________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998
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)
19 Estate Thomas/Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 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 June 30, 1998, the registrant had outstanding 4,909,000 shares of
its common stock ($.01 par value).
________________________________________________________________________
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
December 31, June 30,
ASSETS 1997 1998
(Unaudited)
---------- ----------
Current assets:
Cash $ 15,803 $ 23,071
Accounts receivable, net 38,077 34,006
Materials and supplies 3,536 3,897
Prepayments and other current assets 1,039 2,243
----- -----
Total current assets 58,455 63,217
Fixed assets:
Property, plant and equipment 39,042 45,499
Less accumulated depreciation - (2,402)
------ ------
Net fixed assets 39,042 43,097
Uncollected surcharges 5,941 3,462
Other assets 4,611 5,879
----- -----
$ 108,049 $ 115,655
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,382 $ 7,478
Accrued taxes 3,391 5,876
Advance payments and deposits 809 887
Other current liabilities 2,854 1,993
Current portion of long-term debt 3,298 3,400
----- -----
Total current liabilities 20,734 19,634
Deferred income taxes 2,464 3,456
Long-term debt, excluding current portion 14,536 13,073
Minority interest 16,071 17,282
Contingencies and commitments (Note C)
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;
4,909,000 shares issued and outstanding 49 49
Paid-in capital 54,195 54,195
Retained earnings - 7,966
----- -----
Total stockholders' equity 54,244 62,210
------ ------
$ 108,049 $ 115,655
========= =========
See notes to consolidated condensed and combined financial statements.
2
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED
STATEMENTS OF OPERATIONS
(Columnar Amounts in Thousands, Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
Combined Consolidated Combined Consolidated
========== ============ ========== ============
Revenues:
International long-distance revenues $ 26,255 $ 21,081 $ 57,117 $ 40,982
Local exchange service 739 2,421 1,385 4,634
Other revenues 166 240 400 488
--- --- --- ---
Total revenues 27,160 23,742 58,902 46,104
Expenses:
International long-distance expenses 18,339 10,302 38,593 21,275
Telephone operating expenses 5,580 5,612 10,883 10,290
General and administrative 2,310 1,318 3,359 2,464
----- ----- ----- -----
Total expenses 26,229 17,232 52,835 34,029
Income from operations 931 6,510 6,067 12,075
Non-operating Revenues and Expenses:
Interest expense (1,010) (566) (1,991) (1,147)
Interest income 672 370 1,301 608
Other income - 84 - 3,834
---- ---- ---- -----
Non-operating revenues and expenses, net (338) (112) (690) 3,295
---- ---- ---- -----
Income before income taxes and minority interest 593 6,398 5,377 15,370
Income taxes 347 2,842 2,391 6,532
--- ----- ----- -----
Income before minority interest 246 3,556 2,986 8,838
--- ----- ----- -----
Minority interest (4) (461) (304) (872)
-- ---- ---- ----
Net income $ 242 $ 3,095 $ 2,682 $ 7,966
========== ========= ========= =========
Net income per share $ 0.63 $ 1.62
========== ==========
Weighted average shares outstanding 4,909 4,909
===== =====
See notes to consolidated condensed and combined financial statements.
3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED CONDENSED
STATEMENTS OF CASH FLOWS
(Columnar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
June 30,
1997 1998
Combined Consolidated
========== ============
Net cash flows provided by operating activities $ 4,729 $ 15,246
Cash flows from investing activities:
Capital expenditures (3,744) (4,509)
Acquisition of Digicom S.A., net of cash received - (1,819)
------ ------
Net cash used in investing activities (3,744) (6,328)
Cash flows from financing activities:
Repayment of long-term debt (2,634) (1,650)
Net change in advances to affiliates (1,256) -
------ ------
Net cash flows provided (used) by financing activities (3,890) (1,650)
Net increase in cash (2,905) 7,268
------ -----
Cash, Beginning of Period 8,182 15,803
Cash, End of Period $ 5,277 $ 23,071
========= ==========
Supplemental cash flow information:
Interest paid $ 1,595 $ 872
---------- ----------
Income taxes paid $ 3,487 $ 3,445
---------- ----------
Depreciation and Amortization Expense $ 2,549 $ 1,932
---------- ----------
See notes to consolidated condensed and combined financial statements.
4
Atlantic Tele-Network, Inc. and Subsidiaries
Notes to Consolidated and Combined Condensed
Financial Statements
Three and Six Months Ended June 30, 1997 and 1998
(Columnar Amounts in Thousands, Except Per Share Data)
A. SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The consolidated balance sheet of Atlantic Tele-Network, Inc. and
subsidiaries (ATN or the Company) at December 31, 1997 has been taken from
audited financial statements at that date. All other consolidated and combined
condensed financial statements contained herein have been prepared by the
Company and are unaudited. The consolidated and combined condensed financial
statements should be read in conjunction with the consolidated and combined
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The unaudited interim consolidated and combined 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 six months ended June
30, 1997 and 1998 are not necessarily indicative of the operating results for
the full year not yet completed.
BASIS OF PRESENTATION
Effective December 30, 1997, Atlantic Tele-Network, Inc. split-off into
two separate public companies (the Transaction). One, Emerging Communications,
Inc. (ECI), contained all of the operations of the Company and its
subsidiaries in the U.S. Virgin Islands. The other, ATN, continued the
business and operations of the Company in Guyana, including ownership of its
majority owned subsidiary, Guyana Telephone & Telegraph Company, Limited
(GT&T). The combined financial statements of ATN for the three and six months
ended June 30, 1997 included in this report are the separate financial
statements relating to ATN's business and operations in Guyana, including its
majority owned subsidiary GT&T, and ATN's activities as the parent company of
all of its subsidiaries. ATN's investment in subsidiaries other than GT&T and
operations of these other subsidiaries have been carved out of the combined
financial statements. The combined financial statements of ATN present the
results of operations and cash flows for the three and six months ended June
30, 1997 as if the business, operations and activities included in the
combined financial statements were conducted by a separate entity. All
material intercompany transactions and balances have been eliminated.
The Transaction was accounted for as a non-pro rata split-off of ATN from
the consolidated Company as it previously existed. Accordingly, ATN assets and
liabilities at December 31, 1997 have been accounted for in accordance with
Accounting Principles Board Opinion No. 29 entitled "Accounting for Nonmonetary
Transactions" and Emerging Issues Task Force 96-4 entitled "Accounting for
Reorganizations Involving a Non-Pro Rata Split-off of Certain Nonmonetary
Assets to Owners" at values as determined by the market capitalization of ATN
subsequent to the Transaction. The excess of original cost over such value has
been allocated to reduce the values assigned to long-term assets, primarily
property, plant and equipment and intangibles.
5
ACQUISITION
On June 2, 1998, the Company acquired a 75% interest in Digicom S.A., a
Haitian corporation principally engaged in dispatch radio mobile
telecommunications and paging for $1.7 million in cash and a commitment to
issue in the future 15,873 shares of ATN common stock. The acquisition is
accounted for under the purchase method.
PRO FORMA NET INCOME PER SHARE
Combined historical income per share for the three and six months ended
June 30, 1997 is not presented as the information is not considered
meaningful. Pro forma net income per share as if the Transaction had occurred
January 1, 1997 is calculated as follows
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
============= =============
Net income as reported $ 242 2,682
Reduction in depreciation 678 1,356
Elimination of interest income from subsidiary,
net of interest expense on debt transferred to ECI (429) (858)
Tax effect (160) (319)
-------------- --------------
Pro forma net income $ 331 $ 2,861
============== ===============
Pro forma shares outstanding 4,909 4,909
============== ===============
Pro forma net income per share $ 0.07 $ 0.58
============== ===============
6
Atlantic Tele-Network, Inc. and Subsidiaries
Notes to Consolidated and Combined Condensed
Financial Statements
Three and Six Months Ended June 30, 1997 and 1998
(Columnar Amounts in Thousands, Except Per Share Data)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130 entitled "Reporting of Comprehensive Income". SFAS No. 130 establishes
standards for the display of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from the issuance of shares of
stock and distributions to stockholders. There was no material differences
between net income and comprehensive income during the three and six months
ended June 30, 1997 and 1998.
B. REGULATORY MATTERS
On December 31, 1997, GT&T applied to the Guyana Public Utilities
Commission (PUC) for a significant increase in rates for local and outbound
international long-distance service and was awarded an interim increase in
rates effective February 1, 1998 which was a substantial increase over the
rates in effect during 1997 and earlier years. Subsequently, on March 27,
1998, the PUC reduced the interim rate increase effective in part on April 1,
1998 and in part on May 1, 1998. The interim rates currently in effect are
intended to remain in effect while the PUC holds hearings and reaches a
decision on GT&T's application, although the PUC may increase or decrease
these interim rates before reaching a decision on GT&T's permanent rates.
In October 1995, the Guyana Public Utilities Commission 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 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 a surcharge effective May 1, 1997 to collect the lost revenue, but
temporarily withdrew it when the Guyana Consumers Advisory Bureau (a
non-governmental group in Guyana) instituted a suit to block it. The Consumer
Advisory Bureau's suit 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. On March 27, 1998, the PUC ordered GT&T to cease
collecting this surcharge. GT&T appealed to the Guyana High Court and obtained
a stay of the PUC's order pending determination of GT&T's appeal.
7
In January 1997, the PUC ordered GT&T to cease paying management 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 substantially 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.
In 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 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
filed a motion against the PUC's order in the Guyana High Court and has
appealed the order on different grounds to the Guyana Court of Appeal. No stay
currently exists against this order. GT&T intends to take such steps as seem
appropriate after the level of the demand for telephone service can be
assessed in light of GT&T's current temporary rates.
8
In July 1998, the PUC gave notice that it would hold a public hearing on
August 25, 1998 in respect of the following matters: (i) "the validity of the
grant of monopoly rights to any owner or provider of services in the public
utility sector, having regard to the laws in force in Guyana at the relevant
time;" and (ii) "whether the Commission has power to request the Government to
issue a license to a new provider of services in the public utility sector,
where the existing provider in that sector fails or refuses to meet reasonable
demands for service in that public utility sector." While the PUC's notice did
not name GT&T as the service provider in question, the Company believes that
GT&T is the service provider which will be the subject of the hearing.
C. CONTINGENCIES AND COMMITMENTS
The Company is subject to lawsuits and claims which arise out of the
normal course of business, some of which involve claims for damages that are
substantial in amount. The Company believes, except for the items discussed
below for which the Company is currently unable to predict the outcome, the
disposition of claims currently pending will not have a material adverse
effect on the Company's financial position or results of operations.
Upon the acquisition of GT&T in January 1991, ATN 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 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 Commissioner 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
9
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.
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 and for the timing of the
taxation on certain surcharges to be billed by GT&T. The deductibility of
these advisory fees and the deferral of these surcharges until they are
actually billed had been upheld in a decision of the High Court in August 1995
pertaining to an earlier year. 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 assessments 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 these assessments stem from the same
audit commenced in May 1997 which the Guyana High Court stayed in its July
1997 order referred to above. Apparently because the audit was cut short as a
result of the Court's July 1997 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 of the issues raised in the
assessments 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 assessments 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 assessments violated Guyana law. The
Guyana High Court has issued an order effectively prohibiting any action on
the assessments pending the determination by the Court of the merits of GT&T's
application.
D. SUBSEQUENT EVENT
In July 1998, the Company concluded a combination debt and equity
financing of $4 million to acquire 30% equity ownership in Bermuda Digital
communications Ltd. (BDC) with an option to buy an additional 10% under
certain conditions. The acquisition will be accounted for under the equity
method.
10
Atlantic Tele-Network, Inc. and Subsidiaries
Management Discussion and Analysis of Financial
Conditions and Results of Operations
Forward Looking Statements
This report contains forward looking statements within the meaning of the
federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability
and statements of management's expectations and beliefs. Actual results could
differ materially from these statements as a result of many factors, including
future economic and political conditions in Guyana, the matters discussed in
the Regulatory Considerations section of Management's Discussion and Analysis
of Financial Condition and Results of Operations in this Report and matters
discussed in the Company's Form 10K Annual Report for the fiscal year ended
December 31, 1997.
Introduction
The Company's revenues and income from operations are derived principally
from the operations of its telephone subsidiary, GT&T. GT&T derives
substantially all of its revenues from international telephone services.
In June 1998, the Company acquired a 75% interest in Digicom S.A., a
Haitian corporation principally engaged in dispatch radio mobile
telecommunications and paging for $1.7 million in cash and 15,873 shares of
the Company's common stock. In July 1988, the Company acquired a 30% interest,
with certain options to increase that interest to 40%, in Bermuda Digital
Communications, Ltd., a Bermuda corporation which, when operational, will be
the sole cellular and PCS competitor in Bermuda to the Bermuda Telephone
Company for $4.0 million in debt and equity. The assets, liabilities, and
operations of Digicom and Bermuda Digital Communications, Ltd., individually
and in the aggregate, are not currently material to the assets, liabilities,
and operations of the Company on a consolidated basis.
The principal components of operating expenses for the Company are
international long-distance expenses, telephone operating expenses, and
general and administrative expenses. 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. Telephone operating expenses
consist of plant specific operations, plant non-specific operations, customer
operations, corporate operations expenses of GT&T, and taxes other than income
taxes. General and administrative expenses consist principally of parent
company overheads.
For accounting purposes, the split-off transaction of the Company into
two separate publicly held companies (the Company and the Emerging
Communications, Inc.) has been treated as a non pro-rata split-off of the
Company. In accordance with Accounting Principles Board Opinion No. 29
entitled "Accounting for Nonmonetary Transactions" and Emerging Issues Task
Force 96-4 entitled "Accounting for Reorganizations Involving a Non-Pro Rata
Split-off of Certain Nonmonetary Assets to Owners", the balance sheet of the
Company at December 31, 1997 has been adjusted to values determined by the
market capitalization of the Company immediately after the consummation of the
transaction. This adjustment includes an approximately $60 million reduction
in the Company's consolidated net fixed assets, and an approximately $45
million reduction in the Company's consolidated stockholder's equity. The
adjustment reduced the carrying value on the Company's consolidated financial
statements of its fixed assets significantly below their historical cost and
replacement value. Therefore, depreciation expense after December 31, 1997 is
not a reliable indicator of the Company's cost of replenishing its assets.
11
The financial statements for the three and six months ended June 30, 1997
included in this report are the separate financial statements relating to
Atlantic Tele-Network, Inc.'s business and operations in Guyana including its
majority owned subsidiary, GT&T, and ATN's activities as the parent company of
all of its subsidiaries during the first six months of 1997. These financial
statements do not reflect the valuation adjustment arising from the split-off
transaction. Moreover, the statements of operations include interest income
from indebtedness of subsidiaries which were transferred with such
indebtedness to Emerging Communications, Inc. in the split-off transaction.
As a result of the decline in 1997 in GT&T's revenues and profits from
audiotext traffic, GT&T filed on December 31, 1997 an application with the PUC
seeking rates designed to generate approximately $26 million in additional
revenues in 1998 for local and outbound international long-distance service.
In January 1998, GT&T was awarded an interim increase effective February 1,
1998 designed by the PUC to generate the equivalent of approximately $18
million in additional annual revenues for GT&T. Subsequently, on March 27,
1998, the PUC modified the interim rate increase effective in part on April 1,
1998 and in part on May 1, 1998. As modified, the interim rates are designed
to produce an annual increase in revenues of approximately $14 million over
the rates in effect in 1997. The interim rates are intended to remain in
effect while the PUC holds hearings and reaches a decision on GT&T's
application for permanent rates, although the PUC may increase or decrease
these interim rates before reaching a decision on GT&T's permanent rates. No
assurance can be given as to what permanent rates the PUC will award GT&T or
as to what changes the PUC may make in the current interim rates.
RESULTS OF OPERATIONS
Three and Six Months ended June 30, 1997 and 1998
Operating revenues for the three months ended June 30, 1998 were $23.7
million as compared to $27.2 million for the corresponding period of the prior
year, a decrease of $3.4 million, or 13%. Operating revenues for the six
months ended June 30, 1998 were $46.1 million as compared to $58.9 million for
the corresponding period of the prior year, representing a decrease of $12.8
million or 22%.
12
The decreases were principally due to a $6.5 million and $16.5 million
decrease in audiotext traffic revenues at GT&T for the three and six months
ended June 30, 1998, respectively. GT&T's volume of audiotext traffic
fluctuated between 8 and 9 million minutes per month in the first three
quarters of 1997. In the fourth quarter of 1997, the volume of audiotext
traffic declined to approximately 6.6 million minutes per month. In the first
and second quarters of 1998, audiotext traffic declined further to an average
of approximately 5.3 million and 5.0 million minutes per month, respectively.
The reduction in traffic volume is estimated to account for substantially all
of the decrease in audiotext revenues for the three and six months ended June
30, 1998. The Company expects that audiotext traffic volumes will remain at
least at their current level for the balance of 1998, although the Company is
unable to predict future audiotext revenues with any degree of certainty.
The decrease in audiotext revenues was partially offset by an increase in
local exchange services, which were $2.4 million and $4.6 million for the
three and six months ended June 30, 1998 compared to $739,000 and $1.4 million
for the corresponding periods in 1997. This represents an increase of $1.7
million and $3.2 million for the three and six months ended June 30, 1998, or
an increase of 228% and 235%, respectively. This increase in local exchange
services is primarily the result of the temporary rates granted by the Guyana
Public Utilities Commission (PUC) in response to a tariff filed with the PUC
on December 31, 1997. The increase is also partially attributable to an
increase in access lines to 57,522 at June 30, 1998 from approximately 51,955
at June 30, 1997; an increase of 5,567 lines or 11%.
International long-distance inbound revenues other than audiotext
increased to $7.9 million and $14.7 million for the three and six months ended
June 30, 1998, as compared to $6.0 million and $12.9 million for the
corresponding periods in 1997. This represents an increase of $1.9 million and
$1.9 million, or 32% and 14% for the three and six months ended June 30, 1998
over the corresponding periods in 1997. This increase correlates to an
increase in inbound minutes of traffic from 21.4 million for the six months
ended June 30, 1997 to 23.9 million for the six months ended June 30, 1998; an
increase of 2.4 million minutes or 11%. Management believes that this increase
in inbound telephone traffic other than audiotext is indirectly the result of
the increase in temporary rates for outbound long-distance granted by the PUC.
Because a substantial portion of GT&T's international traffic, other than
audiotext, consists of personal calls between Guyanese expatriates and their
friends and families in Guyana, management believes that an increase in rates
for outbound calls results not only in a decrease in the volume of outbound
calls, but that decrease in outbound calls in turn stimulates an increase in
the volume of inbound calls.
13
International long-distance outbound revenues decreased by $253,000 and
$1.0 million for the three and six months ended June 30, 1998 to $4.1 million
and $7.8 million, respectively. This compares to $4.4 million and $8.8 million
for the corresponding periods in 1997. Again, the decrease is primarily
related to the increased rates awarded by the PUC, as the volume of outbound
international long-distance traffic declined approximately 32% and 36% for the
three and six months ended June 30, 1998 over the corresponding period of the
prior year. The rates awarded for local and outbound international
long-distance service are temporary and they may be either increased or
decreased as a result of hearings by the PUC. See "Regulatory Matters".
Operating expenses for the three and six months ended June 30, 1998 were
$17.2 million and $34.0 million compared to $26.2 million and $52.8 million
for the corresponding periods in 1997. This represents a decrease of $9.0
million and $18.8 million for the three and six month period of 1998 over the
corresponding periods in 1997 or 34% and 36%, respectively. The decrease was
due principally to a decrease in audiotext and outbound traffic expense at
GT&T of $8.0 million and $17.3 million for the three and six months ended June
30, 1998, due to decreased traffic volumes. Operating expenses decreased to
approximately 73% and 74% of operating revenues for the three and six months
ended June 30, 1998 from approximately 97% and 90% of operating revenues for
the corresponding periods in 1997.
Income from operations before interest expense, income taxes and minority
interest for the three and six months ended June 30, 1998 was $6.5 million and
$12.1 million, respectively; an increase of $5.6 million and $6.0 million or
599% and 99%, from income from operations before interest expense, income
taxes and minority interest of $931,000 and $6.1 million for the corresponding
periods in 1997. This increase is principally a result of the factors
affecting revenues and operating expenses discussed above.
In the first three months of 1998, the Company recorded approximately
$3.8 million in other non-operating income resulting from the settlement of a
claim arising from the cancellation of an insurance policy. The settlement was
intended to compensate the Company for the increased cost of replacement
insurance coverage over the remaining term of the cancelled insurance policy,
which was approximately 10 years. The increased cost of the Company's
replacement insurance coverage will be accounted for as an expense over the
remaining term and should not be material to the Company's results of
operation in any period.
The Company's effective tax rate for the three and six months ended June
30, 1998 were 44.4% and 42.5% as compared to 58.5% and 44.5% 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.
14
Regulatory Considerations
As discussed above under "Introduction," GT&T has applied to the PUC for
a significant increase in rates for local and outbound international
long-distance service and has received interim rates which substantially
increase the rates over those in effect during 1997 and earlier years.
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 PUC the failure of GT&T to complete the Plan by February 1995.
The PUC is currently holding hearings on this matter. It is GT&T's position
that its failure to receive timely rate increases, to which GT&T was entitled,
to compensate for the devaluation in Guyana currency which occurred in 1991
provides legal justification for GT&T's delay in completing the Expansion
Plan. Failure to timely fulfill the terms of the Plan without legal
justification 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 PUC issued an order that rejected a request of GT&T
for substantial increases in all telephone rates and temporarily reduced rates
for outbound long-distance calls to certain countries. 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. The Consumer
Advisory Bureau's suit 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. On March 27, 1998, the PUC ordered GT&T to cease
collecting this surcharge. GT&T appealed to the Guyana High Court and obtained
a stay of the PUC's order pending determination of GT&T's appeal.
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.
15
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 substantially 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.
In 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
filed a motion against the PUC's order in the Guyana High Court and has
appealed the order on different grounds to the Guyana Court of Appeal. No stay
currently exists against this order. GT&T intends to take such steps to seek a
stay or modification of this order as seem appropriate after the level of
demand for telephone service can be assessed in light of GT&T's current
temporary rates.
In July 1998, the PUC gave notice that it would hold a public hearing on
August 25, 1998 in respect of the following matters: (i) "the validity of the
grant of monopoly rights to any owner or provider of services in the public
utility sector, having regard to the laws in force in Guyana at the relevant
time;and (ii) "whether the Commission has power to request the Government to
issue a license to a new provider of services in the public utility sector,
where the existing provider in that sector fails or refuses to meet reasonable
demands for service in that public utility sector." While the PUC's notice did
not name GT&T as the service provider in question, the company believes that
GT&T is the service provider which will be the subject of the hearing.
16
In May 1997, GT&T received a letter from the Guyana Commissioner 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.
In June 1997, GT&T received an assessment of approximately $3.9 million
from the Commissioner of Inland Revenue for taxes for 1996 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 and for the timing of the
taxation on certain surcharges to be billed by GT&T. The deductibility of
these advisory fees and the deferral of these surcharges until they are
actually billed had been upheld in a decision of the High Court in August 1995
pertaining to an earlier year. 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 assessments 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 these assessments stem from the same
audit commenced in May 1997 which the Guyana High Court stayed in its July
1997 order referred to above. Apparently because the audit was cut short as a
result of the Court's July 1997 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 of the issues raised in the
assessments 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 assessments 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 assessments violated Guyana law. The
Guyana High Court has issued an order effectively prohibiting any action on
the assessments pending the determination by the Court of the merits of GT&T's
application.
17
There can be no assurance as to the ultimate outcome of any of the above
described matters.
Liquidity and Capital Resources
The Company believes its existing liquidity and capital resources will be
adequate to meet current operating and capital needs. Without external
financing, the Company expended a total of $5.7 million in cash to acquire a
75% interest in Digicom S.A. and a minority interest in Bermuda Digital
Communications, Ltd. in June and July 1998. For the near-term, 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 Considerations," 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 in recent years, from paying any significant funds to the
Company other than the advisory fees and principal 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.
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.
While the Company believes its capital resources are adequate to meet
current operating and capital needs, the Company is also exploring several
opportunities to acquire communications properties or licenses in the
Caribbean and elsewhere. There can be no assurance as to whether, when or on
what terms the Company will be able to acquire any of the businesses or
licenses it is currently seeking or whether it will obtain financing necessary
to do so.
18
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, the
Guyana dollar declined in value to approximately 142 to the U.S. dollar, and
it remained relatively stable at approximately that rate through 1997. In
1998, the Guyana dollar has declined in value to approximately 150 to the U.S.
dollar.
The effect of devaluation and inflation on the Company's financial
results has not been significant in the periods presented.
19
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.
20
Atlantic Tele-Network, Inc. and Subsidiaries
Signatures
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: August 7, 1998 /s/ Craig A. Knock
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
6-MOS
DEC-31-1998
JUN-30-1998
23,071
0
34,006
0
3,897
63,217
45,499
2,402
115,655
19,634
13,073
0
0
49
62,161
115,655
46,104
46,104
34,029
34,029
0
0
1,147
15,370
6,532
7,966
0
0
0
7,966
1.62
1.62
