Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**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, 2010**

 

**OR**

 

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

 

**For the transition period from         to         **

 

**Commission File Number 001-12593**

 

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**AtlanticTele-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 principle executive offices, including zip code)

 

**(978) 619-1300**

(Registrant’s telephone number, including area code)

 

**10 Derby Square**

**Salem, MA 01970**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.Yes xNo o

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):Yes oNo x

 

Asof August 9, 2010, the registrant had outstanding 15,331,512 shares of itscommon stock ($.01 par value).

 

 

 

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**ATLANTIC TELE-NETWORK, INC.**

 

FORM 10-Q

Quarter Ended June 30, 2010

 
| CAUTIONARY STATEMENT REGARDING FORWARD LOOKING  STATEMENTS | 3                                                                                                        |
|------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                       |                                                                                                     |
| PART I—FINANCIAL INFORMATION                     | 4                                                                                                        |
|                                                       |                                                                                                     |
| Item 1                                                | Unaudited  Condensed Consolidated Financial Statements                                                   | 4 |
|                                                       |                                                                                                     |   |
|                                                       | Condensed Consolidated Balance Sheets at  December 31, 2009 and June 30, 2010                  | 4 |
|                                                       |                                                                                                     |   |
|                                                       | Condensed Consolidated Income Statements for the three  and six months ended June 30, 2009 and 2010 | 5 |
|                                                       |                                                                                                     |   |
|                                                       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2009 and 2010    | 6 |
|                                                       |                                                                                                     |   |
|                                                       | Notes to Unaudited Condensed Consolidated Financial  Statements                                          | 7-19 |
|                                                       |                                                                                                     |   |
| Item 2                                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations              | 20-33 |
|                                                       |                                                                                                     |   |
| Item 3                                                     | Quantitative  and Qualitative Disclosures About Market Risk                                              | 33 |
|                                                       |                                                                                                     |   |
| Item 4                                                     | Controls and  Procedures                                                                                 | 33 |
|                                                       |                                                                                                     |   |
| PART II—OTHER  INFORMATION                       | 34                                                                                                       |
|                                                       |                                                                                                     |
| Item 1                                                     | Legal Proceedings                                                                                        | 34 |
|                                                       |                                                                                                     |   |
| Item1A                                                     | Risk Factors                                                                                             | 34 |
|                                                       |                                                                                                     |   |
| Item 2                                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                             | 34 |
|                                                       |                                                                                                     |   |
| Item 6                                                     | Exhibits                                                                                                 | 35 |
|                                                       |                                                                                                     |   |
| SIGNATURES                                                 |                                                                                                     |
|                                                       |                                                                                                     |
| CERTIFICATIONS                                             |                                                                                                     |

 

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**Cautionary Statement RegardingForward-Looking Statements**

 

ThisQuarterly Report on Form 10-Q (or the “Report”) contains forward-lookingstatements relating to, among other matters, our future financial performanceand results of operations; the competitive environment in our key markets,demand for our services and industry trends; the outcome of litigation andregulatory matters; our continued access to the credit and capital markets; thepace of our network expansion and improvement, including our level of estimatedfuture capital expenditures and our realization of the benefits of theseinvestments; and management’s plans and strategy for the future.  These forward-looking statements are based onestimates, projections, beliefs, and assumptions and are not guarantees offuture events or results.  Actual futureevents and results could differ materially from the events and resultsindicated in these statements as a result of many factors, including, amongothers, (1) our ability to operate a large scale retail wireless businessin the United States and integrate these operations into our existingoperations; (2)  the general performance of our U.S. operations, includingoperating margins, and the future retention and turnover of the our subscriberbase; (3) our ability to maintain favorable roaming arrangements; (4) increasedcompetition; (5) economic, political and other risks facing our foreignoperations; (6) the loss of certain FCC and other licenses and otherregulatory changes affecting our businesses; (7) rapid and significanttechnological changes in the telecommunications industry; (8) any loss ofany key members of management; (9) our reliance on a limited number of keysuppliers and vendors for timely supply of equipment and services relating toour network infrastructure and retail wireless business; (10) the adequacyand expansion capabilities of our network capacity and customer service systemto support our customer growth; (11) the occurrence of severe weather andnatural catastrophes; (12) the current difficult global economic environment,along with difficult and volatile conditions in the capital and credit markets;and (13) our ability to realize the value that we believe exists in businessesthat we may or have acquired. These and other additional factors that may causeactual future events and results to differ materially from the events andresults indicated in the forward-looking statements above are set forth morefully under Item 1A “Risk Factors” of this Report as well as the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009,filed with the SEC on March 16, 2010, and the Company’s Quarterly Reporton Form 10-Q for the quarterly period ended March 31, 2010, filedwith the SEC on May 10, 2010. The Company undertakes no obligation toupdate these forward-looking statements to reflect actual results, changes inassumptions or changes in other factors that may affect such forward-lookingstatements.

 

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

 

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

 

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**PART I—FINANCIAL INFORMATION**

**Item 1.  Unaudited Condensed Consolidated FinancialStatements**

 

**ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(Dollars inthousands, except per share amounts)**

 
| ** **                                                                                                                                                                                     | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                                                     |       |                        |       |                    |       |
| Current Assets:                                                                                                                                                                                |       |                        |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                           | 90,247     |                    | $          | 57,645 |   |
| Restricted cash                                                                                                                                                                                |       | 5,248                       |       | 2,387                   |       |
| Accounts receivable, net of allowances of $4.2  million and $8.1 million, respectively                                                                                                         |       | 26,831                      |       | 62,295                  |       |
| Materials and supplies                                                                                                                                                                         |       | 5,917                       |       | 10,270                  |       |
| Deferred income taxes                                                                                                                                                                          |       | 3,046                       |       | 3,046                   |       |
| Prepayments and other current assets                                                                                                                                                           |       | 5,226                       |       | 12,211                  |       |
| Total current assets                                                                                                                                                                           |       | 136,515                     |       | 147,854                 |       |
| Fixed asset, net                                                                                                                                                                               |       | 217,015                     |       | 419,523                 |       |
| Licenses                                                                                                                                                                                       |       | 34,830                      |       | 79,067                  |       |
| Goodwill                                                                                                                                                                                       |       | 40,361                      |       | 40,361                  |       |
| Trade name license, net                                                                                                                                                                        |       | —                      |       | 13,314                  |       |
| Customer relationships, net                                                                                                                                                                    |       | 1,848                       |       | 55,097                  |       |
| Deferred income taxes                                                                                                                                                                          |       | 9,085                       |       | 5,194                   |       |
| Other assets                                                                                                                                                                                   |       | 6,900                       |       | 22,975                  |       |
| Total assets                                                                                                                                                                                   |       | $                           | 446,554    |                    | $          | 783,385 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                 |       |                        |       |                    |       |
| Current Liabilities:                                                                                                                                                                           |       |                        |       |                    |       |
| Current portion of long-term debt                                                                                                                                                              |       | $                           | 3,694      |                    | $          | 11,194 |   |
| Accounts payable and accrued liabilities                                                                                                                                                       |       | 29,717                      |       | 45,675                  |       |
| Dividends payable                                                                                                                                                                              |       | 3,055                       |       | 3,075                   |       |
| Accrued taxes                                                                                                                                                                                  |       | 9,900                       |       | 8,195                   |       |
| Advance payments and deposits                                                                                                                                                                  |       | 3,756                       |       | 17,180                  |       |
| Other current liabilities                                                                                                                                                                      |       | 6,765                       |       | 48,002                  |       |
| Total current liabilities                                                                                                                                                                      |       | 56,887                      |       | 133,321                 |       |
| Deferred income taxes                                                                                                                                                                          |       | 32,171                      |       | 50,181                  |       |
| Other liabilities                                                                                                                                                                              |       | 5,512                       |       | 33,883                  |       |
| Long-term debt, excluding current portion                                                                                                                                                      |       | 69,551                      |       | 245,669                 |       |
| Total liabilities                                                                                                                                                                              |       | 164,121                     |       | 463,054                 |       |
| Commitments and contingencies (Note 11)                                                                                                                                                        |       |                        |       |                    |       |
| Atlantic Tele-Network, Inc.’s Stockholders’  Equity:                                                                                                                            |       |                        |       |                    |       |
| Preferred stock, $0.01 par value per share;  10,000,000 shares authorized, none issued and outstanding                                                                                         |       | —                      |       | —                  |       |
| Common stock, $0.01 par value per share;  50,000,000 shares authorized; 15,732,382 and 15,829,359 shares issued,  respectively, and 15,233,745 and 15,331,512 shares outstanding, respectively |       | 158                         |       | 159                     |       |
| Treasury stock, at cost; 498,637 and 497,847  shares, respectively                                                                                                                             |       | (4,687                      | )          | (4,680                  | )          |
| Additional paid-in capital                                                                                                                                                                     |       | 108,720                     |       | 110,369                 |       |
| Retained earnings                                                                                                                                                                              |       | 156,827                     |       | 179,513                 |       |
| Accumulated other comprehensive loss                                                                                                                                                           |       | (5,272                      | )          | (7,172                  | )          |
| Total Atlantic Tele-Network, Inc.’s  stockholders’ equity                                                                                                                       |       | 255,746                     |       | 278,189                 |       |
| Non-controlling interests                                                                                                                                                                      |       | 26,687                      |       | 42,142                  |       |
| Total equity                                                                                                                                                                                   |       | 282,433                     |       | 320,331                 |       |
| Total liabilities and equity                                                                                                                                                                   |       | $                           | 446,554    |                    | $          | 783,385 |   |

 

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

 

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**ATLANTICTELE-NETWORK, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED INCOME STATEMENTS**

**FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009and 2010**

**(Unaudited)**

**(Dollars inthousands, except per share amounts)**

 
| ** **                                                                                                                                                                                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                            | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| **REVENUE:**                                                                                                                                                                                                                                                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Wireless:                                                                                                                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Retail                                                                                                                                                                                                                                                                                |       | $                                               | —     |                                          | $          | 81,507 |   | $ | — |   | $ | 81,507 |   |
| Wholesale                                                                                                                                                                                                                                                                             |       | 25,800                                          |       | 39,545                                        |       | 47,439 |   | 62,481 |   |
| International Wireless                                                                                                                                                                                                                                                                |       | 11,391                                          |       | 12,530                                        |       | 22,030 |   | 23,449 |   |
| Wireline                                                                                                                                                                                                                                                                              |       | 22,240                                          |       | 23,230                                        |       | 44,666 |   | 43,751 |   |
| Equipment and Other                                                                                                                                                                                                                                                                   |       | 990                                             |       | 7,612                                         |       | 2,380 |   | 8,071 |   |
| Total revenue                                                                                                                                                                                                                                                                         |       | 60,421                                          |       | 164,424                                       |       | 116,515 |   | 219,259 |   |
| **OPERATING EXPENSES**(*excluding depreciation and amortization unless otherwise indicated*):                                                                                                                                                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Termination and access fees                                                                                                                                                                                                                                                           |       | 11,436                                          |       | 41,104                                        |       | 22,828 |   | 52,363 |   |
| Engineering and operations                                                                                                                                                                                                                                                            |       | 7,511                                           |       | 18,127                                        |       | 14,456 |   | 24,542 |   |
| Sales and marketing                                                                                                                                                                                                                                                                   |       | 3,274                                           |       | 31,054                                        |       | 6,309 |   | 34,448 |   |
| Equipment expense                                                                                                                                                                                                                                                                     |       | 533                                             |       | 10,139                                        |       | 1,082 |   | 10,852 |   |
| General and administrative                                                                                                                                                                                                                                                            |       | 9,403                                           |       | 26,643                                        |       | 17,599 |   | 37,413 |   |
| Acquisition-related charges                                                                                                                                                                                                                                                           |       | 358                                             |       | 11,041                                        |       | 358 |   | 15,834 |   |
| Depreciation and amortization                                                                                                                                                                                                                                                         |       | 9,794                                           |       | 18,542                                        |       | 18,994 |   | 28,611 |   |
| Total operating expenses                                                                                                                                                                                                                                                              |       | 42,309                                          |       | 156,650                                       |       | 81,626 |   | 204,063 |   |
| Income from operations                                                                                                                                                                                                                                                                |       | 18,112                                          |       | 7,774                                         |       | 34,889 |   | 15,196 |   |
| **OTHER INCOME (EXPENSE):**                                                                                                                                                                                                                                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                                                                                                                                                                                                                                      |       | (1,197                                          | )          | (2,387                                        | )          | (2,354 | ) | (3,654 | ) |
| Interest income                                                                                                                                                                                                                                                                       |       | 369                                             |       | 84                                            |       | 708 |   | 238 |   |
| Gain on bargain purchase, net of taxes of $18,016                                                                                                                                                                                                                                     |       | —                                          |       | 27,024                                        |       | — |   | 27,024 |   |
| Other income, net                                                                                                                                                                                                                                                                     |       | 10                                              |       | 225                                           |       | 36 |   | 230 |   |
| Other income (expense), net                                                                                                                                                                                                                                                           |       | (818                                            | )          | 24,946                                        |       | (1,610 | ) | 23,838 |   |
| **INCOME BEFORE INCOME TAXES**                                                                                                                                                                                                                                                        |       | 17,294                                          |       | 32,720                                        |       | 33,279 |   | 39,034 |   |
| Income taxes                                                                                                                                                                                                                                                                          |       | 7,342                                           |       | 7,968                                         |       | 14,298 |   | 10,425 |   |
| **INCOME BEFORE EQUITY IN  EARNINGS OF UNCONSOLIDATED AFFILIATES**                                                                                                                                                                                                                    |       | 9,952                                           |       | 24,752                                        |       | 18,981 |   | 28,609 |   |
| Equity in earnings of unconsolidated affiliates                                                                                                                                                                                                                                       |       | —                                          |       | 290                                           |       | — |   | 290 |   |
| **NET INCOME**                                                                                                                                                                                                                                                                        |       | 9,952                                           |       | 25,042                                        |       | 18,981 |   | 28,899 |   |
| Less: Net income attributable to non-controlling  interests, net of tax of $0.7 million and $0.6 million for the three months  ended June 30, 2009 and 2010, respectively, and $1.4 million and $1.2 million  for the six months ended June 30, 2009 and 2010, respectively |       | (315                                            | )          | (238                                          | )          | (543 | ) | (90 | ) |
| **NET INCOME ATTRIBUTABLE TO  ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS**                                                                                                                                                                                                         |       | $                                               | 9,637      |                                          | $          | 24,804 |   | $ | 18,438 |   | $ | 28,809 |   |
| **NET INCOME PER WEIGHTED AVERAGE  SHARE ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS**                                                                                                                                                                              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                                                                                                                                                 |       | $                                               | 0.63       |                                          | $          | 1.62 |   | $ | 1.21 |   | $ | 1.89 |   |
| Diluted                                                                                                                                                                                                                                                                               |       | $                                               | 0.63       |                                          | $          | 1.60 |   | $ | 1.21 |   | $ | 1.86 |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING:**                                                                                                                                                                                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                                                                                                                                                                                                                                 |       | 15,232                                          |       | 15,300                                        |       | 15,231 |   | 15,280 |   |
| Diluted                                                                                                                                                                                                                                                                               |       | 15,282                                          |       | 15,478                                        |       | 15,267 |   | 15,463 |   |
| **DIVIDENDS PER SHARE APPLICABLE  TO COMMON STOCK**                                                                                                                                                                                                                                   |       | $                                               | 0.18       |                                          | $          | 0.20 |   | $ | 0.36 |   | $ | 0.40 |   |

 

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

 

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**ATLANTICTELE-NETWORK, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2010**

**(Unaudited)**

**(Dollars inthousands)**

 
| ** **                                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2009**                                      | ** ** | **2010** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                                             |       | $                                             | 18,981     |   | $ | 28,899 |   |
| Adjustments to reconcile net income to net cash  flows provided by operating activities:               |       |                                          |       |   |   |
| Bargain purchase gain, net of tax                                                                      |       | —                                        |       | (27,024 | ) |
| Depreciation and amortization                                                                          |       | 18,994                                        |       | 28,611 |   |
| Provision for doubtful accounts                                                                        |       | 767                                           |       | 3,917 |   |
| Amortization of debt discount and debt issuance  costs                                                 |       | 255                                           |       | 647 |   |
| Stock-based compensation                                                                               |       | 656                                           |       | 980 |   |
| Deferred income taxes                                                                                  |       | 398                                           |       | 5,159 |   |
| Changes in operating assets and liabilities,  excluding the effects of acquisitions:                   |       |                                          |       |   |   |
| Accounts receivable                                                                                    |       | (4,448                                        | )          | (4,645 | ) |
| Materials and supplies, prepayments, and other  current assets                                         |       | 651                                           |       | (8,559 | ) |
| Prepaid income taxes                                                                                   |       | 10,708                                        |       | — |   |
| Accounts payable and accrued liabilities, advance  payments and deposits and other current liabilities |       | (2,144                                        | )          | 52,597 |   |
| Accrued taxes                                                                                          |       | 902                                           |       | (5,576 | ) |
| Other                                                                                                  |       | 162                                           |       | (14,268 | ) |
| Net cash provided by operating activities                                                              |       | 45,882                                        |       | 60,738 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                             |       |                                          |       |   |   |
| Acquisitions of businesses, net of cash acquired  of $0 and $53                                        |       | (24                                           | )          | (221,306 | ) |
| Capital expenditures                                                                                   |       | (27,541                                       | )          | (51,995 | ) |
| Acquisitions of assets                                                                                 |       | —                                        |       | (57 | ) |
| Maturity of short-term marketable securities                                                           |       | 2,956                                         |       | — |   |
| Decrease in restricted cash                                                                            |       | —                                        |       | 2,862 |   |
| Net cash used in investing activities                                                                  |       | (24,609                                       | )          | (270,496 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds from borrowers under term loan                                                                |       | —                                        |       | 150,000 |   |
| Proceeds from borrowers under revolver loan                                                            |       | —                                        |       | 40,000 |   |
| Dividends paid on common stock                                                                         |       | (5,483                                        | )          | (6,111 | ) |
| Distributions to non-controlling interests                                                             |       | (5,120                                        | )          | (861 | ) |
| Payments of debt issuance costs                                                                        |       | —                                        |       | (3,053 | ) |
| Repayments of long-term debt                                                                           |       | (376                                          | )          | (3,721 | ) |
| Investments made by non-controlling interests                                                          |       | 200                                           |       | 225 |   |
| Proceeds from stock option exercises                                                                   |       | 74                                            |       | 677 |   |
| Purchase of common stock                                                                               |       | (23                                           | )          | — |   |
| Net cash provided by (used in) financing  activities                                                   |       | (10,728                                       | )          | 177,156 |   |
| **NET CHANGE IN CASH AND CASH  EQUIVALENTS**                                                           |       | 10,545                                        |       | (32,602 | ) |
| **CASH AND CASH EQUIVALENTS,  beginning of the period**                                                |       | 79,665                                        |       | 90,247 |   |
| **CASH AND CASH EQUIVALENTS, end  of the period**                                                      |       | $                                             | 90,210     |   | $ | 57,645 |   |

 

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

 

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**ATLANTICTELE-NETWORK, INC. AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. ORGANIZATION AND BUSINESS OPERATIONS**

 

AtlanticTele-Network, Inc. (“ATN” or “Company”) provides the following wirelessand wireline telecommunications services, through our operating subsidiaries,in North America and the Caribbean:

 

·                  ***Wireless.***  In the UnitedStates, the Company offers wireless voice and data services to retail customersunder the “Alltel” name in rural markets located principally in the Southeastand Midwest. Additionally, the Company offers wholesale wireless voice and dataroaming services to national, regional and local wireless carriers in ruralmarkets located principally in the Southwest and Midwest United States.  The Company also offers wireless voice anddata services to retail customers in Guyana, under the “Cellink” name, inBermuda under the “CellularOne” name, in Turks and Caicos under the “Islandcom”name and in the U.S. Virgin Islands under the “Choice” name.

 

·                  ***Wireline.***  The Company’swireline services include operations in Guyana under the “GT&T” name and inthe United States under the “Sovernet” and “ION” names.  The Company is the exclusive provider ofdomestic wireline local and international long distance telephone services inGuyana. The Company offers facilities-based integrated voice and datacommunications services to residential and business customers in New England,primarily in Vermont, and wholesale transport services in New York State. TheCompany is a leading internet access service provider in the U.S. VirginIslands.

 

ATN was incorporated in Delaware in 1987 and since that time, hasengaged in strategic acquisitions to grow the Company’s operations.  From 1998 through 2005, a significant majorityof the Company’s revenue was derived from its wireless and wireline operationsin Guyana, in which we have owned an 80% interest since 1991.  In addition, the Company has been a providerof fixed and portable wireless broadband data and dial-up internet servicesthrough its U.S. Virgin Islands subsidiary, acquired in 1999. In the past fiveyears, the Company has added substantially to the diversity of its business andreduced its historical dependence on its Guyana operations for its financialresults.  The Company entered the U.S.telecommunications market through the 2005 acquisition of an operator of awholesale wireless network in rural portions of the Southwest and Midwest and theCompany continued its U.S. expansion with the 2006 acquisition of a wirelinevoice, broadband data and dial-up service provider in New England.  In 2008, we increased our previouslynon-controlling investment in a Bermudian wireless voice and data servicesprovider to a controlling 58% interest and entered into new U.S. and Caribbeanmarkets with investments in two early stage businesses providing wholesaletransport services in New York State and wireless voice and data services inTurks and Caicos.  In addition to thediversification of its business through acquisition, the Company has furtheraccentuated its focus on its U.S. operations with increased capital investmentin and growth of its wholesale wireless business, which was the single largestcontributor to its revenue and operating income in 2009.

 

In the second quarter of 2010, the Company completed its acquisition ofa U.S. retail wireless business, which provides wireless voice and dataservices in rural markets of the United States under the “Alltel” brandname.  Also during the quarter, theCompany completed an investment in a wireless telecommunications provider inAruba, in which it holds a controlling interest. With the completion of the Alltelasset acquisition, the Company continued its trend towards growth inU.S.-sourced revenue, with the U.S. wireless portion of its business nowconstituting a significant majority of the Company’s consolidated revenue.  The Company continues to actively evaluateadditional investment and acquisition opportunities in the United States andthe Caribbean that meet its return-on-investment and other acquisitioncriteria.

 

TheCompany provides management, technical, financial, regulatory, and marketingservices to its subsidiaries and typically receive a management fee equal toapproximately 3% to 5% of their respective revenue, along with other fees andtransfer payments, where appropriate. Management fees from consolidatedsubsidiaries are eliminated in consolidation.

 

**2.  BASIS OFPRESENTATION**

 

Theaccompanying condensed consolidated financial statements have been prepared bythe Company pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). The financial information included herein isunaudited; however, the Company believes such information and the disclosuresherein are adequate to make the information presented not misleading andreflect all adjustments (consisting only of normal recurring adjustments) thatare necessary for a fair statement of the Company’s financial position andresults of operations for such periods. The year-end condensed balance sheetdata was derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.  Results of interim periods may not be indicativeof results for the full year.  These condensed consolidated financialstatements and related notes should be read in conjunction with the Company’s2009 Annual Report on Form 10-K.

 

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***Consolidation***

 

Theconsolidated financial statements include the accounts of the Company, itsmajority-owned subsidiaries and certain entities, which are consolidated inaccordance with the provisions of Financial Accounting Standards Board (“FASB”)authoritative guidance on the consolidation of variable interest entities sinceit is determined that the Company is the primary beneficiary of these entities.Revenue from these entities constitutes less than 1% of total Company revenue.

 

***Recent Accounting Pronouncements***

 

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

 

In June 2009, the FASBissued new authoritative guidance that amends certain guidance for determiningwhether an entity is a variable interest entity (VIE). The guidance requires anenterprise to perform an analysis to determine whether the Company’s variableinterests give it a controlling financial interest in a VIE. A company would berequired to assess whether it has an implicit financial responsibility toensure that a VIE operates as designed when determining whether it has thepower to direct the activities of the VIE that most significantly impact theentity’s economic performance. In addition, this guidance amends earlierguidance requiring ongoing reassessments of whether an enterprise is theprimary beneficiary of a VIE. The guidance is effective for the Company forfiscal year 2010. The adoption of the provisions of this guidance, which waseffective January 1, 2010, did not have a material impact on the consolidatedfinancial statements.

 

**3.  USE OFESTIMATES**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of revenue and expenses during thereporting periods. The most significant estimates relate to allowance for doubtfulaccounts, useful lives of the Company’s fixed and finite-lived intangibleassets, allocation of purchase price to assets acquired and liabilities assumedin purchase business combinations, fair value of indefinite-lived intangibleassets, goodwill and income taxes. Actual results could differ significantlyfrom those estimates.

 

**4.  ACQUISTION**

 

*Alltel Assets*

 

OnApril 26, 2010, the Company completed its previously-announced acquisitionof wireless assets from Cellco Partnership d/b/a Verizon Wireless (“Verizon”)pursuant to the Purchase Agreement, dated June 9, 2009, by and between theCompany and Verizon (the “Alltel Acquisition”).  Pursuant to the PurchaseAgreement, Verizon contributed certain licenses, network assets, tower andother leases and other assets and certain related liabilities to itswholly-owned subsidiary limited liability company, whose membership interestswere acquired by Allied Wireless Communications Corporation (“AWCC”), theCompany’s subsidiary.  In connection with the Alltel Acquisition, theCompany and Verizon entered into roaming and transition services arrangementsand the Company obtained the rights to use the Alltel brand and related servicemarks for up to twenty-eight years in connection with the continuing operationof the acquired assets.

 

TheCompany funded the purchase price with cash-on-hand and borrowings under itsavailable credit facility.  On April 26, 2010, the Company drew downa $150 million term loan under the Amended and Restated Credit Agreement, datedas of January 20, 2010, by and among the Company, certain of the Company’ssubsidiaries, as Guarantors, CoBank, ACB, as Administrative Agent, Arranger, IssuerLender and Lender, and the other Lenders named therein.  In addition, the Company also borrowed $40million under its previously undrawn $75 million revolving creditfacility.

 

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TheAlltel Acquisition was accounted for using the purchase method and AWCC’sresults of operations since April 26, 2010, the date of acquisition, havebeen included in the Company’s U.S. Wireless segment as reported in Note 10.The total purchase consideration of $221 million cash was allocated to theassets acquired and liabilities assumed at their estimated fair values as ofthe date of acquisition as determined by management. The table below representsthe preliminary assessment of the total acquisition cost to the tangible andintangible assets and liabilities of AWCC based on their acquisition date fairvalues:

 
| Total cash consideration                                     |   | $       | 221,359 |   |
|--------------------------------------------------------------|--------|---------|---------|--------|
|                                                         |   |    |    |
| Purchase price allocation:                                   |   |    |    |
| Net working capital                                          |   | $       | 15,817  |   |
| Property, plant and equipment                                |   | 176,393 |    |
| Customer relationships                                       |   | 55,500  |    |
| Telecommunications licenses                                  |   | 44,000  |    |
| Trade name license                                           |   | 13,400  |    |
| Other long term assets                                       |   | 11,500  |    |
| Other long term liabilities                                  |   | (34,211 | )       |
| Deferred tax liabilities                                     |   | (18,016 | )       |
| Non-controlling interests                                    |   | (16,000 | )       |
| Net assets acquired                                          |   | $       | 248,383 |   |
|                                                         |   |    |    |
| Gain on bargain purchase, net of estimated taxes  of $18,016 |   | $       | 27,024  |   |

 

TheAlltel Acquisition gain was a result of a bargain purchase generated by theforced divesture of the assets that was required to be completed by Verizonwithin a required timeframe to a limited class of potential buyers thatresulted in a favorable price to the Company for these assets.  This gain recognized on the bargain purchaseis included in other income in the accompanying income statements for the threeand six months ended June 30, 2010. For the three and six months ended June 30, 2010, the Alltel Acquisitionaccounted for $102.3 million and $29.9 million of the Company’s revenue and netincome, respectively.  The net incomeincludes the $27.0 million of bargain purchase gain discussed above. Theweighted average amortization period of the amortizable intangible assets(customer relationships and trade name license) is 12.7 years.

 

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

 
|                |   | **2009**                              |   |
|---------------------|--------|---------------------------------------|--------|
|                |   | **Three  Months Ended June 30,** |   | **Six  Months ended June 30,** |   |
|                |   | **As  Reported**                      |   | **As  Adjusted** |   | **As  Reported** |   | **As  Adjusted** |   |
| Revenue             |   | $                                     | 60,421 |   | $ | 222,587 |   | $ | 116,515 |   | $ | 432,994 |   |
| Net income          |   | 9,637                                 |   | 22,919 |   | 18,438 |   | 37,198 |   |
| Earnings per share: |   |                                  |   |   |   |   |   |   |   |
| Basic               |   | $                                     | 0.63   |   | $ | 1.50 |   | $ | 1.21 |   | $ | 2.44 |   |
| Diluted             |   | 0.63                                  |   | 1.50 |   | 1.21 |   | 2.44 |   |

 
| ** **          | ** ** | **2010**                             | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months ended June 30,** | ** ** |
| ** **          | ** ** | **As Reported**                      | ** ** | **As Adjusted** | ** ** | **As Reported** | ** ** | **As Adjusted** | ** ** |
| Revenue             |       | $                                    | 164,424    |   | $ | 219,521 |   | $ | 219,259 |   | $ | 472,871 |   |
| Net income          |       | 24,804                               |       | 28,383 |   | 28,809 |   | 45,549 |   |
| Earnings per share: |       |                                 |       |   |   |   |   |   |   |
| Basic               |       | $                                    | 1.62       |   | $ | 1.86 |   | $ | 1.89 |   | $ | 2.98 |   |
| Diluted             |       | 1.60                                 |       | 1.83 |   | 1.86 |   | 2.95 |   |

 

Theunaudited pro forma data is presented for illustrative purposes only and is notnecessarily indicative of the operating results that would have occurred if theAlltel Acquisition had been consummated on this date or of future operatingresults of the combined company following this transaction.

 

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*Aruba*

 

InJune 2010, we entered into a joint venture with one of our directors,Brian A. Schuchman, to purchase a controlling interest in a wirelesstelecommunications enterprise operating on the island of Aruba.  

 

**5.  FAIR VALUE MEASUREMENTS**

 

Inaccordance with the provisions of fair value accounting, a fair valuemeasurement assumes that the transaction to sell an asset or transfer aliability occurs in the principal market for the asset or liability or, in theabsence of a principal market, the most advantageous market for the asset orliability and defines fair value based upon an exit price model.

 

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

 

*Level 1*- Quoted prices in active markets for identicalassets or liabilities as of the reporting date. Active markets are those in which transactions for the asset orliability occur in sufficient frequency and volume to provide pricinginformation on an ongoing basis.  Level 1assets and liabilities include debt and equity securities and derivativecontracts that are traded in an active exchange market.

 

*Level 2*- Observable inputs other than Level 1 prices, suchas quoted prices for similar assets or liabilities; quoted prices in marketsthat are not active; or other inputs that are observable or can be corroboratedby the observable market data for substantially the full term of the assets orliabilities.  Level 2 assets andliabilities include debt securities with quoted prices that are traded lessfrequently than exchange-traded instruments and derivative contracts whose valueis determined using a pricing model with inputs that are observable in themarket or can be derived principally from or corroborated by observable marketdata.  This category generally includescertain U.S. Government and Agency mortgage-backed debt securities, corporatedebt securities, and non-exchange traded derivative contracts.

 

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

 

Assetsand liabilities of the Company measured at fair value on a recurring basis asof December 31, 2009 are summarized as follows (in thousands):

 
| **December 31, 2009**                    | ** ** |
|-----------------------------------------------|------------|
| **Description**                               | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Total** | ** ** |
| Certificates of deposit                       |       | $ | — |   | $ | 8,362 |   | $ | 8,362 |   |
| Money market funds                            |       | 13,091 |   | — |   | 13,091 |   |
| **Total assets measured at fair  value**      |       | $ | 13,091 |   | $ | 8,362 |   | $ | 21,453 |   |
|                                          |       |   |   |   |   |   |   |
| Interest rate swap (Note 7)                   |       | $ | — |   | $ | 5,096 |   | $ | 5,096 |   |
| **Total liabilities measured at  fair value** |       | $ | — |   | $ | 5,096 |   | $ | 5,096 |   |

 

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

 
| **June 30,  2010**                       | ** ** |
|-----------------------------------------------|------------|
| **Description**                               | ** ** | **Quoted Prices in  Active Markets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Total** | ** ** |
| Certificates of deposit                       |       | $ | — |   | $ | 3,360 |   | $ | 3,360 |   |
| Money market funds                            |       | 5,321 |   | — |   | 5,321 |   |
| **Total assets measured at fair  value**      |       | $ | 5,321 |   | $ | 3,360 |   | $ | 8,681 |   |
|                                          |       |   |   |   |   |   |   |
| Interest rate swap (Note 7)                   |       | $ | — |   | $ | 8,262 |   | $ | 8,262 |   |
| **Total liabilities measured at  fair value** |       | $ | — |   | $ | 8,262 |   | $ | 8,262 |   |

 

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*Money Market Funds*

 

Thisasset class consisted of a money market portfolio that is comprised ofsecurities classified within Level 1 of the fair value hierarchy because theyare valued using quoted market prices in active markets.

 

*Certificates of Deposit*

 

Certificatesof deposit are classified within Level 2 of the fair value hierarchy becausethey are valued using quoted prices for similar assets.

 

*Interest Rate Swap*

 

TheCompany’s objectives in using interest rate derivatives are to add stability tointerest expense and to manage its exposure to interest rate movements. Theinterest rate swap is valued using broker quotations.  As such, the interest rate swap is classifiedwithin Level 2.

 

**6.  LONG-TERM DEBT**

 

Long-termdebt comprises the following (in thousands):

 
| ** **                | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
|---------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Notes payable:            |       |                        |       |                    |       |
| $150 million term loan    |       | $                           | —     |                    | $          | 148,125 |   |
| $75 million term loan     |       | 73,875                      |       | 72,029                  |       |
| $75 million revolver loan |       | —                      |       | 40,000                  |       |
| Total outstanding debt    |       | 73,875                      |       | 260,154                 |       |
| Less: current portion     |       | (3,694                      | )          | (11,194                 | )          |
| Total long-term debt      |       | 70,181                      |       | 248,960                 |       |
| Less: debt discount       |       | (630                        | )          | (3,291                  | )          |
| Net carrying amount       |       | $                           | 69,551     |                    | $          | 245,669 |   |

 

***2008 Loan Facility***

 

OnSeptember 10, 2008, the Company, as borrower, entered into a creditagreement with CoBank, ACB and other lenders as referenced within the creditagreement (the “2008 CoBank Credit Agreement”). The 2008 CoBank CreditAgreement provided a $75 million term loan (the “2008 Term Loan”) as wellas a $75 million revolving credit facility (the “2008 Revolver Facility”,together with the 2008 Term Loan, the “2008 Credit Facility”). The 2008Revolver Facility included a $5 million letter of credit facility

 

The2008 Term Loan required quarterly repayments of principal of $0.2 millionthrough June 30, 2013 and quarterly repayments of principal of$1.4 million from September 30, 2013 to June 30, 2015. Theremaining outstanding principal balance was to be repaid on September 10,2015 when the 2008 Term Loan was to mature.

 

Allborrowings under the 2008 Credit Facility were bearing interest at a rate,selected by the Company from one of the options as defined within theagreement, plus a margin. Such interest rate options included (i) a baserate, defined as the greater of the prime rate or the federal funds rate plus0.5%, or (ii) a LIBOR rate. Margins for base rate borrowings ranged from0% to 0.5%, depending upon the Company’s leverage ratio while margins for LIBORborrowings ranged from 1.25% to 2% also depending upon the Company’s leverageratio.

 

The2008 CoBank Credit Agreement contained certain affirmative and negativecovenants of the Company and its subsidiaries. Among other things, thesecovenants restricted the Company’s ability to incur additional debt or to incurliens on its property. The 2008 Credit Agreement also required the Company tomaintain certain financial ratios including a net leverage ratio of less thanor equal to 3.0 to 1, an interest coverage ratio of greater than or equal to3.5 to 1 and an equity to assets ratio of greater than or equal to 0.4 to 1.

 

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***2010 Loan Facility***

 

OnJanuary 20, 2010, the Company amended and restated its 2008 CreditFacility with CoBank as Administrative Agent. (the “2010 CoBank CreditAgreement”). The 2010 CoBank Credit Agreement provides for a$298.9 million credit facility, consisting of a $73.9 million termloan (the “2010 Term Loan A”), a $150.0 million term loan (the “2010 TermLoan B”) and a $75.0 million revolver loan (the “2010 Revolver Loan,” andtogether with the 2010 Term Loan A and 2010 Term Loan B, the “2010 CreditFacility”). The 2010 Credit Facility also provides for one or more additionalterm loans up to an aggregate $50.0 million, subject to lender andadministrative agent approval.

 

Asof June 30, 2010, $72.0 million was outstanding under the 2010 TermLoan A, $148.1 million was outstanding under the 2010 Term Loan B and$40 million was outstanding under the 2010 Revolver Loan.  As discussed in Note 4, the Company partiallyfunded the purchase price of the Alltel Acquisition with the $150 million 2010Term Loan B and borrowed $40 million under the 2010 Revolver Loan.

 

The2010 Term Loan A and the 2010 Term Loan B each mature on September 30,2014, with certain quarterly repayment obligations described below, unlessaccelerated pursuant to an event of default, as described below. The 2010Revolver Loan matures on September 10, 2014, unless accelerated pursuantto an event of default, as described below. Amounts borrowed under the 2010Term Loan A, 2010 Term Loan B and the 2010 Revolver Loan bear interest at arate equal to, at the Company’s option, either (i) the London InterbankOffered Rate (LIBOR) plus an applicable margin ranging between 3.50% to 4.75%or (ii) a base rate plus an applicable margin ranging from 2.50% to 3.75%.The Company is not required to apply a minimum LIBOR percentage for any loansbearing interest at the LIBOR rate. The base rate is equal to the higher ofeither (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 thecredit agreement). The applicable margin is determined based on the ratio ofthe Company’s indebtedness (as defined in the credit agreement) to its EBITDA(as defined in the credit agreement). Borrowings as of June 30, 2010,including the interest rate swap agreement as described in Note 7, werebearing a weighted average interest rate of 5.95%.

 

Allamounts outstanding under the 2010 Revolver Loan will be due and payable uponthe earlier of the maturity date or the acceleration of the loan upon an eventof default. Amounts outstanding under the 2010 Term Loan A and the 2010 TermLoan B became due and payable commencing on March 31, 2010 andJune 30, 2010, respectively, in quarterly payments equal to 1.25% of theinitial principal amount outstanding under each loan, increasing to 2.50% ofthe initial principal amount outstanding commencing on March 31, 2012.Remaining balances will be due and payable upon maturity, unless the loans areaccelerated upon an event of default.

 

Certainof our subsidiaries, including our principal wholly-owned domestic operatingsubsidiaries, are guarantors of our obligations under the 2010 CoBank CreditAgreement. Further, our obligations are secured by (i) a first priority,perfected lien on substantially all of our property and assets and that of theguarantor subsidiaries, and (ii) a pledge of 100% of the Company’s equityinterests in certain domestic subsidiaries and up to 65% of the equityinterests outstanding of certain foreign subsidiaries, in each case, includingthe Company’s principal operating subsidiaries.

 

The2010 CoBank Credit Agreement contains customary representations, warranties andcovenants, 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 andfundamental changes. In addition, the 2010 CoBank Credit Agreement containsfinancial covenants by the Company that (i) impose a maximum ratio ofindebtedness (as defined in the credit agreement) to EBITDA (as defined in thecredit agreement), (ii) require a minimum ratio of EBITDA to cash interestexpense, (iii) require a minimum ratio of equity to consolidated assetsand (iv) require a minimum ratio of EBITDA to fixed charges (as defined inthe credit agreement). As of June 30, 2010, the Company was in compliancewith all of the financial covenants of the 2010 CoBank Credit Agreement.

 

The2010 CoBank Agreement provides for events of default customary for credit facilitiesof this type, including but not limited to non-payment, defaults on other debt,misrepresentation, breach of covenants, representations and warranties,insolvency and bankruptcy. After the occurrence of an event of default and forso long as it continues, the administrative agent or the requisite lenders (asdefined in the credit agreement) may increase the interest rate then in effecton all outstanding obligations by 2.0%. Upon an event of default relating toinsolvency, bankruptcy or receivership, the amounts outstanding under the 2010Credit Facility will become immediately due and payable and the lendercommitments will be automatically terminated. Upon the occurrence andcontinuation of any other event of default, the administrative agent and/or therequisite lenders (as defined in the credit agreement) may accelerate paymentof all obligations and terminate the lenders’ commitments under the 2010 CoBankAgreement.

 

**7.  DERIVATIVEINSTRUMENTS AND HEDGING ACTIVITIES**

 

Asrequired by the FASB’s authoritative guidance on accounting for derivativeinstruments and hedging activities, the Company records all derivatives on thebalance sheet at fair value. The accounting for changes in the fair value ofderivatives depends on the intended use of the derivative, whether the Companyhas elected to designate a derivative in a hedging relationship and apply hedgeaccounting and whether the hedging relationship has satisfied the criterianecessary to apply hedge accounting. Derivatives 

 

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

 

***Risk Management Objective of UsingDerivatives***

 

TheCompany is exposed to certain risks arising from both its business operationsand economic conditions. The Company principally manages its exposures to awide variety of business and operational risks through management of its corebusiness activities. The Company manages economic risks related to interestrates primarily by managing the amount, sources, and duration of its debtfunding and the use of derivative financial instruments. Specifically, theCompany entered into derivative financial instruments to manage exposures thatarise from business activities that result in the payment of future known anduncertain cash amounts, the value of which are determined by interest rates.The Company’s derivative financial instruments are used to manage differencesin the amount, timing, and duration of its known or expected cash paymentsprincipally related to the Company’s borrowings.

 

***Cash Flow Hedge of Interest Rate Risk***

 

TheCompany’s objectives in using interest rate derivatives are to add stability tointerest expense and to manage its exposure to interest rate movements. Toaccomplish this objective, the Company primarily uses an interest rate swap aspart of its interest rate risk management strategy. Interest rate swapsdesignated as cash flow hedges involve the receipt of variable-rate amountsfrom a counterparty in exchange for the Company making fixed-rate payments overthe life of the agreements without exchange of the underlying notional amount.

 

Theeffective portion of changes in the fair value of interest rate swapsdesignated and that qualify as cash flow hedges is recorded in AccumulatedOther Comprehensive Income and is subsequently reclassified into earnings inthe period that the hedged forecasted transaction affects earnings.  The Company uses a derivative to hedge thevariable cash flows associated with existing variable-rate debt. The ineffectiveportion of the change in fair value of the derivative is recognized directly inearnings. No hedge ineffectiveness was recognized during either the threemonths ended June 30, 2009 or 2010.

 

Asof December 31, 2009 and June 30, 2010, the Company’s sole derivativeinstrument was an interest rate swap with a notional amount of $68 millionthat was designated as a cash flow hedge of interest rate risk.

 

Amountsreported in accumulated other comprehensive income related to the interest rateswap will be reclassified to interest expense as interest payments are made onthe Company’s variable-rate debt. Through June 30, 2011, the Companyestimates that an additional $2.6 million will be reclassified as anincrease to interest expense due to the interest rate swaps since the hedgeinterest rate exceeds the variable interest rate on the debt.

 

Thetable below presents the fair value of the Company’s derivative financialinstrument as well as its classification on the consolidated balance sheet asof December 31, 2009 and June 30, 2010 (in thousands):

 
| ** **                                           | ** ** | **Liability Derivatives**  | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | ** **                 | ** ** | **Fair Value as of** | ** ** |
| ** **                                           | ** ** | **Balance Sheet Location** | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** |
| Derivatives designated as hedging instruments:       |       |                       |       |   |   |   |   |
| Interest Rate Swap                                   |       | Other liabilities          |       | $ | 5,096 |   | $ | 8,262 |   |
| Total derivatives designated as hedging  instruments |       |                       |       | $ | 5,096 |   | $ | 8,262 |   |

 

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Thetable below presents the effect of the Company’s derivative financialinstrument on the consolidated income statements for the three months ended June 30,2009 and 2010 (in thousands):

 
| **Three Months Ended June 30,** | ** ** | **Derivative in Cash Flow  Hedging Relationships** | ** ** | **Amount of Gain or  (Loss) Recognized  in OCI on Derivative  (Effective Portion)** | ** ** | **Location of Gain or  (Loss) Reclassified  from Accumulated  OCI into Income  (Effective Portion)** | ** **       | **Amount of Gain or  (Loss) Reclassified  from Accumulated  OCI into Income  (Effective Portion)** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------------------------|------------|
| 2009                                 |       | Interest Rate Swap                                 |       | $                                                                                   | 2,411      |                                                                                                 | Interest expense |                                                                                               | $          | 690 |   |
| 2010                                 |       | Interest Rate Swap                                 |       | (2,263                                                                              | )          | Interest expense                                                                                     |             | 709                                                                                                |       |
|                                      |            |                                                    |            |                                                                                     |            |                                                                                                      |                  |                                                                                                    |            |  |  |

 

Thetable below presents the effect of the Company’s derivative financialinstrument on the consolidated income statements for the six months ended June 30,2009 and 2010 (in thousands):

 
| **Six Months Ended June 30,** | ** ** | **Derivative in Cash Flow  Hedging Relationships** | ** ** | **Amount of Gain or  (Loss) Recognized  in OCI on Derivative  (Effective Portion)** | ** ** | **Location of Gain or  (Loss) Reclassified  from Accumulated  OCI into Income  (Effective Portion)** | ** **       | **Amount of Gain or  (Loss) Reclassified  from Accumulated  OCI into Income  (Effective Portion)** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------------------------|------------|
| 2009                               |       | Interest Rate Swap                                 |       | $                                                                                   | 3,091      |                                                                                                 | Interest expense |                                                                                               | $          | 1,349 |   |
| 2010                               |       | Interest Rate Swap                                 |       | (3,083                                                                              | )          | Interest expense                                                                                     |             | 1,422                                                                                              |       |
|                                    |            |                                                    |            |                                                                                     |            |                                                                                                      |                  |                                                                                                    |            |  |  |

 

***Credit-risk-related Contingent Features***

 

TheCompany has an agreement with its derivative counterparty that contains aprovision where if the Company defaults on any of its indebtedness, includingdefault where repayment of the indebtedness has not been accelerated by thelender, then the Company could also be declared in default on its derivativeobligations.

 

Asof June 30, 2010, the fair value of the interest rate swap liabilityposition, related to this agreement was $8.3 million. As of June 30,2010, the Company has not posted any collateral related to this agreement. Ifthe Company had breached any of these provisions at June 30, 2010, itwould have been required to settle its obligation under the agreement at itstermination value of $8.3 million.

 

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**8.  RECONCILIATION OF TOTAL EQUITY**

 

Totalequity was as follows (in thousands):

 
| ** **                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** |
| ** **                                                                            | ** ** | **Atlantic Tele-  Network, Inc.**       | ** ** | **Non-Controlling  Interests** | ** ** | **Total Equity** | ** ** | **Atlantic Tele-  Network, Inc.** | ** ** | **Non-Controlling  Interests** | ** ** | **Total  Equity** | ** ** |
| Equity, beginning of period                                                           |       | $                                                 | 228,873    |   | $ | 32,787 |   | $ | 261,660 |   | $ | 255,745 |   | $ | 26,687 |   | $ | 282,432 |   |
| Stock based compensation                                                              |       | 656                                               |       | — |   | 656 |   | 981 |   | — |   | 981 |   |
| Comprehensive income:                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                            |       | 18,438                                            |       | 543 |   | 18,981 |   | 28,809 |   | 90 |   | 28,899 |   |
| Other comprehensive income(loss)- Gain(loss)  on interest rate swap (net of tax) |       | 1,897                                             |       | — |   | 1,897 |   | (1,900 | ) | — |   | (1,900 | ) |
| Total comprehensive income                                                            |       | 20,335                                            |       | 543 |   | 20,878 |   | 26,909 |   | 90 |   | 26,999 |   |
| Issuance of common stock upon exercise of stock  options                              |       | 74                                                |       | — |   | 74 |   | 677 |   | — |   | 677 |   |
| Dividends on common stock                                                             |       | (5,483                                            | )          | (5,118 | ) | (10,601 | ) | (6,123 | ) | — |   | (6,123 | ) |
| Non-controlling interests of acquired business                                        |       | —                                            |       | — |   | — |   | — |   | 16,000 |   | 16,000 |   |
| Distributions to non-controlling interests                                            |       | —                                            |       | — |   | — |   | — |   | (860 | ) | (860 | ) |
| Investments made by minority shareholders                                             |       | —                                            |       | 200 |   | 200 |   | — |   | 225 |   | 225 |   |
| Purchase of common shares                                                             |       | (23                                               | )          | — |   | (23 | ) | — |   | — |   | — |   |
| Equity, end of period                                                                 |       | $                                                 | 244,432    |   | $ | 28,412 |   | $ | 272,844 |   | $ | 278,189 |   | $ | 42,142 |   | $ | 320,331 |   |

 

**9.  NET INCOMEPER SHARE**

 

Forthe three and six months ended June 30, 2009 and 2010, outstanding stockoptions were the only potentially dilutive securities.

 

Thereconciliation from basic to diluted weighted average common shares outstandingis as follows (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                        | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **2010** | ** ** |
| Basic weighted average common shares outstanding   |       | 15,232                                          |       | 15,300                                        |       | 15,231 |   | 15,280 |   |
| Stock options                                      |       | 50                                              |       | 178                                           |       | 36 |   | 183 |   |
| Diluted weighted average common shares outstanding |       | 15,282                                          |       | 15,478                                        |       | 15,267 |   | 15,463 |   |

 

Theabove calculations for the three months ended June 30, 2009 and 2010 donot include 323,000 and 114,000 shares, respectively, related to certain stockoptions because the effects of such were anti-dilutive. For the six monthsended June 30, 2009 and 2010, the calculation does not include 349,000 and87,000 shares, respectively, related to certain stock options because theeffect of such options were anti-dilutive.

 

**10. SEGMENT REPORTING**

 

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

 

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Telephonyand has its assets located in Guyana. Integrated Telephony — Domestic has been renamed U.S. Wireline, and hasits assets located in the United States. The operating segments are managed separately because each offersdifferent services and serves different markets.  Reconciling items refer to corporate overheadmatters.

 

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

 
| ** **                        | ** ** | **For the Three Months Ended June 30, 2009** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **U.S. Wireless**                                 | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **U.S.  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| Revenue                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Wireless:                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail                            |       | $                                                 | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Wholesale                         |       | 25,800                                            |       | — |   | — |   | — |   | — |   | 25,800 |   |
| International Wireless            |       | —                                            |       | 5,184 |   | 6,207 |   | — |   | — |   | 11,391 |   |
| Wireline                          |       | —                                            |       | 17,512 |   | — |   | 4,728 |   | — |   | 22,240 |   |
| Equipment and Other               |       | —                                            |       | — |   | 990 |   | — |   | — |   | 990 |   |
| Total Revenue                     |       | 25,800                                            |       | 22,696 |   | 7,197 |   | 4,728 |   | — |   | 60,421 |   |
| Depreciation and amortization     |       | 3,614                                             |       | 4,197 |   | 1,229 |   | 680 |   | 74 |   | 9,794 |   |
| Non-cash stock-based compensation |       | —                                            |       | — |   | — |   | 32 |   | 323 |   | 355 |   |
| Operating income (loss)           |       | 13,463                                            |       | 8,762 |   | (937 | ) | (234 | ) | (2,942 | ) | 18,112 |   |
|                                   |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **For the Three Months Ended June 30, 2010** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **U.S. Wireless**                                 | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **U.S.  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| Revenue                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Wireless:                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail                            |       | $                                                 | 81,507     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 81,507 |   |
| Wholesale                         |       | 39,545                                            |       | — |   | — |   | — |   | — |   | 39,545 |   |
| International Wireless            |       | —                                            |       | 6,311 |   | 6,219 |   | — |   | — |   | 12,530 |   |
| Wireline                          |       | 81                                                |       | 18,154 |   | — |   | 4,995 |   | — |   | 23,230 |   |
| Equipment and Other               |       | 7,077                                             |       | — |   | 535 |   | — |   | — |   | 7,612 |   |
| Total Revenue                     |       | 128,210                                           |       | 24,465 |   | 6,754 |   | 4,995 |   | — |   | 164,424 |   |
| Depreciation and amortization     |       | 12,527                                            |       | 4,245 |   | 965 |   | 727 |   | 78 |   | 18,542 |   |
| Non-cash stock-based compensation |       | —                                            |       | — |   | — |   | — |   | 625 |   | 625 |   |
| Operating income (loss)           |       | 16,834                                            |       | 7,899 |   | (586 | ) | 3 |   | (16,376 | ) | 7,774 |   |
|                                   |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                        | ** ** | **For the Six Months Ended June 30, 2009** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **U.S. Wireless**                               | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **U.S.  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| Revenue                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Wireless:                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Retail                            |       | $                                               | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Wholesale                         |       | 47,439                                          |       | — |   | — |   | — |   | — |   | 47,439 |   |
| International Wireless            |       | —                                          |       | 10,103 |   | 11,927 |   | — |   | — |   | 22,030 |   |
| Wireline                          |       | —                                          |       | 35,328 |   | — |   | 9,338 |   | — |   | 44,666 |   |
| Equipment and Other               |       | —                                          |       | — |   | 2,380 |   | — |   | — |   | 2,380 |   |
| Total Revenue                     |       | 47,439                                          |       | 45,431 |   | 14,307 |   | 9,338 |   | — |   | 116,515 |   |
| Depreciation and amortization     |       | 6,849                                           |       | 8,380 |   | 2,218 |   | 1,399 |   | 148 |   | 18,994 |   |
| Non-cash stock-based compensation |       | —                                          |       | — |   | — |   | 63 |   | 593 |   | 656 |   |
| Operating income (loss)           |       | 21,817                                          |       | 15,476 |   | (1,830 | ) | (1,035 | ) | 461 |   | 34,889 |   |
|                                   |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                        | ** ** | **For the Six Months Ended June 30, 2010** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **U.S. Wireless**                               | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **U.S.  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| Revenue                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Wireless:                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Retail                            |       | $                                               | 81,507     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 81,507 |   |
| Wholesale                         |       | 62,481                                          |       | — |   | — |   | — |   | — |   | 62,481 |   |
| International Wireless            |       | —                                          |       | 11,875 |   | 11,574 |   | — |   | — |   | 23,449 |   |
| Wireline                          |       | 81                                              |       | 33,750 |   | — |   | 9,920 |   | — |   | 43,751 |   |
| Equipment and Other               |       | 7,077                                           |       | — |   | 994 |   | — |   | — |   | 8,071 |   |
| Total Revenue                     |       | 151,146                                         |       | 45,625 |   | 12,568 |   | 9,920 |   | — |   | 219,259 |   |
| Depreciation and amortization     |       | 16,597                                          |       | 8,528 |   | 1,941 |   | 1,426 |   | 119 |   | 28,611 |   |
| Non-cash stock-based compensation |       | —                                          |       | — |   | — |   | 11 |   | 970 |   | 981 |   |
| Operating income (loss)           |       | 26,784                                          |       | 15,355 |   | (1,584 | ) | (112 | ) | (25,247 | ) | 15,196 |   |
|                                   |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **Segment Assets** | ** ** |
|-----------------------------|------------|--------------------|------------|
| ** **                  | ** ** | **U.S. Wireless**  | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **U.S.  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| **December 31, 2009:** |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Net fixed assets            |       | $                  | 68,560     |   | $ | 117,931 |   | $ | 20,749 |   | $ | 8,829 |   | $ | 946 |   | $ | 217,015 |   |
| Goodwill                    |       | 32,148             |       |   |   | 722 |   | 7,491 |   | — |   | 40,361 |   |
| Total assets                |       | 147,639            |       | 152,936 |   | 49,734 |   | 24,898 |   | 71,347 |   | 446,554 |   |
| **June 30, 2010:**     |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Net fixed assets            |       | $                  | 262,552    |   | $ | 123,359 |   | 21,549 |   | 8,554 |   | 3,509 |   | 419,523 |   |
| Goodwill                    |       | 32,148             |       | — |   | 722 |   | 7,491 |   | — |   | 40,361 |   |
| Total assets                |       | 533,743            |       | 154,276 |   | 47,992 |   | 22,238 |   | 25,136 |   | 783,385 |   |
|                             |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **Capital Expenditures** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **US Wireless**          | ** ** | **International  Integrated  Telephony** | ** ** | **Island  Wireless** | ** ** | **US  Wireline** | ** ** | **Reconciling  Items** | ** ** | **Consolidated** | ** ** |
| **Six Months Ended  June 30,** |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| 2009                                          |       | $                        | 11,329     |   | $ | 10,951 |   | $ | 4,791 |   | $ | 463 |   | $ | 7 |   | $ | 27,541 |   |
| 2010                                          |       | 25,456                   |       | 13,538 |   | 9,413 |   | 904 |   | 2,684 |   | 51,995 |   |
|                                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**11.  COMMITMENTSAND CONTINGENCIES**

 

**Regulatory and Litigation Matters**

 

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

 

***Regulatory***

 

The Company’s wireless and wireline operations in the United States andin the U.S. Virgin Islands are governed by the Communications Act of 1934, asamended, the implementing regulations adopted thereunder by the FederalCommunications Commission, judicial and regulatory decisions and other federaland state statutes.  In addition, certainof the Company’s subsidiaries are subject to additional regulation in theUnited States in connection with their acceptance of stimulus award grantspursuant to the American Recovery and Reinvestment Act of 2009.  The Company’s Bermuda operations are subjectto Bermuda’s Telecommunications Act of 1986.

 

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

 

Currently, the Company holds an exclusive license to provide domesticwireline local and international voice and data services in Guyana, which theCompany renewed for an additional twenty year term in November of 2009.Since 2001, the Government of Guyana has stated its intention to introduceadditional competition into Guyana’s telecommunications sector.  Since that time, the Company has met with theGovernment of Guyana to discuss potential modifications of its exclusivityrights, however, no additional steps towards the introduction of competitionfor international voice and data services have occurred.  The Company has been informed that draftlegislation liberalizing the telecommunications sector in Guyana may beavailable during 2010, however, the Company does not know whether or how anydraft legislation will address the Company’s exclusive license, and if so,whether it would be pursuant to a mutual agreement with the Government.  In exercising the Company’s option to renew itslicenses, it reiterated to the Government that the Company would be willing tovoluntarily relinquish the exclusivity aspect of our licenses, but only as partof an overall settlement agreement with the Government.  Although the Company believe that we would beentitled to damages for any involuntary termination of that exclusive license, theCompany cannot guarantee that the Company would prevail in any court orarbitration proceeding or that our actions would effectively halt anyunilateral action by the Government.

 

***Litigation***

 

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

 

In addition, we are currently involved in several legal challenges toour exclusive license under Guyana’s constitution, which have remained pendingfor anywhere from one to ten years.  Webelieve that any legal challenge to our exclusive license granted in 1990, includinglawsuits filed in 2000 by Inet Communications, Inc., in 2002 by anindividual and in 2009 by Digicel, are without merit, and we have and willcontinue to vigorously defend against such legal challenges.

 

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

 

***Other***

 

The Company is currently disputingcertain invoices received during the three months ended June 30, 2010 relatingto acquisition-related charges.  Aportion of these disputed invoices is included in the accompanying statementsof operations for the three and six months ended June 30, 2010.

 

**12.  SUBSEQUENT EVENTS**

 

On July 7, 2010, in partnership with the Vermont TelecommunicationsAuthority (the “VTA”), we were awarded a $33.4 million federal stimulus grantby the National Telecommunications and Information Administration of the U.S.Department of Commerce (“NTIA”).  Thegrant, along with partial matching funds to be contributed by us (through aVermont subsidiary) and the VTA, will be invested in fiber-optic middle milenetwork in Vermont to provide broadband and wireless services to communityschools, colleges, libraries and state-owned buildings in the area.  The funding of this project is not scheduledto occur until later in 2010, once the necessary environmental site work iscompleted.  Accordingly, we did notrecognize any of the granted funds during the three or six months endedJune 30, 2010.  The results of ourU.S. wireline business are included in the Company’s “U.S. Wireline” segment asreported in Note 10.

 

On  July 26, 2010, the Company executed anadditional interest rate swap with a notional amount of $30 million that wasalso designated as a cash flow hedge of interest rate risk.

 

Therewere no other subsequent events required to be recognized or disclosed in thefinancial statements.

 

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

 

*The discussion and analysis of our financial condition and results ofoperations that follows are based upon our condensed consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of our financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets and liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities at the date of our financialstatements. Actual results may differ significantly from these estimates underdifferent assumptions or conditions. This discussion should be read inconjunction with our condensed consolidated financial statements herein and theaccompanying notes thereto, and our Annual Report on Form 10-K for theyear ended December 31, 2009, in particular, the information set forththerein under Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”.*

 

**Overview**

 

We provide the following wireless and wireline telecommunicationsservices, through our operating subsidiaries, in North America and the Caribbean:

 

·                  ***Wireless.***  In the UnitedStates, we offer wireless voice and data services to retail customers under the“Alltel” name in rural markets located principally in the Southeast andMidwest.  Additionally, we offerwholesale wireless voice and data roaming services to national, regional andlocal wireless carriers in rural markets located principally in the Southwestand Midwest United States.  We also offerwireless voice and data services to retail customers in Guyana under the “Cellink”name, in Bermuda under the “CellularOne” name, in Turks and Caicos under the “Islandcom”name and in the U.S. Virgin Islands under the “Choice” name.

 

·                  ***Wireline.***  Our localtelephone and data services include our operations in Guyana under the “GT&T”name and in the United States under the “Sovernet” and “ION” names.  In Guyana, we are the exclusive provider ofdomestic wireline local and long distance telephone services and also provideinternational voice and data services. We offer facilities-based integratedvoice and data communications services to residential and business customers inNew England, primarily in Vermont, and wholesale transport services in New YorkState. We are also a leading internet access service provider in the U.S.Virgin Islands.

 

ATN was incorporated in Delaware in 1987, and since that time, hasengaged in strategic acquisitions to grow the Company’s operations.  From 1998 through 2005, a significantmajority of our revenue was derived from our wireless and wireline operationsin Guyana, in which we have owned an 80% interest since 1991.  In addition, the Company has been a providerof fixed and portable wireless broadband data and dial-up internet servicesthrough our U.S. Virgin Islands subsidiary, acquired in 1999.  In the past five years, we have addedsubstantially to the diversity of our business and reduced our historicaldependence on our Guyana operations for our financial results.  We entered the U.S. telecommunications marketthrough the 2005 acquisition of an operator of a wholesale wireless network inrural portions of the Southwest and Midwest and we continued our U.S. expansionwith the 2006 acquisition of a wireline voice, broadband data and dial-upservice provider in New England.  In2008, we increased our previously non-controlling investment in a Bermudianwireless voice and data services provider to a controlling 58% interest andentered into new U.S. and Caribbean markets with investments in two early stagebusinesses providing wholesale transport services in New York State andwireless voice and data services in Turks and Caicos.  In addition to the diversification of ourbusiness through acquisition, we have further accentuated our focus on our U.S.operations with increased capital investment in and growth of our wholesalewireless business, which was the single largest contributor to our revenue andoperating income in 2009.

 

In the second quarter of 2010, we completed the acquisition of ourretail wireless business, which provides wireless voice and data services inrural markets of the United States under the “Alltel” brand name (the “AlltelAcquisition”).  Also during the quarter,we completed an investment in a wireless telecommunications provider in Aruba,in which we hold a controlling interest. With the completion of the Alltel asset acquisition, we continued ourtrend towards growth in U.S.-sourced revenue, with the U.S. wireless portion ofour business now constituting a significant majority of the Company’sconsolidated revenue.  Of course, wecontinue to actively evaluate additional investment and acquisitionopportunities in the United States and the Caribbean that meet ourreturn-on-investment and other acquisition criteria.

 

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The following chart summarizes the operating activities of ourprincipal subsidiaries, the segments in which we report their revenue and themarkets they serve as of June 30, 2010:

 
| **Services** | ** ** | **Segment**                         | ** ** | **Markets**                                     |
|--------------|------------|-------------------------------------|------------|-------------------------------------------------|
| **Wireless** |       | U.S. Wireless                       |       | United States (rural  markets)                  |
| ** **   |       | International Integrated  Telephony |       | Guyana                                          |
| ** **   |       | Island Wireless                     |       | Bermuda, Turks and Caicos,  U.S. Virgin Islands |
| **Wireline** |       | International Integrated  Telephony |       | Guyana                                          |
| ** **   |       | U.S. Wireline 

               |       | United States (New England  and New York State) |

 

Weprovide management, technical, financial, regulatory, and marketing services toour subsidiaries and typically receive a management fee equal to approximately3% to 5% of their respective revenue. Management fees from consolidatedsubsidiaries are eliminated in consolidation. For information about our business segments and geographical informationabout our revenue, operating income and long-lived assets, see Note 10 tothe Consolidated Financial Statements included in this Report.

 

As discussed above, we have historically been dependent on ourwholesale U.S. wireless business and International Integrated Telephonyoperations for a majority of our revenue and profits.  The addition of our retail U.S. wirelessbusiness following our Alltel Acquisition has shifted our reliancesubstantially to our U.S. Wireless segment, which now includes both ourwholesale and retail U.S. wireless businesses. For the three months ended June 30, 2010, approximately 78% of ourconsolidated revenue was generated by our U.S. Wireless segment, while only 15%was generated by our International Integrated Telephony segment.  In comparison, for the three months ended June 30,2009, approximately 43% of our consolidated revenue was generated by our U.S.Wireless segment (then our “Rural Wireless” segment), while 38% was generatedby our International Integrated Telephony segment.  All of our consolidated operating income wasgenerated by these two operating segments for the three and six months ended June 30,2009 and 2010.

 

Asof June 30, 2010, our U.S. retail wireless services was offered insix states to approximately 807,000 customers under the “Alltel” brandname.  Our wireless licenses providemobile data and voice coverage to a network footprint covering a population ofapproximately six million people as of June 30, 2010.  As a result of Verizon’s required divestitureof Alltel assets, we acquired a regional, non-contiguous wireless network thatwe anticipate will require network expansion and improvements as well asroaming support to ensure ongoing nationwide coverage.  Our Alltel service offerings provide rate planswhich include local and nationwide voice and data services on either a postpaidor prepaid basis.  We offer several rateplans designed for customers to choose the flexibility that they desire fortheir calling preferences, and believe that the ability to offer nationwidecalling to our customers is a key factor in our ability to remain competitivein the telecommunications market.

 

Therevenue of our U.S. retail wireless business is primarily driven by the numberof wireless subscribers acquired in the Alltel Acquisition and their relatedvoice and data usage.  The number of ourretail subscribers and their usage volumes and patterns also has a major impacton the profitability of our U.S. retail wireless operations.  Our customer activity may be influenced bytraditional retail selling periods, which may be seasonal in nature, and otherfactors that arise in connection with our rural customer base.  We expect to initially experience a greaterdegree of customer turnover due to the recent acquisition, including some netreduction in total subscribers, but generally expect that this turnover, or “churn,”will gradually improve during the next two years as we are able to refine ourservice offerings and transition the assets from the legacy Alltel informationtechnology systems and platforms to our own. During this time, we also expect to experience higher economic-relatedchurn as we eliminate certain sales and credit practices implemented by themanagement of the trust that operated the assets from 2009 through thecompletion of the acquisition in April 2010.  During this time, we may engage in sales andpromotional activities designed to retain or increase our customer base, butmay be affected by other factors, including general economic conditions, the roamingand usage of our existing customer base and actions by our competitors, whichmay reduce or outweigh the success of our marketing or promotionalefforts.  The mix of our customers andtheir patterns of usage, particularly usage outside our network footprint, willhave a significant impact on the level of profits for our U.S. retail wirelessbusiness.  In general, we compete withnational and regional wireless providers that offer both prepaid and postpaidservices; whose scale, resources and U.S. network footprint are significantlygreater than ours.  Our ability to remaincompetitive and to maintain reasonable profit margins will depend, in part, onour ability to remain attractive to customers who prefer a rural-based serviceprovider, to provide competitive pricing for our customers, to provide thelatest mobile voice and data services in all of the areas they wish to accessthose services and to anticipate and respond to various competitive factors.

 

Inaddition, the revenue and profits of our U.S. wholesale wireless businesscontribute to our overall U.S. Wireless revenue and are primarily driven by thenumber of sites and base stations we operate, the amount of voice and datatraffic that each of these

 

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sitesgenerates, and the rate we get paid from our carrier customers on that traffic.We also provide roaming services in a number of areas in the U.S. (mainly inthe western United States) where we do not operate a retail wirelessbusiness.  With the Alltel Acquisition,our reported wholesale wireless revenue also includes roaming revenuegeneration in areas in which we have retail wireless operations.  Historically, the growth in same site voiceand data volumes and the number of operated sites has outpaced the decline inrates.  However, in the first half of2010, a significant decrease in the data rates almost offset overall voice anddata traffic growth.  The growth of thisrevenue has historically been driven mainly by the rate at which we expand thenumber of base stations we operate. We compete with other wireless serviceproviders that operate networks in their markets and offer wholesale roamingservices as well.

 

However,the most significant competitive factor we face in our U.S. wholesale wirelessbusiness is the extent to which our carrier customers elect to build or acquiretheir own infrastructure (including networks that we built out pursuant tocertain roaming agreements) in a market in which they operate, reducing oreliminating their need for our services in that market.  For example, the 2009 acquisition by VerizonWireless of Alltel Corporation assets and subsequent 2010 acquisition of divestedAlltel assets by AT&T, will result in our wholesale customers having theirown infrastructure in certain markets where they are currently served by us.This has already resulted in some loss, and is expected to continue to resultin a significant loss, of wireless wholesale revenue and operating income infuture periods, which, if not offset by growth in other wholesale revenuegenerated or other sources, could materially reduce our overall operatingprofits. While we are not able to forecast the extent of this revenue impactprecisely at this time, we expect that at the very least we will begin toexperience lost revenue from those overlapping areas in late 2010 or early2011, which may more than offset any growth in U.S. wholesale wireless revenue duringthese periods.

 

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

 

**Acquisition of Alltel Assets**

 

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

 

**Stimulus Grants**

 

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

 

In December 2009, we were named to receive a $39.7 millionfederal stimulus grant to fund our ION Upstate New York Rural BroadbandInitiative, which involves building ten new segments of fiber-optic,middle-mile broadband infrastructure, serving more than 70 rural communities inupstate New York and parts of Pennsylvania and Vermont. The new project will beundertaken through our public-private partnership with the DevelopmentAuthority of the North Country (“DANC”), a New York State public benefitcorporation that owns and operates 750 miles of fiber optic network andprovides wholesale telecommunications transport services to voice, video, dataand wireless service providers.  The$39.7 million grant, awarded to us by the National Telecommunications andInformation Administration of the U.S. Department of Commerce (“NTIA”), underits Broadband Technology Opportunities Program, will be paid over the course ofthe three-year project period as expenses are incurred. An additional$9.9 million will be invested in the project by us and by DANC.  The funding of the new ION project isscheduled to begin in the third quarter of 2010.   Accordingly, the Company did not recognizeany of the granted funds during the three or six months ended June 2010.The results of our U.S. fiber optic transport business are included in theCompany’s “U.S. Wireline” segment as reported in Note 10 to ourConsolidated Financial Statements included in this Report.

 

On March 25, 2010 the NTIA awarded the Navajo Tribal UtilityAuthority (“NTUA”) a $32.1 million federal stimulus grant. The grant, alongwith partial matching funds, will provide broadband infrastructure access tothe Navajo Nation across Arizona, New Mexico and Utah. As part of the project,we are proposing to partner with NTUA to provide last mile services through a 4GLTE network to be constructed as a part of this project. This network willallow NTUA to supply both fixed and mobile customers with high-speed broadbandaccess. The funding of this project is not scheduled to begin until later in2010, once the necessary environmental site work is completed.  Accordingly, we did not recognize any of thegranted funds during the three or six months ended June 30, 2010.  The results of our wholesale U.S. wireless

 

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businessare included in the Company’s “U.S. Wireless” segment as reported inNote 10 to our Consolidated Financial Statements included in this Report.

 

On July 7, 2010, in partnership with the VermontTelecommunications Authority (the “VTA”), we were awarded a $33.4 millionfederal stimulus grant by the NTIA.  Thegrant, along with partial matching funds to be contributed by us (through aVermont subsidiary) and the VTA, will be invested in fiber-optic middle milenetwork in Vermont to provide broadband and wireless services to communityschools, colleges, libraries and state-owned buildings in the area.  The funding of this project is not scheduledto occur until later in 2010, once the necessary environmental site work iscompleted.  Accordingly, we did notrecognize any of the granted funds during the three or six months endedJune 30, 2010.  The results of ourU.S. wireline business are included in the Company’s “U.S. Wireline” segment asreported in Note 10 to our Consolidated Financial Statements included inthis Report.

 

**Aruba Investment**

 

In June 2010, weentered into a joint venture to purchase a controlling interest in a wirelesstelecommunications enterprise in bankruptcy proceedings and operating on theisland of Aruba.  The joint venture isconducted through a newly-created company named Caribbean Telecom Partners, LLC(“CTP”), in which we invested $3.1 million in exchange for a 51% controllinginterest.  CTP is governed by athree-member board of directors, which consists of two members designated by usand one member designated by a member of our Board, Brian A. Schuchman, who,through a company wholly-owned by him, owns the remaining 49% interest.  Mr. Schuchman oversees the day-to-daymanagement of CTP and, through CTP, the day-to-day management of the underlyingAruba telecommunications business.  TheAudit Committee of our Board approved the above-described arrangement with Mr. Schuchmanafter review in accordance with our Related Person Transaction policy.

 

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**Results of Operations**

 

***Three Months Ended June 30, 2010and 2009***

 
| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Amount of  Increase** | ** ** | **Percent  Increase** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2009**                              | ** ** | **2010**                | ** ** | **(Decrease)**        | ** ** | **(Decrease)** | ** ** |
| ** **                                                                    | ** ** | **(In thousands)**                    | ** ** |
| **REVENUE:**                                                                  |       |                                  |       |                    |       |                  |       |   |   |
| US  Wireless:                                                                 |       |                                  |       |                    |       |                  |       |   |   |
| Retail                                                                        |       | $                                     | —     |                    | $          | 81,507                |       | $ | 81,507 |   | — | % |
| Wholesale                                                                     |       | 25,800                                |       | 39,545                  |       | 13,745                |       | 53.3 |   |
| International  Wireless                                                       |       | 11,391                                |       | 12,530                  |       | 1,139                 |       | 10.0 |   |
| Wireline                                                                      |       | 22,240                                |       | 23,230                  |       | 990                   |       | 4.4 |   |
| Equipment  and Other                                                          |       | 990                                   |       | 7,612                   |       | 6,622                 |       | 668.9 |   |
| Total  revenue                                                                |       | 60,421                                |       | 164,424                 |       | 104,003               |       | 172.1 |   |
| **OPERATING EXPENSES:**                                                       |       |                                  |       |                    |       |                  |       |   |   |
| Termination  and access fees                                                  |       | 11,436                                |       | 41,104                  |       | 29,668                |       | 259.4 |   |
| Engineering  and operations                                                   |       | 7,511                                 |       | 18,127                  |       | 10,616                |       | 141.3 |   |
| Sales,  Marketing and customer services                                       |       | 3,274                                 |       | 31,054                  |       | 27,780                |       | 848.5 |   |
| Equipment  Expense                                                            |       | 533                                   |       | 10,139                  |       | 9,606                 |       | 1,802.3 |   |
| General  and administrative                                                   |       | 9,403                                 |       | 26,643                  |       | 17,240                |       | 183.3 |   |
| Acquisition-related  charges                                                  |       | 358                                   |       | 11,041                  |       | 10,683                |       | 2,984.1 |   |
| Depreciation  and amortization                                                |       | 9,794                                 |       | 18,542                  |       | 8,748                 |       | 89.3 |   |
| Total  operating expenses                                                     |       | 42,309                                |       | 156,650                 |       | 114,341               |       | 270.3 |   |
| Income  from operations                                                       |       | 18,112                                |       | 7,774                   |       | (10,338               | )          | (57.1 | ) |
| **OTHER INCOME (EXPENSE):**                                                   |       |                                  |       |                    |       |                  |       |   |   |
| Interest  expense                                                             |       | (1,197                                | )          | (2,387                  | )          | (1,190                | )          | 99.4 |   |
| Interest  income                                                              |       | 369                                   |       | 84                      |       | (285                  | )          | (77.2 | ) |
| Gain  on acquisition, net of tax                                              |       | —                                |       | 27,024                  |       | 27,024                |       | — |   |
| Other  income (expense), net                                                  |       | 10                                    |       | 225                     |       | 215                   |       | 2,150.0 |   |
| Other  income, net                                                            |       | (818                                  | )          | 24,946                  |       | 25,764                |       | 3,149.6 |   |
| **INCOME BEFORE INCOME TAXES**                                                |       | 17,294                                |       | 32,720                  |       | 15,426                |       | 89.2 |   |
| Income  taxes                                                                 |       | 7,342                                 |       | 7,968                   |       | 626                   |       | 8.5 |   |
| **INCOME BEFORE EQUITY IN EARNINGS OF UNCONSOLIDATED  AFFILIATE**             |       | 9,952                                 |       | 24,752                  |       | 14,800                |       | 148.7 |   |
| Equity  in earnings of unconsolidated affiliate                               |       | —                                |       | 290                     |       | 290                   |       | 100.0 |   |
| **NET INCOME**                                                                |       | 9,952                                 |       | 25,042                  |       | 15,090                |       | 151.6 |   |
| Net  income attributable to non-controlling interests                         |       | (315                                  | )          | (238                    | )          | 77                    |       | 24.4 |   |
| **NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC.  STOCKHOLDERS** |       | $                                     | 9,637      |                    | $          | 24,804                |       | $ | 15,167 |   | 157.4 | % |

 

*U.S. Wireless revenue.*  Wireless revenue includes voice and dataservices revenue from our prepaid and postpaid retail operations as well as ourwholesale roaming operations.  Retailrevenue is derived from access by our retail customers to and usage of ournetworks and facilities, including airtime, roaming and long distance as wellas enhanced services such as caller identification, call waiting, voice mailand other features. Wholesale revenue is generated from providing mobile voiceor data services to the customers of other wireless carriers and also includesrevenue from other, related, wholesale services such as the provision ofnetwork switching services and certain wholesale transport services.

 

The retail portion of our U.S. Wireless revenue was $81.5 million forthe three months ended June 30, 2010 as a result of our April 26,2010 Alltel Acquisition. Our U.S. Wireless prepaid subscriber base was 230,000and our post-paid subscriber base was 577,000 at June 30, 2010.

 

We expect wireless revenue from our U.S. retail operations to remainfairly consistent in future periods noting that the revenue for the quarterending June 30, 2010 represents revenue only since our acquisition of Alltel onApril 26, 2010.

 

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The wholesale portion of our U.S. Wireless revenue increased to $39.5million for the three months ended June 30, 2010 from $25.8 millionfor the three months ended June 30, 2009, an increase of $13.7 million.The increase in wireless wholesale revenue was entirely due to the roamingrevenue generated by the networks we acquired in the Alltel Acquisition. Basestations in our rural U.S. network increased from 537 as of June 30, 2009to 598 as of June 30, 2010.  Theroaming traffic generated in the Alltel network footprint contributedapproximately $13.7 million in wireless wholesale revenue for the secondquarter of 2010.

 

Verizon’s acquisition of Alltel in 2009 has caused some loss ofwireless wholesale revenue and contributed to our lack of growth this quarteras certain network assets acquired by Verizon overlap geographically with asubstantial number of areas of our rural U.S. network in which we formerlyprovided wholesale roaming services to Verizon. Similarly, we expect that the AT&T acquisition of certain Alltelassets, which was completed in June 2010, may also contribute toadditional decreases in wireless wholesale revenue as we had previouslyprovided wholesale roaming services to AT&T in a substantial number ofareas that they acquired.  In addition,we expect the AT&T acquisition to result in a significant additional lossin wireless wholesale revenue during the last half of 2010 and in 2011 whenAT&T completes its previously announced GSM network build in thoseareas.  This loss in wireless wholesale revenuecould have a significant negative impact on our revenue and operating income ifit is not offset or replaced by increased revenue in other areas of our U.S.rural wireless business or from other sources (including increased revenue inconnection with our Alltel Acquisition).

 

While we expect to see some increase in wireless wholesale revenue fromour rural U.S. wireless business  in geographicalareas not impacted by Verizon or AT&T’s acquisition of Alltel networks, thepace of that increase in non-Alltel overlap markets may be slower as comparedto the growth in previous periods due to a reduction in the number of new sitesand base stations added and scheduled reductions in roaming rates.  We also expect to receive a portion of the$32.1 million grant from the NTIA to build on the Navajo Nation during2010 but do not expect the network buildout, which will occur as a result ofthat grant, to significantly impact revenue during 2010.

 

*International Wireless revenue.*  International Wireless revenue includesretail and wholesale voice and data wireless revenue from internationaloperations in Guyana, Bermuda, Turks and Caicos and the U.S Virgin Islands.

 

International Wireless revenue increased by $1.1 million to$12.5 million for the three months ended June 30, 2010, from $11.4million for the three months ended June 30, 2009.  Wireless subscribers in Guyana increased 9%,from approximately 266,000 subscribers as of June 30, 2009 toapproximately 290,000 subscribers as of June 30, 2010. Wirelesssubscribers in Bermuda increased moderately to 20,800 for the three monthsended June 30, 2010 from 20,200 for the three months ended June 30,2009, respectively.

 

Whilewe have experienced recent subscriber growth in Guyana, competition remainsintense, and the largely pre-paid subscriber base means that subscribers andrevenue could shift relatively quickly in future periods. In addition, theoverall number of our wireless subscribers in Guyana could be reduced as aresult of recent regulations imposed on Guyana telecommunications carriers,including our Guyana operations, to collect proof of address and photographicidentification for all new and existing customers.

 

*Wireline revenue.*  Wireline revenue is generated by our wirelineoperations in Guyana, including international telephone calls into and out ofGuyana, our integrated voice and data operations in New England and ourwholesale transport operations in New York State and in the western UnitedStates. This revenue includes basic service fees, measured service revenue, andinternet access fees, as well as installation charges for new lines, monthlyline rental charges, long distance or toll charges, maintenance and equipmentsales.

 

Wireline revenue increased by $1.0 million to $23.2 million forthe three months ended June 30, 2010 from $22.2 million for the threemonths ended June 30, 2009. The increase is attributable to localtelephone and data revenue in our Guyana markets partially offset by a decreasein international long distance revenue. Our access lines in Guyana grew fromapproximately 142,000 lines as of June 30, 2009 to approximately 149,000lines as of June 30, 2010 (an increase of 5%). Revenue from the growth inaccess lines has been partially offset by a decrease in usage that is likelydue to wireless service alternatives.

 

For the quarter, we experienced a decrease in international longdistance revenue at our Guyana operations. We believe this decrease is a result of continued and considerableillegal bypass activities resulting in lost revenue opportunities, as well asan overall reduction in call volume into Guyana attributable to the currentdifficult global economic environment. In the U.S., we saw increased revenue from our upstate New York networktransport service business. We continue to add business customers for our voiceand data services; however, the overall revenue increase is partially offset bythe decline in the residential data business, particularly dial-up internetservices.

 

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In future periods, we anticipate that wireline revenue from ourinternational long distance business in Guyana may continue to decrease, butmay be offset by increased revenue from local telephone and voice services inGuyana, as well as high-speed data sales in New York. While we expect to expandour network in New York and receive a portion of the $39.7 millionstimulus grant during 2010, we do not expect the network buildout to becompleted during 2010 and thus we are not expecting that grant to significantlyimpact revenue for 2010.

 

*Equipment and Other revenue.*  Equipment revenue represents revenue fromwireless equipment sales and other miscellaneous revenue items.

 

Equipment and Other revenue increased by $6.6 million to$7.6 million for the three months ended June 30, 2010, from $1.0million for the three months ended June 30, 2009. The increase is due toequipment sales from our recent Alltel acquisition.

 

*Termination and access fee expenses*.  Termination and access fee expenses arecharges that we pay for voice and data transport circuits (in particular, thecircuits between our wireless sites and our switches), internet capacity andother access fees we pay to terminate our calls.  Termination and access fees increased by$29.7 million from $11.4 million for the three months ended June 30,2009 to $41.1 million for the three months ended June 30, 2010, as aresult of the Alltel Acquisition.

 

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

 

*Engineering and operations expenses.*  Engineering and operations expenses includethe expenses associated with developing, operating, supporting and expandingour networks, including the salaries and benefits paid to employees directlyinvolved in the development and operation of our networks.  Engineering and operations expenses increasedby $10.6 million from $7.5 million for the three months endedJune 30, 2009 to $18.1 million for the three months ended June 30,2010 as a result of the Alltel Acquisition. We expect that engineering and operations expenses will increase in thefuture as our networks expand and require additional support and as wetransition the network that we recently acquired as part of the AlltelAcquisition.

 

*Sales marketing and customer service expenses.*  Sales and marketing expenses include salariesand benefits we pay to sales personnel, customer service expenses, salescommissions and the costs associated with the development and implementation ofour promotion and marketing campaigns.

 

Sales and marketing expenses increased by $27.8 million from$3.3 million for the three months ended June 30, 2009 to$31.1 million for the three months ended June 30, 2010. The majorityof this increase is the result of the Alltel Acquisition.

 

Due to our Alltel Acquisition, we expect that sales and marketingexpenses will increase substantially in future periods.

 

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

 

Equipment Expenses increased from $0.5 million for the three monthsended June 30, 2010 to $10.1 million for the three months ended June 30,2009. We expect that with respect to the equipment acquired as part of theAlltel Acquisition, these expenses will increase in future periods with ourexpanded operations, but to remain proportionate to our equipment revenue.

 

*General and administrative expenses.*  General and administrative expenses includesalaries, benefits and related costs for general corporate functions, includingexecutive management, finance and administration, legal and regulatory,facilities, information technology and human resources.  General and administrative expenses alsoinclude internal costs associated with our pending or completed acquisitions.

 

General and administrative expenses increased by $17.2 million from$9.4 million for the three months ended June 30, 2009 to $26.6million for the three months ended June 30, 2010. This increase resultedfrom the Alltel Acquisition as well as increased overhead to support our growthand internal costs associated with the acquisition.

 

We expect overall general and administrative expenses to increase bothin order to aid our transition efforts in relation to the Alltel Acquisitionand to support our growth in our new U.S. retail wireless business.  We expect that these increased expenses willcontinue to overlap during the next three to four quarters, and afterwards weexpect that the expenses, as a percentage of revenue, will decrease.

 

*Acquisition-related charges.*  Acquisition-related charges include theexternal costs, such as legal, accounting, and consulting fees directlyassociated with acquisition related activities, which are expensed as incurred.Acquisition-related charges do not include internal costs,

 

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suchas employee salary and travel-related expenses, which we incurred during thethree months ended June 30, 2010 in connection with the AlltelAcquisition.

 

For the three months ended June 30, 2010, acquisition-relatedcharges for legal, banking, consulting and accounting fees were$11.0 million (including, in part, invoiced amounts disputed but not yetresolved by the Company), all of which were attributable to closing theApril 2010 Alltel Acquisition, as compared to $0.4 million for the threemonths ended June 30, 2009.  As the Company continues to explore anyadditional acquisition opportunities that arise and may meet our investmentobjectives, we expect that acquisition-related expenses will continue to beincurred.

 

*Depreciation and amortization expenses.*  Depreciation and amortization expensesrepresent the depreciation and amortization charges we record on our propertyand equipment and on our intangible assets.

 

Depreciation and amortization expenses increased by $8.7 millionfrom $9.8 million for the three months ended June 30, 2009 to$18.5 million for the three months ended June 30, 2010. The increaseis primarily due to the addition of the Alltel tangible and intangible assetsas well as additional fixed assets from our network expansion in our U.S.Wireless business.

 

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

 

*Interest expense.*  Interest expense represents interest incurredon our outstanding credit facilities.

 

Interest expense increased from $1.2 million for the three monthsended June 30, 2009 to $2.4 million for the three months endedJune 30, 2010, due to the amendment of our 2008 Credit Facility and ourincreased debt under the 2010 Credit Facility. On January 20, 2010, the Company entered into the 2010 CreditFacility, which increased both the amounts available for borrowings by theCompany and the applicable interest rates on such borrowings.  As of June 30, 2010, we had $72.0million outstanding under our 2010 Term Loan A facility, and $148.1 millionoutstanding under our 2010 Term Loan B facility.  We also had $40 million in outstanding borrowingsunder our 2010 Revolver Loan as of June 30, 2010.  For a discussion of the Company’s 2010 CreditFacility, see Note 6 to the Consolidated Financial Statements and “—Liquidityand Capital Resources.”

 

*Interest income.*  Interest income represents interest earned onour cash, cash equivalents and short term investments.

 

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

 

*Bargain purchase gain, net of tax.*Bargain purchase gain, netof tax, represents the gain the Company recognized on the Alltel Acquisition.This gain was a result of a bargain purchase generated by the forced divestureof the assets that was required to be completed by Verizon within a registeredtimeframe to a limited class of potential buyers.

 

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

 

*Income taxes*.  Income taxexpense includes federal and state income taxes at their respective statutoryrates as well as foreign income taxes in excess of the statutory U.S. incometax rates. Since we operate in jurisdictions that have a wide range ofstatutory tax rates, our consolidated effective tax rate is impacted by the mixof income generated in those jurisdictions as well as the receipt of dividendsfrom our foreign subsidiaries. Our effective tax rate was 42% for the threemonths ended June 30, 2009 and 24% for the three months ending June 30,2010.For 2010, the effective tax rate was reduced by the bargain purchase gainwhich is shown net of tax on our statements of operations.  Partially offsetting this reduction was a$5.2 million expense related to an increase in valuation allowance against theCompany's foreign tax credit carryforward. As part of its acquisition of assets from Alltel and the associatedlevels of future debt and interest service, the Company re-examined itsprojected mix of foreign source and US-source earnings and concluded it is morelikely than not that it will not generate enough foreign source income toutilize its existing foreign tax credits prior to their expiration date.  As a result, the Company has placed a fullvaluation allowance against those credits.

 

*Equity in earnings of unconsolidated affiliates. *    Equityin earnings of unconsolidated affiliates included our share of the earnings ofan unconsolidated affiliate of our U.S. Wireless segment. Equity in earnings ofunconsolidated affiliates was $0.3 million for the three months ended June 30,2010.

 

*Net Income Attributable to Non-Controlling Interests.*   Net income attributable to non-controllinginterests includes minority shareholders’ share of net income in our less thanwholly owned subsidiaries.

 

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Net income attributable to non-controlling interests decreased from$0.3 million for the three months ended June 30, 2009 to a $0.2 millionfor the three months ended June 30, 2010. This decrease was a result ofthe allocation of non-controlling shareholders’ share of losses at our earlystage businesses.

 

*Net income attributable to Atlantic Tele-Network, Inc.Stockholders.*  As a resultof the above factors, net income increased to $24.8 million for the threemonths ended June 30, 2010 from $9.6 million for the three months ended June 30,2009. On a per share basis, net income increased from $0.63 per basic anddiluted share to $1.62 per basic and $1.60 per diluted share for the threemonths ended June 30, 2009 to 2010, respectively.

 

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

 

***Six Months Ended June 30, 2010and 2009***

 
| ** **                                                                    | ** ** | **Six Months Ended  June 30,** | ** ** | **Amount of  Increase** | ** ** | **Percent  Increase** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2009**                            | ** ** | **2010**                | ** ** | **(Decrease)**        | ** ** | **(Decrease)** | ** ** |
| ** **                                                                    | ** ** | **(In thousands)**                  | ** ** |
| **REVENUE:**                                                                  |       |                                |       |                    |       |                  |       |   |   |
| US  Wireless:                                                                 |       |                                |       |                    |       |                  |       |   |   |
| Retail                                                                        |       | $                                   | —     |                    | $          | 81,507                |       | $ | 81,507 |   | — | % |
| Wholesale                                                                     |       | 47,439                              |       | 62,481                  |       | 15,042                |       | 31.7 |   |
| International  Wireless                                                       |       | 22,030                              |       | 23,449                  |       | 1,419                 |       | 6.4 |   |
| Wireline                                                                      |       | 44,666                              |       | 43,751                  |       | (915                  | )          | 2.0 |   |
| Equipment  and Other                                                          |       | 2,380                               |       | 8,071                   |       | 5,691                 |       | 239.1 |   |
| Total  revenue                                                                |       | 116,515                             |       | 219,259                 |       | 102,744               |       | 88.2 |   |
| **OPERATING EXPENSES:**                                                       |       |                                |       |                    |       |                  |       |   |   |
| Termination  and access fees                                                  |       | 22,828                              |       | 52,363                  |       | 29,535                |       | 129.4 |   |
| Engineering  and operations                                                   |       | 14,456                              |       | 24,542                  |       | 10,086                |       | 69.8 |   |
| Sales,  Marketing and Customer Services                                       |       | 6,309                               |       | 34,448                  |       | 28,139                |       | 446.0 |   |
| Equipment  Expense                                                            |       | 1,082                               |       | 10,852                  |       | 9,770                 |       | 903.0 |   |
| General  and administrative                                                   |       | 17,599                              |       | 37,413                  |       | 19,814                |       | 112.6 |   |
| Acquisition-related  charges                                                  |       | 358                                 |       | 15,834                  |       | 15,476                |       | — |   |
| Depreciation  and amortization                                                |       | 18,994                              |       | 28,611                  |       | 9,617                 |       | 50.6 |   |
| Total  operating expenses                                                     |       | 81,626                              |       | 204,063                 |       | 122,437               |       | 150.0 |   |
| Income  from operations                                                       |       | 34,889                              |       | 15,196                  |       | (19,693               | )          | (56.4 | ) |
| **OTHER INCOME (EXPENSE):**                                                   |       |                                |       |                    |       |                  |       |   |   |
| Interest  expense                                                             |       | (2,354                              | )          | (3,654                  | )          | (1,300                | )          | (55.2 | ) |
| Interest  income                                                              |       | 708                                 |       | 238                     |       | (470                  | )          | (66.4 | ) |
| Gain  on acquisition, net of tax                                              |       | —                              |       | 27,024                  |       | 27,024                |       | — |   |
| Other  income (expense), net                                                  |       | 36                                  |       | 230                     |       | 194                   |       | 538.9 |   |
| Other  income, net                                                            |       | (1,610                              | )          | 23,838                  |       | 25,448                |       | 1,580.6 |   |
| **INCOME BEFORE INCOME TAXES**                                                |       | 33,279                              |       | 39,034                  |       | 5,755                 |       | 17.3 |   |
| Income  taxes                                                                 |       | 14,298                              |       | 10,425                  |       | (3,873                | )          | (27.1 | ) |
| **INCOME BEFORE EQUITY IN EARNINGS OF UNCONSOLIDATED  AFFILIATE**             |       | 18,981                              |       | 28,609                  |       | 9,628                 |       | 50.7 |   |
| Equity  in earnings of unconsolidated affiliate                               |       | —                              |       | 290                     |       | 290                   |       | — |   |
| **NET INCOME**                                                                |       | 18,981                              |       | 28,899                  |       | 9,918                 |       | 52.2 |   |
| Net  income attributable to non-controlling interests                         |       | (543                                | )          | (90                     | )          | 453                   |       | 83.4 |   |
| **NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC.  STOCKHOLDERS** |       | $                                   | 18,438     |                    | $          | 28,809                |       | $ | 10,371 |   | 56.2 | % |

 

*U.S. Wireless revenue.*  The retail portion of our U.S. Wireless revenuewas $81.5 million for the six months ended June 30, 2010 as a result ofour April 26, 2010 Alltel Acquisition. Our U.S. Wireless prepaidsubscriber base was 230,000, and post-paid subscribers were 577,000 at June 30,2010.

 

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The wholesale portion of our U.S. Wireless revenue increased to $62.5million for the six months ended June 30, 2010 from $47.4 million forthe six months ended June 30, 2009, an increase of $15.1 million. Theincrease in wireless wholesale revenue was predominately due to the roamingrevenue generated by the networks in our recently completed Alltel Acquisition.Base stations in our rural U.S. network increased from 537 as of June 30,2009 to 598 as of June 30, 2010. The roaming traffic generated in the Alltel footprint contributedapproximately $13.7 million in wholesale revenue for the six months ended June 30,2010.

 

*International Wireless revenue.*  International Wireless revenue increased by$1.4 million to $23.4 million for the six months ended June 30, 2010,from $22.0 million for the six months ended June 30, 2009.  Wireless subscribers in Guyana increased 9%,from approximately 266,000 subscribers as of June 30, 2009 toapproximately 290,000 subscribers as of June 30, 2010. Wirelesssubscribers in Bermuda increased moderately to 20,800 for the three monthsended June 30, 2010 from 20,200 for the three months ended June 30,2009, respectively.

 

*Wireline revenue.*  Wireline revenue decreased by $0.9 million to$43.8 million for the six months ended June 30, 2010 from$44.7 million for the six months ended June 30, 2009. The decrease isattributable to a decrease in international long distance revenue in Guyana. Ouraccess lines in Guyana grew from approximately 142,000 lines as ofJune 30, 2009 to approximately 149,000 lines as of June 30, 2010 (anincrease of 5%). Revenue from the growth in access lines has been partiallyoffset by a decrease in usage that is likely due to wireless servicealternatives.

 

*Equipment and Other revenue.*  Equipment and other revenue increased by $5.7million to $8.1 million for the six months ended June 30, 2010, from$2.4 million for the six months ended June 30, 2009. The increase is dueto equipment sales from our recently acquired U.S. retail wireless operations,offset by a decrease in revenues from our television business in the U.S.Virgin Islands, which we terminated in May of 2009.

 

*Termination and access fee expenses*.  Termination and access fees increased by $29.6million from $22.8 million for the six months ended June 30, 2009 to$52.4 million for the six months ended June 30, 2010, as a result of theAlltel Acquisition.

 

*Engineering and operations expenses.*    Engineering and operations expensesincreased by $10.0 million from $14.5 million for the six months endedJune 30, 2009 to $24.5 million for the six months ended June 30, 2010as a result of the Alltel Acquisition.

 

*Sales marketing and customer service expenses.*  Sales and marketing expenses increased by$28.1 million from $6.3 million for the six months endedJune 30, 2009 to $34.4 million for the six months ended June 30,2010. The majority of this increase is the result of the recently completedAlltel Acquisition.

 

*Equipment expenses.*  Equipment Expenses increased from $1.1million for the six months ended June 30, 2010 to $10.9 million for thesix months ended June 30, 2009 as a result of the Alltel Acquisition.

 

*General and administrative expenses.*  General and administrative expenses increasedby $19.8 million, or 113%, from $17.6 million for the six months endedJune 30, 2009 to $37.4 million for the six months ended June 30,2010. This increase resulted from the recently completed Alltel Acquisition,which was completed in April 2010, as well as increased overhead tosupport our growth and internal costs associated with the acquisition.

 

*Acquisition-related charges.*  For the six months ended June 30, 2010,acquisition-related charges for legal, banking, consulting and accounting fees were$15.8 million (including, in part, invoiced amounts disputed but not yetresolved by the Company), all of which were attributable to closing theApril 2010 Alltel Acquisition, as compared to $0.4 million for the sixmonths ended June 30, 2009.

 

*Depreciation and amortization expenses.*  Depreciation and amortization expensesincreased by $9.6 million, or 51%, from $19.0 million for the sixmonths ended June 30, 2009 to $28.6 million for the six months endedJune 30, 2010. The increase is primarily due to the addition of the Allteltangible and intangible assets as well as additional fixed assets from ournetwork expansion in our U.S. Wireless business.

 

*Interest expense.*  Interest expense increased from$2.4 million for the six months ended June 30, 2009 to $3.7 millionfor the six months ended June 30, 2010, due to the amendment of ourexisting credit facility.  On January 20,2010, the Company entered into an amended and restated credit agreement, whichincreased both the amounts available for borrowings by the Company and theapplicable interest rates on such borrowings. As of June 30, 2010, we had $72.0 million outstanding under our2010 Term Loan A facility and $148.1 million outstanding under our 2010 TermLoan B facility.  We had $40 million inoutstanding borrowings under our revolving line of credit as of June 30,2010.

 

For a discussion of the Company’s 2010 Credit Facility, see Note 6 tothe Consolidated Financial Statements.

 

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*Interest income.*  Interest income decreased to$0.2 million from $0.7 million for the six months ended June 30,2010 and 2009, respectively. This decrease is a result of a decrease in ourcash balances as well as in the interest rates and subsequent amounts earned onour cash and investments.

 

*Other income (expense). * For the six months ended June 30,2010 Other income was $0.2 million.

 

*Income taxes.*  Our effectivetax rate was 42% for the six months ended June 30, 2009 and 27% for the sixmonths ending June 30, 2010.For 2010, the effective tax rate was reduced by thebargain purchase gain which is shown net of tax on our statements ofoperations.  Partially offsetting thisreduction was a $5.2 million expense related to an increase in valuationallowance against the Company's foreign tax credit carryforward.  As part of its acquisition of assets fromAlltel and the associated levels of future debt and interest service, theCompany re-examined its projected mix of foreign source and US-source earningsand concluded it is more likely than not that it will not generate enoughforeign source income to utilize its existing foreign tax credits prior totheir expiration date.  As a result, theCompany has placed a full valuation allowance against those credits.

 

*Equity in earnings of unconsolidated affiliates. *  Equity in earnings of unconsolidated affiliates was $0.3 million for the sixmonths ended June 30, 2010.

 

*Net Income Attributable to Non-Controlling Interests.*  Net income attributable to non-controllinginterests decreased from $0.5 million for the six months ended June 30,2009 to $0.1 million for the six months ended June 30, 2010. This decreasewas a result of the allocation of non-controlling shareholders’ share of lossesat our early stage businesses.

 

*Net income attributable to Atlantic Tele-Network, Inc.Stockholders.*  As a resultof the above factors, net income increased to $28.8 million for the six monthsended June 30, 2010 from $18.4 million for the six months ended June 30,2009. On a per share basis, net income increased from $1.21 per basic anddiluted share to $1.89 per basic and $1.86 per diluted share for the six monthsended June 30, 2009 and 2010, respectively.

 

**Regulatoryand Tax Issues**

 

We are involved in a number of regulatory and tax proceedings. See Note11 to the Consolidated Financial Statements included in this Report. A materialand adverse outcome in one or more of these proceedings could have a materialadverse impact on our financial condition and future operations.

 

**Liquidityand Capital Resources**

 

Historically, we have met our operational liquidity needs through acombination of cash on hand and internally generated funds and have fundedcapital expenditures and acquisitions with a combination of internallygenerated funds, cash on hand and borrowings under our credit facilities.

 

***Uses of Cash***

 

*Capital Expenditures.*  A significant use of our cash has been forcapital expenditures to expand and upgrade our networks.

 

For the six months ended June 30, 2009 and 2010, we spentapproximately $27.5 million and $52.0 million on capital expenditures,respectively. Of the 2010 capital expenditures, we spent approximately $25.5million in our U.S. Wireless segment, expanding our retail and wholesalenetworks. Also included in our costs are one-time costs associated withdeveloping our billing, point-of-sale and other OSS and BSS systems, and costsrelated to network migration following the Alltel closing. In our InternationalIntegrated Telephony segment, we spent approximately $13.5 million on capitalexpenditures, of which $9.3 million was related to construction costs on a newfiber optic submarine cable into Guyana which we launched in July 2010,while the remainder of the capital expenditures in this segment was for theexpansion of the capacity and coverage of our wireline and wireless network inGuyana. In addition, we invested $9.4 million in capital expenditures in ourIsland Wireless segment with $6.9 million of which related to two wirelessnetwork build-outs in the U.S. Virgin Islands, which are expected to launch laterin 2010. A majority of the remaining Island Wireless capital expenditures wasincurred in Turks and Caicos in connection with our network development andexpansion which we launched in June 2010.

 

We are continuing to invest in expanding our networks in many of ourmarkets and expect to incur capital expenditures between $130 million and $140million in 2010.  The majority of theseexpenditures, and the increase from our previous estimate, relate to our U.Swireless business.  Specifically weanticipate expenditures of between $70 million to $80 million in our U.S.retail wireless business primarily related to one-time costs for networkmigration and information technology and system conversion costs in conjunctionwith our integration of our newly acquired wireless assets.  The balance is comprised of several capitalprojects inherited with our Alltel Acquisition that we intend to completeduring 2010.  This 2010 estimate alsoincludes approximately $15 million to $20 million relating to the constructionof the submarine fiber optic cable in Guyana and wireless network build-out inthe

 

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U.S.Virgin Islands, most of which was incurred in the first half of 2010.  We expect to fund our current capitalexpenditures primarily from cash generated from our operations, and borrowingsagainst our new line of credit.  We arealso seeking to expand our existing credit facility by an additional $75million.

 

*Acquisitions and Investments.*  Historically, we have funded our acquisitionswith a combination of cash on hand and borrowings under our credit facilities.In April 2010, we funded the purchase price of the Alltel Acquisition withcash-on-hand and borrowings under our existing credit facility.  We drew down a $150 million term loan underthe credit facility and borrowed $40 million under our previously undrawn $75million revolving credit facility. In the third quarter of 2010 we drew down anadditional $4.0 million from our revolving credit facility.

 

We also continue to explore opportunities to acquire or expand ourexisting communications properties or licenses in the United States, theCaribbean and elsewhere.  Suchacquisitions may require external financing. While there can be no assurance asto whether, when or on what terms we will be able to acquire any suchbusinesses or licenses or make such investments, such acquisitions may beaccomplished through the issuance of shares of our capital stock, payment ofcash or incurrence of additional debt. From time to time, we may raise capital ahead of any definitive use ofproceeds to allow us to move more quickly and opportunistically if anattractive investment materializes.

 

*Dividends.*  We use cash-on-hand to make dividend paymentsto our common stockholders when declared by our Board of Directors. For the sixmonths ended June 30, 2010, our dividends to our stockholders approximated$6.1 million, which reflects dividends declared on April 1 and June 18,2010, and paid on April 19 and July 12, 2010, respectively. We havepaid quarterly dividends for the last 47 fiscal quarters.

 

*Stock Repurchase Plan.*  Our Board of Directors approved a $5.0million stock buyback plan in September 2004 pursuant to which we havespent $2.1 million as of June 30, 2010 repurchasing common stock. We mayrepurchase shares at any time depending on market conditions, our availablecash and our cash needs. We did not repurchase any shares under this planduring the six months ended June 30, 2010.

 

***Sources of Cash***

 

*Total Liquidity at June 30, 2010.*  As of June 30, 2010, we hadapproximately $57.6 million in cash and cash equivalents, a decrease of $32.6million from the December 31, 2009 balance of $90.2 million. In addition, wehave $2.4 million in restricted cash escrowed for payment on the undersea cablein Guyana as of June 30, 2010. We are currently seeking to expand our creditfacility by $75 million to allow more flexibility for spending on operating andcapital needs, and expect to close on the expanded credit facility by the endof September 2010.

 

*Cash Generated by Operations.*  Cash provided by operating activities was$60.7 million for the six months ended June 30, 2010 compared to $45.9million for the six months ended June 30, 2009. The increase of $14.8million was primarily due to an increase in net income and accrued liabilities forthe six months ended June 30, 2010 as compared to June 30, 2009.

 

*Cash Generated by Financing Activities.*  On January 20, 2010, we amended andrestated our 2008 Credit Facility with CoBank as Administrative Agent. (the “2010CoBank Credit Agreement”). The 2010 CoBank Credit Agreement provides for a$298.9 million credit facility, consisting of a $73.9 million term loan (the “2010Term Loan A”), a $150.0 million term loan (the “2010 Term Loan B”) and a $75.0million revolver loan (the “2010 Revolver Loan,” and together with the 2010Term Loan A and 2010 Term Loan B, the “2010 Credit Facility”). The 2010 CreditFacility also provides for one or more additional term loans up to an aggregate$50.0 million, subject to lender and administrative agent approval.

 

As of June 30, 2010, $72.0 million was outstanding under the 2010Term Loan A, an amount equal to the outstanding principal amount under the 2008Term Loan and $148.1 million was outstanding under the 2010 Term Loan B.  The borrowings under the 2010 Term Loan B and2010 Revolver Loan were used to fund a portion of the purchase price of theAlltel Acquisition as well as capital expenditures, as discussed above.

 

The 2010 Term Loan A and the 2010 Term Loan B eachmature on September 30, 2014, with certain quarterly repayment obligationsdescribed below, unless accelerated pursuant to an event of default, asdescribed below. The 2010 Revolver Loan matures on September 10, 2014,unless accelerated pursuant to an event of default, as described below. Amountsborrowed under the 2010 Term Loan A, 2010 Term Loan B and the 2010 RevolverLoan bear interest at a rate equal to, at our option, either (i) theLondon Interbank Offered Rate (LIBOR) plus an applicable margin ranging between3.50% to 4.75% or (ii) a base rate plus an applicable margin ranging from2.50% to 3.75%. We are not required to apply a minimum LIBOR percentage for anyloans bearing interest at the LIBOR rate. The base rate is equal to the higherof either (i) 1.50% plus the higher of (x) the one-week LIBOR and (y) theone-month LIBOR and (ii) the prime rate (as defined in the creditagreement). The applicable margin is determined based on the ratio of ourindebtedness (as defined in the credit agreement) to our EBITDA (as defined inthe credit agreement).

 

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Allamounts outstanding under the 2010 Revolver Loan will be due and payable uponthe earlier of the maturity date or the acceleration of the loan upon an eventof default. Amounts outstanding under the 2010 Term Loan A and the 2010 TermLoan B became due and payable commencing on March 31, 2010 and June 30,2010, respectively,  in quarterlypayments equal to 1.25% of the initial principal amount outstanding under eachloan, increasing to 2.50% of the initial principal amount outstandingcommencing on March 31, 2012. Remaining balances will be due and payableupon maturity, unless the loans are accelerated upon an event of default.

 

Certain subsidiaries, including our principal wholly-owned domesticoperating subsidiaries, are guarantors of our obligations under the 2010 CoBankCredit Agreement.  Further, ourobligations are secured by (i) a first priority, perfected lien onsubstantially all of our property and assets and the guarantor subsidiaries,and (ii) a pledge of 100% of the Company’s equity interests in certaindomestic subsidiaries and up to 65% of the equity interests outstanding ofcertain foreign subsidiaries, in each case, including the Company’s principaloperating subsidiaries.

 

The 2010 CoBank Credit Agreement provides for events of defaultcustomary for credit facilities of this type, including but not limited tonon-payment, defaults on other debt, misrepresentation, breach of covenants,representations and warranties, insolvency and bankruptcy. After the occurrenceof an event of default and for so long as it continues, the administrativeagent or the requisite lenders (as defined in the credit agreement) mayincrease the interest rate then in effect on all outstanding obligations by2.0%. Upon an event of default relating to insolvency, bankruptcy orreceivership, the amounts outstanding under the 2010 Credit Facility willbecome immediately due and payable and the lender commitments will beautomatically terminated. Upon the occurrence and continuation of any otherevent of default, the administrative agent and/or the requisite lenders (asdefined in the credit agreement) may accelerate payment of all obligations andterminate the lenders’ commitments under the 2010 CoBank Credit Agreement.

 

OnSeptember 23, 2008, we executed a forward starting interest rate swap. Ourobjective in using the derivative is to add stability to interest expense andto manage our exposure to adverse changes in interest rates. The interest rateswap has an initial notional amount of $68 million, receives 1 month LIBOR, andpays a fixed rate of 4.42%. The interest rate swap agreement effectivelyconverts the variable interest payments on the first $68 million of our termdebt to a fixed rate of 4.42% plus our credit spread, over the life of theagreement. The interest rate swap agreement has a maturity date of September 15,2015.

 

OnJuly 26, 2010, we executed an additional interest rate swap with anotional amount of $30 million that was also designated as a cash flow hedge ofinterest rate risk. The results of such derivative will be reported in ourfinancial results for the quarter ending September 30, 2010.

 

***Factors Affecting Sources of Liquidity***

 

*Internally Generated Funds.*  The key factors affecting our internallygenerated funds are demand for our services, competition, regulatorydevelopments, economic conditions in the markets where we operate ourbusinesses and industry trends within the telecommunications industry. For adiscussion of tax and regulatory risks in Guyana that could have a materialadverse impact on our liquidity, see “Risk Factors—Risks Relating to OurWireless and Wireline Services in Guyana”, and “Business—Regulation of OurGT&T Subsidiary” in our 2009 Form 10-K and Note 11 to the CondensedConsolidated Financial Statements included in this Report.

 

*Restrictions Under Credit Facility.*  The 2010 CoBank Credit Agreement containscustomary representations, warranties and covenants, including covenants by uslimiting additional indebtedness, liens, guaranties, mergers andconsolidations, substantial asset sales, investments and loans, sale andleasebacks, transactions with affiliates and fundamental changes. In addition,the 2010 Credit Facility contains financial covenants by us that (i) imposea maximum ratio of indebtedness (as defined in the credit agreement) to EBITDA(as defined in the credit agreement), (ii) require a minimum ratio ofEBITDA to cash interest expense, (iii) require a minimum ratio of equityto consolidated assets and (iv) require a minimum ratio of EBITDA to fixedcharges (as defined in the credit agreement). As of June 30, 2010, we werein compliance with all of the financial covenants of the 2010 CoBank CreditAgreement.

 

*Capital Markets.*  Our ability to raise funds in the capitalmarkets depends on, among other things, general economic conditions, theconditions of the telecommunications industry, our financial performance, thestate of the capital markets and our compliance with Securities and ExchangeCommission (“SEC”) requirements for the offering of securities. On May 13,2010, the SEC declared effective a new “universal” shelf registration statementfiled by the Company. This filing registered potential future offerings by theCompany of the Company’s securities.

 

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**Recent Accounting Pronouncements**

 

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

 

InJune 2009, the FASB issued new authoritative guidance that amends certainguidance for determining whether an entity is a variable interest entity (VIE).The guidance requires an enterprise to perform an analysis to determine whetherthe Company’s variable interests give it a controlling financial interest in aVIE. A company would be required to assess whether it has an implicit financialresponsibility to ensure that a VIE operates as designed when determiningwhether it has the power to direct the activities of the VIE that mostsignificantly impact the entity’s economic performance. In addition, thisguidance amends earlier guidance requiring ongoing reassessments of whether anenterprise is the primary beneficiary of a VIE. The guidance is effective forthe Company for fiscal year 2010. The adoption of the provisions of thisguidance, which was effective January 1, 2010, did not have a materialimpact on the consolidated financial statements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*Foreign Currency Exchange Sensitivity.*  GT&T’s functional currency is the U.S.dollar because a significant portion of GT&T’s revenue and expenditures aretransacted in U.S. dollars. The results of future operations nevertheless maybe affected by changes in the value of the Guyana dollar; however, the Guyaneseexchange rate has remained at approximately $205 Guyana dollars to $1 U.S.dollar since 2004 so we have not recorded any foreign exchange gains or lossessince that date. All of our other foreign subsidiaries operate in jurisdictionswhere the U.S. dollar is the recognized currency.

 

*Interest Rate Sensitivity.*  Our exposure to changes in interest rates islimited and relates primarily to our variable interest rate long-term debt. Asof June 30, 2010, $68.0 million of our long term debt has a fixed rate byway of an interest-rate swap that effectively hedges our interest rate risk.The remaining $192.0 million of long term debt as of June 30, 2010, wassubject to interest rate risk. As a result, a 1% increase in the variableborrowing rate associated with our variable rate debt would result inadditional annualized interest expense of $1.9 million. As of July 26,2010, the Company executed an additional interest rate swap with a notionalamount of $30 million that was also designated as a cash flow hedge of interestrate risk. The results of such derivative will be reported by the Company alongwith financial results as of September 30, 2010.  We continue to evaluate our exposure tointerest rate risk, including additional hedging opportunities. If the companydecides against any additional hedges, our exposure to fluctuations in interestrates could have a material impact on our financial statements.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures as of June 30, 2010.  Theterm “disclosure controls and procedures,” as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), means controls and other proceduresof an issuer that are designed to ensure that information required to bedisclosed by the issuer in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Based on theevaluation of our disclosure controls and procedures as of June 30, 2010,our Chief Executive Officer and Chief Financial Officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level to ensure that information required to be disclosedby us in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer as appropriate to allow timely decisions regarding requireddisclosure.

 

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*Changes in internalcontrol over financial reporting.*  Our management, with the participation of ourprincipal executive officer and principal financial officer, is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, asamended.  ATN considers the AlltelAcquisition completed on April 26, 2010 as material to the results of itsoperations, financial position and cash flows from the date of acquisitionthrough June 30, 2010 and considers the internal controls and proceduresrelating to the acquired Alltel operations to be reasonably likely tomaterially affect the ATN’s internal control over financial.  The Company plans to utilize the scopeexception as it relates to the Alltel operations in management's report oninternal control over financial reporting for the year-ended December 31, 2010.

 

**PART II—OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

SeeNote 11 to the Condensed Consolidated Financial Statements included in thisReport.

 

**Item 1A. Risk Factors**

 

In addition to the otherinformation set forth in this Report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our 2009 Annual Report onForm 10-K as filed with the SEC on March 16, 2010, and Part II, “Item1A. Risk Factors” in our Quarterly Report on Form 10-Q, for the quarterlyperiod ended March 31, 2010, as filed with the SEC on April 10, 2010,which could materially affect our business, financial condition or futureresults. The risks described in our 2009 Form 10-K and first quarter 2010 Form 10-Qare not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**Item 2.  Unregistered Sales of Equity Securities and Use ofProceeds**

 

InSeptember 2004, the Board of Directors authorized the Company torepurchase up to $5.0 million of common stock. The repurchase authorizations donot have a fixed termination date and the timing of the buyback amounts andexact number of shares purchased will depend on market conditions.

 

Thefollowing table reflects the repurchases by the Company of its common stockduring the quarter ended June 30, 2010:

 
| **Period**                                    | ** ** | **(a)  Total Number  of Shares  Purchased** | ** ** | **(b)  Average  Price  Paid per  Share** | ** ** | **(c)  Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **(d)  Maximum  Number (or  Approximate  Dollar Value) of  Shares that May  be Purchased  Under the Plans or  Programs** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2010 — April 30, 2010 |       | —                                      |       | $                                        | —     |                                                                                               | —     |                                                                                                                     | $          | 2,808,173 |   |
| May 1, 2010 — May 31, 2010     |       | —                                      |       | $                                        | —     |                                                                                               | —     |                                                                                                                     | $          | 2,808,173 |   |
| June 1, 2010 — June 30, 2010   |       | —                                      |       | $                                        | —     |                                                                                               | —     |                                                                                                                     | $          | 2,808,173 |   |

 

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**Item 6. Exhibits**

 
| 2.1    |   | Purchase  Agreement by and between Atlantic Tele-Network, Inc. and Cellco  Partnership d/b/a Verizon Wireless, dated as of June 9, 2009 (incorporated  by reference to Exhibit 2.1 of the Company’s Current Report on  Form 8-K filed on June 15, 2009 (File No. 001-12593)). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Offer  Letter by and between Atlantic Tele-Network, Inc. and Leonard Q. Slap,  dated May 27, 2010 (incorporated by reference to Exhibit 10.1 of  the Company’s Current Report on Form 8-K filed on May 27, 2010  (File No. 001-12593)).                                       |
|   |   |                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                       | Atlantic  Tele-Network, Inc.      |
|----------------------------|----------------------------------------|
|                       |                                   |
| Date:  August 9, 2010 | /s/  Michael T. Prior                  |
|                       | Michael  T. Prior                      |
|                       | President  and Chief Executive Officer |
|                       |                                   |
| Date:  August 9, 2010 | /s/  Justin D. Benincasa               |
|                       | Justin  D. Benincasa                   |
|                       | Chief  Financial Officer and Treasurer |

 

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**EXHIBIT INDEX**

 
| **Item  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                  |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                                                                                                                                                                                                             |
| 2.1           |       | Purchase  Agreement by and between Atlantic Tele-Network, Inc. and Cellco  Partnership d/b/a Verizon Wireless, dated as of June 9, 2009  (incorporated by reference to Exhibit 2.1 of the Company’s Current Report  on Form 8-K filed on June 15, 2009 (File No. 001-12593)). |
|          |       |                                                                                                                                                                                                                                                                                                             |
| 10.1          |       | Offer  Letter by and between Atlantic Tele-Network, Inc. and Leonard Q. Slap,  dated May 27, 2010(incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed on May 27, 2010 (File  No. 001-12593)).                                        |
|          |       |                                                                                                                                                                                                                                                                                                             |
| 31.1          |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                               |
|          |       |                                                                                                                                                                                                                                                                                                             |
| 31.2          |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                               |
|          |       |                                                                                                                                                                                                                                                                                                             |
| 32.1          |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                    |
|          |       |                                                                                                                                                                                                                                                                                                             |
| 32.2          |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                    |

 

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