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TMCNet:  ATLANTIC TELE NETWORK INC /DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 09, 2012]

ATLANTIC TELE NETWORK INC /DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The discussion and analysis of our financial condition and results of operations that follows are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements.

Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our condensed consolidated financial statements herein and the accompanying notes thereto, and our Annual Report on Form 10-K for the year ended December 31, 2011, in particular, the information set forth therein under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Overview We provide wireless and wireline telecommunications services in North America, Bermuda and the Caribbean. Through our operating subsidiaries, we offer the following principal services: † Wireless. In the United States, we offer wireless voice and data services to retail customers under the "Alltel" name in rural markets located principally in the Southeast and Midwest. Additionally, we offer wholesale wireless voice and data roaming services to national, regional and local wireless carriers and selected international wireless carriers in rural markets located principally in the Southwest and Midwest. We also offer wireless voice and data services to retail customers in Bermuda under the "CellOne" name, in Guyana under the "Cellink" name, and in other smaller markets in the Caribbean and the United States under other tradenames.

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

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

The following chart summarizes the operating activities of our principal subsidiaries, the segments in which we report our revenue and the markets we served as of September 30, 2012: Services Segment Markets Tradenames Wireless United States (rural U.S. Wireless markets) Alltel, Choice Island Wireless Aruba, Bermuda, Turks Mio, and Caicos, U.S. CellOne, Islandcom, Virgin Islands Choice International Integrated Telephony Guyana Cellink Wireline International Integrated Telephony Guyana GT&T, Emagine U.S. Wireline United States (New Sovernet, ION England and New York State) We provide management, technical, financial, regulatory, and marketing services to our subsidiaries and typically receive a management fee equal to a percentage of their respective revenue. Management fees from consolidated subsidiaries are eliminated in consolidation.

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

Wireless segment.

23 -------------------------------------------------------------------------------- Table of Contents Our U.S. retail wireless revenue is primarily driven by the number of subscribers to our services, their adoption of our enhanced service offerings and their related voice and data usage. The number of subscribers and their usage volumes and patterns also has a major impact on the profitability of our U.S. retail wireless operations. As of September 30, 2012, our U.S. retail wireless services were provided to approximately 585,000 customers under the "Alltel" brand name. Our wireless licenses provide mobile data and voice coverage to a network footprint covering a population of approximately four and a half million people as of September 30, 2012. Through the acquisition of a portion of the former Alltel network from Verizon Wireless (the "Alltel Acquisition"), we acquired a regional, non-contiguous wireless network that we anticipate will require continued network expansion and improvements as well as roaming support to ensure ongoing nationwide coverage. In late July 2011, we completed the transition of our Alltel customers from the legacy Alltel information technology systems, platforms and customer care centers to our own (the "Alltel Transition") and as a result, eliminated many of the duplicate costs associated with the migration in the third quarter of 2011.

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

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

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

Merger with M3 Wireless, Ltd.

On May 2, 2011, we completed the merger of our Bermuda wireless operations, Bermuda Digital Communications, Ltd. ("BDC"), with that of M3 Wireless, Ltd.

("M3"), a wireless provider in Bermuda (the "CellOne Merger"). As part of the CellOne Merger, M3 merged with and into BDC, and the combined entity continues to operate under BDC's CellOne brand. As a result of the CellOne Merger, our 58% ownership interest in BDC was reduced to a controlling 42% interest in the combined entity. Since we have the right to designate the majority of seats on the combined entity's board of directors and therefore control its management and policies, we have consolidated the results of the combined entity in our consolidated financial statements effective on the date of the CellOne Merger.

Stimulus Grants We were awarded several federal stimulus grants in 2009 and 2010 by the U.S.

Government under provisions of the American Recovery and Reinvestment Act of 2009 intended to stimulate the deployment of broadband infrastructure and services to rural, unserved and underserved areas. As of September 30, 2012, we have spent (i) $22.4 million in capital expenditures (of which $17.9 million has been or will be funded by the federal stimulus grant) in connection with our ION Upstate New York Rural Broadband Initiative, which involves building ten new segments of fiber-optic, middle-mile broadband infrastructure in upstate New York and parts of Pennsylvania and Vermont; (ii) $5.4 million in capital expenditures (of which $3.8 million has been or will be funded by the federal stimulus grant) in connection with our last-mile broadband infrastructure buildout in the Navajo Nation across Arizona, New Mexico and Utah; and (iii) $19.2 million in capital expenditures (of which $13.4 million has been or will be funded by the federal stimulus grant) in connection with our fiber-optic middle mile network buildout to provide broadband and transport services to over 340 community anchor institutions in Vermont. For more information on these stimulus projects, please refer to Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012. The results of our New York and Vermont stimulus projects are included in our "U.S. Wireline" segment and the results of our Navajo stimulus project are included in our "U.S. Wireless" segment.

Mobility Fund Grants In November 2011, the Federal Communications Commission ("FCC") released an Order reforming its Universal Service Fund ("USF") program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households. In 2011, we received approximately $9.9 million in USF support to our U.S. wireless businesses relating to high-cost areas. Beginning in June 2012, the FCC began phasing out this existing USF support at a rate of 20% per year over the next five years as part of its reform program.

Also as part of the USF reform program, the FCC created two new funds, including the Mobility Fund, a one-time grant meant to support wireless coverage in underserved geographic areas in the United States. On October 3, 2012, we were provisionally awarded approximately $68.8 million by the FCC under the new Mobility Fund (the "Mobility Fund Grants"). Although our receipt of the Mobility Fund Grants are still subject to FCC approval, we currently expect to receive approximately $68.8 million in support, to be received from time to time, beginning in 2013 to expand our voice and broadband networks in certain geographic areas to offer either 3G or 4G coverage pursuant to certain FCC construction and other requirements. The results of our Mobility Fund projects, once initiated, will be included in our "U.S. Wireless" segment.

On October 29, 2012, we further amended our Amended Credit Facility to provide for a letter of credit sub-facility to our revolver loan, to be available for issuance in connection with the Company's Mobility Fund Grant obligations.

Under the amendment, we have the 25 -------------------------------------------------------------------------------- Table of Contents ability to use up to $55 million of our revolving credit facility for the issuance of letters of credit, which, when issued, will accrue a fee at a rate of 1.75% per annum on the outstanding amounts. We currently have no Mobility Fund letters of credit outstanding. Any actual award of Mobility Fund Grants is subject to certain conditions, including the issuance of a letter of credit. If we fail to comply with any of the terms and conditions upon which the Mobility Fund Grants were granted, or if we lose eligibility for Mobility Fund support, the FCC will be entitled to draw the entire amount of the letter of credit applicable to the affected project and may disqualify us from the receipt of additional Mobility Fund support.

26 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended September 30, 2011 and 2012 Three Months Ended Amount of Percent September 30, Increase Increase 2011 2012 (Decrease) (Decrease) (In thousands) REVENUE: US Wireless: Retail $ 89,143 $ 83,269 $ (5,874 ) (6.6 )% Wholesale 57,048 54,918 (2,130 ) (3.7 ) International wireless 20,377 21,048 671 3.3 Wireline 21,748 21,120 (628 ) (2.9 ) Equipment and other 6,030 8,443 2,413 40.0 Total revenue 194,346 188,798 (5,548 ) (2.9 ) OPERATING EXPENSES: Termination and access fees 48,764 38,790 (9,974 ) (20.5 ) Engineering and operations 20,165 20,796 631 3.1 Sales and marketing 33,965 27,929 (6,036 ) (17.8 ) Equipment expense 14,379 23,408 9,029 62.8 General and administrative 25,014 22,195 (2,819 ) (11.3 ) Acquisition-related charges 98 2 (96 ) (98.0 ) Depreciation and amortization 26,712 26,048 (664 ) (2.5 ) Gain on disposition of long-lived assets (2,397 ) - (2,397 ) (100.0 ) Total operating expenses 166,700 159,168 (7,532 ) (4.5 ) Income from operations 27,646 29,630 1,984 7.2 OTHER INCOME (EXPENSE): Interest expense (4,320 ) (2,986 ) 1,334 30.9 Interest income 99 3 (96 ) (97.0 ) Equity in earnings of unconsolidated affiliate 729 679 (50 ) (6.9 ) Other income(expense), net 255 199 (56 ) (22.0 ) Other, net (3,237 ) (2,105 ) 1,132 35.0 INCOME BEFORE INCOME TAXES 24,409 27,525 3,116 12.8 Income taxes 11,193 9,513 (1,680 ) (15.0 ) NET INCOME 13,216 18,012 4,796 36.3 Net income attributable to non-controlling interests (1,880 ) (2,047 ) (167 ) 8.9 NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC.

STOCKHOLDERS $ 11,336 $ 15,965 $ 4,629 40.8 27 -------------------------------------------------------------------------------- Table of Contents U.S. wireless revenue. U.S. Wireless revenue includes voice and data services revenue from our prepaid and postpaid retail operations as well as our wholesale roaming operations. Retail revenue is derived from subscriber fees for use of our networks and facilities, including airtime, roaming and long distance as well as enhanced services such as caller identification, call waiting, voicemail and other features. Retail revenue also includes amounts received from the Universal Service Fund ("USF"). Wholesale revenue is generated from providing mobile voice or data services to the customers of other wireless carriers and also includes revenue from other related wholesale services such as the provision of network switching services and certain wholesale transport services using our wireless subsidiaries' networks.

Retail revenue The retail portion of our U.S. Wireless revenue was $83.3 million for the three months ended September 30, 2012, as compared to $89.1 million for the three months ended September 30, 2011, a decrease of $5.8 million, or 6.5%. This decrease was primarily the result of net subscriber attrition especially in our post-paid subscriber base and $1.8 million of revenue received in the third quarter of 2011 from the Universal Service Fund relating to a previous period.

The decrease was partially offset by a $2.3 million increase in usage charges in 2011 for which we were temporarily not able to bill customers immediately following the completion of an Alltel system conversion.

As of September 30, 2012, we had approximately 585,000 U.S. retail wireless subscribers (including 432,000 postpaid subscribers and 153,000 prepaid subscribers), a decrease of 8,000 from the approximately 593,000 subscribers we had as of September 30, 2011 and an increase of 1,000 from the approximately 584,000 subscribers we had as of June 30, 2012. Gross additions to the U.S.

retail wireless subscriber base increased to 67,000 for the three months ended September 30, 2012, as compared to approximately 30,000 for the three months ended September 30, 2011. We will continue to focus on improving gross additions to our subscriber base in future periods as we concentrate our efforts on increasing distribution, by means such as our re-launch of our U-Prepaid branded offering in Walmart stores in our markets, and increasing awareness of our value proposition to potential customers in our markets. However, we believe that the gross additions to our subscriber base could be hindered by our challenges in obtaining some of the more popular handset devices.

Our overall U.S. retail wireless churn decreased from 4.05% for the three months ended September 30, 2011 to 3.70% for the three months ended September 30, 2012. This improvement was the result of fewer postpaid customer contract expirations as well as our ability to better control customer care and other churn factors since the end of the Alltel Transition period. However, our churn may increase in the near term as we are in a period of higher than normal contract expirations and seasonally higher churn. This, along with our challenges in obtaining popular handset devices, could lead to a decline in subscriber levels.

28 -------------------------------------------------------------------------------- Table of Contents Wholesale revenue The wholesale portion of our U.S. Wireless revenue decreased to $54.9 million for the three months ended September 30, 2012 from $57.0 million for the three months ended September 30, 2011, a reduction of $2.1 million or 4%. The decrease was the result of a reduction in voice traffic, a trend seen throughout the industry, expansion of the networks of our carrier customers and a decline in the average rates we charge these customers. Such decreases, however, were partially offset by growth in the volume of data, also a trend seen throughout the industry.

In 2007, we entered into a license purchase agreement with a roaming partner whereby we agreed to purchase and build out a wireless network in the midwestern United States and our roaming partner retained a call option to repurchase the spectrum and the related cell sites within a specified number of years. Since that time, we have generated wholesale revenue from our roaming partners' use of this network, which accounted for approximately $15.1 million in wholesale revenue during the year ended December 31, 2011 and $12.1 million during the nine months ended September 30, 2012. Following the exercise of this call option in July 2012, we entered into a definitive agreement to sell the spectrum and related sites for approximately $15.8 million. We currently expect to close the transaction in late 2012 and to record a gain on the transaction of approximately $11.0 million. The spectrum and related sites are being accounted for as held for sale and are included in other assets on our balance sheet and applicable depreciation has been suspended. With the exception of one similar call option involving a smaller portion of our wholesale roaming network, no other roaming partner has the right to acquire any portion of our existing roaming network.

We expect that data volume may increase in the next several quarters as customer usage of data and smart phone penetration continues to increase. Such increase, however, may be completely offset by a number of factors, including decisions by our roaming partners to no longer roam on our networks or to expand their networks in areas where we operate. In addition, any reductions in the roaming rates that we charge or any continued declines in overall voice traffic would also reduce our wholesale revenue. Further, the replacement of the wholesale revenue related to our midwestern United States sites, which we have agreed to sell in connection with the call option described above, will be unlikely to be entirely offset by future growth in other areas.

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

International wireless revenue increased by $0.6 million, or 3%, to $21.0 million for the three months ended September 30, 2012, from $20.4 million for the three months ended September 30, 2011. International Wireless revenue increased as a result of subscriber growth in certain island markets partially offset by a decrease in subscribers in our other international operations.

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

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

Wireline revenue decreased by $0.6 million, or 3%, from $21.7 million to $21.1 million for the three months ended September 30, 2011 and 2012, respectively.

The reductions of revenue in our integrated voice and data operations in New England and in our international long distance business in Guyana were partially offset by the growth in our data revenue in Guyana and in our wholesale transport revenue in New York State.

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

See Note 11 to our Condensed Consolidated Financial Statements for more information regarding GT&T's exclusive license in Guyana.

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

29 -------------------------------------------------------------------------------- Table of Contents Equipment and other revenue increased by $2.4 million, or 40% to $8.4 million for the three months ended September 30, 2012, from $6.0 million for the three months ended September 30, 2011. Equipment revenue in our U.S. Wireless segment increased as the result of an increase in gross subscriber additions and an increase in smartphone sales. Equipment and other revenue also increased in our International Integrated Telephony segment due to increased smartphone sales.

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

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

Termination and access fees decreased by $10.0 million, or 20% from $48.8 million for the three months ended September 30, 2011 to $38.8 million for the three months ended September 30, 2012. The decrease in such fees was primarily the result of a reduction in roaming expenses and the completion of the Alltel Transition in our U.S. Wireless segment. Termination and access fees also decreased in our Island Wireless segment as the result of reduced roaming rates and cost synergies experienced in Bermuda subsequent to the CellOne Merger.

These decreases were partially offset by an increase in circuit costs within our U.S. Wireline segment as our networks in New York and Vermont continue to expand. Termination and access fees may increase in future periods with expected growth in data volume, but should remain fairly proportionate to their related revenue.

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

Engineering and operations expenses increased $0.6 million, or 3%, from $20.2 million to $20.8 million for the three months ended September 30, 2011 and 2012, respectively. Increased expenses in our U.S. Wireless and International Integrated Telephony segments, which experienced expansions in their respective networks in comparison with 2011, were partially offset by the completion of the Alltel Transition which reduced our engineering and operations expenses by eliminating duplicate costs.

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

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

Sales and marketing expenses decreased by $6.1 million, or 18%, from $34.0 million for the three months ended September 30, 2011 to $27.9 million for the three months ended September 30, 2012. The decrease in sales and marketing expenses was the result of the elimination of duplicate expenses associated with the Alltel Transition, higher than usual customer service expenses in 2011 subsequent to the completion of the Alltel Transition and a reduction in expenses in our Island Wireless segment from the increased promotional expenses we incurred in 2011 relating to the CellOne Merger and brand re-launch in Bermuda.

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

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

30 -------------------------------------------------------------------------------- Table of Contents Equipment expenses increased by $9.0 million, or 63%, from $14.4 million for the three months ended September 30, 2011 to $23.4 million for the three months ended September 30, 2012. The increase was the result of an increase in gross subscriber additions and an increase in smartphone sales in both our U.S.

Wireless business and in our International Integrated Telephony segment. These increases were partially offset by decreased equipment expenses in Bermuda as a result of the CellOne Merger which caused higher than usual equipment expenses in 2011. We believe that equipment expenses could continue to increase in 2012 as a result of seasonal handset promotions and also increase in the first half of 2013 as a large portion of our two-year contracts with Alltel subscribers will be expiring, resulting in increased upgrades as compared to 2011 and due to increased demand for more expensive smartphone handset devices. We may also choose, from time to time, to increase device subsidies to attract and retain customers.

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

General and administrative expenses decreased by $2.8 million, or 11%, from $25.0 million for the three months ended September 30, 2011 to $22.2 million for the three months ended September 30, 2012 primarily as a result of the completion of the Alltel Transition, as well as increased operating efficiencies in our U.S. Wireless segment. These expense decreases were partially offset by an increase in corporate overhead expenses.

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

Acquisition-related charges. Acquisition-related charges include the external costs, such as legal, accounting, and consulting fees directly associated with acquisition-related activities, which are expensed as incurred.

Acquisition-related charges do not include internal costs, such as employee salary and travel-related expenses, incurred in connection with acquisitions or any integration-related costs.

We incurred $0.1 million of acquisition-related charges for the three months ended September 30, 2011 and a nominal amount of acquisition-related charges for the three months ended September 30, 2012. We expect that acquisition-related expenses will be incurred from time to time as we continue to explore additional acquisition opportunities.

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

Depreciation and amortization expenses decreased by $0.7 million, or 2.6%, from $26.7 million for the three months ended September 30, 2011 to $26.0 million for the three months ended September 30, 2012. The decrease is primarily due to the elimination of depreciation expense on U.S. Wireless assets to be sold to a roaming partner in the Midwestern United States as well as a reduction in the amortization of certain intangible assets which are being amortized on an accelerated basis.

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

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

Interest expense decreased from $4.3 million for the three months ended September 30, 2011 to $3.0 million for the three months ended September 30, 2012 due to a reduction in our outstanding debt and decreases in applicable margins as a result of amendments to our credit facilities effective September 16, 2011 and May 18, 2012. As of September 30, 2012, we had $276.0 million in outstanding debt as compared to $298.9 million as of September 30, 2011.

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

Equity in earnings of an unconsolidated affiliate. Equity in earnings of an unconsolidated affiliate is related to a minority-owned investment in our U.S.

Wireless segment and was $0.7 million for the three months ended September 30, 2011 and 2012.

Other income (expense), net. Other income (expense), net represents miscellaneous non-operational income we earned or expenses we incurred. Other income (expense), net was $0.3 million and $0.2 million for the three months ended September 30, 2011 and 2012 respectively.

Income taxes. Our effective tax rates for the three months ended September 30, 2011 and 2012 were 46% and 35%, respectively. Our effective tax rate declined in 2012 as the result of increased income in lower taxed jurisdictions, such as Bermuda and the U.S., as compared to 2011. In addition, we recorded a $1.3 million benefit, net of reserves, relating to U.S. research and development tax credits claimed for 2010 and 2011 that positively impacted the effective tax rate by approximately 4.8%. Excluding the research and development tax credits, our effective tax rates were higher than the statutory federal income tax rate of 35% due primarily to (i) the portion of our earnings that are taxed in Guyana at 45%, and (ii) the portion of our earnings that include losses generated in non-tax foreign jurisdictions for which we receive no tax benefit. Our consolidated tax rate will continue to be impacted by the shift in the mix of income generated in the jurisdictions in which we operate.

32 -------------------------------------------------------------------------------- Table of Contents Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests reflected an allocation of $1.9 million and $2.0 million of income generated by our less than wholly-owned subsidiaries for the three months ended September 30, 2011 and 2012, respectively.

Net income attributable to Atlantic Tele-Network, Inc. stockholders. Net income attributable to Atlantic Tele-Network, Inc. stockholders increased to $16.0 million for the three months ended September 30, 2012 from $11.3 million for the three months ended September 30, 2011. On a per share basis, net income increased to $1.02 per diluted share from $0.73 per diluted share for the three months ended September 30, 2012 and 2011, respectively.

Nine Months Ended September 30, 2011 and 2012 Nine Months Ended Amount of Percent September 30, Increase Increase 2011 2012 (Decrease) (Decrease) (In thousands) REVENUE: US Wireless: Retail $ 284,221 $ 254,081 $ (30,140 ) (10.6 )% Wholesale 153,615 153,854 240 - International Wireless 52,874 60,318 7,444 14.1 Wireline 63,305 63,573 268 0.4 Equipment and Other 22,238 25,155 2,917 13.1 Total revenue 576,253 556,981 (19,272 ) (3.3 ) OPERATING EXPENSES: Termination and access fees 155,077 118,224 (36,853 ) (23.8 ) Engineering and operations 63,967 64,077 110 0.2 Sales and marketing 101,874 91,307 (10,567 ) (10.4 ) Equipment expense 54,447 65,747 11,300 20.8 General and administrative 81,405 67,102 (14,303 ) (17.6 ) Acquisition-related charges 664 7 (657 ) (98.9 ) Depreciation and amortization 76,903 79,654 2,751 3.6 Gain on disposition of long-lived assets (2,397 ) - (2,397 ) (100.0 ) Total operating expenses 531,940 486,117 (45,823 ) (8.6 ) Income from operations 44,313 70,864 26,551 59.9 OTHER INCOME (EXPENSE): Interest expense (12,743 ) (10,953 ) 1,790 14.0 Interest income 680 200 (480 ) (70.6 ) Equity in earnings of unconsolidated affiliate 1,484 3,011 1,527 102.9 Other income, net 854 (133 ) (987 ) (115.6 ) Other, net (9,725 ) (7,875 ) 1,850 19.0 INCOME BEFORE INCOME TAXES 34,588 62,989 28,401 82.1 Income taxes 16,074 24,273 8,199 51.0 NET INCOME 18,514 38,716 20,202 109.1 Net income attributable to non-controlling interests (866 ) (2,900 ) (2,034 ) (234.9 ) NET INCOME ATTRIBUTABLE TO ATLANTIC TELE-NETWORK, INC. STOCKHOLDERS $ 17,648 $ 35,816 $ 18,168 102.9 U.S. wireless revenue.

Retail revenue The retail portion of our U.S. Wireless revenue was $254.1 million for the nine months ended September 30, 2012, as compared to $284.2 million for the nine months ended September 30, 2011, a decrease of $30.1 million, or 11%. The decrease in retail U.S. Wireless revenues was primarily the result of a decline in subscribers we experienced during the past year due to post-Alltel 33 -------------------------------------------------------------------------------- Table of Contents Acquisition initiatives to tighten credit and contract policies, the loss of a significant prepaid distribution channel and a number of other factors, including the effects of the separation of our markets from the formerly unified Alltel market, leaving many of our subscribers near the edge or outside of our licensed territory. In late July 2011, we completed the Alltel Transition. As a result, we are now able to better enhance our service offerings which we believe will enable us to drive improved gross subscriber additions, further control churn and optimize our service offerings. These subscriber-related functions had been somewhat constrained during the transition period and contributed to a continued decline in our U.S. retail wireless revenue.

Wholesale revenue The wholesale portion of our U.S. Wireless revenue remained relatively unchanged at $153.9 million for the nine months ended September 30, 2012 as compared to $153.6 million for the nine months ended September 30, 2011. The increase in wireless wholesale revenue was due to an increase in data volume and a slightly larger network coverage area. This increase was partially offset by a decrease in voice traffic largely as a result of the industry trend of lower voice traffic as compared to data volume and, to some extent, Verizon and AT&T's network overbuilds following their acquisitions of certain Alltel properties.

International wireless revenue. International wireless revenue increased by $7.4 million, or 14%, to $60.3 million for the nine months ended September 30, 2012, from $52.9 million for the nine months ended September 30, 2011 due mainly to our CellOne Merger in Bermuda and subscriber growth in the U.S. Virgin Islands. This increase was partially offset by a decrease in roaming revenue and subscribers in certain of our international operations.

Wireline revenue. Wireline revenue increased by $0.3 million from $63.3 million to $63.6 million for the nine months ended September 30, 2011 and 2012, respectively. The growth in our data revenue in Guyana and in our wholesale transport revenue in New York State was offset by the reductions of revenue in our integrated data and voice operations in Vermont and in our international long distance business in Guyana.

Equipment and other revenue. Equipment and other revenue increased by $3.0 million, or 14% to $25.2 million for the nine months ended September 30, 2012, from $22.2 million for the nine months ended September 30, 2011. Equipment revenue increased due to an increase in gross subscriber additions and related handset sales in our U.S. Wireless segment. Equipment and other revenue also increased in our International Integrated Telephony segment due to increased promotional campaigns that included increased handset subsidies.

Termination and access fee expenses. Termination and access fees decreased by $36.9 million, or 24% from $155.1 million for the nine months ended September 30, 2011 to $118.2 million for the nine months ended September 30, 2012. The decrease was primarily the result of a reduction in roaming expenses, decreased customer bad debt expense, and the elimination of duplicate costs upon the completion of the Alltel Transition in our U.S. Wireless segment. These decreases were partially offset by an increase in data usage volume which increases "backhaul" costs as well as an increase in circuit costs within our U.S. Wireline segment as our networks in New York and Vermont continue to expand.

Engineering and operations expenses. Engineering and operations expenses remained unchanged at $64.0 million for the nine months ended September 30, 2011. Increased expenses in our International Integrated Telephony and Island Wireless segments which experienced network expansions as compared to 2011, including an expansion of our network in Bermuda following our CellOne Merger in May 2011, were partially offset by the completion of the Alltel Transition which reduced our engineering and operations expenses by eliminating redundant costs.

Sales and marketing expenses. Sales and marketing expenses decreased by $10.6 million, or 10% from $101.9 million for the nine months ended September 30, 2011 to $91.3 million for the nine months ended September 30, 2012. The decrease in sales and marketing expenses was the result of the elimination of expenses associated with the Alltel Transition and the culmination of increased promotional expenses in 2011 relating to the CellOne Merger in Bermuda. These decreases, however, were partially offset by an increase in sales and marketing expenses in our International Integrated Telephony segment as a result of increased promotional campaigns.

Equipment expenses. Equipment expenses increased by $11.3 million, or 21%, from $54.4 million for the nine months ended September 30, 2011 to $65.7 million for the nine months ended September 30, 2012. This increase is largely the result of an increase in gross subscriber additions and an increase in smartphone sales in our U.S. wireless business and in our International Integrated Telephony segment. These increases were partially offset by decreased equipment expenses in Bermuda in 2012 as compared to the increased equipment expenses resulting from the CellOne Merger in 2011.

General and administrative expenses. General and administrative expenses decreased by $14.3 million, or 18% from $81.4 million for the nine months ended September 30, 2011 to $67.1 million for the nine months ended September 30, 2012 primarily as a result of the completion of the Alltel Transition. During this transition period, we incurred a significant overlap of certain general and administrative expenses. These expense decreases were partially offset by an increase in expenses in Bermuda as a result of the CellOne Merger in 2011 and an increase in corporate overhead expenses.

34 -------------------------------------------------------------------------------- Table of Contents Acquisition-related charges. We incurred $0.7 million of acquisition-related charges during the nine months ended September 30, 2011 and a nominal amount of acquisition-related charges for the nine months ended September 30, 2012.

35 -------------------------------------------------------------------------------- Table of Contents Depreciation and amortization expenses. Depreciation and amortization expenses increased by $2.8 million, or 4% from $76.9 million for the nine months ended September 30, 2011 to $79.7 million for the nine months ended September 30, 2012. The increase is primarily due to additional fixed assets associated with the development of operational and business support systems which were put in service at the end of the Alltel Transition as well as the addition of tangible and intangible assets acquired with the CellOne Merger.

Interest expense. Interest expense decreased from $12.8 million for the nine months ended September 30, 2011 to $11.0 million for the nine months ended September 30, 2012 due to a reduction in our outstanding debt and decreases in applicable margins as a result of amendments to our credit facilities effective September 16, 2011 and May 18, 2012. As of September 30, 2012, we had $276.0 million in outstanding debt as compared to $298.9 million as of September 30, 2011.

Interest income. Interest income decreased from $0.7 million for the nine months ended September 30, 2011 to $0.2 million for the nine months ended September 30, 2012.

Equity in earnings of an unconsolidated affiliate. Equity in earnings of an unconsolidated affiliate was $3.0 million for the nine months ended September 30, 2012 as compared to $1.5 million for the nine months ended September 30, 2011.

Other income (expense), net. Other income (expense), net was $0.9 million of income for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, we recorded $0.1 million of expense primarily as a result of $0.7 million of deferred financing costs being expensed in connection with an amendment to our credit facility effective May 18, 2012.

Income taxes. Our effective tax rates for the nine months ended September 30, 2011 and 2012 were 46% and 39%, respectively. Our effective tax rate declined in 2012 as the result of (i) increased income in lower taxed jurisdictions, such as Bermuda, as compared to 2011 and (ii) a $1.3 million benefit, net of tax, resulting from U.S. research and development tax credits claimed for 2010 and 2011. Excluding the research and development tax credits, our effective tax rates were higher than the statutory federal income tax rate of 35% due primarily to (i) the portion of our earnings that are taxed in Guyana at 45%, and (ii) the portion of our earnings that include losses generated in non-tax foreign jurisdictions for which we receive no tax benefit.

Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests reflected an allocation of $0.9 million and $2.9 million of income generated by our less than wholly owned subsidiaries for the nine months ended September 30, 2011 and 2012, respectively.

Net income attributable to Atlantic Tele-Network, Inc. stockholders. Net income attributable to Atlantic Tele-Network, Inc. stockholders increased to $35.8 million for the nine months ended September 30, 2012 from $17.6 million for the nine months ended September 30, 2011. On a per share basis, net income increased to $2.30 per diluted share from $1.14 per diluted share for the nine months ended September 30, 2012 and 2011, respectively.

Regulatory and Tax Issues We are involved in a number of regulatory and tax proceedings. A material and adverse outcome in one or more of these proceedings could have a material adverse impact on our financial condition and future operations. For a discussion of ongoing proceedings, see Note 11 to the Consolidated Financial Statements included in this Report.

Liquidity and Capital Resources Historically, we have met our operational liquidity needs through a combination of cash on hand and internally generated funds and have funded capital expenditures and acquisitions with a combination of internally generated funds, cash on hand and borrowings under our credit facilities. We believe our current cash, cash equivalents and availability under our current credit facility will be sufficient to meet our cash needs for the next twelve months for working capital and capital expenditures.

Uses of Cash Capital expenditures. A significant use of our cash has been for capital expenditures to expand and upgrade our networks.

For the nine months ended September 30, 2011 and 2012, we spent approximately $65.9 million and $50.5 million, respectively, on capital expenditures. The following notes our capital expenditures, by operating segment, for these periods: 36 -------------------------------------------------------------------------------- Table of Contents Capital Expenditures International Integrated Island U.S. Reconciling U.S. Wireless Telephony Wireless Wireline Items Consolidated Nine Months Ended September 30, 2011 $ 44,532 $ 12,697 $ 5,812 $ 1,805 $ 2,004 $ 65,850 2012 29,446 7,362 3,915 7,280 2,502 50,505 We are continuing to invest in expanding our networks in many of our markets and updating our operating and business support systems. We expect to incur capital expenditures between $65 million and $85 million during 2012. Of this amount, we anticipate capital expenditures of between $35 million to $50 million in our U.S. Wireless business. Our 2012 capital expenditures are lower than our previously disclosed forecast of $90 million to $100 million primarily as a result of a delay in certain 2012 capital projects which are now forecasted for 2013.

We expect to fund our current capital expenditures primarily from cash generated from our operations and borrowings under our credit facilities.

Acquisitions and investments. Historically, we have funded our acquisitions with a combination of cash on hand and borrowings under our credit facilities.

We continue to explore opportunities to acquire or expand our existing communications properties and licenses in the United States, the Caribbean and elsewhere. Such acquisitions may require external financing. While there can be no assurance as to whether, when or on what terms we will be able to acquire any such businesses or licenses or make such investments, such acquisitions may be accomplished through the issuance of shares of our capital stock, payment of cash or incurrence of additional debt. From time to time, we may raise capital ahead of any definitive use of proceeds to allow us to move more quickly and opportunistically if an attractive investment materializes.

Dividends. We use cash-on-hand to make dividend payments to our common stockholders when declared by our Board of Directors. For the nine months ended September 30, 2012, dividends to our stockholders were approximately $10.7 million, which reflects dividends declared on September 14, 2012 and paid on October 10, 2012. We have paid quarterly dividends for the last 56 fiscal quarters.

Stock repurchase plan. Our Board of Directors approved a $5.0 million stock buyback plan in September 2004 pursuant to which we have spent approximately $2.1 million as of September 30, 2012 repurchasing our common stock. Our last repurchase of our common stock was in 2007. We may repurchase shares at any time depending on market conditions, our available cash and our cash needs.

Sources of Cash Total liquidity at September 30, 2012. As of September 30, 2012, we had approximately $111.4 million in cash and cash equivalents, an increase of $62.7 million from the December 31, 2011 balance of $48.7 million. The increase in our cash and cash equivalents is attributable to the cash provided by our operating activities partially offset by investments in capital expenditures and dividends paid to our stockholders.

Cash generated by operations. Cash provided by operating activities was $84.7 million for the nine months ended September 30, 2011 and $137.5 million for the nine months ended September 30, 2012, an increase of $52.8 million. Net income increased $20.5 million to $39.0 million for the nine months ended September 30, 2012 from $18.5 million for the nine months ended September 30, 2011. The remainder of the increase in cash generated by operations was the result of an $11.5 million income tax refund as well as increases in depreciation and amortization, the provision for doubtful accounts and changes in our working capital.

Cash used in financing activities. Cash used in financing activities increased by $14.4 million from $9.9 million to $24.3 million for the nine months ended September 30, 2011 and 2012, respectively. The increase was primarily the result of increased principal repayments on our credit facility and the payment of debt issuance costs, both in connection with an amendment to our credit facility effective May 18, 2012.

37 -------------------------------------------------------------------------------- Table of Contents Loan Facilities-Bank On May 18, 2012, we amended and restated our existing credit facility with CoBank, ACB (the "Amended Credit Facility") providing for $275.0 million in two term loans and a revolver loan of up to $100.0 million (which includes a $10.0 million swingline sub-facility) and additional term loans up to an aggregate of $100.0 million, subject to lender approval.

On October 29, 2012, we further amended our Amended Credit Facility to provide for an additional letter of credit sub-facility to our revolver loan, to be available for issuance in connection with the Company's Mobility Fund Grant obligations. Under the amendment, we have the ability to use up to $55 million of our revolving credit facility for the issuance of letters of credit, which, when issued, will accrue a fee at a rate of 1.75% per annum on the outstanding amounts. We currently have no Mobility Fund letters of credit outstanding. Any actual award of Mobility Fund Grants is subject to certain conditions, including the issuance of a letter of credit. If we fail to comply with any of the terms and conditions upon which the Mobility Fund Grants were granted, or if we lose eligibility for Mobility Fund support, the FCC will be entitled to draw the entire amount of the letter of credit applicable to the affected project and may disqualify us from the receipt of additional Mobility Fund support.

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

Amounts borrowed under the Term Loan A-1 and the revolver loan bear interest at a rate equal to, at our option, either (i) LIBOR plus an applicable margin ranging between 2.00% to 3.50% or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.50% (or, in the case of amounts borrowed under the swingline sub-facility, an applicable margin ranging from 0.50% to 2.00%).

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

Borrowings as of September 30, 2012, after considering the effect of the interest rate swap agreements as described in Note 7, bore a weighted-average interest rate of 4.36%. Availability under the revolver loan, net of an outstanding letter of credit of $0.1 million, was $99.9 million as of September 30, 2012. Upon completing the Amended Credit Facility, we expensed $0.7 million of deferred financing costs which are included in other income (expense) within the statement of operations for the nine months ended September 30, 2012.

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

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

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

Factors Affecting Sources of Liquidity Internally generated funds. The key factors affecting our internally generated funds are demand for our services, competition, regulatory developments, economic conditions in the markets where we operate our businesses and industry trends within the telecommunications industry. For a discussion of regulatory risks in Guyana that could have an adverse impact on our liquidity, see "Risk Factors-Risks Relating to Our Wireless and Wireline Services in Guyana", and "Business-Guyana Regulation" in our Annual Report on Form 10-K for the year ended December 31, 2011.

Restrictions under credit facility. The Amended Credit Facility contains customary representations, warranties and covenants, including covenants by us limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset 38 -------------------------------------------------------------------------------- Table of Contents sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Amended Credit Facility contains financial covenants by us that (i) impose a maximum ratio of indebtedness to EBITDA (ii) require a minimum ratio of EBITDA to principal and interest payments and cash taxes and, (iii) require a minimum ratio of equity to consolidated assets. As of September 30, 2012, we were in compliance with all of the financial covenants of the Amended Credit Facility, as amended.

Capital markets. Our ability to raise funds in the capital markets depends on, among other things, general economic conditions, the conditions of the telecommunications industry, our financial performance, the state of the capital markets and our compliance with Securities and Exchange Commission ("SEC") requirements for the offering of securities. On May 13, 2010, the SEC declared effective our "universal" shelf registration statement. This filing registered potential future offerings of our securities.

39 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements In June 2011, the Financial Accounting Standards Board ("FASB") issued a new accounting standard that eliminates the option to present other comprehensive income ("OCI") in the statement of stockholders' equity and instead requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or in two separate, but consecutive, statements.

The standard also requires that items reclassified from OCI to net income be presented on the face of the financial statements. However, in December 2011, the FASB finalized a proposal to defer the requirement to present reclassifications from OCI to net income on the face of the financial statements and require that reclassification adjustments be disclosed in the notes to the financial statements, consistent with the existing disclosure requirements. The deferral does not change the requirement to present net income, components of OCI, and total comprehensive income in either one continuous statement or two separate but consecutive statements. The standard, which we adopted during the first quarter of 2012, did not have a material impact on our financial position, results of operations or liquidity.

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

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

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