________________________________________________________________________
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, 1999
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, 1999, the registrant had outstanding 4,659,000 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,
1998 1999
ASSETS (Unaudited)
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $35,116 $31,956
Accounts receivable, net 24,448 22,424
Materials and supplies 4,988 4,899
Prepayments and other current assets 1,861 3,210
------------- -------------
Total current assets 66,413 62,489
------------- -------------
Fixed assets:
Property, plant and equipment 51,126 56,223
Less accumulated depreciation (4,695) (7,397)
------------- -------------
Net fixed assets 46,431 48,826
------------- -------------
Uncollected surcharges, net of current portion 1,802 1,619
Investment in and advances to Bermuda Digital Communications, Ltd. 3,944 4,650
Other assets 7,670 6,388
============= =============
Total assets $126,260 $123,972
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $11,863 $12,767
Accrued taxes 8,636 5,252
Advance payments and deposits 969 987
Other current liabilities 1,924 2,056
Current portion of long-term debt 3,403 3,403
------------- -------------
Total current liabilities 26,795 24,465
Deferred income taxes 502 1,497
Long-term debt, excluding current portion 11,394 9,666
------------- -------------
Total liabilities 38,691 35,628
------------- -------------
Minority interests 18,695 19,170
------------- -------------
Contingencies and commitments (Notes 7 and 8)
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 4,909,000 and 4,659,000 outstanding, respectively 49 49
Treasury stock, at cost (555) (2,331)
Paid-in capital 54,195 54,195
Retained earnings 15,185 17,261
------------- -------------
Total stockholders' equity 68,874 69,174
============= =============
Total liabilities and stockholders' equity $126,260 $123,972
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
<PAGE>
<TABLE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Columnar Amounts in Thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Telephone operations:
Revenues:
Local exchange service revenues $2,421 $2,082 $4,634 $4,025
International long-distance revenues 21,081 15,811 40,982 34,263
Other revenues 240 408 488 754
------------ ------------ ------------ ------------
Total revenues 23,742 18,301 46,104 39,042
------------ ------------ ------------ ------------
Operating expenses:
International long-distance expenses 10,302 8,083 21,275 17,493
Telephone operating expenses 5,612 4,927 10,290 10,020
General and administrative expenses 1,318 1,451 2,464 2,816
------------ ------------ ------------ ------------
Total operating expenses 17,232 14,461 34,029 30,329
------------ ------------ ------------ ------------
Income from telephone operations 6,510 3,840 12,075 8,713
------------ ------------ ------------ ------------
Other operations:
Revenues of other operations - 385 - 717
Expenses of other operations - 476 - 936
------------ ------------ ------------ ------------
Loss from other operations - (91) - (219)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (566) (463) (1,147) (943)
Interest income 454 506 692 1,056
Other income (expense), net - (140) 3,750 (245)
------------ ------------ ------------ ------------
Other income (expense), net: (112) (97) 3,295 (132)
------------ ------------ ------------ ------------
Income before income taxes and minority interests 6,398 3,652 15,370 8,362
Income taxes 2,842 1,996 6,532 4,414
------------ ------------ ------------ ------------
Income before minority interests 3,556 1,656 8,838 3,948
Minority interests (461) (195) (872) (474)
------------ ------------ ------------ ------------
Net income $3,095 $1,461 $7,966 $3,474
============ ============ ============ ============
Net income per share:
Basic $0.63 $0.31 $1.62 $0.74
============ ============ ============ ============
Diluted $0.63 $0.31 $1.62 $0.74
============ ============ ============ ============
Weighted average common stock outstanding:
Basic 4,909 4,659 4,909 4,709
============ ============ ============ ============
Diluted 4,909 4,659 4,909 4,709
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE>
<TABLE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998, AND 1999
(Columnar Amounts in Thousands)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Six months ended June 30,
1998 1999
-----------------------------
(Unaudited)
<S> <C> <C>
Net cash flows provided by operating activities: $15,246 $7,770
------------- -------------
Cash flows from investing activities:
Capital expenditures (4,509) (5,097)
Acquisition of Digicom, S.A., net of cash received (1,819) -
Advances to Bermuda Digital Communications, Ltd. - (931)
------------- -------------
Net cash flows used in investing activities (6,328) (6,028)
------------- -------------
Cash flows from financing activities:
Repayment of long-term debt (1,650) (1,728)
Purchase of common stock - (1,776)
Dividends declared on common stock - (1,398)
------------- -------------
Net cash flows used in financing activities (1,650) (4,902)
------------- -------------
Net change in cash and cash equivalents 7,268 (3,160)
Cash and cash equivalents, beginning of period 15,803 35,116
------------- -------------
Cash and cash equivalents, end of period $23,071 $31,956
============= =============
Supplemental cash flow information:
Interest paid $872 $719
============= =============
Income taxes paid $3,445 $1,429
============= =============
Depreciation and Amortization Expense $1,932 $2,702
============= =============
</TABLE>
The accompanying notes are an integral part of these 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, 1998 and 1999
(Columnar Amounts in Thousands, Except Per Share Data)
(Unaudited)
1. ORGANIZATION AND BUSINESS OPERATIONS
Atlantic Tele-Network, Inc. (the "Company" or "ATN"), a Delaware
corporation, is engaged principally through its 80%-owned subsidiary, Guyana
Telephone & Telegraph Company, Limited ("GT&T"), in providing
telecommunications services, including local telephone service, long-distance
services and cellular service in the Cooperative Republic of Guyana ("Guyana")
and international telecommunications service to and from Guyana. The Company
also owns a 75% interest in Digicom S.A. ("Digicom"), a Haitian corporation
principally engaged in dispatch radio, mobile telecommunications and paging
and a 30% interest (plus warrants which would enable the Company to increase
its investment to 45% under certain circumstances in Bermuda Digital
Communications, Ltd., ("BDC"), a Bermuda corporation which operates under the
name "Cellular One" and is the sole cellular and PCS competitor in Bermuda to
the Bermuda Telephone Company. ATN provides management, technical, financial,
regulatory and marketing services for GT&T, Digicom and BDC for a management
fee equal to 6% of gross revenues.
2. BASIS OF PRESENTATION
The consolidated condensed balance sheet of ATN and susidiaries at
December 31, 1998 has been taken from audited financial statements at that
date. All of the other accompanying consolidated condensed financial
statements are unaudited. These consolidated condensed financial statements
have been prepared by the management of ATN in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of the management of
the Company, all adjustments (consisting only of normal recurring adjustments)
considered necessary for fair presentation of the consolidated condensed
financial statements have been included, and the accompanying condensed
consolidated financial statements present fairly the financial position and
the results of operations for the interim periods presented. The consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and related footnotees included in the
Company's 1998 Annual Report on Form 10-K, as filed with the SEC.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. In determining revenue, the Company estimates the country of
origin of traffic it receives from foreign carriers to determine the
appropriate rate to apply to minutes of long distance traffic carried by the
Company. Additionally, the Company establishes reserves for possible
"refiling" or mislabeling of the origin of traffic, possible unreported or
uncollectible minutes from foreign carriers and doubtful accounts from
customers. The amounts the Company will ultimately realize upon settlement
could differ significantly in the near term from the amounts assumed in
estimating these revenues and the related accounts receivable.
5
<PAGE>
4. NET INCOME PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". That
statement requires the disclosure of basic net income per share and diluted
net income per share. Basic net income per share is computed by dividing net
income available to common shareholders by the weighted-average number of
common shares outstanding during the period and does not include any other
potentially dilutive securities. Diluted net income per share gives effect to
all potentially dilutive securities. There is no difference between basic net
income per share and diluted net income per share for any period presented as
the Company's only dilutive security, stock options, is antidilutive to the
calculation as of June 30, 1999. There were no dilutive securities outstanding
as of June 30, 1998.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for derivatives
and hedging. It requires that all derivatives be recognized as either assets
or liabilities at fair value and establishes specific criteria for the use of
hedge accounting. The Company's original required adoption date was January 1,
2000. SFAS No. 133 is not to be applied retroactively to financial statements
of prior periods. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000 (January 15, 2001 for Companies
with calendar year fiscal years. The Company expects no material impact to its
financial position upon adoption of SFAS No. 137
"Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and is required to be adopted no later than the Company's 1999
fiscal year. Also, in June 1998, the American Institute of Certified Public
Accountants issued SOP 98-5, "Reporting on the Costs of Start-up Activities."
SOP 98-5 requires costs of start-up activities and organizational costs, as
defined, to be expensed as incurred. The Company expects no material impact to
its financial position upon adoption of SOP 98-1 or SOP 98-5.
6
<PAGE>
6. ACQUISITIONS
Effective June 2, 1998, the Company acquired a 75% interest in Digicom, 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 Company has signed
an advisory fee contract with Digicom compensating it at 6% of gross revenues
for management services provided, effective from the acquisition date. The
acquisition has been accounted for as a purchase in accordance with Accounting
Principles Board No. 16, "Business Combinations." Accordingly, the purchase
price has been allocated to the assets acquired based on the estimated fair
values as of the acquisition date. The excess of the cost over the estimated
fair value of the net tangible assets acquired amounted to $874,000 and has
been included in other assets in the accompanying consolidated balance sheet
and is being amortized on a straight-line basis over 15 years.
On July 17, 1998, the Company acquired a 30% equity interest, plus
certain warrants in BDC for $1 million in cash. The Company has signed an
advisory fee contract with BDC compensating it at 6% of gross revenues for
management services provided, effective from the acquisition date. BDC is a
Bermuda corporation which operates under the name "Cellular One", and is the
sole cellular and PCS competitor to the Bermuda Telephone Company.
7. 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 so as to enable GT&T to earn a 15% return
on its rate base. Effective February 1, 1998, GT&T was awarded an interim
increase in rates which represented 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. On October 27, 1998, to reflect changed conditions since
December 31, 1997, GT&T filed for an additional rate increase designed to
generate $19.0 million in additional revenues over and above the interim rates
currently in effect. GT&T's two applications for a permanent rate increase are
still pending before the PUC. In January 1999, after the chairman of the PUC
held a press conference which dealt extensively with the rate issues under
consideration by the PUC, GT&T applied to the Guyana High Court for an order
prohibiting the chairman from further participation in the rate case on the
grounds that this press conference and his statements at the press conference
revealed a predetermination and bias by the chairman against GT&T on the
pending issues. In response to this application, the Guyana High Court issued
an order directing the chairman and the PUC to show cause why such an order of
prohibition should not be issued. The Guyana High Court's order has the legal
effect of barring the chairman from further participation in the rate case
pending a determination by the Guyana High Court of the merits of GT&T's
application and, thus, is likely to further delay a decision by the PUC on
GT&T's pending applications. In April 1999, the PUC furnished to GT&T a
preliminary report of the PUC's staff to the Commissioners for a response by
GT&T. In this report, the staff challenged GT&T's computation of rate base and
expense in several respects and concluded with a recommendation that the
temporary rates currently in effect for local service should be reduced by
approximately $2.7 million, rather than being increased as GT&T is seeking.
GT&T has filed a response to the PUC disputing the staff's conclusions. GT&T
and the Company are also involved in discussions with officials at the highest
levels in the Guyana government seeking to resolve all outstanding PUC and
Guyana tax issues affecting GT&T. There can be no assurance as to how or when
any or all of these issues will be resolved.
7
<PAGE>
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 $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. Effective on October 1, 1997, GT&T put into effect a
surcharge to recover the approximately $9.5 million of lost revenues from the
period of October 1995 to January 1997 pending an ultimate trial on the merits
of the Consumer Advisory Bureau's suit and the Company recognized the
approximately $9.5 million of lost revenues in the third quarter of 1997. As
of June 30, 1999, GT&T had collected approximately $8.5 million of the lost
revenues. The 1997 PUC Act, which has not yet come into effect, (and under a
bill pending in the Guyana legislature may never come into effect), contains
provisions which appear to prohibit GT&T from collecting any portion of the
lost revenues which remain uncollected on the effective date of the Act and
may require GT&T to refund all amounts previously collected in excess of the
rates in effect on January 1, 1996.
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 appealed the PUC's
order to the Guyana High Court. In July 1999 the Court found that the PUC's
procedure violated principles of natural justice and ordered the PUC to
conduct a new hearing in the matter.
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 its' alleged 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. As
of December 31, 1998 GT&T had fully paid to the Company all of the amounts at
issue. GT&T appealed the PUC's order to the Guyana High Court. In July 1999
the Court found that the PUC's procedure violated principles of natural
justice and ordered the PUC to conduct a new hearing in the matter.
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.
8
<PAGE>
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.
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. This
intended hearing has been stayed by an order issued by the Guyana High Court
on an application by GT&T pending a hearing on the merits of GT&T's
application.
On October 30, 1998, the U.S. Federal Trade Commission ("FTC") issued for
comments a proposed rule which would expand the definition of "pay-per-call"
services to include audiotext services such as those which GT&T terminates in
Guyana. The FTC previously received comments and conducted a workshop in 1997
in an earlier phase of this proceeding. If adopted in its present form the
FTC's proposed rule would require, among other things, that a caller must
receive a short preamble at the beginning of the call advising the caller of
the cost of the call and permitting the caller to terminate the call without
charge if terminated immediately. Although GT&T has not completed its study of
the ways and means of possibly complying with this requirement, it may be
technically impossible for recipients of international audiotext traffic, such
as GT&T, to separate audiotext traffic from other incoming international
traffic and permit a free preamble for audiotext calls. The FTC's proposed
rule would have the effect of prohibiting a local telephone company from
disconnecting a subscriber's telephone service for failure to pay charges for
an international audiotext call. This requirement currently applies to area
code 900 domestic audiotext but not to international audiotext, and provides a
collection advantage for international audiotext over domestic audiotext. The
proposed rule would also include several requirements which, if adopted, could
make it more difficult to bill and collect for international audiotext calls.
If the proposed regulations are adopted, the provisions described above may
have a significant adverse impact on international audiotext traffic from the
United States to Guyana and other non-U.S. termination points.
9
<PAGE>
8. 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 government agreed to permit rate increases in the event
of currency devaluation within the 3 year period, but GT&T was unable to get
timely increases when the Guyana currency suffered a sharp decline in March
1991. 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 has
commenced but not concluded hearings on this matter. If the PUC were to find
that GT&T was not excused from fulfilling the terms of the Plan by February
1995, GT&T could be subject to 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. The
requirements of the Plan were substantially completed during 1998.
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.
10
<PAGE>
In June 1997, GT&T received an assessment of the current equivalent of
approximately $3 million from the Commissioner of Inland Revenue for taxes for
1997 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 for an earlier year 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 the current equivalent of
approximately $11 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.
The Federal Communications Commission ("FCC") has issued a Report and
Order in a rule making proceeding in which it adopted mandatory international
accounting and settlement rate benchmarks for many countries, including
Guyana. The FCC classified countries as low-income, middle-income, high-income
based upon World Bank data. Guyana is classified as a low-income country. The
FCC adopted a mandatory settlement rate benchmark of $.23 per minute for
low-income countries and required that settlement rates between the U.S. and
low-income countries be reduced to $.23 per minute by January 1, 2002. The
current settlement rate is $.85 per minute. The FCC stated in the Report and
Order that it expects U.S. licensed carriers to negotiate proportionate annual
reductions. AT&T recently sought a $.125 per minute decrease in the settlement
rate for traffic between Guyana and the United States. GT&T has declined to
agree to this reduction, and AT&T has given GT&T notice terminating the
current operating agreement between AT&T and GT&T effective December 31, 1999.
Any significant reduction in the settlement rates for U.S. - Guyana traffic
could have a significant adverse impact on GT&T's earnings. While such an
event would also provide GT&T with a basis to seek a rate increase from the
PUC so as to permit GT&T to earn its contractually provided 15% rate of
return, there can be no assurances to when or whether GT&T would receive such
a rate increase.
11
<PAGE>
Atlantic Tele-Network, Inc. and Subsidiaries
Management Discussion and Analysis of Financial
Conditions and Results of Operations
Forward Looking Statements and Analysts' Reports
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, 1998.
Investors should also be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that the Company
agrees with any statement or report issued by an analyst irrespective of the
content of the statement or report. Furthermore, the Company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
Introduction
The Company's revenues and income from operations are derived principally
from the operations of its telephone subsidiary, Guyana Telephone & Telegraph
Company, Ltd. ("GT&T"). GT&T derives substantially all of its revenues from
local exchange, cellular and international telephone services. The Company
also owns a 75% interest (acquired in June 1998) in Digicom S.A., a Haitian
corporation principally engaged in dispatch radio, mobile telecommunications
and paging and a 30% interest (acquired in July 1998) plus warrants which
would enable the Company to increase that interest to 45% in certain
circumstances in Bermuda Digital Communications, Ltd., a Bermuda corporation
which operates under the name "Cellular One" and is the sole cellular and PCS
competitor to the Bermuda Telephone Company. The Company has signed advisory
fee contracts with both Digicom and Bermuda Digital Communications Ltd.
compensating it at 6% of gross revenues for management services provided,
effective from the acquisition dates. The assets, liabilities, and operations
of Digicom and Bermuda Digital Communications are not material to the assets,
liabilities, and operations of the Company on a consolidated basis.
12
<PAGE>
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 (which
includes depreciation and amortization), customer operations, corporate
operations expenses of GT&T, and taxes other than income taxes. General and
administrative expenses consist principally of expenses of the parent company.
In connection with the split-off transaction effective December 30, 1997
in which the Company was divided into two separate companies, and 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 was adjusted to fair value as 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 fair value 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 for periods after December 31, 1997 is
not a reliable indicator of the Company's cost of replenishing its assets.
RESULTS OF OPERATIONS
Three and Six Months ended June 30, 1998 and 1999
The Company had earnings of $1.5 million ($0.31per share) and $3.5
million ($0.74 per share) for the three and six months ended June 30, 1999.
This compares to $3.1 million ($0.63 per share) and $8.0 million ($1.62 per
share) for the corresponding periods of the prior year.
Telephone operating revenues for the three and six months ended June 30,
1999 were $18.3 million and $39.0 million as compared to $23.7 million and
$46.1 million for 1998, decreases of $5.4 million (23%) and $7.1 million
(15%). The decreases in revenue were due primarily to the expected drop in
audiotext traffic and to an increase in the "refiling" or mislabeling of
foreign traffic from the United States and the United Kingdom to Guyana.
Telephone operating expenses were $14.5 million and $30.3 million for the
three and six months ended June 30, 1999 as compared to $17.2 million and
$34.0 million for 1998, decreases of $2.8 million (16%) and $3.7 million
(11%). These decreases were due to reductions in audiotext traffic which
resulted in reduced international long-distance expense.
Income from telephone operations was $3.8 million and $8.7 million as
compared to $6.5 million and $12.1 million for 1998, decreases of $2.7 million
(41%) and $3.4 million (28%). These decreases were due to the factors
affecting telephone operating revenues and expenses discussed above.
Loss from other operations, which represent the operations of Digicom
S.A, was $91,000 and $219,000 for the three and six months ended June 30,
1999. No figures are included for the six months ended June 30, 1998 as the
purchase was treated as having been completed at June 30, 1998.
Interest expense was $463,000 and $943,000 for the three and six months
ended June 30, 1999 as compared to $566,000 and $1,147,000 for the
corresponding periods of the prior year. These decreases were primarily due to
the decreased level of debt.
Interest income was $506,000 and $1.1 million for the three and six
months ended June 30, 1999 as compared to $454,000 and $692,000 for 1998,
increases of $52,000 (11%) and $364,000 (53%). These increases are due to
higher overall cash balances.
13
<PAGE>
Other income (expense) was ($140,000) and ($245,000) for the three and
six months ended June 30, 1999 as compared to $0 and $3.8 million for the same
periods of 1998. The amounts for 1999 represent the 30% equity interest in
Bermuda Digital Communications, Ltd. which was purchased in July 1998. Bermuda
Digital Communications, Ltd. commenced operations July 2, 1999. The amount for
the six month period in 1998 represents 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.
Income taxes are $2.0 million and $4.4 million for the three and six
months ended June 30, 1999 as compared to $2.8 million and $6.5 million for
1998, decreases of $846,000 (30%) and $2.1 million (32%) over the prior year.
These decreases are due to lower taxable income.
The Company's effective tax rate for the three and six months ended June
30, 1999 was 55% and 53% as compared to 44% and 43% for the corresponding
periods of the prior year. The change in the effective tax rate is due
primarily to $2.9 million of the $3.8 million from the settlement of a claim
with an insurance carrier, discussed above, being taxed at the United States
statutory rate of 35% for 1998 rather than the Guyana statutory rate of 45%.
The 1999 effective tax rate is also increased because the Company's equity in
losses at Digicom S.A. and Bermuda Digital Communications, Ltd. do not
generate a tax benefit to the Company for 1999 since the tax jurisdictions are
separate and distinct from either the United States or Guyana.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
Regulatory and Tax Issues
The Company is involved in a number of regulatory and tax proceedings.
See notes 7 and 8 to the Company's Consolidated Condensed Financial Statements
included in this Report. A material and adverse outcome in one or more of
these proceedings could have a material adverse impact on the Company's
financial condition and future operations.
Liquidity and Capital Resources
The Company believes its existing liquidity and capital resources will be
adequate to meet its current operating and capital needs. The Company's
current primary source of funds is advisory fees from GT&T. If and when the
tax and regulatory issues discussed in Notes 7 and 8 to the Consolidated
Condensed Financial Statements included in this Report are resolved, the
Company anticipates that GT&T may begin paying dividends to its stockholders,
which are the Company and the government of Guyana. GT&T is not subject to any
contractual restrictions on the payment of dividends.
14
<PAGE>
If and when the Company settles outstanding issues with the Guyana
government and the Public Utilities Commission of Guyana ("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. However as a
result of the rate increases recently awarded to and currently sought by GT&T
and the efforts of the U.S. FCC, AT&T and carriers in other countries to
reduce international accounting rates, it is likely that an increasing portion
of the Company's revenues will be earned in Guyana currency. The Company
believes that the majority of GT&T's revenues will continue to be denominated
in U.S. dollars or other hard currencies. While there are no legal
restrictions on the conversion of Guyana currency into U.S dollars or other
hard currencies, or in the expatriation of Guyana currency or foreign currency
from Guyana, there is little liquidity in the foreign currency markets in
Guyana. GT&T had some difficulty in converting significant amounts of Guyana
currency into U.S. dollars during 1998. While the Company believes that it
has, and will continue to have, adequate cash flows denominated in hard
currency to meet its current operating, debt service and capital requirements
for the foreseeable future, there can be no assurance that GT&T will be able
to convert its Guyana currency earnings into hard currency to meet such
obligations. At June 30, 1999, approximately $2.3 million of the Company's
total cash balances consisted of balances denominated in the Guyana dollar.
The Company is currently exploring several opportunities to acquire
communications properties or licenses in the Caribbean and elsewhere. The
Company believes it has adequate capital resources to acquire these properties
and licenses without any external financing. However, 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.
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 declined in value to approximately 180 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.
15
<PAGE>
Year 2000 Compliance
The inability of computer hardware, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain databased information.
The Company believes it has identified all significant applications in
its systems that will require modification or replacement to ensure Year 2000
Compliance. Internal and external resources are being used to make the
required modifications and replacements and test Year 2000 Compliance. The
modification process of all significant applications is under way. The Company
plans on completing the testing process of all significant applications by
August 31, 1999.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position
or results of operations in any given year. These costs and the date on which
the Company plans to complete the Year 2000 modification and testing processes
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ from those plans.
16
<PAGE>
Atlantic Tele-Network, Inc. and Subsidiaries
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.
17
<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: August 12, 1999 /s/ Cornelius B. Prior, Jr.
- --------------------- ---------------------------
Cornelius B. Prior, Jr.
Secretary
Date: August 12, 1999 /s/ Steven M. Ross
- --------------------- -------------------
Steven M. Ross
Chief Financial Officer
18
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