- --------------------------------------------------------------------------------
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 March 31, 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 March 31, 1998, the registrant had outstanding 4,909,000 shares of its
common stock ($.01 par value).
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ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- -----------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
ASSETS 1997 1998
(UNAUDITED)
Current assets:
Cash $ 15,803 $ 23,458
Accounts receivable, net 38,077 33,448
Materials and supplies 3,536 3,573
Prepayments and other current assets 1,039 2,753
----------- -----------
Total current assets 58,455 63,232
Fixed assets:
Property, plant and equipment 39,042 41,705
Less accumulated depreciation - (927)
----------- -----------
Net fixed assets 39,042 40,778
Uncollected surcharges 5,941 4,710
Other assets 4,611 4,882
----------- -----------
$ 108,049 $ 113,602
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,382 $ 5,734
Accrued taxes 3,391 6,308
Advance payments and deposits 809 1,066
Other current liabilities 2,854 4,933
Current portion of long-term debt 3,298 3,298
----------- -----------
Total current liabilities 20,734 21,339
Deferred income taxes 2,464 2,955
Long-term debt, excluding current portion 14,536 13,711
Minority interest 16,071 16,482
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 - 4,871
----------- -----------
Total stockholders' equity 54,244 59,115
----------- -----------
$108,049 $113,602
=========== ===========
See notes to consolidated condensed and combined financial statements.
2
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED AND COMBINED CONDENSED
STATEMENTS OF OPERATIONS
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1997 1998
COMBINED CONSOLIDATED
Revenues:
International long-distance revenues $ 30,862 $ 19,901
Local exchange service 646 2,213
Other revenues 234 248
------------- ------------
Total revenues 31,742 22,362
Expenses:
International long-distance expenses 20,254 10,973
Telephone operating expenses 5,303 4,678
General and administrative 1,049 1,146
------------- ------------
Total expenses 26,606 16,797
Income from operations 5,136 5,565
Non-operating Revenues and Expenses:
Interest expense (981) (581)
Interest income 629 238
Other income - 3,750
------------- ------------
Non-operating revenues and expenses, net (352) 3,407
------------- ------------
Income before income taxes and minority interest 4,784 8,972
Income taxes 2,044 3,690
------------- ------------
Income before minority interest 2,740 5,282
Minority interest (300) (411)
------------- ------------
Net income $ 2,440 $ 4,871
============= ============
Net income per share $ 0.99
============
Weighted average shares outstanding 4,909
============
See notes to consolidated condensed and combined financial statements.
3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED AND COMBINED CONDENSED
STATEMENTS OF CASH FLOWS
(COLUMNAR AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
COMBINED CONSOLIDATED
Net cash flows provided by operating activities $ (405) $ 11,143
Cash flows from investing activities:
Capital expenditures (1,256) (2,663)
----------- ------------
Net cash used in investing activities (1,256) (2,663)
Cash flows from financing activities:
Repayment of long-term debt (1,312) (825)
Net change in advances to affiliates 457 -
----------- ------------
Net cash flows provided (used) by financing activities (855) (825)
----------- ------------
Net increase in cash (2,516) 7,655
Cash, Beginning of Period 8,182 15,803
----------- ------------
Cash, End of Period $ 5,666 $ 23,458
=========== ============
Supplemental cash flow information:
Interest paid $ 783 $ 447
=========== ============
Income taxes paid $ 2,219 $ 594
=========== ============
Depreciation and Amortization Expense $ 1,258 $ 927
=========== ============
See notes to consolidated condensed and combined financial statements.
4
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 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
subsidiary (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 months ended
March 31, 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. (ATN or the
Company) 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 months ended March 31, 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 months ended March 31, 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
5
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
------------------------------------------
(Columnar Amounts in Thousands, Except Per Share Data)
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.
PRO FORMA NET INCOME PER SHARE
Historical income per share is not presented for the combined statement of
operations 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:
Net income as reported $ 2,440
Reduction in depreciation 678
Elimination of interest income from subsidiary,
net of interest expense on debt transferred to ECI (429)
Tax effect (159)
----------
Pro forma net income $ 2,530
==========
Pro forma shares outstanding 4,909
==========
Pro forma net income per share $ 0.52
==========
6
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 1998 and 1997.
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
7
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
------------------------------------------
(Columnar Amounts in Thousands, Except Per Share Data)
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 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, but recently the PUC requested further information from GT&T on
this matter.
8
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
------------------------------------------
(Columnar Amounts in Thousands, Except Per Share Data)
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.
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 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
9
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED AND COMBINED CONDENSED
--------------------------------------------
FINANCIAL STATEMENTS
--------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
------------------------------------------
(Columnar Amounts in Thousands, Except Per Share Data)
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 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 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.
10
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
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.
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 up 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 in the future will not be a reliable indicator of the
Company's cost of replenishing its assets.
The financial statements for the three months ended March 31, 1997 included
in this report are the separate financial statements relating to Atlantic
Tele-Network, Inc.'s business and operations in Guyana
11
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
including its majority owned subsidiary, GT&T, and ATN's activities as the
parent company of all of its subsidiaries during the first three months of
1997. These financial statements do not reflect the valuation adjustment
arising from the split up 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 up 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 MONTHS ENDED MARCH 31, 1997 AND 1998
Operating revenues for the three months ended March 31, 1997 were $22.3
million as compared to $31.7 million for the corresponding period of the
prior year, a decrease of $9.4 million, or 30%.
The decrease was principally due to a $10.0 million, or 50%, decrease in
audiotext traffic revenues at GT&T for the three months ended March 31,
1998. 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 quarter of 1998, audiotext
traffic declined further to approximately 5.3 million minutes per month.
The reduction in traffic volume is estimated to account for approximately
$7.9 million, or 79% of the $10.0 million decrease in audiotext revenues in
the first quarter of 1998. The remaining $2.1 million, or 21% of the
decrease in audiotext revenues, results from a combination of the
following: changes in the traffic mix, increased chargebacks from a
carrier, and the strength of the U.S. dollar against certain foreign
currencies. Changes in traffic mix refers to the mix between countries of
origin which have different accounting rates. The changes in the volume of
traffic and the other factors discussed are subject to a number of
influences, most of which are beyond the Company's control, and may change
significantly in the future, positively or negatively. As a result of the
above factors, GT&T's profit
12
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
margins from this traffic also declined. Given the Company's recent
experience, the Company expects the negative trend in audiotext revenues to
continue (which could have a material adverse impact on the Company's total
revenues), although the Company is unable to predict the magnitude of the
decline in future revenues with any degree of certainty.
The decrease in audiotext revenues was partially offset by an increase in
local exchange services, which were $2.2 million for the three months ended
March 31, 1998 compared to $646,000 for the corresponding period in 1997,
an increase of $1.6 million, or 243%. This increase in local exchange
services is primarily the result of temporary rates granted by the Guyana
Public Utilities Commission (PUC) in response to a tariff filed with the
PUC on December 31, 1997, with effect from February 1, 1998. International
long-distance outbound revenues decreased by $944,000 for the three months
ended March 31, 1998 to $3.2 million from $4.2 million for the
corresponding period 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 39% for the
first three months of 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 months ended March 31, 1998 were $16.8
million, a decrease of $9.8 million or 37%, from operating expenses of
$26.6 million for the prior year. The decrease was due principally to a
decrease in audiotext and outbound traffic expense at GT&T of $9.3 million
for the three months ended March 31, 1998, due to decreased traffic
volumes. As a percentage of operating revenues, operating expenses
decreased to approximately 75% for the three months ended March 31, 1997
from approximately 84% for the prior year.
Income from operations before interest expense, income taxes and minority
interest for the three months ended March 31, 1998 was $5.6 million, an
increase of $429,000 or 8%, from income from operations before interest
expense, income taxes and minority interest of $5.1 million for the prior
year. 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 months ended March 31, 1998
was 41.1% as compared to
13
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
42.7% for the corresponding period of the prior year.
The minority interest in earnings consists of the Guyana Government's 20%
interest in GT&T.
Pro forma net income per share for the first three months of 1997 adjusts
the Company's depreciation expense, interest expense, and shares
outstanding as if the split-off Transaction had occurred on January 1,
1997.
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 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. 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 Guyana Public Utilities Commission ("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
14
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
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.
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, but recently the PUC requested further information from
GT&T on this matter. 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 May 1997, GT&T received a letter from the Guyana Commissioner of Inland
Revenue indicating that
15
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
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 for 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 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.
There can be no assurance as to the ultimate outcome of any of the above
described matters.
16
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As a result of the split-up of the Company into two separate public
companies, the Company's capital resources have changed significantly, and
the Company has fewer resources and significantly reduced operations.
However, the Company believes existing liquidity and capital resources will
be adequate to meet current operating needs. 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 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 capital resources are adequate to meet current
operations, 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.
17
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
-----------------------------------------------
CONDITIONS AND RESULTS OF OPERATIONS
------------------------------------
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.
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
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: May 13, 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
20
5
3-MOS
DEC-31-1998
MAR-31-1998
23,458
0
33,448
0
3,573
63,232
41,705
927
113,602
21,339
13,711
0
0
49
59,066
113,602
22,362
22,362
16,797
16,797
0
0
581
8,972
3,690
4,871
0
0
0
4,871
0.99
0.99
