XNAS:ATNI Atlantic Tele-Network, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 2012

 

OR

 

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

 

For the transition period from         to         

 

Commission File Number 001-12593

 


 

Atlantic Tele-Network, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

47-0728886

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

600 Cummings Center

Beverly, MA 01915

(Address of principal executive offices, including zip code)

 

(978) 619-1300

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of August 9, 2012, the registrant had outstanding 15,554,398 shares of its common stock ($.01 par value).

 

 

 



Table of Contents

 

ATLANTIC TELE-NETWORK, INC.

 

FORM 10-Q

 

Quarter Ended June 30, 2012

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

3

 

 

 

PART I—FINANCIAL INFORMATION

4

 

 

 

Item 1

Unaudited Condensed Consolidated Financial Statements

4

 

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2011 and June 30, 2012

4

 

 

 

 

Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2011 and 2012

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2012

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8-16

 

 

 

Item 2

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

17-28

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4

Controls and Procedures

28

 

 

 

PART II—OTHER INFORMATION

29

 

 

 

Item 1

Legal Proceedings

29

 

 

 

Item1A

Risk Factors

29

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 6

Exhibits

29

 

 

 

SIGNATURES

31

 

 

 

CERTIFICATIONS

 

 

2



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (or the “Report”) contains forward-looking statements relating to, among other matters, our future financial performance and results of operations; the competitive environment in our key markets, demand for our services and industry trends; the outcome of litigation and regulatory matters; our continued access to the credit and capital markets; the pace of our network expansion and improvement, including our level of estimated future capital expenditures and our realization of the benefits of these investments; and management’s plans and strategy for the future.  These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results.  Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1)  the general performance of our U.S. operations, including operating margins, and the future retention and turnover of our subscriber base; (2) our ability to maintain favorable roaming arrangements; (3) increased competition; (4) economic, political and other risks facing our foreign operations; (5) the loss of certain FCC and other licenses and other regulatory changes affecting our businesses; (6) rapid and significant technological changes in the telecommunications industry; (7) any loss of any key members of management; (8) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure and retail wireless business; (9) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (10) the occurrence of severe weather and natural catastrophes; (11) the current difficult global economic environment, along with difficult and volatile conditions in the capital and credit markets; (12) our continued access to capital and credit markets and (13) our ability to realize the value that we believe exists in businesses that we may or have acquired. These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the forward-looking statements above are set forth more fully under Item 1A “Risk Factors” of this Report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 10, 2012. The Company undertakes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements.

 

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

 

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

 

3



Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

December 31,
2011

 

June 30,
2012

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

48,735

 

$

79,837

 

Accounts receivable, net of allowances of $15.3 million and $14.5 million, respectively

 

71,159

 

75,059

 

Materials and supplies

 

20,802

 

19,982

 

Deferred income taxes

 

21,921

 

21,921

 

Income tax receivable

 

11,545

 

 

Prepayments and other current assets

 

9,738

 

13,960

 

Total current assets

 

183,900

 

210,759

 

Property, plant and equipment, net

 

483,203

 

456,239

 

Telecommunications licenses

 

87,468

 

87,404

 

Goodwill

 

45,077

 

45,077

 

Trade name license, net

 

13,013

 

12,773

 

Customer relationships, net

 

41,314

 

36,860

 

Other assets

 

19,756

 

27,700

 

Total assets

 

$

873,731

 

$

876,812

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

25,068

 

$

15,680

 

Accounts payable and accrued liabilities

 

57,262

 

44,480

 

Dividends payable

 

3,548

 

3,587

 

Accrued taxes

 

7,739

 

16,895

 

Advance payments and deposits

 

15,834

 

17,829

 

Other current liabilities

 

36,327

 

35,820

 

Total current liabilities

 

145,778

 

134,291

 

Deferred income taxes

 

88,906

 

89,134

 

Other liabilities

 

29,371

 

26,422

 

Long-term debt, excluding current portion

 

257,146

 

258,235

 

Total liabilities

 

521,201

 

508,082

 

Commitments and contingencies (Note 11)

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value per share; 50,000,000 shares authorized; 15,955,886 and 16,063,869 shares issued, respectively, and 15,451,238 and 15,554,398 shares outstanding, respectively

 

160

 

160

 

Treasury stock, at cost; 504,648 and 509,471 shares, respectively

 

(4,942

)

(5,126

)

Additional paid-in capital

 

118,620

 

121,481

 

Retained earnings

 

190,327

 

203,020

 

Accumulated other comprehensive loss

 

(9,899

)

(9,718

)

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

 

294,266

 

309,817

 

Non-controlling interests

 

58,264

 

58,913

 

Total equity

 

352,530

 

368,730

 

Total liabilities and equity

 

$

873,731

 

$

876,812

 

 

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

 

4



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 and 2012

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

REVENUE:

 

 

 

 

 

 

 

 

 

U.S. wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

95,410

 

$

84,062

 

$

195,079

 

$

170,812

 

Wholesale

 

51,870

 

51,569

 

96,567

 

98,952

 

International wireless

 

18,434

 

20,315

 

32,497

 

39,270

 

Wireline

 

20,886

 

20,889

 

41,557

 

42,437

 

Equipment and other

 

7,153

 

8,458

 

16,208

 

16,712

 

Total revenue

 

193,753

 

185,293

 

381,908

 

368,183

 

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

 

 

 

 

 

 

 

 

 

Termination and access fees

 

54,539

 

38,951

 

106,313

 

79,434

 

Engineering and operations

 

21,897

 

21,945

 

43,802

 

43,281

 

Sales and marketing

 

36,079

 

31,203

 

67,908

 

63,377

 

Equipment expense

 

18,486

 

21,989

 

40,069

 

42,340

 

General and administrative

 

30,775

 

21,549

 

56,390

 

44,907

 

Acquisition-related charges

 

316

 

 

567

 

5

 

Depreciation and amortization

 

25,384

 

26,582

 

50,192

 

53,606

 

Total operating expenses

 

187,476

 

162,219

 

365,241

 

326,950

 

Income from operations

 

6,277

 

23,074

 

16,667

 

41,233

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,351

)

(3,998

)

(8,423

)

(7,968

)

Interest income

 

201

 

71

 

581

 

162

 

Equity in earnings of an unconsolidated affiliate

 

239

 

930

 

755

 

2,331

 

Other income (expense), net

 

4

 

(331

)

599

 

(295

)

Other income (expense), net

 

(3,907

)

(3,328

)

(6,488

)

(5,770

)

INCOME BEFORE INCOME TAXES

 

2,370

 

19,746

 

10,179

 

35,463

 

Income tax expense

 

1,052

 

7,979

 

4,882

 

14,759

 

NET INCOME

 

1,318

 

11,767

 

5,297

 

20,704

 

Net loss (income) attributable to non-controlling interests, net of tax of $0.4 million and $0.5 million for the three months ended June 30, 2011 and 2012, respectively, and $0.8 million and $1.1 million for the six months ended June 30, 2011 and 2012, respectively.

 

497

 

(1,237

)

1,015

 

(853

)

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

 

$

1,815

 

$

10,530

 

$

6,312

 

$

19,851

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.68

 

$

0.41

 

$

1.28

 

Diluted

 

$

0.12

 

$

0.67

 

$

0.41

 

$

1.27

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

15,394

 

15,535

 

15,389

 

15,495

 

Diluted

 

15,497

 

15,609

 

15,491

 

15,581

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.22

 

$

0.23

 

$

0.44

 

$

0.46

 

 

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

 

5



Table of Contents

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2012

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2011

 

2012

 

 

 

 

 

 

 

Net income

 

$

5,297

 

$

20,704

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

13

 

 

Unrealized (loss) gain on interest rate swap, net of tax of $0.4 million and $0.1 million respectively

 

(583

)

149

 

Other comprehensive (loss) income, net of tax

 

(570

)

149

 

Comprehensive income

 

4,727

 

20,853

 

Less: Comprehensive income (loss) attributable to non-controlling interests

 

1,015

 

(853

)

Comprehensive income attributable to Atlantic Tele-Network, Inc.

 

$

5,742

 

$

20,000

 

 

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

 

6



Table of Contents

 

ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2012

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2011

 

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

5,297

 

$

20,704

 

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

 

 

 

 

 

Depreciation and amortization

 

50,192

 

53,606

 

Provision for doubtful accounts

 

3,856

 

6,325

 

Amortization of debt discount and debt issuance costs

 

873

 

1,747

 

Stock-based compensation

 

1,890

 

1,908

 

Deferred income taxes

 

118

 

108

 

Equity in earnings of an unconsolidated affiliate

 

(755

)

(2,331

)

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

 

 

 

 

 

Accounts receivable

 

(11,063

)

(10,225

)

Materials and supplies, prepayments, and other current assets

 

3,570

 

(3,401

)

Income tax receivable

 

 

11,545

 

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

 

(7,968

)

(5,054

)

Accrued taxes

 

(700

)

9,156

 

Other

 

(2,281

)

(4,480

)

Net cash provided by operating activities

 

43,029

 

79,608

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(45,428

)

(32,272

)

Cash acquired in business combinations

 

4,087

 

 

Decrease in restricted cash

 

467

 

 

Net cash used in investing activities

 

(40,874

)

(32,272

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from borrowing under term loan

 

 

275,000

 

Proceeds from borrowings under revolver loan

 

23,095

 

46,378

 

Principal repayments of term loan

 

(6,515

)

(252,953

)

Principal repayments of revolver loan

 

 

(74,534

)

Proceeds from stock option exercises

 

52

 

946

 

Dividends paid on common stock

 

(6,771

)

(7,119

)

Distributions to non-controlling interests

 

(1,608

)

(929

)

Payments of debt issuance costs

 

(931

)

(3,564

)

Repurchase of non-controlling interests

 

(446

)

(80

)

Investments made by non-controlling interests

 

507

 

805

 

Purchase of common stock

 

(91

)

(184

)

Net cash provided by (used in) financing activities

 

7,292

 

(16,234

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

9,447

 

31,102

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

37,330

 

48,735

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

46,777

 

$

79,837

 

 

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

 

7



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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BUSINESS OPERATIONS

 

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

 

·                  Wireless.  In the United States, the Company offers wireless voice and data services to retail customers under the “Alltel” name in rural markets located principally in the Southeast and Midwest. Additionally, the Company offers wholesale wireless voice and data roaming services to national, regional and local wireless carriers and selected international wireless carriers in rural markets located principally in the Southwest and Midwest. The Company also offers wireless voice and data services to retail customers in Bermuda under the “CellOne” name, in Guyana under the “Cellink” name, and in other smaller markets in the Caribbean and the United States.

 

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

 

In the second quarter of 2011, the Company completed the merger of its Bermuda operations with M3 Wireless, Ltd., a leading retail wireless provider in Bermuda. For more information on the merger in Bermuda, see Note 4. The Company actively evaluates additional investment and acquisition opportunities in the United States and the Caribbean that meet the Company’s return-on-investment and other acquisition criteria.

 

The following chart summarizes the operating activities of the Company’s principal subsidiaries, the segments in which the Company reports its revenue and the markets it served as of June 30, 2012:

 

Services

 

Segment

 

Markets

 

Tradenames

Wireless

 

U.S. Wireless

 

United States (rural markets)

 

Alltel, Choice

 

 

Island Wireless

 

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

 

Mio, CellOne, Islandcom, Choice

 

 

International Integrated Telephony

 

Guyana

 

Cellink

Wireline

 

International Integrated Telephony

 

Guyana

 

GT&T, Emagine

 

 

U.S. Wireline

 

United States (New England and New York State)

 

Sovernet, ION

 

The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a management fee equal to a percentage of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation. For information about the Company’s business segments and geographical information about its revenue, operating income and long-lived assets, see Note 10 to the Consolidated Financial Statements included in this Report.

 

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 2011 Annual Report on Form 10-K.

 

Consolidation

 

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

 

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Recent Accounting Pronouncements

 

In June 2011, the FASB issued a new accounting standard that requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or in two separate, but consecutive, statements. The standard also requires that items reclassified from OCI to net income be presented on the face of the financial statements. The standard, which the Company adopted during the first quarter of 2012, did not have a material impact on its financial position, results of operations or liquidity.

 

In May 2011, the FASB issued amended guidance that clarifies the application of existing fair value measurement and increases certain related disclosure requirements about measuring fair value. The standard, which the Company adopted during the first quarter of 2012, did not have a material impact on its financial position, results of operations or liquidity.

 

Other new pronouncements issued but not effective until after June 30, 2012, are not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

3.  USE OF ESTIMATES

 

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

 

4.  ACQUISITIONS

 

Merger with M3 Wireless, Ltd.

 

On May 2, 2011, the Company completed the merger of its Bermuda wireless operations, Bermuda Digital Communications, Ltd. (“BDC”), with that of M3 Wireless, Ltd. (“M3”), a wireless provider in Bermuda (the “CellOne Merger”). As part of the CellOne Merger, M3 merged with and into BDC, and the combined entity will continue to operate under BDC’s CellOne brand. As a result of the CellOne Merger, the Company’s 58% ownership interest in BDC was reduced to a controlling 42% interest in the combined entity. Since the Company has the right to designate the majority of seats on the combined entity’s board of directors and therefore controls its management and policies, the Company has consolidated the results of the combined entity in its consolidated financial statements effective on the date of the CellOne Merger.

 

The CellOne Merger was accounted for using the purchase method and M3’s results of operations since May 2, 2011 have been included in the Company’s Island Wireless segment as reported in Note 10. The total consideration of the CellOne Merger was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the CellOne Merger as determined by management. The consideration paid for M3 was determined based on the estimated fair value of the equity of M3. The table below represents the assignment of the total consideration to the tangible and intangible assets and liabilities of M3 based on their merger date fair values (in thousands) noting that Bermuda is a non-taxable jurisdiction:

 

Total consideration

 

$

6,655

 

Purchase price allocation:

 

 

 

Net working capital

 

$

675

 

Property, plant and equipment

 

10,577

 

Customer relationships

 

2,600

 

Telecommunications licenses

 

6,100

 

Goodwill

 

3,105

 

Note payable-affiliate (see Note 6)

 

(7,012

)

Other long term liabilities

 

(200

)

Non-controlling interests

 

(9,190

)

Net assets acquired

 

$

6,655

 

 

The amortization period of the customer relationships is 12.0 years. The value of the goodwill from the CellOne Merger can be attributed to a number of business factors including, but not limited to, the reputation of M3 as a retail provider of wireless services and a network operator, M3’s reputation for customer care and the strategic position M3 holds in Bermuda.

 

9



Table of Contents

 

The following table reflects unaudited pro forma results of operations of the Company for the three and six months ended June 30, 2011 assuming that the merger of M3 had occurred at the beginning of the earliest period presented (in thousands, except per share data):

 

 

 

Three Months Ended June 30, 2011

 

Six Months ended June 30, 2011

 

 

 

As Reported

 

As Adjusted

 

As Reported

 

As Adjusted

 

Revenue

 

$

193,753

 

$

195,247

 

$

381,908

 

$

387,996

 

Net income

 

1,815

 

1,788

 

6,312

 

$

6,847

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.12

 

$

0.41

 

$

0.44

 

Diluted

 

0.12

 

0.12

 

0.41

 

0.44

 

 

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 merger had been consummated on these dates or of future operating results of the combined company following this transaction.

 

5.  FAIR VALUE MEASUREMENTS

 

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

 

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

 

Level 1

 

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

 

 

 

Level 2

 

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

 

 

 

 

 

This category generally includes corporate obligations and non-exchange traded derivative contracts.

 

 

 

Level 3

 

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

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2011 and June 30, 2012 are summarized as follows:

 

 

 

December 31, 2011

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

 

$

3,366

 

$

3,366

 

Money market funds

 

3,847

 

 

3,847

 

Total assets measured at fair value

 

$

3,847

 

$

3,366

 

$

7,213

 

Interest rate derivative (Note 7)

 

$

 

$

11,337

 

$

11,337

 

Total liabilities measured at fair value

 

$

 

$

11,337

 

$

11,337

 

 

10



Table of Contents

 

 

 

June 30, 2012

 

Description

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Total

 

Certificates of deposit

 

$

 

$

3,360

 

$

3,360

 

Money market funds

 

2,779

 

 

2,779

 

Total assets measured at fair value

 

$

2,779

 

$

3,360

 

$

6,139

 

Interest rate derivative (Note 7)

 

$

 

$

11,037

 

$

11,037

 

Total liabilities measured at fair value

 

$

 

$

11,037

 

$

11,037

 

 

Money Market Funds and Certificates of Deposit

 

As of December 31, 2011 and June 30, 2012, this asset class consisted of time deposits at financial institutions denominated in U.S. dollars and a money market portfolio that comprises Federal government and U.S. Treasury securities. The asset class is classified within Level 1 of the fair value hierarchy because its underlying investments are valued using quoted market prices in active markets for identical assets.

 

Derivatives

 

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

 

We did not have any significant nonfinancial assets or nonfinancial liabilities that would be recognized or disclosed at fair value on a recurring basis as of December 31, 2011 and June 30, 2012.  The Company did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the three months ended December 31, 2011 and June 30, 2012.

 

6.  LONG-TERM DEBT

 

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

 

 

 

December 31,
2011

 

June 30,
2012

 

Notes payable - Bank

 

 

 

 

 

Term loans

 

$

252,311

 

$

275,000

 

Revolver loan

 

28,156

 

 

Note Payable — Other

 

5,752

 

4,912

 

Total outstanding debt

 

286,021

 

279,912

 

Less: current portion

 

(25,068

)

(15,680

)

Total long-term debt

 

260,953

 

264,232

 

Less: debt discount

 

(3,807

)

(5,997

)

Net carrying amount

 

$

257,146

 

$

258,235

 

 

Loan Facilities—Bank

 

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

 

The term loan A-1 is $125 million and matures on June 30, 2017 (the “Term Loan A-1”). The term loan A-2 is $150 million and matures on June 30, 2019 (the “Term Loan A-2” and collectively with the Term Loan A-1, the “Term Loans”).  Each of the Term Loans require certain quarterly repayment obligations.  The revolver loan matures on June 30, 2017. The Company may prepay the Amended Credit Facility at any time without premium or penalty, other than customary fees for the breakage of London Interbank Offered Rate (LIBOR) loans.

 

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Table of Contents

 

Amounts borrowed under the Term Loan A-1 and the revolver loan bear interest at a rate equal to, at the Company’s option, either (i) LIBOR plus an applicable margin ranging between 2.00% to 3.50% or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.50% (or, in the case of amounts borrowed under the swingline sub-facility, an applicable margin ranging from 0.50% to 2.00%). Amounts borrowed under the Term Loan A-2 bear interest at a rate equal to, at the Company’s option, either (i) the LIBOR plus an applicable margin ranging between 2.50% to 4.00% or (ii) a base rate plus an applicable margin ranging from 1.50% to 3.00%.  The base rate is equal to the higher of (i) 1.50% plus the higher of (x) the one-week LIBOR and (y) the one-month LIBOR; and (ii) the prime rate (as defined in the Amended Credit Facility).  The applicable margin is determined based on the ratio of the Company’s indebtedness (as defined in the Amended Credit Facility) to its EBITDA (as defined in the Amended Credit Facility).

 

Borrowings as of June 30, 2012, after considering the effect of the interest rate swap agreements as described in Note 7, bore a weighted-average interest rate of 4.45%. Upon completing the Amended Credit Facility, the Company expensed $0.7 million of deferred financing costs, which are included in other income (expense) within the statement of operations for the three months ended June 30, 2012.

 

Under the terms of the Amended Credit Facility, the Company must also pay a fee ranging from 0.25% to 0.50% of the average daily unused portion of the revolver loan over each calendar quarter, in which the fee is payable in arrears on the last day of each calendar quarter.

 

The Amended Credit Facility contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Amended Credit Facility contains financial covenants by the Company that (i) impose a maximum leverage ratio of indebtedness to EBITDA, (ii) require a minimum debt service ratio of EBITDA to principal, interest and taxes payments and (iii) require a minimum ratio of equity to consolidated assets. As of June 30, 2012, the Company was in compliance with all of the financial covenants of the Amended Credit Facility.

 

Prior to the execution of the Amended Credit Facility, the Company’s existing credit facility with CoBank, ACB, entered into on September 30, 2010 (the “Previous Credit Facility”) provided for $275.0 million in term loans and a revolver loan of up to $100.0 million (which includes a $10.0 million swingline sub-facility) and additional term loans up to an aggregate of $50.0 million, subject to lender approval.  These term loans were scheduled to mature on September 30, 2014 and required certain quarterly repayment obligations. The revolver loan was scheduled to mature on September 10, 2014.  As a result of an amendment entered into on September 16, 2011, amounts borrowed under the Previous Credit Facility bore interest at a rate equal to, at the Company’s option, either (i) LIBOR plus an applicable margin ranging between 2.75% to 4.25% or (ii) a base rate plus an applicable margin ranging from 1.75% to 3.25% (or, in the case of amounts borrowed under the swingline sub-facility, an applicable margin ranging from 1.25% to 2.75%). The applicable margin was determined based on the ratio of the Company’s indebtedness to its EBITDA (each as defined in the Previous Credit Facility agreement).

 

Note Payable—Other

 

In connection with the CellOne Merger with M3 Wireless, Ltd., the Company assumed a term loan of approximately $7.0 million owed to Keytech Ltd., the former parent company of M3 and current 42% minority shareholder in the Company’s Bermuda operations. The term loan requires quarterly repayments of principal, matures on March 15, 2015 and bears interest at a rate of 7% per annum.

 

The Company believes that the carrying value of its debt approximates fair value which was based on quoted market prices and falls within Level 1 of the fair value measurement hierarchy.

 

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. No hedge ineffectiveness was recognized during any of the periods presented.

 

The total outstanding notional amount of cash flow hedges was $143.0 million as of June 30, 2012.

 

12



Table of Contents

 

Amounts reported in accumulated other comprehensive income related to the interest rate swaps are reclassified to interest expense as interest payments are accrued on the Company’s variable-rate debt. Through June 30, 2013, the Company estimates that an additional $4.0 million will be reclassified as an increase to interest expense due to the interest rate swaps since the hedge interest rate exceeds the variable interest rate on the debt.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheet as of December 31, 2011 and June 30, 2012 (in thousands):

 

 

 

Liability Derivatives

 

 

 

 

 

Fair Value as of

 

 

 

Balance Sheet
Location

 

December 31,
2011

 

June 30,
2012

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest Rate Swaps

 

Other liabilities

 

$

11,337

 

$

11,037

 

Total derivatives designated as hedging instruments

 

 

 

$

11,337

 

$

11,037

 

 

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three and six months ended June 30, 2011 and 2012 (in thousands):

 

Three Months Ended June 30,

 

Derivative in Cash Flow
Hedging Relationships

 

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

 

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

 

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

 

2011

 

Interest Rate Swap

 

$

(2,488

)

Interest expense

 

$

1,042

 

2012

 

Interest Rate Swap

 

(144

)

Interest expense

 

1,033

 

 

Six Months Ended June 30,

 

Derivative in Cash Flow
Hedging Relationships

 

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

 

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

 

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

 

2011

 

Interest Rate Swap

 

$

(4,012

)

Interest expense

 

$

2,072

 

2012

 

Interest Rate Swap

 

301

 

Interest expense

 

2,056

 

 

Credit-risk-related Contingent Features

 

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

As of June 30, 2012, the fair value of the interest rate swaps liability position related to these agreements was $11.0 million. As of June 30, 2012, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2012, it would have been required to settle its obligations under these agreements at their termination values of $11.0 million.

 

8.  RECONCILIATION OF TOTAL EQUITY

 

Total equity was as follows (in thousands):

 

13



Table of Contents

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2012

 

 

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total Equity

 

Atlantic Tele-
Network, Inc.

 

Non-Controlling
Interests

 

Total
Equity

 

Equity, beginning of period

 

$

283,768

 

$

45,268

 

$

329,036

 

$

294,266

 

$

58,264

 

$

352,530

 

Stock-based compensation

 

1,890

 

 

1,890

 

1,908

 

 

1,908

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

6,312

 

(1,015

)

5,297

 

19,851

 

853

 

20,704

 

Other comprehensive income(loss)-

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustment

 

13

 

 

13

 

 

 

 

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

 

(583

)

 

(583

)

149

 

 

149

 

Total comprehensive income

 

5,742

 

(1,015

)

4,727

 

20,000

 

853

 

20,853

 

Issuance of common stock upon exercise of stock options

 

52

 

 

52

 

946

 

 

946

 

Dividends declared on common stock

 

(6,775

)

(1,607

)

(8,382

)

(7,119

)

 

(7,119

)

Distributions to non-controlling interests

 

 

 

 

 

(929

)

(929

)

Investments made by minority shareholders

 

 

3,507

 

3,507

 

 

805

 

805

 

Repurchase of non-controlling interests

 

 

 

 

 

(80

)

(80

)

Change in equity ownership of consolidated subsidiaries

 

3,475

 

11,923

 

15,398

 

 

 

 

Purchase of common shares

 

(91

)

 

(91

)

(184

)

 

(184

)

Equity, end of period

 

$

288,061

 

$

58,076

 

$

346,137

 

$

309,817

 

$

58,913

 

$

368,730

 

 

9.  NET INCOME PER SHARE

 

For the three and six months ended June 30, 2011 and 2012, outstanding stock options were the only potentially dilutive securities. The reconciliation from basic to diluted weighted average common shares outstanding is as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Basic weighted-average common shares outstanding

 

15,394

 

15,535

 

15,389

 

15,495

 

Stock options

 

103

 

74

 

102

 

86

 

Diluted weighted-average common shares outstanding

 

15,497

 

15,609

 

15,491

 

15,581

 

 

The above calculations for the three months ended June 30, 2011 and 2012 do not include 293,000 and 381,000 shares, respectively, related to certain stock options because the effects of such were anti-dilutive. For the six months ended June 30, 2011 and 2012, the calculation does not include 245,000 and 353,000 shares, respectively, related to certain stock options because the effect on such options was anti-dilutive.

 

10. SEGMENT REPORTING

 

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

 

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

 

14



Table of Contents

 

 

 

For the Three Months Ended June 30, 2011

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

95,410

 

$

 

$

 

$

 

$

 

$

95,410

 

Wholesale

 

51,870

 

 

 

 

 

51,870

 

International Wireless

 

 

6,970

 

11,464

 

 

 

18,434

 

Wireline

 

139

 

15,674

 

 

5,073

 

 

20,886

 

Equipment and Other

 

5,830

 

106

 

1,217

 

 

 

7,153

 

Total Revenue

 

153,249

 

22,750

 

12,681

 

5,073

 

 

193,753

 

Depreciation and amortization

 

17,363

 

4,557

 

2,453

 

791

 

220

 

25,384

 

Non-cash stock-based compensation

 

58

 

 

 

 

754

 

812

 

Operating income (loss)

 

6,507

 

6,640

 

(2,440

)

51

 

(4,481

)

6,277

 

 

 

 

For the Six Months Ended June 30, 2011

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

195,079

 

$

 

$

 

$

 

$

 

$

195,079

 

Wholesale

 

96,567

 

 

 

 

 

96,567

 

International Wireless

 

 

13,631

 

18,866

 

 

 

32,497

 

Wireline

 

278

 

31,176

 

 

10,103

 

 

41,557

 

Equipment and Other

 

13,431

 

192

 

2,585

 

 

 

16,208

 

Total Revenue

 

305,355

 

44,999

 

21,451

 

10,103

 

 

381,908

 

Depreciation and amortization

 

34,771

 

9,104

 

4,323

 

1,577

 

417

 

50,192

 

Non-cash stock-based compensation

 

367

 

 

 

 

1,523

 

1,890

 

Operating income (loss)

 

16,935

 

12,884

 

(4,103

)

10

 

(9,059

)

16,667

 

 

 

 

For the Three Months Ended June 30, 2012

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

84,062

 

$

 

$

 

$

 

$

 

$

84,062

 

Wholesale

 

51,553

 

 

 

16

 

 

51,569

 

International Wireless

 

 

6,705

 

13,610

 

 

 

20,315

 

Wireline

 

154

 

15,990

 

 

4,745

 

 

20,889

 

Equipment and Other

 

6,714

 

524

 

1,220

 

 

 

8,458

 

Total Revenue

 

142,483

 

23,219

 

14,830

 

4,761

 

 

185,293

 

Depreciation and amortization

 

18,324

 

4,659

 

2,783

 

693

 

123

 

26,582

 

Non-cash stock-based compensation

 

58

 

 

 

 

755

 

813

 

Operating income (loss)

 

23,978

 

4,141

 

287

 

(666

)

(4,666

)

23,074

 

 

 

 

For the Six Months Ended June 30, 2012

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

170,812

 

$

 

$

 

$

 

$

 

$

170,812

 

Wholesale

 

98,936

 

 

 

16

 

 

98,952

 

International Wireless

 

 

13,052

 

26,218

 

 

 

39,270

 

Wireline

 

298

 

32,564

 

 

9,575

 

 

42,437

 

Equipment and Other

 

13,318

 

957

 

2,437

 

 

 

16,712

 

Total Revenue

 

283,364

 

46,573

 

28,655

 

9,591

 

 

368,183

 

Depreciation and amortization

 

37,026

 

9,017

 

5,569

 

1,438

 

556

 

53,606

 

Non-cash stock-based compensation

 

116

 

 

 

 

1,792

 

1,908

 

Operating income (loss)

 

42,900

 

8,190

 

(1,324

)

(1,089

)

(7,444

)

41,233

 

 

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Segment Assets

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

296,279

 

$

129,069

 

$

40,446

 

$

9,126

 

$

8,283

 

$

483,203

 

Goodwill

 

32,148

 

 

5,438

 

7,491

 

 

45,077

 

Total assets

 

544,388

 

171,676

 

84,057

 

22,790

 

50,820

 

873,731

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net fixed assets

 

$

273,346

 

123,972

 

37,395

 

11,698

 

9,828

 

456,239

 

Goodwill

 

32,148

 

 

5,438

 

7,491

 

 

45,077

 

Total assets

 

536,942

 

177,342

 

80,865

 

25,550

 

56,113

 

876,812

 

 

 

 

Capital Expenditures

 

 

 

U.S. Wireless

 

International
Integrated
Telephony

 

Island
Wireless

 

U.S.
Wireline

 

Reconciling
Items

 

Consolidated

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

$

30,762

 

$

8,198

 

$

3,486

 

$

1,220

 

$

1,762

 

$

45,428

 

2012

 

$

20,411

 

$

4,131

 

$

2,521

 

$

3,538

 

$

1,671

 

$

32,272

 

 

11.  COMMITMENTS AND CONTINGENCIES

 

Regulatory and Litigation Matters

 

The Company and its subsidiaries are subject to certain regulatory and legal proceedings and other claims arising in the ordinary course of business, some of which involve claims for damages and taxes that are substantial in amount. The Company believes that, except for the items discussed in its Annual Report on Form 10-K for the year ended December 31, 2011, for which the Company is currently unable to predict the final outcome, the disposition of proceedings currently pending will not have a material adverse effect on the Company’s financial position or results of operations.

 

On July 20, 2012 a trial court in Guyana made findings calling into question the validity of the Company’s Guyana subsidiary’s, Guyana Telephone & Telegraph Ltd. (“GT&T”), exclusive license to provide international voice and data service in Guyana and the applicability of the license to telecommunications services using Voice over Internet Protocol (“VoIP”).  The findings were made in a breach of contract case brought originally in 2007 against GT&T by a subscriber to its internet service.  Digicel, our main competitor in Guyana, in response to the trial court’s findings, began connecting its own international traffic out of Guyana without receiving an international license and at rates which had not been approved by the Guyana Public Utilities Commission (“PUC”). In response, the Guyana Public Utilities Commission ordered Digicel to cease providing service at these rates and the government of Guyana notified us that they have undertaken to advise Digicel that its activities are in contravention of Guyana law.  The Guyana courts also granted GT&T an interim injunction restraining Digicel from bypassing GT&T’s network until GT&T’s request for a permanent injunction can be addressed at a hearing currently scheduled for September 18, 2012. GT&T has also appealed the case, not only with respect to the contract claim, but also as to the court’s findings regarding the exclusivity of GT&T’s license and its application to VoIP services.

 

Historically, the Company has been subject to litigation proceedings and other disputes in Guyana that while not conclusively resolved, to its knowledge have not been the subject of discussions or other significant activity in the last five years. It is possible, but not likely, that these disputes may be revived. The Company believes that none of these additional proceedings would, in the event of an adverse outcome, have a material impact on its consolidated financial position, results of operation or liquidity.  For all of the regulatory, litigation, or related matters listed above and in our Form 10-K for the year ended December 31, 2011, the Company believes some adverse outcome is probable and has accordingly accrued $5.0 million as of June 30, 2012.

 

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

 

The discussion and analysis of our financial condition and results of operations that follows are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our condensed consolidated financial statements herein and the accompanying notes thereto, and our Annual Report on Form 10-K for the year ended December 31, 2011, in particular, the information set forth therein under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

Overview

 

We provide wireless and wireline telecommunications services in North America, Bermuda and the Caribbean. Through our operating subsidiaries, we offer the following principal services:

 

·                  Wireless.  In the United States, we offer wireless voice and data services to retail customers under the “Alltel” name in rural markets located principally in the Southeast and Midwest. Additionally, we offer wholesale wireless voice and data roaming services to national, regional and local wireless carriers and selected international wireless carriers in rural markets located principally in the Southwest and Midwest. We also offer wireless voice and data services to retail customers in Bermuda under the “CellOne” name, in Guyana under the “Cellink” name, and in other smaller markets in the Caribbean and the United States.

 

·                  Wireline.  Our local telephone and data services include our operations in Guyana and the mainland United States. We are the exclusive licensed provider of domestic wireline local and long distance telephone services in Guyana and international voice and data communications into and out of Guyana. We also offer facilities-based integrated voice and data communications services to enterprise and residential customers in New England, primarily in Vermont, and wholesale transport services in New York State and New England.

 

In the second quarter of 2011, we completed the merger of our Bermuda operations with M3 Wireless, Ltd., a leading retail wireless provider in Bermuda.  We actively evaluate additional investment and acquisition opportunities in the United States and the Caribbean that meet our return-on-investment and other acquisition criteria.

 

The following chart summarizes the operating activities of our principal subsidiaries, the segments in which we report our revenue and the markets we served as of June 30, 2012:

 

Services

 

Segment

 

Markets

 

Tradenames

Wireless

 

U.S. Wireless

 

United States (rural markets)

 

Alltel, Choice

 

 

Island Wireless

 

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

 

Mio, CellOne, Islandcom, Choice

 

 

International Integrated Telephony

 

Guyana

 

Cellink

Wireline

 

International Integrated Telephony

 

Guyana

 

GT&T, Emagine

 

 

U.S. Wireline

 

United States (New England and New York State)

 

Sovernet, ION

 

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

 

We are dependent on our U.S. Wireless segment for the substantial majority of our revenue and profits. For the quarter and six months ended June 30, 2012, approximately 77% of our consolidated revenue was generated by our U.S. Wireless segment.

 

Our U.S. retail wireless revenue is primarily driven by the number of subscribers to our services, their adoption of our enhanced service offerings and their related voice and data usage. The number of subscribers and their usage volumes and patterns also has a major impact on the profitability of our U.S. retail wireless operations. As of June 30, 2012, our U.S. retail wireless services were provided to approximately 584,000 customers under the “Alltel” brand name. Our wireless licenses provide mobile data and voice coverage to a network footprint covering a population of approximately four and a half million people as of June 30, 2012. Through the acquisition of a portion of the former Alltel network from Verizon Wireless (the “Alltel Acquisition”), we acquired a regional, non-contiguous wireless network that we anticipate will require continued network expansion and improvements as well as roaming support to ensure ongoing nationwide coverage. In late July 2011, we completed the transition of our Alltel customers from the legacy Alltel information technology systems, platforms and customer care centers to our own (the “Alltel Transition”) and as a result, eliminated many of the duplicate costs associated with the migration in the third quarter of 2011.

 

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Our retail wireless business competes with national, regional and local wireless providers offering both prepaid and postpaid services such as our primary competitor, Verizon Wireless.

 

We provide wholesale roaming services in a number of areas in the U.S., including in areas in which we also have retail wireless operations. Our wholesale wireless revenue is an important part of our overall U.S. Wireless segment revenue because this revenue has a higher margin of profitability than our retail revenue. Wholesale wireless revenue is primarily driven by the number of sites and base stations we operate, the amount of voice and data traffic from the subscribers of other carriers that each of these sites generates, and the rate we get paid from other carrier customers for serving that traffic.

 

The most significant competitive factors we face in our U.S. wholesale wireless business is the extent to which our carrier customers choose to roam on our networks or elect to build or acquire their own infrastructure in a market, reducing or eliminating their need for our services in those markets.

 

Merger with M3 Wireless, Ltd.

 

On May 2, 2011, we completed the merger of our Bermuda wireless operations, Bermuda Digital Communications, Ltd. (“BDC”), with that of M3 Wireless, Ltd. (“M3”), a wireless provider in Bermuda (the “CellOne Merger”). As part of the CellOne Merger, M3 merged with and into BDC, and the combined entity continues to operate under BDC’s CellOne brand. As a result of the CellOne Merger, our 58% ownership interest in BDC was reduced to a controlling 42% interest in the combined entity. Since we have the right to designate the majority of seats on the combined entity’s board of directors and therefore control its management and policies, we have consolidated the results of the combined entity in our consolidated financial statements effective on the date of the CellOne Merger.

 

Stimulus Grants

 

We were awarded several federal stimulus grants in 2009 and 2010 by the U.S. Government under provisions of the American Recovery and Reinvestment Act of 2009 intended to stimulate the deployment of broadband infrastructure and services to rural, unserved and underserved areas. As of June 30, 2012, we have spent (i) $18.4 million in capital expenditures (of which $14.7 million has been or will be funded by the federal stimulus grant) in connection with our ION Upstate New York Rural Broadband Initiative, which involves building ten new segments of fiber-optic, middle-mile broadband infrastructure in upstate New York and parts of Pennsylvania and Vermont; (ii) $5.4 million in capital expenditures (of which $3.8 million has been or will be funded by the federal stimulus grant) in connection with our last-mile broadband infrastructure buildout in the Navajo Nation across Arizona, New Mexico and Utah; and (iii) $13.3 million in capital expenditures (of which $9.3 million has been or will be funded by the federal stimulus grant) in connection with our fiber-optic middle mile network buildout to provide broadband and transport services to over 340 community anchor institutions in Vermont. For more information on these stimulus projects, please see refer to Item 7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012.  The results of our New York and Vermont stimulus projects are included in our “U.S. Wireline” segment and the results of our Navajo stimulus project are included in our “U.S. Wireless” segment.

 

Results of Operations

 

Three Months Ended June 30, 2011 and 2012

 

 

 

Three Months Ended
June 30,

 

Amount of
Increase

 

Percent
Increase

 

 

 

2011

 

2012

 

(Decrease)

 

(Decrease)

 

 

 

(In thousands)

 

REVENUE:

 

 

 

 

 

 

 

 

 

US Wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

95,410

 

84,062

 

(11,348

)

(11.9

)%

Wholesale

 

51,870

 

51,569

 

(301

)

(0.6

)

International wireless

 

18,434

 

20,315

 

1,881

 

10.2

 

Wireline

 

20,886

 

20,889

 

3

 

 

Equipment and other

 

7,153

 

8,458

 

1,305

 

18.2

 

Total revenue

 

193,753

 

185,293

 

(8,460

)

(4.4

)

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Termination and access fees

 

54,539

 

38,951

 

(15,588

)

(28.6

)

Engineering and operations

 

21,897

 

21,945

 

48

 

0.2

 

Sales and marketing

 

36,079

 

31,203

 

(4,876

)

(13.5

)

Equipment expense

 

18,486

 

21,989

 

3,503

 

18.9

 

General and administrative

 

30,775

 

21,549

 

(9,226

)

(30.0

)

Acquisition-related charges

 

316

 

 

(316

)

(100.0

)

Depreciation and amortization

 

25,384

 

26,582

 

1,198

 

4.7

 

Total operating expenses

 

187,476

 

162,219

 

(25,257

)

(13.5

)

Income from operations

 

6,277

 

23,074

 

16,797

 

267.6

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,351

)

(3,998

)

353

 

8.1

 

Interest income

 

201

 

71

 

(130

)

(64.7

)

Equity in earnings of unconsolidated affiliate

 

239

 

930

 

691

 

289.1

 

Other income(expense), net

 

4

 

(331

)

(335

)

(8375.0

)

Other income (expense), net

 

(3,907

)

(3,328

)

579

 

14.8

 

INCOME BEFORE INCOME TAXES

 

2,370

 

19,746

 

17,376

 

733.2

 

Income taxes

 

1,052

 

7,979

 

6,927

 

658.5

 

NET INCOME

 

1,318

 

11,767

 

10,449

 

792.8

 

Net loss attributable to non-controlling interests

 

497

 

(1,237

)

(1,734

)

(348.9

)

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

 

$

1,815

 

10,530

 

8,715

 

480.2

 

 

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U.S. wireless revenue.  U.S. Wireless revenue includes voice and data services revenue from our prepaid and postpaid retail operations as well as our wholesale roaming operations. Retail revenue is derived from subscriber fees for use of our networks and facilities, including airtime, roaming and long distance as well as enhanced services such as caller identification, call waiting, voicemail and other features. Retail revenue also includes amounts received from the Universal Service Fund (“USF”). Wholesale revenue is generated from providing mobile voice or data services to the customers of other wireless carriers and also includes revenue from other related wholesale services such as the provision of network switching services and certain wholesale transport services using our wireless subsidiaries’ networks.

 

Retail revenue

 

The retail portion of our U.S. Wireless revenue was $84.1 million for the three months ended June 30, 2012, as compared to $95.4 million for the three months ended June 30, 2011, a decrease of $11.3 million, or 12%.  This decrease was primarily the result of a decline in subscribers which we experienced during the past year due to post-Alltel Acquisition initiatives to tighten credit and contract policies, the loss of a significant prepaid distribution channel and a number of other factors, including the effects of the separation of our markets from the formerly unified Alltel market, leaving many of our subscribers near the edge or outside of our licensed territory.  In late July 2011, we completed the Alltel Transition. As a result, we are now able to better enhance our service offerings which we believe will enable us to drive improved gross subscriber additions, further control churn and optimize our service offerings. These subscriber-related functions had been somewhat constrained during the transition period and contributed to a continued decline in our U.S. retail wireless revenue.

 

As of June 30, 2012, we had approximately 584,000 U.S. retail wireless subscribers (including 442,000 postpaid subscribers and 142,000 prepaid subscribers), a decrease of 55,000 from the approximate 639,000 subscribers we had as of June 30, 2011 and an increase of 5,000 from the 579,000 subscribers we had as of March 31, 2012.  Gross additions to the U.S. retail wireless subscriber base increased to 55,000 for the three months ended June 30, 2012, as compared to approximately 39,000 for the three months ended June 30, 2011.  We will continue to focus on improving gross additions to our subscriber base in future periods as we concentrate our efforts on increasing distribution, by means such as our partnership with U.S. Cellular to again distribute our prepaid offerings in Walmart stores in our markets, and increasing awareness of our value proposition to potential customers in our markets.

 

Our overall U.S. retail wireless churn decreased from 3.73% for the three months ended June 30, 2011 to 2.9% for the three months ended June 30, 2012.  This improvement was the result of our efforts to offer our customers improved service and handset offerings as well as our ability to better control customer care and other churn factors since the end of the Alltel Transition period.  Our churn also benefited from a decline in the number of subscribers coming off of one-year contracts signed prior to the Alltel Acquisition, as we have transitioned our subscribers to more traditional two-year contracts. However, our churn will increase in the near term as we are entering a period of higher than normal contract expirations and seasonally lower net additions.  This could lead to a decline in subscriber levels..

 

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Table of Contents

 

Wholesale revenue

 

The wholesale portion of our U.S. Wireless revenue decreased to $51.6 million for the three months ended June 30, 2012 from $51.9 million for the three months ended June 30, 2011, a reduction of $0.3 million or 1%.  The decrease was the result of a reduction in voice traffic largely due to the carrier customer overbuilds, including the Verizon and AT&T network overbuilds following their acquisitions of certain Alltel properties and a decline in the rates we charge our carrier customers.  Such decreases, however, were partially by growth in the volume of data.

 

We expect that data volume may increase in the next several quarters as customer usage of data and smart phone penetration continues to increase. Such increase, however, may be completely offset by a number of factors, including decisions by our roaming partners to no longer roam on our networks or, to overbuild our networks, any reductions in the roaming rates that we charge or any declines in overall voice traffic.

 

In 2007, we entered into a license purchase agreement with a roaming partner whereby we agreed to purchase and build out spectrum in the Midwestern United States and our roaming partner retained a call option to repurchase the spectrum and the related cell sites within a specified number of years.  Since that time, we have generated wholesale revenue from our roaming partners’ use of this network, which accounted for approximately $15.1 million in wholesale revenue during the year ended December 31, 2011 and $8.0 million during the first half of 2012.  Following the exercise of this call option in July 2012, we entered into a definitive agreement to sell the spectrum and related sites for approximately $15.8 million.  Subject to obtaining the necessary regulatory consent, we currently expect to close the transaction in late 2012 or early 2013. With the exception of one similar call option involving a smaller portion of our wholesale roaming network, no other roaming partner has the right to acquire any portion of our existing roaming network.

 

Although it is difficult to predict, over time we expect wholesale revenue to decrease as the number of sites actively used by our customers decline.  In addition, the replacement of the wholesale revenue related to our Midwestern United States sites, as described above, will be unlikely to be replaced with organic growth.

 

International wireless revenue.  International Wireless revenue includes retail and wholesale voice and data wireless revenue from international operations in Bermuda and the Caribbean, including our operations in the U.S. Virgin Islands.

 

International wireless revenue increased by $1.9 million, or 9% to $20.3 million for the three months ended June 30, 2012, from $18.4 million for the three months ended June 30, 2011. International Wireless revenue increased by $2.4 million due mainly to our CellOne Merger in Bermuda and subscriber growth in the U.S. Virgin Islands. This increase was partially offset by as a result of a decrease in subscribers in our other international operations.

 

While we have experienced subscriber growth in a number of our international markets, competition remains strong, and due to the fact that the majority of our international wireless subscribers are prepaid subscribers revenue and subscriber levels could shift relatively quickly in future periods.

 

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

 

The growth in our data revenue in Guyana and in our wholesale transport revenue in New York State were offset by the reduction of revenue in our integrated data and voice operations in Vermont resulting in our wireline revenue remaining unchanged for the three months ended June 30, 2011 and 2012 at $20.9 million.

 

We anticipate that wireline revenue from our international long distance business in Guyana will be negatively impacted, principally through the loss of market share, if we cease to be the exclusive provider of domestic fixed and international long distance service in Guyana, whether by reason of the Government of Guyana enacting legislation to such effect or a modification, early termination or other revocation or lack of enforcement our exclusivity rights.  While the loss of our exclusivity rights will likely cause an immediate reduction in our wireline revenue , over the longer term such pressure on our wireline revenue may be offset by increased revenue from data services to consumers and enterprises in Guyana, and wholesale transport services and large enterprise and agency sales in the United States.  We currently cannot predict when or if the Government of Guyana will enact such legislation or take, or fail to take, any action that would otherwise affect our exclusive rights in Guyana.  See Note 11 to our Condensed Consolidated Financial Statements for more information regarding GT&T’s exclusive license in Guyana.

 

Equipment and other revenue.  Equipment and other revenue represent revenue from wireless equipment sales, primarily handsets to retail customers, and other miscellaneous revenue items.

 

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Table of Contents

 

Equipment and other revenue increased by $1.3 million, or 18% to $8.5 million for the three months ended June 30, 2012, from $7.2 million for the three months ended June 30, 2011.  Equipment revenue in our U.S. Wireless segment increased as the result of an increase in gross subscriber additions and an increase in smartphone sales.  Equipment and other revenue also increased in our International Integrated Telephony segment due to increased promotional campaigns that included increased handset subsidies.

 

We believe that equipment and other revenue could continue to increase in 2012 as a large portion of the two-year contracts with Alltel subscribers continue to expire, resulting in increased upgrades as compared to 2011.  In addition, an increase in gross subscriber additions, more aggressive device subsidies and the continued growth in smartphone penetration could result in increased equipment revenues in future periods.

 

Termination and access fee expenses.  Termination and access fee expenses are charges that we pay for voice and data transport circuits (in particular, the circuits between our wireless sites and our switches), internet capacity and other access fees we pay to terminate our calls, as well as customer bad debt expense.

 

Termination and access fees decreased by $15.5 million, or 28% from $54.5 million for the three months ended June 30, 2011 to $39.0 million for the three months ended June 30, 2012.  The decrease was primarily the result of a reduction in roaming expenses and the elimination of duplicate costs upon the completion of the Alltel Transition in our U.S. Wireless segment.  These decreases were partially offset by an increase in circuit costs within our U.S. Wireline segment as our networks in New York and Vermont continue to expand. Termination and access fees may increase in future periods with expected growth in data volume, but should remain fairly proportionate to their related revenue.

 

Engineering and operations expenses.  Engineering and operations expenses include the expenses associated with developing, operating and supporting our expanding networks, including the salaries and benefits paid to employees directly involved in the development and operation of our networks.

 

Engineering and operations expenses were $21.9 million for the three months ended June 30, 2011 and 2012.  The completion of the Alltel Transition reduced our engineering and operations expenses by eliminating redundant expenses, but such reductions were offset by increased expenses in our International Integrated Telephony and Island Wireless segments which experienced expansions in their respective networks in comparison with 2011, including an expansion of our network in Bermuda following our CellOne Merger in May 2011.

 

We expect that engineering and operations expenses will increase over time due to ongoing network upgrades, including possible upgrades to a next generation mobile wireless technology and an increase in our network capacity if we choose to geographically expand our network.

 

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

 

Sales and marketing expenses decreased by $4.9 million, or 14% from $36.1 million for the three months ended June 30, 2011 to $31.2 million for the three months ended June 30, 2012.  The decrease in sales and marketing expenses was the result of the elimination of expenses associated with the Alltel Transition as well as a reduction in expenses in our Island Wireless segment which primarily resulted from increased promotional expenses in 2011 relating to the CellOne Merger and brand re-launch in Bermuda.  These decreases, however, were partially offset by an increase in sales and marketing expenses in our International Integrated Telephony segment as a result of increased promotional campaigns.

 

We expect that sales and marketing expenses will remain relatively constant as a percentage of revenue for the short term as we continue to incur promotional and retention costs in an attempt to offset customer churn and increase gross customer additions.  In the longer term, these costs should decrease as a percentage of revenue.

 

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

 

Equipment expenses increased by $3.5 million, or 19% from $18.5 million for the three months ended June 30, 2011 to $22.0 million for the three months ended June 30, 2012.  The increase was the result of an increase in gross subscriber additions and an increase in smartphone sales.  .  These increases were partially offset by decreased equipment expenses in Bermuda as a result of the CellOne Merger which caused higher than usual equipment expenses in 2011.  We believe that equipment expenses could continue to increase in 2012 as a large portion of our two-year contracts with Alltel subscribers will be expiring, resulting in increased upgrades as compared to 2011 and due to increased demand for more expensive smartphone handset devices.  We may also choose, from time to time, to increase device subsidies to attract and retain customers.

 

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Table of Contents

 

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

 

General and administrative expenses decreased by $9.3 million, or 30%, from $30.8 million for the three months ended June 30, 2011 to $21.5 million for the three months ended June 30, 2012 primarily as a result of the completion of the Alltel Transition. During this transition period, we incurred a significant overlap of certain general and administrative expenses.  These expense decreases were partially offset by an increase in corporate overhead expenses.

 

We expect that these general and administrative expenses will remain fairly consistent as a percentage of revenues in future periods.

 

Acquisition-related charges.  Acquisition-related charges include the external costs, such as legal, accounting, and consulting fees directly associated with acquisition-related activities, which are expensed as incurred. Acquisition-related charges do not include internal costs, such as employee salary and travel-related expenses, incurred in connection with acquisitions or any integration-related costs.

 

We incurred $0.3 million of acquisition-related charges for the three months ended June 30, 2011 and no acquisition-related charges for the three months ended June 30, 2012. We expect that acquisition-related expenses will be incurred from time to time as we continue to explore additional acquisition opportunities.

 

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

 

Depreciation and amortization expenses increased by $1.2 million, or 5% from $25.4 million for the three months ended June 30, 2011 to $26.6 million for the three months ended June 30, 2012. The increase is primarily due to additional fixed assets associated with the development of operational and business support systems which were put in service at the end of the Alltel Transition as well as the addition of tangible and intangible assets acquired with the CellOne Merger.

 

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

 

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

 

Interest expense decreased from $4.4 million for the three months ended June 30, 2011 to $4.0 million for the three months ended June 30, 2012 due to a reduction in our outstanding debt and decreases in applicable margins as a result of amendments to our credit facilities effective September 16, 2011 and May 18, 2012.  As of June 30, 2012, we had $279.9 million in outstanding debt as compared to $311.9 million as of June 30, 2011.

 

Interest income.  Interest income represents interest earned on our cash and cash equivalents.  Interest income decreased from $0.2 million for the three months ended June 30, 2011 to $0.1 million for the three months ended June 30, 2012.

 

Equity in earnings of an unconsolidated affiliate.  Equity in earnings of an unconsolidated affiliate is related to a minority-owned investment in our U.S. Wireless segment and was $0.9 million for the three months ended June 30, 2012 as compared to $0.2 million for the three months ended June 30, 2011.

 

Other income (expense), net.  Other income (expense), net represents miscellaneous non-operational income we earned or expenses we incurred. Other income (expense), net was nominal for the three months ended June 30, 2011.  For the three months ended June 30, 2012, other income (expense), net was $0.3 million of expense as a result of $0.7 million of deferred financing costs being expensed in connection with an amendment to our credit facility effective May 18, 2012.

 

Income taxes.  Our effective tax rates for the three months ended June 30, 2011 and 2012 were 44% and 40%, respectively. Our effective tax rate declined in 2012 as the result of increased income in lower taxed jurisdictions, such as Bermuda and the U.S., as compared to 2011.  Our effective tax rates were higher than the statutory federal income tax rate of 35% due primarily to (i) the portion of our earnings that are taxed in Guyana at 45%, and (ii) the portion of our earnings that include losses generated in non-tax foreign

 

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jurisdictions for which we receive no tax benefit.  Our consolidated tax rate will continue to be impacted by the mix of income generated in the jurisdictions in which we operate.

 

Net loss attributable to non-controlling interests.  Net loss attributable to non-controlling interests reflected an allocation of $0.5 million of losses and $1.2 million of income for the three months ended June 30, 2011 and 2012, respectively.

 

Net income attributable to Atlantic Tele-Network, Inc. stockholders.  Net income attributable to Atlantic Tele-Network, Inc. stockholders increased to $10.5 million for the three months ended June 30, 2012 from $1.8 million for the three months ended June 30, 2011.  On a per share basis, net income increased to $0.67 per diluted share from $0.12 per diluted share for the three months ended June 30, 2012 and 2011, respectively.

 

Six Months Ended June 30, 2011 and 2012

 

 

 

Six Months Ended
June 30,

 

Amount of
Increase

 

Percent
Increase

 

 

 

2011

 

2012

 

(Decrease)

 

(Decrease)

 

 

 

(In thousands)

 

REVENUE:

 

 

 

 

 

 

 

 

 

US Wireless:

 

 

 

 

 

 

 

 

 

Retail

 

$

195,079

 

$

170,812

 

$

(24,267

)

(12.4

)%

Wholesale

 

96,567

 

98,952

 

2,385

 

2.5

 

International Wireless

 

32,497

 

39,270

 

6,773

 

20.8

 

Wireline

 

41,557

 

42,437

 

880

 

2.1

 

Equipment and Other

 

16,208

 

16,712

 

504

 

3.1

 

Total revenue

 

381,908

 

368,183

 

(13,725

)

(3.6

)

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Termination and access fees

 

106,313

 

79,434

 

(26,879

)

(25.3

)

Engineering and operations

 

43,802

 

43,281

 

(521

)

(1.2

)

Sales and marketing

 

67,908

 

63,377

 

(4,531

)

(6.7