_______________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19551
Atlantic Tele-Network, Inc.
(exact name of issuer as specified in its charter)
Delaware 47-072886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 00821
(809) 777-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
As of September 30, 1997, the registrant had outstanding 12,272,500
shares of its common stock ($.01 par value).
________________________________________________________________________
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------
December 31, September 30,
ASSETS 1996 1997
(Unaudited)
----------- -----------
Current assets:
Cash $ 11,540 $ 15,150
Accounts receivable, net 63,660 57,948
Materials and supplies 9,658 9,570
Prepayments and other current assets 4,110 5,558
------------ -----------
Total current assets 88,968 88,226
Fixed assets:
Property, plant and equipment 328,895 341,306
Less accumulated depreciation (117,031) (128,739)
Franchise rights and cost in excess of underlying book value, less
accumulated amortization of $11,170,000 and $12,221,000 40,132 39,081
------------ -----------
Net fixed assets 251,996 251,648
Property costs recoverable from future revenues 22,905 21,923
Uncollected surcharges 3,119 6,328
Other assets 22,336 23,694
------------ -----------
$389,324 $391,819
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 17,153 $ 16,281
Accounts payable 25,021 21,558
Accrued taxes 2,457 7,341
Advance payments and deposits 2,701 3,163
Other current liabilities 8,231 4,901
Current portion of long-term debt 12,942 12,936
------------ -----------
Total current liabilities 68,505 66,180
Deferred income taxes and tax credits 33,066 21,980
Long-term debt, excluding current portion 116,227 106,469
Pension and other long-term liabilities 6,702 6,329
Minority interest 15,033 16,390
Contingencies and commitments (Note E)
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; - -
none issued and outstanding
Common stock, par value $.01 per share; 20,000,000 shares authorized;
12,272,500 shares issued and outstanding 123 123
Paid-in capital 81,852 81,852
Retained earnings 67,816 92,496
------------ -----------
Total stockholders' equity 149,791 174,471
------------ -----------
$ 389,324 $ 391,819
============ ===========
See notes to consolidated condensed financial statements.
2
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1997 1996 1997
Revenues:
Local exchange service $ 6,317 $ 7,273 $ 18,906 $ 21,749
Access charges 4,542 4,115 11,618 12,714
International long-distance revenues 38,786 35,860 112,259 92,977
Universal Service Fund 2,802 3,452 8,406 10,494
Billing and other revenues 1,418 1,365 3,722 4,185
Directory advertising 645 418 1,938 1,332
Cellular services 1,238 748 4,457 2,894
Product sales and rentals 1,287 1,046 3,931 3,380
----------- ---------- ----------- -----------
Total revenues 57,035 54,277 165,237 149,725
Expenses:
Plant specific operations 4,614 4,445 12,483 12,435
Plant nonspecific operations 6,013 6,269 16,148 18,122
Customer operations 1,612 1,662 4,836 4,968
Corporate operations 2,823 2,616 8,950 8,727
International long-distance expenses 25,503 17,957 71,797 56,550
Taxes other than income 778 890 2,406 2,646
Cellular services and product sales and rental expenses 1,907 1,867 6,084 5,737
General and administrative expenses 1,895 2,542 8,801 7,498
----------- ---------- ----------- -----------
Total expenses 45,145 38,248 131,505 116,683
Income from operations 11,890 16,029 33,732 33,042
Interest Expense and Interest Income:
Interest expense (2,807) (2,662) (8,537) (7,979)
Interest income 25 78 252 236
----------- ---------- ----------- ------------
Interest expense, net (2,782) (2,584) (8,285) (7,743)
----------- ---------- ----------- ------------
Income before income taxes and minority interest 9,108 13,445 25,447 25,299
Income taxes 3,608 5,873 10,484 (739)
----------- ---------- ----------- ------------
Income before minority interest 5,500 7,572 14,963 26,038
Minority interest (588) (1,050) (1,860) (1,358)
----------- ---------- ----------- ------------
Net income $ 4,912 $ 6,522 $ 13,103 $ 24,680
=========== ========== =========== ============
Net income per share $ 0.40 $ 0.53 $ 1.07 $ 2.01
=========== ========== =========== ============
Weighted average shares outstanding 12,273 12,273 12,273 12,273
=========== ========== =========== ============
See notes to consolidated condensed financial statements.
3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------
(Unaudited)
Nine Months Ended
September 30,
------------------------
1996 1997
---- ----
Net cash flows provided by operating activities $26,631 $29,151
Cash flows from investing activities:
Capital expenditures (33,515) (14,905)
---------- ----------
Net cash used in investing activities (33,515) (14,905)
Cash flows from financing activities:
Repayment of long-term debt (14,804) (9,764)
Issuance of long-term debt 1,335 -
Net borrowings (repayments) on notes 10,533 (872)
---------- ----------
Net cash flows used by financing activities (2,936) (10,636)
---------- ----------
Net increase (decrease) in cash (9,820) 3,610
Cash, Beginning of Period 18,822 11,540
---------- ----------
Cash, End of Period $9,002 $15,150
========== ==========
Supplemental cash flow information:
Interest paid $8,542 $7,730
========== ==========
Income taxes paid $9,621 $4,308
========== ==========
Depreciation and Amortization Expense $14,518 $16,502
========== ==========
See notes to consolidated condensed financial statements.
4
Atlantic Tele-Network, Inc. and Subsidiaries
Notes to Consolidated Condensed
Financial Statements
Three and Nine Months Ended September 30, 1996 and 1997
A. GENERAL
SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed balance sheet of Atlantic Tele-Network, Inc.
and subsidiaries (the "Company") at December 31, 1996 has been taken from
audited financial statements at that date. All other consolidated condensed
financial statements contained herein have been prepared by the Company and
are unaudited. The consolidated condensed financial statements should be read
in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
The unaudited interim consolidated condensed financial statements
furnished herein reflect all adjustments, which are, in the opinion of
management, necessary to fairly present the financial results for the interim
periods presented. The results for the three and nine months ended September
30, 1996 and 1997 are not necessarily indicative of the operating results for
the full year not yet completed.
Reclassification - Certain reclassifications have been made to the 1996
amounts to conform to the 1997 presentation.
B. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands
causing extensive damage to the outside telephone plant of Vitelco. None of
the damage was covered by insurance. The historical cost of the facilities
damaged or destroyed by Hurricane Marilyn was approximately $26.3 million with
associated accumulated depreciation of approximately $9.1 million. These costs
have been removed from the property accounts and along with certain excess
maintenance costs and costs of removal of $7.1 million have been classified as
property costs recoverable from future revenues because the Company
anticipates that future revenue in an amount at least equal to the capitalized
cost will result from inclusion of these costs in allowable costs for rate
making purposes. Vitelco has received approval from the Federal Communications
Commission to include the interstate portion of these costs in its rate base
and amortize them over a five year period. The Company believes that it is
probable that future revenue in an amount at least equal to the intrastate
portion of these costs will result from inclusion of these costs for rate
making purposes.
5
C. ACCOUNTING FOR INCOME TAXES
As discussed in Note B above, Vitelco received approval from the Virgin
Islands Industrial Development Commission in May 1997 for a five year
exemption (commencing October 1, 1998) from 90% of Virgin Islands income taxes
and 100% of Virgin Islands gross receipts, excise and property taxes. In
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company has adjusted its deferred tax
assets and liabilities to reflect the change in the tax rates applicable to
Vitelco during the benefit period. This change has resulted in the Company
recording a non-recurring credit to income tax expense of approximately $10.9
million in the nine months ended September 30, 1997. On October 9, 1997 the
Virgin Islands Public Service Commission instituted a proceeding to determine
whether Vitelco's rates were just and reasonable in light of this tax rebate.
There can be no assurance as to the outcome of this proceeding.
D. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $9.5 million for the period when the order was
effective. GT&T initially instituted such a surcharge effective May 1, 1997,
but temporarily withdrew it when the Guyana Consumers Advisory Bureau (a
non-governmental group in Guyana) instituted a suit to block it. In May 1997
the Consumer Advisory Bureau sought an injunction from the Guyana High Court
restoring telephone rates to those imposed by the PUC in its October 1995
order. The Consumer Advisory Bureau's application is still pending. In
September 1997, the Guyana High Court denied an order which the Consumer
Advisory Bureau had sought to temporarily enjoin GT&T from putting into effect
a surcharge to recover the approximately $9.5 million over a period of 18
months. GT&T put such surcharge into effect on October 1, 1997 pending an
ultimate trial on the merits, and the Company recognized the approximately
$9.5 million of lost revenues in the third quarter of 1997.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to
the Company and to recover from the Company approximately $25 million of such
fees paid by GT&T to the Company since January 1991. GT&T has appealed the
PUC's order to the Guyana High Court and obtained a stay of the PUC's order
pending determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital
expenditure needs of GT&T. GT&T's indebtedness to the Company was evidenced by
a series of promissory notes. In March 1997, the PUC voided all of the
promissory notes then outstanding for failure to comply with certain
provisions of the PUC law. The PUC ordered that no further payments be made on
any of the outstanding notes and that GT&T recover from the Company all
amounts theretofore paid. The order also provided that the PUC would be
willing to authorize the payment of any amounts properly proven to the
satisfaction of the PUC to be due and payable from GT&T to the Company. GT&T
has appealed the PUC's order to the Guyana High Court and obtained a stay of
the PUC's order pending determination of that appeal.
6
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
In October 1997, the PUC ordered GT&T to increase the number of telephone
lines in service to a total of 69,278 lines by the end of 1998, 89,054 lines
by the end of 1999 and 102,126 by the end of the year 2000, to allocate and
connect an additional 9,331 telephone lines before the end of the 1998 and to
provide to subscribers who request them facilities for call diversion, call
waiting, reminder call and three-way calling by the end of the year 1998. In
issuing this order, the PUC did not hear evidence or make any findings on the
cost of providing these lines and services, the adjustment in telephone rates
which may be necessary to give GT&T a fair return on its investment or the
ways and means of financing the requirements of the PUC's order. GT&T has
appealed the PUC's order to the Guyana High Court and obtained a stay of the
PUC's order pending determination of that appeal.
E. CONTINGENCIES AND COMMITMENTS
Upon the acquisition of GT&T in January 1991, GT&T entered into an
agreement with the government of Guyana to expand significantly GT&Ts
existing facilities and telecommunications operations and to improve service
within a three-year period pursuant to an expansion and service improvement
plan (the "Plan"). The Plan was modified in certain respects and the date for
completion of the Plan was extended to February 1995. The government has
referred to the PUC the failure of GT&T to complete the Plan by February 1995.
The PUC is currently holding hearings on this matter. Failure to timely
fulfill the terms of the Plan could result in monetary penalties, cancellation
of the License, or other action by the PUC or the government which could have
a material adverse affect on the Company's business and prospects.
In May 1997, GT&T received a letter from the Guyanese department of
Inland Revenue indicating that GT&T's tax returns for 1992 through 1996 had
been selected for an audit under the direct supervision of the Trade Minister
with particular focus on the withholding tax on payments to international
audiotext providers. In March and April 1997, the Guyanese Trade Minister
publicly announced that he had appointed a task force to probe whether GT&T
should pay withholding taxes on fees paid by GT&T to international audiotext
providers. The Minister announced that if GT&T were found guilty of tax
evasion it could owe as much as $40 million in back taxes. In July 1997, GT&T
applied to the Guyana High Court for an order prohibiting this audit on the
grounds that the decision of the Minister of Trade to set up this task force
and to control and direct its investigation was beyond his authority, violated
the provisions of the Guyanese Income Tax Act, interfered with the
independence of the Commissioner of Inland Revenue and was done in bad faith,
and the court issued an order effectively staying the audit pending a
determination by the court of the merits of GT&T's application.
7
In June 1997, GT&T received an assessment of approximately $3.9 million
from the Commissioner of Inland Revenue for taxes for the current year based
on the disallowance as a deduction for income tax purposes of five-sixths of
the advisory fees payable by GT&T to the Company. The deductibility of these
advisory fees in an earlier year had been upheld in a decision of the High
Court in August 1995. In July 1997, GT&T applied to the High Court for an
order prohibiting the Commissioner of Inland Revenue from further proceeding
with this assessment on the grounds that the assessment was arbitrary and
unreasonable and capriciously contrary to the August 1995 decision of the
Guyana High Court, and GT&T obtained an order of the High Court effectively
prohibiting any action on the assessment pending the determination by the
court of the merits of GT&T's application.
In November 1997, GT&T received an assessment of approximately $14
million from the Commissioner of Inland Revenue for taxes for the years 1991
through 1996. It is GT&T's understanding that this assessment stems from the
same audit commenced in May 1997 which the Guyana High Court stayed in its
July 1997 order referred above. Apparently because the audit was cut short as
a result of the Court's July order, GT&T did not receive notice of and an
opportunity to respond to the proposed assessments as is the customary
practice in Guyana, and substantially all the issues raised in the assessment
appear to be based on mistaken facts. GT&T has applied to the Guyana High
Court for an order prohibiting the Commissioner of Inland Revenue from
enforcing the assessment on the grounds that the origin of the audit with the
Minister of Trade and the failure to give GT&T notice of and opportunity to
respond to the proposed assessment violated Guyana law. The Guyana High Court
has issued an order effectively prohibiting any action on the assessment
pending the determination by the Court of the merits of GT&T's application.
The principle issues raised by the November 1997 assessment are as
follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S. $4.1 million
of taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.
$2.1 million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High
Court's decision in August 1995 referred to above (approximately
U.S. $2.9 million of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable
assets (approximately U.S. $1.6 million of taxes).
8
Approximately U.S. $1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
F. SPLIT-UP TRANSACTION
The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997 and November 19, 1997 which includes a Proxy
Statement-Prospectus to consider and vote upon a proposed transaction to
divide the Company into two separate publicly-owned companies ( the
"Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. The Company will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of the Company Common Stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and the
absence of any material adverse change in the business of the Companies. In
October 1997 a tax ruling was received by the Company from the Internal
Revenue Service to the effect that the transfer of assets and liabilities to
ECI and the distribution of ECI common stock to shareholders of the Company
will be tax free for federal income tax purposes to the Company and its
shareholders. On the Effective Date of the Transaction, Atlantic Tele-Network,
Inc. will record a loss on the split-off and fair valuation of the net assets
of New ATN which on a pro forma basis is estimated to be $55 million.
Accordingly, equity of Atlantic Tele-Network, Inc. will decrease by the loss
recorded on the split-off and fair valuation of the net assets of New ATN on
the Effective Date.
9
Atlantic Tele-Network, Inc. and Subsidiaries
Management Discussion and Analysis of Financial
Conditions and Results of Operations
Introduction
The Company's revenues and income from operations are derived principally
from the operations of its telephone subsidiaries, Vitelco and GT&T. Vitelco
derives most of its revenues from local telephone and long-distance access
services. GT&T derives almost all of its revenues from international telephone
services. Other operations in the Company's Consolidated Statements of
Operations include: VitelCellular, which provides cellular telephone service
in the U.S. Virgin Islands; and Vitelcom, which supplies customer premises
equipment in the U.S. Virgin Islands.
The principal components of operating expenses for the Company's
telephone operations are plant specific operations expenses, plant
non-specific operations expenses, customer operations expenses, corporate
operations expenses, long-distance expenses and taxes other than income taxes.
These categories are consistent with FCC accounting practices. Plant specific
operations expenses relate to support and maintenance of telephone plant and
equipment and include vehicle expense, land and building expense, central
office switching expense and cable and wire expense. Plant non-specific
operations expenses consist of depreciation charges for telephone plant and
equipment and expenses related to telephone plant and network administration,
engineering, power, materials and supplies, provisioning and plant network
testing. Customer operations expenses relate to marketing, providing operator
services for call completion and directory assistance, and establishing and
servicing customer accounts. Corporate operations expenses include Vitelco's
and GT&T's expenses for executive management and administration, corporate
planning, accounting and finance, external relations, personnel, labor
relations, data processing, legal services, procurement and general insurance.
International long-distance expenses consist principally of charges from
international carriers for outbound international calls from Guyana and
payments to audiotext providers from whom GT&T derives international audiotext
traffic. Taxes other than income taxes include gross receipts taxes, property
taxes, and other miscellaneous taxes. Cellular services and product sales and
rentals expense includes the operating expense of VitelCellular and Vitelcom.
General and administrative expenses consist principally of parent company
overheads and amortizations.
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 1996 and 1997
Operating revenues for the three months ended September 30, 1997 were
$54.3 million as compared to $57.0 million for the corresponding period of the
prior year, a decrease of $2.8 million, or 5%. Operating revenues for the nine
months ended September 30, 1997 were $149.7 million as compared to $165.2
million for the corresponding period of the prior year, a decrease of $15.5
million, or 9%.
The decreases were principally due to a $12.7 and $31.8 million decrease
in audiotext traffic revenues at GT&T for the three and nine months ended
September 30, 1997, respectively.
10
GT&T's volume of audiotext traffic fluctuated between 9 and 10 million
minutes per month in 1996. Through the first nine months of 1997, the volume
of audiotext traffic has averaged about 16% less than in the comparable period
of 1996. The reduction in traffic volume is estimated to account for
approximately $13.6 million, or 43% of the $31.8 million decrease in audiotext
revenues. Chargebacks from a carrier for the nine months ended September 30,
1997 approximated $4.3 million representing 13% of the decline in audiotext
traffic. While subject to change, the Company anticipates that it will
experience chargebacks in the future as a proportion of audiotext revenue
similar to that experienced for the nine months ended September 30, 1997. The
remaining decrease in audiotext revenues resulted from a combination of the
following: the mislabeling of the origin of certain traffic, changes in the
traffic mix, certain accounting rate reductions, and the strength of the U.S.
dollar against certain foreign currencies. Mislabeling of the origin of
traffic occurs when a carrier reports traffic as coming from one country when
it actually originated in another. Changes in traffic mix refers to the mix
between countries of origins which have different accounting rates and
accounting rate reductions occur when the Company and a foreign administration
(telephone company) agree to a change in rates. The changes in volume of
traffic and lower collection rates are subject to a number of influences
beyond the Company's control, and may change significantly in the future,
positively or negatively. However, given the Company's recent experience, the
Company expects the negative trend in audiotext revenues to continue, although
it is unable to predict the magnitude with any degree of certainty. As a
result of the above factors, GT&T's profit margin from this traffic also
declined.
GT&T's outbound international revenues increased $10.6 and $13.2 million
for the three and nine months ended September 30, 1997, respectively. This
increase was principally as a result of the recognition of $9.5 million in
surcharge revenues for the three and nine months ended September 30, 1997, See
"Regulatory Matters" for further discussion.
Vitelco's telephone operations revenues increased $795,000 and $5.5
million for the three and nine months ended September 30, 1997, respectively.
These increases are primarily the result of the recovery from Hurricane
Marilyn in September 1995 and an increase in Universal Service Fund revenues
of $650,000 and $2.1 million for the three and nine months ended September 30,
1997, respectively, as a result of increased investment in net fixed assets.
At September 30, 1997 Vitelco had 61,326 lines in service compared to 58,431
at the corresponding date in the prior year.
Operating expenses for the three months ended September 30, 1997 were
$38.2 million, a decrease of $6.9 million, or 15%, from consolidated operating
expenses of $45.1 million for the corresponding period of the prior year.
Operating expenses for the nine months ended September 30, 1997 were $116.7
million, a decrease of $14.8 million, or 11%, from operating expenses of
$131.5 million for the corresponding period of the prior year. These decreases
were due principally to decreases in audiotext and outbound traffic expenses
at GT&T of $7.5 million and $15.2 million for the three and nine months ended
September 30, 1997, respectively, due to decreased traffic volumes. Somewhat
offsetting these decreases were increases in plant non-specific expenses which
increased as a result of increased plant in service. General and
administrative expenses increased $647,000 for the three months ended
September 30, 1997 and decreased $1.3 million for the nine months ended
September 30, 1997. The increase for the three months ended September 30, 1997
is principally due to an increase in certain corporate expenses. The decrease
for the nine months ended September 30, 1997 was principally due to a
non-recurring charge of $2.8 million in the first three months of 1996 for the
Companies obligation to reimburse its two Co-Chief Executive Officers for
certain litigation expenses in connection with a management dispute settled in
February 1996, offset by a $1.3 million charge related to the suspension of
the acquisition of the Congo national phone system in the second quarter of
1997. As a percentage of operating revenues, operating expenses were
approximately 70% and 78% for the three and nine month period ended September
30, 1997, respectively, as compared to approximately 79% and 80% for the
corresponding periods of 1996.
11
Income from operations increased $4.1 million for the three months ended
September 30, 1997 while income from operations decreased $690,000 for the
nine months ended September 30, 1997. These changes occurred principally as a
result of the factors affecting operating revenues and expenses discussed
above. Including the $9.5 million of outbound international long distance
revenues discussed above, GT&T's contribution to income from operations
increased by $4.2 million, or 46%, for the three months ended and decreased
$5.0 million, or 18%, for the nine months ended September 30, 1997. Vitelco's
contribution to income from operations increased by $1.2 million, or 31%, and
$4.7 million, or 38%, for the same periods. Other operations decreased
$731,000, or 29% and $2.1 million, or 25% for the three and nine months ended
September 30, 1997 principally from decreased cellular operations.
With decreases of $198,000 and $542,000 in net interest expense due to
reduced debt, income before income taxes and minority interest increased $4.3
million for the three months ended and decreased $148,000 for the nine months
ended September 30, 1997 respectively.
As discussed in Note C to the Consolidated Condensed Financial
Statements, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1, 1998)
from 90% of Virgin Islands income taxes and 100% of Virgin Islands gross
receipts, excise and property taxes. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the Company has
adjusted its deferred tax assets and liabilities to reflect the change in the
tax rates applicable to Vitelco during the benefit period. This change has
resulted in the Company recording a non-recurring credit to income tax expense
of approximately $10.9 million in the nine months ended September 30, 1997.
The effect of the tax exemption on future current taxes payable during the
benefit period will be reflected in the Company's financial statements during
the benefit period. On October 9, 1997 the Virgin Islands Public Service
Commission ("PSC") instituted a proceeding to determine whether Vitelco's
rates were just and reasonable in light of this tax rebate. There can be no
assurance as to the outcome of this proceeding.
Before giving effect to the change in deferred taxes discussed above, the
Company's effective tax rate for the three and nine months ended September 30,
1997 was 43.7% and 40.2% as compared to 39.6% and 41.2% for the corresponding
periods of the prior year.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
12
Regulatory Matters
Upon the acquisition of GT&T in January 1991, GT&T entered into an
agreement with the government of Guyana to expand significantly GT&T's
existing facilities and telecommunications operations and to improve service
within a three-year period pursuant to an expansion and service improvement
plan (the "Plan"). The Plan was modified in certain respects and the date for
completion of the Plan was extended to February 1995. The government has
referred to the Guyana Public Utilities Commission ("PUC") the failure of GT&T
to complete the Plan by February 1995. The PUC is currently holding hearings
on this matter. Failure to timely fulfill the terms of the Plan could result
in monetary penalties, cancellation of the License, or other action by the PUC
or the government which could have a material adverse affect on the Company's
business and prospects.
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $9.5 million for the period when the order was
effective. GT&T initially instituted such a surcharge effective May 1, 1997,
but temporarily withdrew it when the Guyana Consumers Advisory Bureau (a
non-governmental group in Guyana) instituted a suit to block it. In May 1997
the Consumer Advisory Bureau sought an injunction from the Guyana High Court
restoring telephone rates to those imposed by the PUC in its October 1995
order. The Consumer Advisory Bureau's application is still pending. In
September 1997, the Guyana High Court denied an order which the Consumer
Advisory Bureau had sought to temporarily enjoin GT&T from putting into effect
a surcharge to recover the approximately $9.5 million over a period of 18
months. GT&T put such surcharge into effect on October 1, 1997 pending an
ultimate trial on the merits, and the Company recognized the approximately
$9.5 million of lost revenues in the third quarter of 1997.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to
the Company and to recover from the Company approximately $25 million of such
fees paid by GT&T to the Company since January 1991. GT&T has appealed the
PUC's order to the Guyana High Court and obtained a stay of the PUC's order
pending determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital
expenditure needs of GT&T. GT&T's indebtedness to the Company was evidenced by
a series of promissory notes. In March 1997, the PUC voided all of the
promissory notes then outstanding for failure to comply with certain
provisions of the PUC law. The PUC ordered that no further payments be made on
any of the outstanding notes and that GT&T recover from the Company all
amounts theretofore paid. The order also provided that the PUC would be
willing to authorize the payment of any amounts properly proven to the
satisfaction of the PUC to be due and payable from GT&T to the Company. GT&T
has appealed the PUC's order to the Guyana High Court and obtained a stay of
the PUC's order pending determination of that appeal.
13
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
In October 1997, the PUC ordered GT&T to increase the number of telephone
lines in service to a total of 69,278 lines by the end of 1998, 89,054 lines
by the end of 1999 and 102,126 by the end of the year 2000, to allocate and
connect an additional 9,331 telephone lines before the end of the 1998 and to
provide to subscribers who request them facilities for call diversion, call
waiting, reminder call and three-way calling by the end of the year 1998. In
issuing this order, the PUC did not hear evidence or make any findings on the
cost of providing these lines and services, the adjustment in telephone rates
which may be necessary to give GT&T a fair return on its investment or the
ways and means of financing the requirements of the PUC's order. GT&T has
appealed the PUC's order to the Guyana High Court and obtained a stay of the
PUC's order pending determination of that appeal.
In June 1997, GT&T received an assessment of approximately $3.9 million
from the Commissioner of Inland Revenue for taxes for the current year based
on the disallowance as a deduction for income tax purposes of five-sixths of
the advisory fees payable by GT&T to the Company. The deductibility of these
advisory fees in an earlier year had been upheld in a decision of the High
Court in August 1995. In July 1997, GT&T applied to the High Court for an
order prohibiting the Commissioner of Inland Revenue from further proceeding
with this assessment on the grounds that the assessment was arbitrary and
unreasonable and capriciously contrary to the August 1995 decision of the
Guyana High Court, and GT&T obtained an order of the High Court effectively
prohibiting any action on the assessment pending the determination by the
court of the merits of GT&T's application.
In November 1997, GT&T received an assessment of approximately $14
million from the Commissioner of Inland Revenue for taxes for the years 1991
through 1996. It is GT&T's understanding that this assessment stems from the
same audit commenced in May 1997 which the Guyana High Court stayed in its
July 1997 order referred above. Apparently because the audit was cut short as
a result of the Court's July order, GT&T did not receive notice of and an
opportunity to respond to the proposed assessments as is the customary
practice in Guyana, and substantially all the issues raised in the assessment
appear to be based on mistaken facts. GT&T has applied to the Guyana High
Court for an order prohibiting the Commissioner of Inland Revenue from
enforcing the assessment on the grounds that the origin of the audit with the
Minister of Trade and the failure to give GT&T notice of and opportunity to
respond to the proposed assessment violated Guyana law. The Guyana High Court
has issued an order effectively prohibiting any action on the assessment
pending the determination by the Court of the merits of GT&T's application.
14
The principle issues raised by the November 1997 assessment are as
follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S. $4.1 million
of taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.
$2.1 million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High
Court's decision in August 1995 referred to above (approximately
U.S. $2.9 million of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable
assets (approximately U.S. $1.6 million of taxes).
Approximately U.S. $1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
As a result of the decline in GT&T's revenues and profits from audiotext
traffic in 1997 as previously discussed, GT&T is preparing to file an
application with the PUC for a significant increase in local and outbound
international rates. There can be no assurance as to whether or when GT&T will
receive any such rate increase.
Liquidity and Capital Resources
The Company depends upon funds received from subsidiaries to meet its
capital needs, including servicing existing debt and its ongoing program of
seeking to acquire telecommunications licenses and businesses. The major
sources of funds for the Company has been advisory fees received from GT&T and
interest payments by GT&T and ATN-VI on intercompany debt.
15
The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997 and November 19, 1997, which includes a Proxy
Statement-Prospectus to consider and vote upon a proposed transaction to
divide the Company into two separate publicly-owned companies ( the
"Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. The Company will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of the Company Common Stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and the
absence of any material adverse change in the business of the Companies. In
October 1997 a tax ruling was received by the Company from the Internal
Revenue Service to the effect that the transfer of assets and liabilities to
ECI and the distribution of ECI common stock to shareholders of the Company
will be tax free for federal income tax purposes to the Company and its
shareholders.
As a result of the Transaction, the Company's liquidity and capital
resources may change significantly, and the Company will have fewer resources
and significantly reduced operations. On the Effective Date of the
Transaction, Atlantic Tele-Network, Inc. will record a loss on the split-off
and fair valuation of the net assets of New ATN which on a pro forma basis is
estimated to be $55 million. Accordingly equity of Atlantic Tele-Network, Inc.
will decrease by the loss recorded on the split-off and fair valuation of the
net assets of New ATN on the Effective Date. The Company's primary sources of
funds will be advisory fees, repayment of loans, and interest from GT&T. The
PUC orders in January, March, and October 1997, discussed above under
"Regulatory Matters", could have a material adverse impact on the Company's
liquidity.
GT&T is not subject to any contractual restrictions on the payment of
dividends. However, GT&T's own capital needs and debt service obligations have
precluded GT&T from paying any significant funds to the Company other than the
advisory fees and interest on intercompany debt mentioned above.
If and when the Company settles outstanding issues with the Guyana
government and the PUC with regard to GT&T's Expansion Plan and its rates for
service, GT&T may require additional external financing to enable GT&T to
further expand its telecommunications facilities. The Company has not
estimated the cost to comply with the October 1997 PUC order to increase the
number of telephone lines in service, but believes such a project would
require significant capital expenditures that would require external
financing. There can be no assurance that the Company will be able to obtain
any such financing.
16
The continued expansion of GT&T's network is dependent upon the ability
of GT&T to purchase equipment with U.S. dollars. A portion of GT&T's taxes in
Guyana may be payable in U.S. dollars or other hard currencies. The Company
anticipates that GT&T's foreign currency earnings will enable GT&T to service
its debt and pay its hard currency tax obligations. There are no Guyana legal
restrictions on the conversion of Guyana's currency into U.S. dollars or on
the expatriation of foreign currency from Guyana.
Until the effective date of the Transaction, other potential sources of
funds to the Company are from repayment of loans or dividends from ATN - VI.
However, the RTFC Loan limits the payment of dividends by ATN - VI unless ATN
- - VI meets certain financial ratios (which were not met at September 30,
1997). Consequently ATN - VI was restricted from paying dividends at that
date. At September 30, 1997, the Company also holds a note of ATN - VI in the
amount of approximately $24 million which may be repaid by ATN - VI in whole
or in part without regard to the limit on the payment of dividends by ATN -
VI.
However, ATN - VI's ability to service its debt is dependent on funds
from its parent or its subsidiaries . The RUS loan and applicable RUS
regulations restrict Vitelco's ability to pay dividends based upon certain net
worth tests except for limited dividend payments authorized when specific
security instrument criteria are unable to be met. Settlement agreements made
in 1989 and 1991 with the PSC also contain certain restrictions on dividends
by Vitelco which, in general, are more restrictive than those imposed by the
RUS. Dividends by Vitelco are generally limited to 60% of its net income,
although additional amounts are permitted to be paid for the sole purpose of
servicing ATN-VI's debt to the RTFC. Under the above restrictions, at
September 30, 1997, Vitelco's dividend paying capacity was approximately $8.8
million in excess of the amounts permitted for servicing ATN-VI debt.
The RTFC Loan and RUS Loan agreements also require, among other things,
maintenance of minimum debt service and times interest earned coverage and
restrictions on issuance of additional long-term debt. As of September 30,
1997, the Company was in compliance with all covenants contained in its
long-term debt agreements.
At September 30, 1997, Vitelco had outstanding $5 million of borrowings
under a $5 million line of credit with the RTFC expiring in March 2000, and an
additional $5 million under a $15 million line of credit with the RTFC
expiring in October 1998. These borrowings were incurred to finance part of
the costs of repairing damage to Vitelco's telephone plant caused by Hurricane
Marilyn in September 1995. Vitelco has also received approval from the RUS for
$35.7 million of long-term financing, which may be used to repay Vitelco's
outstanding line of credit borrowings from the RTFC. Borrowings under
Vitelco's $5 million line of credit are required to be repaid within 12 months
of the date of the borrowing, but may be repaid from the proceeds of
borrowings under the $15 million line of credit. Borrowings under Vitelco's
$15 million line of credit will mature on October 31, 1998, at which date, if
long-term loan funds from RUS have not yet been made available to Vitelco,
Vitelco will have the option of rolling the outstanding amount borrowed under
that line of credit into a 15-year term loan from RTFC having terms
substantially similar to those contained in Vitelco's existing long-term loan
from the RTFC.
17
The Company's short term bank credit facility, under which the Company
has $5.5 million of loans outstanding, expired on October 1, 1994. The bank
has orally agreed to renew this facility until October 1, 1998 and to waive
the prohibition on borrowing under the facility during the first thirty days
of the renewal period.
Impact of Devaluation and Inflation
Although the majority of GT&T's revenues and expenditures are transacted
in U.S. dollars or other hard currencies, the results of operations
nevertheless may be affected by changes in the value of the Guyana dollar.
From February 1991 until early 1994, the Guyana dollar remained relatively
stable at the rate of approximately 125 to the U.S. dollar. In 1994, however,
the Guyana dollar has declined in value to the current rate of approximately
142 to the U.S. dollar, and it has remained relatively stable at approximately
that rate since 1994.
The effect of inflation on the Company's financial results of telephone
operations in the U.S. Virgin Islands has not been significant in recent
years. The effect of inflation on the cost of providing telephone service in
the U.S. Virgin Islands has generally been offset (without any increase in
local subscribers' rates) by increased revenues resulting from growth in the
number of subscribers and from regulatory cost recovery practices in
determining access revenues.
18
Atlantic Tele-Network, Inc. and Subsidiaries
Part II- Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
19
Pursuant to the Securities Act of 1934, the registrant has caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
Atlantic Tele-Network, Inc.
Date: December 5, 1997 /s/ Craig A. Knock
- ---------------------- -------------------
Chief Financial Officer and Vice-
President signing both in his capacity
as Vice- President on behalf of the
Registrant and as Chief Financial
Officer of the Registrant
5
9-MOS
DEC-31-1997
SEP-30-1997
15,150
0
57,948
0
9,570
88,226
380,387
128,739
391,819
66,180
106,469
0
0
123
174,348
391,819
149,725
149,725
116,683
116,683
0
0
7,979
25,299
(739)
24,680
0
0
0
24,680
2.01
2.01
