comprised of telecommunication equipment located in the U.S Virgin Islands, British Virgin Islands and St. Maarten (subsequently disposed, see below).  The property, plant and equipment was valued using the income and cost approaches.  Cash flows were discounted between 14% and 25% based on the risk associated with the cash flows to determine fair value under the income approach.  The property, plant and equipment have useful lives ranging from 1 to 18 years and the customer relationships acquired have useful lives ranging from 7 to 13 years.  The fair value of the non-controlling interest was determined using the income approach with discount rates ranging from 15% to 25%.  The acquired receivables consist of trade receivables incurred in the ordinary course of business.  The Company has collected full amount of the receivables. The Company recorded a liability equal

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to the funded status of the plans in its purchase price allocation.  Discount rates between 3.6% and 3.9% were used to determine the pension and postretirement benefit obligations.

 

The goodwill generated from the Viya Transaction is primarily related to value placed on the acquired employee workforces, service offerings, and capabilities of the acquired businesses as well as expected synergies from future combined operations.  The goodwill is not deductible for income tax purposes.

 

The Company acquired Viya’s pension and other postretirement benefit plans as part of the transaction.  The plans cover employees located in the U.S. Virgin Islands and consist of noncontributory defined benefit pension plans and noncontributory defined medical, dental, vision and life benefit plans.  As noted above, the contractual purchase price included an adjustment related to the funded status of Viya’s pension and other postretirement benefit plans.  As contemplated by the transaction, the Company contributed approximately $22.5 million during the fourth quarter of 2016 to Viya’s pension plans.  This payment is recorded as a cash outflow from operations in the statement of cash flows in the fourth quarter of 2016.  At September 30, 2017, the Company held $5.1 million of restricted cash equal to the unfunded status of the other postretirement benefit plans.  The cash is restricted due to the Company’s intent to use the cash to satisfy future postretirement benefit obligations.

 

Dispositions

 

On December 15, 2016, the Company transferred control of its subsidiary in Aruba to another stockholder in a nonreciprocal transfer.  Subsequent to that date, it no longer consolidated the results of the operations of the Aruba business. The Company did not recognize a gain or loss on the transaction.

 

On January 3, 2017, the Company completed the sale of the Viya cable operations located in St. Maarten for $4.8 million and recognized a gain of $0.1 million on the transaction. 

 

On August 18, 2017, the Company completed the sale of the Viya cable operations located in the British Virgin Islands.  The company did not recognize a gain or loss on the transaction. 

 

The results of the St. Maarten, Aruba, and British Virgin Islands operations are not material to the Company’s historical results of operations. Since the dispositions do not relate to a strategic shift in our operations, the historical results and financial position of the operations are presented within continuing operations.

 

U.S. Telecom

 

Acquisition

 

In July 2016, the Company acquired certain telecommunications fixed assets and the associated operations located in the western United States.  The acquisition qualified as a business combination for accounting purposes.  The Company transferred $9.1 million of cash consideration in the acquisition.  The consideration transferred was allocated to $10.2 million of acquired fixed assets, $3.5 million of deferred tax liabilities, and $0.7 million to other net liabilities, and the resulting $3.1 million in goodwill which is not deductible for income tax purposes. Results of operations for the business are included in the U.S. Telecom segment and are not material to the Company’s historical results of operations. 

 

Disposition

 

On August 4, 2016, the Company entered into a stock purchase agreement to sell its integrated voice and data communications and wholesale transport businesses in New England and New York (“Sovernet”).  On March 8, 2017, the Company completed the sale for consideration of $25.9 million (the “Sovernet Transaction”).  The consideration included $20.9 million of cash, $3.0 million of receivables, and $2.0 million of contingent consideration.  The $3.0 million of receivables are held in escrow to satisfy working capital adjustments in favor of the acquirer, to fund certain capital expenditure projects related to the assets sold and to secure the Company’s indemnification obligations.  The contingent consideration represents the fair value of future payments related to certain operational milestones of the

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disposed assets.  The value of the contingent consideration could be up to $4.0 million based on whether or not the operational milestones are achieved by December 31, 2017.  The table below identifies the assets and liabilities transferred (amounts in thousands):

 

 

 

 

 

Consideration Received

$

25,926

 

 

 

 

 

Assets and liabilities disposed

 

 

 

Cash

 

1,821

 

Accounts receivable

 

1,696

 

Inventory

 

639

 

Prepaid

 

1,034

 

Property, plant and equipment

 

25,294

 

Other assets

 

288

 

Accounts payable and accrued liabilities

 

(1,718)

 

Advance payments and deposits

 

(1,897)

 

Net assets disposed

 

27,157

 

 

 

 

 

Consideration less net assets disposed

 

(1,231)

 

 

 

 

 

Transaction costs

 

(1,156)

 

 

 

 

 

Loss

$

(2,387)

 

 

Prior to the closing of the transaction, the Company repurchased non-controlling interests from minority shareholders in a Sovernet subsidiary for $0.7 million.  The non-controlling interest had a book value of zero.  Additionally the Company recorded a loss on deconsolidation of $0.5 million. 

   

The Company incurred $1.2 million of transaction related charges pertaining to legal, accounting and consulting services associated with the transaction, of which $ 0.6 million were incurred during the nine months ended September 30, 2017.  Since the Sovernet disposition does not relate to a strategic shift in our operations, the historic results and financial position of the operations are presented within continuing operations.

 

Subsequent to close of the Sovernet Transaction, management continually monitored and assessed the probability of earning the contingent consideration.  In September 2017, based on progress toward achieving the operational milestones necessary to earn the contingent consideration and the December 31, 2017 deadline under which such milestones are to be achieved, management has determined that the Company is unlikely to earn the contingent consideration or any material portion thereof.  As a result the fair value of the contingent consideration was reduced to zero.  The amount was recorded as a loss on disposition of assets within operating income during the three and nine months ended September 30, 2017.

 

Prior to the Sovernet Transaction, in the second quarter of 2016, the Company recorded an impairment loss of $11.1 million on assets related to Sovernet.  The impairment consisted of a $3.6 million impairment of property, plant and equipment and $7.5 million impairment of goodwill.

 

Pro forma Results

 

The following table reflects unaudited pro forma operating results of the Company for the nine months ended September 30, 2016 as if the One Communications and Viya Transactions occurred on January 1, 2016. The pro forma amounts adjust One Communications’ and Viya’s results to reflect the depreciation and amortization that would have been recorded assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016.  Also, the pro forma results were adjusted to reflect changes to the acquired entities’

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capital structure related to the transaction.  One Communications’ results reflect the retirement of $24.7 million of debt.  Viya’s results reflect the retirement of $185.8 million of debt and the addition of $60 million of purchase price debt.  Finally, the Company’s results were adjusted to reflect the Company’s incremental ownership in BDC.  The historical results of the Vibrant Energy, and Western United States acquisitions are not included in the pro forma results as their impacts were not material to the Company’s historical results.     

 

The pro forma results for the nine months ended September 30, 2016 include $5.4 million of impairment charges recorded by One Communications and Viya prior to the Company’s acquisition of the businesses.  Amounts are presented in thousands, except per share data.

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

(unaudited)

 

2016

 

 

 

As

 

Pro-

 

 

 

Reported

 

Forma

 

Revenue

 

$

328,471

 

$

407,096

 

Net income attributable to ATN International, Inc. Stockholders

 

 

10,206

 

 

12,768

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

 

0.63

 

 

0.79

 

Diluted

 

 

0.63

 

 

0.79

 

 

The three months ended September 30, 2016 is not presented because both the One Communications and Viya transactions were completed on or before July 1, 2016.  As a result there are no pro forma adjustments.  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 acquisitions had been consummated on these dates or of future operating results of the combined company following the transactions.  

 

Renewable Energy

 

Vibrant Energy

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

Consideration Transferred

$

6,193

 

 

 

 

 

 

Purchase price allocation:

 

 

Cash

 

136

Prepayments and other assets

 

636

Property, plant and equipment

 

7,321

Goodwill

 

3,279

Accounts payable and accrued liabilities

 

(5,179)

Net assets acquired

$

6,193

 

  The consideration transferred includes $4.9 million paid as of September 30, 2017 and $1.3 million payable at future dates, which is contingent upon the passage of time and achievement of initial production milestones that are considered probable.  The acquired property, plant and equipment is comprised of solar equipment and the accounts payable and accrued liabilities consists mainly of amounts payable for certain asset purchases.  The fair value of the property, plant, and equipment was based on recent acquisition costs for the assets, given their recent purchase dates from third parties.  The goodwill is not deductible for income tax purposes and primarily relates to the assembled workforce of the business acquired.

 

6. 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 corporate obligations and non-exchange traded derivative contracts.

 

 

 

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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 and intangible assets that have been impaired 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 September 30, 2017 and December 31, 2016 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

Quoted Prices in

 

Observable

 

 

 

 

 

 

Active Markets

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

Total

 

Certificates of deposit

 

$

 —

 

$

391

 

$

391

 

Money market funds

 

$

2,287

 

$

 —

 

$

2,287

 

Short term investments

 

$

371

 

$

7,486

 

$

7,857

 

Commercial paper

 

$

 —

 

$

50,107

 

$

50,107

 

Interest rate swap

 

$

 —

 

$

(42)

 

$

(42)

 

Total assets and liabilities measured at fair value

 

$

2,658

 

$

57,942

 

$

60,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

Quoted Prices in

 

Observable

 

 

 

 

 

 

Active Markets

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

Total

 

Certificates of deposit

 

$

 —

 

$

391

 

$

391

 

Money market funds

 

$

29,027

 

$

 —

 

$

29,027

 

Short term investments

 

$

1,751

 

$

7,486

 

$

9,237

 

Commercial paper

 

$

 —

 

$

29,981

 

$

29,981

 

Total assets measured at fair value

 

$

30,778

 

$

37,858

 

$

68,636

 

 

Certificate of Deposit

 

As of September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, 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.

 

Short Term Investments and Commercial Paper

 

As of September 30, 2017 and December 31, 2016, this asset class consisted of short term foreign and U.S. corporate bonds, equity securities, and commercial paper. Corporate bonds and including commercial paper are classified within Level 2 of the fair value hierarchy because the fair value is based on observable market data.  Equity securities are classified within Level 1 because fair value is based on quoted market prices in active markets for identical assets.

 

Other Fair Value Disclosures

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

The fair value of the interest rate swap is measured using level 2 inputs.

In the third quarter of 2017, the Company made strategic investments totaling $18.1 million. The investments are accounted for as cost method investments.   At September 30, 2017, the Company holds $20.1 million of investments accounted for under the cost method.  The Company has not estimated the fair value of these investments because the fair value is not readily determinable and there have been no changes in circumstances which would have an adverse effect on the fair value of the investments.  

The fair value of long-term debt is estimated using Level 2 inputs.  At September 30, 2017, the fair value of long-term debt, including the current portion, was $ 163.1 million and its book value was $ 159.7 million.  At December 31, 2016, the fair value of long-term debt, including the current portion, was $15 9.9 million and its book value was $ 156.8 million.

7. LONG-TERM DEBT

 

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

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

 

On January 11, 2016, the Company amended the Credit Facility to increase the amount the Company is permitted to invest in “unrestricted” subsidiaries of the Company, which are not subject to the covenants of the Credit Facility , from $275.0 million to $400.0 million (as such increased amount shall be reduced from time to time by the aggregate amount of certain dividend payments to the Company’s stockholders).     The Amendment also provides for the incurrence by the Company of incremental term loan facilities, when combined with increases to revolving loan commitments under the Credit Facility , in an aggregate amount not to exceed $200.0 million, which facilities shall be subject to certain conditions, including pro forma compliance with the total net leverage ratio financial covenant under the Credit Facility .

 

    The Credit Facility contains customary representations, warranties and covenants, including a financial covenant that imposes a maximum ratio of indebtedness to EBITDA as well as covenants limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Credit Facility contains a financial covenant that imposes a maximum ratio of indebtedness to EBITDA. As of September 30, 2017, the Company was in compliance with all of the financial covenants of the Credit Facility.

 

As of September 30, 2017, the Company had no borrowings under the Credit Facility. 

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Ahana Debt

On December 24, 2014, in connection with the Ahana Acquisition, the Company assumed $38.9 million in long-term debt (the “Original Ahana Debt”).  The Original Ahana Debt included multiple loan agreements with banks that bore interest at rates between 4.5% and 6.0%, matured at various times between 2018 and 2023 and were secured by certain solar facilities.  Repayment of the Original Ahana Debt was being made in cash on a monthly basis until maturity.

 

The Original Ahana Debt also included a loan from Public Service Electric & Gas (the “PSE&G Loan”).  The PSE&G Loan bears interest at 11.3%, matures in 2027, and is secured by certain solar facilities.  Repayment of the Original Ahana Debt with PSE&G can be made in either cash or solar renewable energy credits (“SRECs”), at the Company’s discretion, with the value of the SRECs being fixed at the time of the loan’s closing.  Historically, the Company has made all repayments of the PSE&G Loan using SRECs.

 

On December 19, 2016, Ahana’s wholly owned subsidiary, Ahana Operations, issued $20.6 million in aggregate principal amount of 4.427% senior notes due 2029 (the “Series A Notes”) and $45.2 million in aggregate principal amount of 5.327% senior notes due 2031 (the “Series B Notes” and collectively with the Series A Notes and the PSE&G Loan, the “Ahana Debt” ).  Interest and principal are payable semi-annually, until the respective maturity dates of March 31, 2029 (for the Series A Notes) and September 30, 2031 (for the Series B Notes).  Cash flows generated by the solar projects that secure the Series A Notes and Series B Notes are only available for payment of such debt and are not available to pay other obligations or the claims of the creditors of Ahana or its subsidiaries. However, subject to certain restrictions, Ahana Operations holds the right to the excess cash flows not needed to pay the Series A Notes and Series B Notes and other obligations arising out of the securitizations.  The Series A and Series B Notes are secured by certain assets of Ahana and are guaranteed by certain of its subsidiaries.

 

A portion of the proceeds from the issuances of the Series A Notes and Series B Notes were used to repay the Original Ahana Debt in full except for the PSE&G Loan which remains outstanding after the refinancing.

 

The Series A Notes and the Series B Notes contain customary representations, warranties and certain affirmative and negative covenants, which limit additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes.  The Series A Notes and Series B Notes are subject to financial covenants that imposes 1) a maximum debt service coverage ratio and 2) a maximum ratio of the present value of Ahana’s future cash flow to the aggregate principal amounts of all outstanding obligations.  These financial covenants are tested semi-annually for Ahana Operations on a consolidated basis and on an individual basis for certain subsidiaries.  Both the Series A Notes and Series B Notes may be redeemed at any time, in whole or part, subject to a make-whole premium.  As of September 30, 2017, the Company was in compliance with all of the financial covenants of the Series A Notes and the Series B Notes.

 

The Company capitalized $2.8 million of fees associated with the Series A and Series B Notes which is recorded as a reduction to the debt carrying amount and will be amortized over the life of the notes.   

 

As of September 30, 2017, $2.3 million of the Original Ahana Debt, $64.6 million of the Series A Notes and Series B Notes remained outstanding, and $2.7 million of the capitalized fees remain unamortized.

 

One Communications Debt

In connection with the One Communications Transaction on May 3, 2016, the Company assumed $35.4 million in debt (the “One Communications Debt”) in the form of a loan from HSBC Bank Bermuda Limited.  The One Communications Debt was scheduled to mature in 2021, was bearing interest at the three-month LIBOR rate plus a margin of 3.25%, and had repayment being made quarterly.  As of March 31, 2017, $28.9 million of the One Communications Debt was outstanding. The One Communications Debt contained customary representations, warranties and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limited the maximum ratio of indebtedness less cash to annual operating cash flow.

 

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On May 22, 2017, the Company amended and restated the One Communications Debt to increase the original facility to $37.5 million.  The amended and restated debt is scheduled to mature on May 22, 2022 and bears an interest at the three month LIBOR rate plus an applicable margin rate ranging between 2.5% to 2.75% paid quarterly.  The amended and restated One Communications Debt contains customary representations, warranties and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and financial covenants that limit the ratio of tangible net worth to long term debt and total net debt to EBITDA and require a minimum debt service coverage ratio (net cash generated from operating activities plus interest expense less net capital expenditures to debt repayments plus interest expense).  The covenants are tested annually commencing the fiscal year ending December 31, 2017.

 

As a condition of the amended and restated agreement, within 90 days of the refinance date the Company is required to enter into a hedging arrangement with a notional amount equal to at least 30% of the outstan ding loan balance and  a term corresponding to the maturity of the One Communications Debt.  As of July 2017, we entered into an amortizing interest rate swap.  This swap has been designated as a cash flow hedge, has an original notional amount of $11.0 million, has an interest rate of 1.874%, and expires in March 2022.

 

In connection with the amended and restated debt, the Company increased the limit of its overdraft facility from $5.0 million to $10.0 million.  This facility has an interest rate of three month LIBOR plus 1.75%.

 

The Company capitalized $0.3 million of fees associated with the One Communications Debt, which is recorded as a reduction to the debt carrying amount and will be amortized over the life of the debt.   

 

As of September 30, 2017, $36.6 million of the One Communications Debt was outstanding, there were no borrowings under the overdraft facility, and $0.3 million of the capitalized fees remain unamortized.

 

Viya Debt (formerly Innovative Debt)

On July 1, 2016, the Company and certain of its subsidiaries entered into a $60.0 million loan agreement (the “Viya Debt”). The Viya Debt agreement contains customary representations, warranties and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limits the maximum ratio of indebtedness less cash to annual operating cash flow.  The covenant is tested on an annual basis commencing in 2017.  Interest is paid quarterly at a fixed rate of 4.0% and principal repayment is not required until maturity on July 1, 2026.  Prepayment of the Viya Debt may be subject to a fee under certain circumstances.  The debt is secured by certain assets of the Company’s Viya subsidiaries and is guaranteed by the Company.

 

The Company paid a fee of $0.9 million to lock the interest rate at 4% per annum over the term of the debt.  The fee was recorded as a reduction to the debt carrying amount and will be amortized over the life of the loan. 

 

As of September 30, 2017, $60.0 million of the Viya Debt remained outstanding and $0.8 million of the rate lock fee was unamortized.

 

8. GOVERNMENT GRANTS

 

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

 

Phase I Mobility Fund Grants

 

As part of the Federal Communications Commission’s (“FCC”) reform of its Universal Service Fund (“USF”) program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households, the FCC created the Phase I Mobility Fund (“Phase I Mobility Fund”), a one-time award meant to support wireless coverage in underserved geographic areas in the United States. The Company has received

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$21.1 million of Phase I Mobility Fund support to its wholesale wireless business (the “Mobility Funds”) to expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the receipt of the Mobility Funds, the Company committed to comply with certain additional FCC construction and other requirements. A portion of these funds was used to offset network capital costs and a portion is used to offset the costs of supporting the networks for a period of five years from the award date.