________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19551
Atlantic Tele-Network, Inc.
(exact name of issuer as specified in its charter)
Delaware 47-072886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 00821
(809) 777-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
As of June 30, 1997, the registrant had outstanding 12,272,500 shares of
its common stock ($.01 par value).
________________________________________________________________________
<PAGE>
<TABLE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
<S> <C> <C>
(Unaudited)
Current assets:
Cash $ 11,540 $ 11,441
Accounts receivable, net 63,660 56,092
Materials and supplies 9,658 9,427
Prepayments and other current assets 4,110 6,195
------------ ------------
Total current assets 88,968 83,155
Fixed assets:
Property, plant and equipment 328,895 336,761
Less accumulated depreciation (117,031) (124,058)
Franchise rights and cost in excess of underlying book value, less
accumulated amortization of $11,170,000 and $11,870,000 40,132 39,432
------------ ------------
Net fixed assets 251,996 252,135
Property costs recoverable from future revenues 22,905 22,250
Uncollected authorized rate increases 3,119 2,920
Other assets 22,336 21,729
------------ ------------
$389,324 $382,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 17,153 $ 15,722
Accounts payable 25,021 20,377
Accrued taxes 2,457 1,970
Advance payments and deposits 2,701 3,065
Other current liabilities 8,231 6,737
Current portion of long-term debt 12,942 12,936
------------ ------------
Total current liabilities 68,505 60,807
Deferred income taxes and tax credits 33,066 22,059
Long-term debt, excluding current portion 116,227 109,580
Pension and other long-term liabilities 6,702 6,453
Minority interest 15,033 15,341
Contingencies and commitments (Note E)
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; - -
none issued and outstanding
Common stock, par value $.01 per share; 20,000,000 shares authorized;
12,272,500 shares issued and outstanding 123 123
Paid-in capital 81,852 81,852
Retained earnings 67,816 85,974
------------ ------------
Total stockholders' equity 149,791 167,949
------------ ------------
$ 389,324 $ 382,189
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
<TABLE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Telephone Operations:
Revenues:
Local exchange service $ 6,278 $ 7,193 $ 12,589 $ 14,476
Access charges 3,712 4,407 7,076 8,599
International long-distance revenues 38,232 26,255 73,473 57,117
Universal Service Fund 2,802 3,451 5,604 7,042
Billing and other revenues 1,275 1,290 2,304 2,820
Directory advertising 644 427 1,293 914
----------- ----------- ----------- -----------
Total revenues 52,943 43,023 102,339 90,968
Expenses:
Plant specific operations 4,152 4,169 7,869 7,990
Plant nonspecific operations 5,212 5,410 10,135 11,853
Customer operations 1,630 1,692 3,224 3,306
Corporate operations 3,206 3,122 6,127 6,111
International long-distance expenses 23,989 18,339 46,294 38,593
Taxes other than income 712 862 1,628 1,756
----------- ----------- ----------- -----------
Total expenses 38,901 33,594 75,277 69,609
Income from telephone operations 14,042 9,429 27,062 21,359
Other Operations:
Revenues:
Cellular services 1,581 997 3,219 2,146
Product sales and rentals 1,358 1,304 2,644 2,334
----------- ----------- ----------- -----------
Total revenues 2,939 2,301 5,863 4,480
Expenses of other operations 2,103 2,010 4,177 3,870
----------- ----------- ----------- -----------
Income from other operations 836 291 1,686 610
Non-operating Revenues and Expenses:
Interest expense (2,862) (2,745) (5,730) (5,317)
Interest income 85 69 227 158
Other revenues and expenses (2,464) (3,288) (6,906) (4,956)
----------- ----------- ----------- -----------
Non-operating revenues and expenses, net (5,241) (5,964) (12,409) (10,115)
----------- ----------- ----------- -----------
Income before income taxes and minority interest 9,637 3,756 16,339 11,854
Income taxes 3,952 (9,521) 6,876 (6,612)
----------- ----------- ----------- -----------
Income before minority interest 5,685 13,277 9,463 18,466
Minority interest (680) (1) (1,272) (308)
----------- ----------- ----------- -----------
Net income $ 5,005 $ 13,276 $ 8,191 $ 18,158
=========== =========== =========== ===========
Net income per share $ 0.41 $ 1.08 $ 0.67 $ 1.48
=========== =========== =========== ===========
Weighted average shares outstanding 12,273 12,273 12,273 12,273
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
<TABLE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
----------------------------------
1996 1997
<S> <C> <C>
Net cash flows provided by operating activities $22,567 $18,304
Cash flows from investing activities:
Capital expenditures (28,839) (10,319)
----------- ------------
Net cash used in investing activities (28,839) (10,319)
Cash flows from financing activities:
Repayment of long-term debt (11,608) (6,653)
Net borrowings (repayments) on notes 8,808 (1,431)
----------- ------------
Net cash flows provided (used) by financing activities (2,800) (8,084)
----------- ------------
Net decrease in cash (9,072) (99)
Cash, Beginning of Period 18,822 11,540
----------- ------------
Cash, End of Period $9,750 $11,441
=========== ============
Supplemental cash flow information:
Interest paid $5,797 $5,233
=========== ============
Income taxes paid $8,523 $3,683
=========== ============
Depreciation and Amortization Expense $9,154 $10,920
=========== ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
Atlantic Tele-Network, Inc. and Subsidiaries
Notes to Consolidated Condensed
Financial Statements
Three and Six Months Ended June 30, 1996 and 1997
A. GENERAL
SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet of Atlantic Tele-Network, Inc. and
subsidiaries (the "Company") at December 31, 1996 has been taken from audited
financial statements at that date. All other consolidated condensed financial
statements contained herein have been prepared by the Company and are
unaudited. The consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The unaudited interim consolidated condensed financial statements
furnished herein reflect all adjustments, which are, in the opinion of
management, necessary to fairly present the financial results for the interim
periods presented. The results for the three and six months ended June 30,
1996 and 1997 are not necessarily indicative of the operating results for the
full year not yet completed.
Reclassifications - Certain reclassifications have been made to the 1996
amounts to conform to the 1997 presentation.
B. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands
causing extensive damage to the outside telephone plant of Vitelco. None of
the damage was covered by insurance. The historical cost of the facilities
damaged or destroyed by Hurricane Marilyn was approximately $26.3 million with
associated accumulated depreciation of approximately $9.1 million. These costs
have been removed from the property accounts and along with certain excess
maintenance costs and costs of removal of $7.1 million have been classified as
property costs recoverable from future revenues because the Company
anticipates that future revenue in an amount at least equal to the capitalized
cost will result from inclusion of these costs in allowable costs for rate
making purposes. Vitelco has received approval from the Federal Communications
Commission to include the interstate portion of these costs in its rate base
and amortize them over a five year period. In May 1997, Vitelco received
approval from the Virgin Islands Industrial Development Commission for a five
year exemption (commencing October 1, 1998) from 90% of Virgin Islands income
taxes and 100% of Virgin Islands gross receipts, excise and property taxes to
assist in recovering the intrastate portion of the hurricane related costs.
C. ACCOUNTING FOR INCOME TAXES
As discussed in Note B above, Vitelco received approval from the Virgin
Islands Industrial Development Commission in May 1997 for a five year
exemption (commencing October 1, 1998) from 90% of Virgin Islands income taxes
and 100% of Virgin Islands gross receipts, excise and property taxes. In
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company has adjusted its deferred tax
assets and liabilities to reflect the change in the tax rates applicable to
Vitelco during the benefit period. This change has resulted in the Company
recording a non-recurring credit to income tax expense of approximately $10.9
million in the three and six months ended June 30, 1997. On October 9, 1997
the Virgin Islands Public Service Commission instituted a proceeding to
determine whether Vitelco's rates were just and reasonable in light of this
tax rebate. There can be no assurance as to the outcome of this proceeding.
5
<PAGE>
D. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $10 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 PUC has
appealed the January 1997 decision of the Guyana High Court to the Guyana
Court of Appeals, and in May 1997 the Consumer Advisory Bureau sought an
injunction from the Guyana High Court restoring telephone rates to those
imposed by the PUC in its October 1995 order. The PUC's appeal and the
Consumer Advisory Bureau's application are 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 $10 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.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to
the Company and to recover from the Company approximately $25 million of such
fees paid by GT&T to the Company since January 1991. GT&T has appealed the
PUC's order to the Guyana High Court and obtained a stay of the PUC's order
pending determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital
expenditure needs of GT&T. GT&T's indebtedness to the Company was evidenced by
a series of promissory notes. In March 1997, the PUC voided all of the
promissory notes then outstanding for failure to comply with certain
provisions of the PUC law. The PUC ordered that no further payments be made on
any of the outstanding notes and that GT&T recover from the Company all
amounts theretofore paid. The order also provided that the PUC would be
willing to authorize the payment of any amounts properly proven to the
satisfaction of the PUC to be due and payable from GT&T to the Company. GT&T
has appealed the PUC's order to the Guyana High Court and obtained a stay of
the PUC's order pending determination of that appeal.
6
<PAGE>
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
E. CONTINGENCIES AND COMMITMENTS
The Company previously had no insurance coverage for its outside plant
for damages caused by wind storms. Effective June 1997, the Company has
obtained such insurance coverage in the amount of $30 million per storm and
$55 million in the aggregate.
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. Failure to timely
fulfill the terms of the Plan could result in monetary penalties,
cancellation of the License, or other action by the PUC or the government
which could have a material adverse affect on the Company's business and
prospects.
In May 1997, GT&T received a letter from the Guyanese department of
Inland Revenue indicating that GT&T's tax returns for 1992 through 1996 had
been selected for an audit under the direct supervision of the Trade Minister
with particular focus on the withholding tax on payments to international
audiotext providers. In March and April 1997, the Guyanese Trade Minister
publicly announced that he had appointed a task force to probe whether GT&T
should pay withholding taxes on fees paid by GT&T to international audiotext
providers. The Minister announced that if GT&T were found guilty of tax
evasion it could owe as much as $40 million in back taxes. In July 1997, GT&T
applied to the Guyana High Court for an order prohibiting this audit on the
grounds that the decision of the Minister of Trade to set up this task force
and to control and direct its investigation was beyond his authority, violated
the provisions of the Guyanese Income Tax Act, interfered with the
independence of the Commissioner of Inland Revenue and was done in bad faith,
and the court issued an order effectively staying the audit pending a
determination by the court of the merits of GT&T's application.
In June 1997, GT&T received an assessment of approximately $3.9 million
from the Commissioner of Inland Revenue for taxes for the current year based
on the disallowance as a deduction for income tax purposes of five-sixths of
the advisory fees payable by GT&T to the Company. The deductibility of these
advisory fees in an earlier year had been upheld in a decision of the High
Court in August 1995. In July 1997, GT&T applied to the High Court for an
order prohibiting the Commissioner of Inland Revenue from further proceeding
with this assessment on the grounds that the assessment was arbitrary and
unreasonable and capriciously contrary to the August 1995 decision of the
Guyana High Court, and GT&T obtained an order of the High Court effectively
prohibiting any action on the assessment pending the determination by the
court of the merits of GT&T's application.
7
<PAGE>
F. SPLIT-UP TRANSACTION
The Company has filed a Registration Statement dated August 12, 1997,
which includes a Proxy Statement-Prospectus to consider and vote upon a
proposed transaction to divide the Company into two separate publicly-owned
companies ( the "Transaction"). Emerging Communications, Inc. (ECI) will
contain all the outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which
owns and conducts the Company's business and operations in the U.S. Virgin
Islands, and certain other assets and liabilities. The Company will retain its
business and operations in Guyana and certain other assets and liabilities.
The Transaction is conditioned upon, among other things, approval of the
Transaction by the holders of a majority of the outstanding shares of the
Company Common Stock, completion of $17.4 million of long-term financing by
ECI or ATN-VI, receipt from the Internal Revenue Service of a tax ruling to
the effect that the transfer of assets and liabilities to ECI and the
distribution of ECI common stock to shareholders of the Company will be tax
free for federal income tax purposes to the Company and its shareholders, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and the
absence of any material adverse change in the business of the Companies.
8
<PAGE>
Atlantic Tele-Network, Inc. and Subsidiaries
Management Discussion and Analysis of Financial
Conditions and Results of Operations
Introduction
The Company's revenues and income from continuing operations are derived
principally from the operations of its telephone subsidiaries, Vitelco and
GT&T. Vitelco derives most of its revenues from local telephone and
long-distance access services. GT&T derives almost all of its revenues from
international telephone services. Other operations in the Company's
Consolidated Statements of Operations include: VitelCellular, which provides
cellular telephone service in the U.S. Virgin Islands; and Vitelcom, which
supplies customer premises equipment in the U.S. Virgin Islands.
The principal components of operating expenses for the Company's
telephone operations are plant specific operations expenses, plant
non-specific operations expenses, customer operations expenses, corporate
operations expenses, long-distance expenses and taxes other than income taxes.
These categories are consistent with FCC accounting practices. Plant specific
operations expenses relate to support and maintenance of telephone plant and
equipment and include vehicle expense, land and building expense, central
office switching expense and cable and wire expense. Plant non-specific
operations expenses consist of depreciation charges for telephone plant and
equipment and expenses related to telephone plant and network administration,
engineering, power, materials and supplies, provisioning and plant network
testing. Customer operations expenses relate to marketing, providing operator
services for call completion and directory assistance, and establishing and
servicing customer accounts. Corporate operations expenses include Vitelco's
and GT&T's expenses for executive management and administration, corporate
planning, accounting and finance, external relations, personnel, labor
relations, data processing, legal services, procurement and general insurance.
International long-distance expenses consist principally of charges from
international carriers for outbound international calls from Guyana and
payments to audiotext providers from whom GT&T derives international audiotext
traffic. Taxes other than income taxes include gross receipts taxes, property
taxes, and other miscellaneous taxes.
RESULTS OF OPERATIONS
Three and Six Months ended June 30, 1996 and 1997
Revenues from telephone operations for the three months ended June 30,
1997 were $43.0 million as compared to $52.9 million for the corresponding
period of the prior year, a decrease of $9.9 million, or 19%. Revenues from
telephone operations for the six months ended June 30, 1997 were $91.0 million
as compared to $102.3 million for the corresponding period of the prior year,
a decrease of $11.4 million, or 11%. The decreases were principally due to a
$12.7 and $19.1 million decrease in audiotext traffic revenues at GT&T for the
three and six months ended June 30, 1997, respectively.
GT&T's volume of audiotext traffic peaked in August 1995 at slightly in
excess of 10 million minutes per month and fluctuated between 9 and 10 million
minutes per month in 1996. Through the first six months of 1997, the volume of
audiotext traffic has averaged about 12% less than in the comparable period of
1996. During the three and six months ended June 30, 1997, revenues from
audiotext traffic were adversely impacted by changes in the traffic mix,
reduction in some accounting rates, the strength of the U.S. dollar against
certain foreign currencies, chargebacks from certain foreign carriers, and a
foreign carrier's mislabeling of the origin of certain traffic. As a result of
the above items, GT&T's revenues from audiotext traffic in the first six
months of 1997 were approximately 35% less than in the comparable period of
1996 and GT&T's profit margins from this traffic also declined significantly.
9
<PAGE>
Vitelco's telephone operations revenues increased $1.9 and $4.7 million
for the three and six months ended June 30, 1997, respectively. These
increases are primarily the result of the recovery from Hurricane Marilyn in
September 1995 and an increase in Universal Service Fund revenues of $649,000
and $1.4 million for the three and six months ended June 30, 1997,
respectively, as a result of increased investment in net fixed assets. At June
30, 1997 Vitelco had 61,055 lines in service compared to 58,824 at the
corresponding date in the prior year. This revenue increase at Vitelco was
more than offset by decreases of $13.2 and $19.0 million for the three and six
months ended June 30, 1997, respectively in international inbound long
distance revenues at GT&T principally due to lower audiotext revenues, as a
result of items previously discussed. Offsetting this was an increase of $1.2
and $2.6 million in GT&T's unprofitable international outbound revenues. In
January 1997, the Guyana High Court voided a Guyana PUC order of October 1995
which had substantially reduced outbound rates in 1996, and permitted GT&T to
restore its rates for outbound traffic to their pre-October 1995 level.
Consolidated telephone operating expenses for the three months ended June
30, 1997 were $33.6 million, a decrease of $5.3 million or 14%, from
consolidated telephone operating expenses of $38.9 million for the
corresponding period of the prior year. Consolidated telephone operating
expenses for the six months ended June 30, 1997 were $69.6 million, a decrease
of $5.7 million or 8%, from consolidated telephone operating expenses of $75.3
million for the corresponding period of the prior year. These decreases were
due principally to decreases in audiotext and outbound traffic expenses at
GT&T of $5.7 million and $7.7 million for the three and six months ended June
30, 1997, respectively, due to decreased traffic volumes. Offsetting these
decreases were increases in plant non-specific expenses which increased as a
result of increased plant in service. As a percentage of revenues from
telephone operations, consolidated telephone operating expenses increased to
approximately 78% and 77% for the three and six month period ended June 30,
1997, respectively, from approximately 73% and 74% for the corresponding
periods of 1996.
Income from telephone operations decreased $4.6 and $5.7 million for the
three and six months ended June 30, 1997. These changes occurred principally
as a result of factors affecting revenues from telephone operations and
consolidated telephone operating expenses discussed above. GT&T's contribution
to income from telephone operations decreased by $6.5 million, or 67%, and
$9.2 million, or 49%, for the three and six months ended June 30, 1997
respectively, while Vitelco's contribution to income from telephone operations
increased by $1.9 million, or 43%, and $3.5 million, or 48%, for the same
periods.
10
<PAGE>
Income before income taxes and minority interest decreased $5.9 and $4.5
million for the three and six months ended June 30, 1997 respectively. The
significant factors that contributed to these increases were:
(i) the $4.6 and $5.7 million decrease in income from telephone
operations discussed above;
(ii) $545,000 and $1.1 million decreases in income from other operations,
principally from decreased cellular operations;
(iii) $101,000 and $344,000 decreases in net interest expense due to
reduced debt;
(iv) a $824,000 increase and a $2.0 million decrease for the three and
six months, respectively in other non operating revenues and
expenses. The increase for the three months ended June 30, 1997
is principally due to a charge of approximately $1.3 million
related to the suspension of the acquisition of the Congo national
phone system, offset by reductions of certain corporate expenses.
The decrease for the six months ended June 30, 1997 was principally
due to a non-recurring charge of $2.8 million in the first three
months of 1996 for the companies obligation to reimburse its two
Co-Chief Executive Officers for certain litigation expenses in
connection with a management dispute settled in February 1996, offset
by the increase in the three months ended June 30, 1997 previously
discussed.
As discussed in Note C to the Consolidated Condensed Financial
Statements, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1, 1998)
from 90% of Virgin Islands income taxes and 100% of Virgin Islands gross
receipts, excise and property taxes. In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the Company has
adjusted its deferred tax assets and liabilities to reflect the change in the
tax rates applicable to Vitelco during the benefit period. This change has
resulted in the Company recording a non-recurring credit to income tax expense
of approximately $10.9 million in the three and six months ended June 30,
1997. The effect of the tax exemption on future current taxes payable during
the benefit period will be reflected in the Company's financial statements
during the benefit period. On October 9, 1997 the Virgin Islands Public
Service Commission ("PSC") instituted a proceeding to determine whether
Vitelco's rates were just and reasonable in light of this tax rebate. There
can be no assurance as to the outcome of this proceeding.
Before giving effect to the change in deferred taxes discussed above, the
Company's effective tax rate for the three and six months ended June 30, 1997
was 36.7% and 36.2% as compared to 41.0% and 42.1% for the corresponding
periods of the prior year. The lower effective tax rates are primarily
attributable to significantly lower earnings at GT&T.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
11
<PAGE>
Regulatory Considerations
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 currenltly holding hearings
on this matter. Failure to timely fulfill the terms of the Plan could result
in monetary penalties, cancellation of the License, or other action by the PUC
or the government which could have a material adverse affect on the Company's
business and prospects.
In October 1995, the PUC issued an order that rejected the request of
GT&T for substantial increases in all telephone rates and temporarily reduced
rates for outbound long-distance calls to certain countries. In most cases,
the existing rates were already less than GT&T's payment obligations to
foreign carriers. In January 1997, on an appeal by GT&T, the Guyana High Court
voided the PUC's order in regard to rates and the rates were returned to the
rates in existence in October 1995. The lost revenue was approximately $10
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 PUC has appealed the January 1997 decision
of the Guyana High Court to the Guyana Court of Appeals, and in May 1997 the
Consumer Advisory Bureau sought an injunction from the Guyana High Court
restoring telephone rates to those imposed by the PUC in its October 1995
order. The PUC's appeal and the Consumer Advisory Bureau's application are
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 $10 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.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to
the Company and to recover from the Company approximately $25 million of such
fees paid by GT&T to the Company since January 1991. GT&T has appealed the
PUC's order to the Guyana High Court and obtained a stay of the PUC's order
pending determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital
expenditure needs of GT&T. GT&T's indebtedness to the Company was evidenced by
a series of promissory notes. In March 1997, the PUC voided all of the
promissory notes then outstanding for failure to comply with certain
provisions of the PUC law. The PUC ordered that no further payments be made on
any of the outstanding notes and that GT&T recover from the Company all
amounts theretofore paid. The order also provided that the PUC would be
willing to authorize the payment of any amounts properly proven to the
satisfaction of the PUC to be due and payable from GT&T to the Company. GT&T
has appealed the PUC's order to the Guyana High Court and obtained a stay of
the PUC's order pending determination of that appeal.
12
<PAGE>
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
As a result of the decline in GT&T's revenues and profits from audiotext
traffic in 1997 as previously discussed, GT&T is preparing to file an
application with the PUC for a significant increase in local and outbound
international rates. There can be no assurance as to whether or when GT&T will
receive any such rate increase.
Liquidity and Capital Resources
The Company depends upon funds received from subsidiaries to meet its
capital needs, including servicing existing debt and its ongoing program of
seeking to acquire telecommunications licenses and businesses. The major
sources of funds for the Company has been advisory fees received from GT&T and
interest payments by GT&T and ATN-VI on intercompany debt.
The Company has filed a Registration Statement dated August 12, 1997,
which includes a Proxy Statement-Prospectus to consider and vote upon a
proposed transaction to divide the Company into two separate publicly-owned
companies ( the "Transaction"). Emerging Communications, Inc. (ECI) will
contain all the outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which
owns and conducts the Company's business and operations in the U.S. Virgin
Islands, and certain other assets and liabilities. The Company will retain its
business and operations in Guyana and certain other assets and liabilities.
The Transaction is conditioned upon, among other things, approval of the
Transaction by the holders of a majority of the outstanding shares of the
Company Common Stock, completion of $17.4 million of long-term financing by
ECI or ATN-VI, receipt from the Internal Revenue Service of a tax ruling to
the effect that the transfer of assets and liabilities to ECI and the
distribution of ECI common stock to shareholders of the Company will be tax
free for federal income tax purposes to the Company and its shareholders, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and the
absence of any material adverse change in the business of the Companies.
As a result of the Transaction, the Company's liquidity and capital
resources may change significantly, and the Company might have fewer resources
and significantly reduced operations. The Company's primary sources of funds
will be advisory fees, repayment of loans, and interest from GT&T. The PUC
orders in January and March 1997, discussed above under "Regulatory
Considerations", could have a material adverse impact on the Company's
liquidity.
13
<PAGE>
GT&T is not subject to any contractual restrictions on the payment of
dividends. However, GT&T's own capital needs and debt service obligations have
precluded GT&T from paying any significant funds to the Company other than the
advisory fees and interest on intercompany debt mentioned above.
If and when the Company settles outstanding issues with the Guyana
government and the PUC with regard to GT&T's Expansion Plan and its rates for
service, GT&T may require additional external financing to enable GT&T to
further expand its telecommunications facilities. 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.
Until the effective date of the Transaction, other potential sources of
funds to the Company are from repayment of loans or dividends from ATN - VI.
However, the RTFC Loan limits the payment of dividends by ATN - VI unless ATN
- - VI meets certain financial ratios (which were not met at June 30, 1997).
Consequently ATN - VI was restricted from paying dividends at that date. At
June 30, 1997, the Company also holds a note of ATN - VI in the amount of
approximately $24 million which may be repaid by ATN - VI in whole or in part
without regard to the limit on the payment of dividends by ATN - VI.
ATN - VI's ability to service its debt is dependent on funds from its
parent or its subsidiaries . The RUS loan and applicable RUS regulations
restrict Vitelco's ability to pay dividends based upon certain net worth tests
except for limited dividend payments authorized when specific security
instrument criteria are unable to be met. Settlement agreements made in 1989
and 1991 with the U.S. Virgin Islands Public Service Commission (PSC) also
contain certain restrictions on dividends by Vitelco which, in general, are
more restrictive than those imposed by the RUS. Dividends by Vitelco are
generally limited to 60% of its net income, although additional amounts are
permitted to be paid for the sole purpose of servicing ATN-VI's debt to the
RTFC. Under the above restrictions, at June 30, 1997, Vitelco's dividend
paying capacity was approximately $8.4 million in excess of the amounts
permitted for servicing ATN-VI debt. The RTFC Loan and RUS Loan agreements
also require, among other things, maintenance of minimum debt service and
times interest earned coverage and restrictions on issuance of additional
long-term debt. As of June 30, 1997, the Company was in compliance with all
covenants contained in its long-term debt agreements.
14
<PAGE>
At June 30, 1997, Vitelco had outstanding $5 million of borrowings under
a $5 million line of credit with the RTFC expiring in March 2000, and an
additional $5 million under a $15 million line of credit with the RTFC
expiring in October 1997. These borrowings were incurred to finance part of
the costs of repairing damage to Vitelco's telephone plant caused by Hurricane
Marilyn in September 1995. Vitelco has also received approval from the RUS for
$35.7 million of long-term financing, which may be used to repay Vitelco's
outstanding line of credit borrowings from the RTFC. Borrowings under
Vitelco's $5 million line of credit are required to be repaid within 12 months
of the date of the borrowing, but may be repaid from the proceeds of
borrowings under the $15 million line of credit. Borrowings under Vitelco's
$15 million line of credit will mature on October 31, 1997, at which date, if
long-term loan funds from RUS have not yet been made available to Vitelco,
Vitelco will have the option of rolling the outstanding amount borrowed under
that line of credit into a 15-year term loan from RTFC having terms
substantially similar to those contained in Vitelco's existing long-term loan
from the RTFC. The Company's short term bank credit facility, under which the
Company has $5.5 million of loans outstanding, expired on October 1, 1994. The
bank has orally agreed to renew this facility until October 1, 1998 and to
waive the prohibition on borrowing under the facility during the first thirty
days of the renewal period.
Impact of Devaluation and Inflation
Although the majority of GT&T's revenues and expenditures are transacted
in U.S. dollars or other hard currencies, the results of operations
nevertheless may be affected by changes in the value of the Guyana dollar.
From February 1991 until early 1994, the Guyana dollar remained relatively
stable at the rate of approximately 125 to the U.S. dollar. In 1994, however,
the Guyana dollar has declined in value to the current rate of approximately
142 to the U.S. dollar, and it has remained relatively stable at approximately
that rate since 1994.
The effect of inflation on the Company's financial results of telephone
operations in the U.S. Virigin Islands has not been significant in recent
years. The effect of inflation on the cost of providing telephone service in
the U.S. Virgin Islands has generally been offset (without any increase in
local subscribers' rates) by increased revenues resulting from growth in the
number of subscribers and from regulatory cost recovery practices in
determining access revenues.
15
<PAGE>
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.
16
<PAGE>
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: October 20, 1997 /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
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
*** (COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ***
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,441
<SECURITIES> 0
<RECEIVABLES> 56,092
<ALLOWANCES> 0
<INVENTORY> 9,427
<CURRENT-ASSETS> 83,155
<PP&E> 376,193
<DEPRECIATION> 124,058
<TOTAL-ASSETS> 382,189
<CURRENT-LIABILITIES> 60,807
<BONDS> 109,580
0
0
<COMMON> 123
<OTHER-SE> 167,826
<TOTAL-LIABILITY-AND-EQUITY> 382,189
<SALES> 95,448
<TOTAL-REVENUES> 95,448
<CGS> 73,479
<TOTAL-COSTS> 73,479
<OTHER-EXPENSES> 4,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,317
<INCOME-PRETAX> 11,854
<INCOME-TAX> (6,612)
<INCOME-CONTINUING> 18,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,158
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
</TABLE>
