________________________________________________________________________
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, 2002
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,
2002, the registrant had outstanding 4,995,559 shares of its common stock
($.01 par value).
________________________________________________________________________
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- ------------------------------------------------------------------------------------------------------------------
----------------------------
December 31, June 30,
2001 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $17,536 $28,862
Marketable securities 6,385 -
Accounts receivable, net 16,561 9,018
Materials and supplies 4,498 4,338
Prepayments and other current assets 2,784 5,424
------------ ------------
Total current assets 47,764 47,642
------------ ------------
Fixed assets:
Property, plant and equipment 107,603 115,182
Less accumulated depreciation (25,651) (30,811)
------------ ------------
Total fixed assets, net 81,952 84,371
------------ ------------
Investment in and advances to Bermuda Digital Communications, Ltd. 6,700 3,969
Other assets 5,590 3,842
------------ ------------
Total assets $142,006 $139,824
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $7,876 $5,932
Accrued taxes 4,082 5,169
Advance payments and deposits 1,800 3,106
Other current liabilities 4,147 1,474
Current portion of long-term debt 2,402 2,207
------------ ------------
Total current liabilities 20,307 17,888
Deferred income taxes 5,953 6,868
Long-term debt, excluding current portion 5,582 4,537
------------ ------------
Total liabilities 31,842 29,293
------------ ------------
Minority interests 21,221 19,409
------------ ------------
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;
5,151,424 shares issued 4,995,559 outstanding 52 52
Treasury stock, at cost (1,501) (1,477)
Paid-in capital 55,787 55,787
Retained earnings 34,571 36,760
Unrealized gain on marketable securities 34 -
------------ ------------
Total stockholders' equity 88,943 91,122
------------ ------------
Total liabilities and stockholders' equity $142,006 $139,824
============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2002
(Columnar Amounts in Thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Three months Six months
2001 2002 2001 2002
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Telephone operations
Revenues:
International long-distance revenues $16,381 $9,261 $30,468 $17,779
Local exchange service revenues 4,388 6,502 7,930 12,660
Other revenues 670 783 1,413 1,419
----------- ----------- ----------- -----------
Total revenues 21,439 16,546 39,811 31,858
----------- ----------- ----------- -----------
Operating expenses:
International long-distance expenses 4,220 2,417 8,193 5,085
Telephone operating expenses 6,920 6,868 13,014 13,236
General and administrative expenses 1,579 1,125 2,882 2,268
----------- ----------- ----------- -----------
Total operating expenses 12,719 10,410 24,089 20,589
----------- ----------- ----------- -----------
Income from telephone operations 8,720 6,136 15,722 11,269
----------- ----------- ----------- -----------
Other operations:
Revenues of other operations 1,129 860 2,267 1,945
Expenses of other operations 1,831 2,124 3,684 4,030
----------- ----------- ----------- -----------
Loss from other operations (702) (1,264) (1,417) (2,085)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (167) (131) (346) (286)
Interest income 368 350 925 651
Equity in earnings of Bermuda Digital Com., Ltd. 408 498 587 848
Other income (expense), net (412) 229 (314) 408
----------- ----------- ----------- -----------
Other income (expense), net: 197 946 852 1,621
----------- ----------- ----------- -----------
Income before income taxes and minority interests 8,215 5,818 15,157 10,805
Income taxes 4,301 3,136 7,849 5,683
----------- ----------- ----------- -----------
Income before minority interests 3,914 2,682 7,308 5,122
Minority interests (809) (510) (1,437) (933)
----------- ----------- ----------- -----------
Net income $3,105 $2,172 $5,871 $4,189
=========== =========== =========== ===========
Net income per share:
Basic $0.62 $0.43 $1.18 $0.84
=========== =========== =========== ===========
Diluted $0.62 $0.43 $1.17 $0.83
=========== =========== =========== ===========
Weighted average common stock outstanding:
Basic 4,987 4,995 4,987 4,995
=========== =========== =========== ===========
Diluted 5,025 5,066 5,010 5,066
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2002
(Columnar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2001 2002
----------------------------
(Unaudited)
Net cash flows provided by operating activities: $5,596 $15,436
------------ ------------
Cash flows from investing activities:
Sale (purchase) of Marketable securities (5,743) 6,385
Capital expenditures (8,957) (7,579)
Advances to Bermuda Digital Communications, Ltd. 113 3,387
Investment in Lightrade Inc. (5,000) (320)
------------ ------------
Net cash flows (used in) provided by investing activities (19,587) 1,873
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (936) 1,245)
Purchase of common stock - 24
Dividends paid on common stock (1,870) (2,012)
Dividend to minority stockholder in GT&T (2,550) (2,750)
------------ ------------
Net cash flows used in financing activities (5,356) (5,983)
------------ ------------
Net change in cash and cash equivalents (19,347) 11,326
Cash and cash equivalents, beginning of period 24,495 17,536
------------ ------------
Cash and cash equivalents, end of period $5,148 $28,862
============ ============
Supplemental cash flow information:
Interest paid $200 $0
============ ============
Income taxes paid $7,622 $0
============ ============
Supplemental non cash information:
Depreciation and Amortization Expense $4,160 $0
============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
Atlantic Tele-Network, Inc. and Subsidiaries
Notes to Consolidated Condensed
Financial Statements
Three and Six Months Ended June 30, 2001 and 2002
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 wholly owns Choice Communications, LLC ("Choice Communications"),
formerly Wireless World, LLC, which holds Multichannel Multipoint Distribution
Service ("MMDS") and Local Multipoint Distribution Service ("LMDS") licenses
for the U.S. Virgin Islands and is engaged in the U.S. Virgin Islands in the
internet service provider, specialized mobile radio and paging businesses and
the wireless cable television business. The Company owns an 80% interest in
ATN (Haiti) S.A. ("ATN (Haiti)") and an 80% interest in Transnet, S.A.
("Transnet"), Haitian corporations which have been principally engaged in
dispatch radio, mobile telecommunications, paging, and internet access and
data services in Haiti and which the company is in the process of liquidating
or selling. Atlantic Tele-Center, Inc., a wholly owned subsidiary of ATN, is
currently developing a Web-enabled outsourcing call center in Guyana to
provide customer support to companies serving the U.S. and other markets. The
Company owns a 44% interest in Bermuda Digital Communications, Ltd. ("BDC"),
which provides cellular telephone services in Bermuda under the name "Cellular
One." ATN provides management, technical, financial, regulatory, and marketing
services for its subsidiaries and affiliates for a management fee equal to 6%
of their revenues.
2. BASIS OF PRESENTATION
The consolidated condensed balance sheet of ATN and subsidiaries at
December 31, 2001 has been taken from the 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 accounting principles generally
accepted in the United States of America 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 footnotes
included in the Company's 2001 Annual Report on Form 10-K, as filed with the
SEC.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
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. Actual results could differ from
those estimates.
5
4. NET INCOME PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings 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.
A reconciliation of basic net income per share to diluted net income per
share for the three and six month periods ended June 30, 2002 and June 30,
2001 is as follows (in thousands, except per share data):
Three Months Ended
------------------
June 30, 2001 June 30, 2002
------------- -------------
Weighted Net Weighted Net
Net Average Income Net Average Income
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic net income $3,105 4,987 $0.62 $2,172 4,993 $0.44
Dilutive Securities:
Stock Options $0 38 $0.00 $0 71 $0.01
Diluted net income $3,105 5,025 $0.62 $2,172 5,064 $0.43
====== ===== ===== ====== ===== =====
Six Months Ended
----------------
June 30, 2001 June 30, 2002
------------- -------------
Weighted Net Weighted Net
Net Average Income Net Average Income
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Basic net income $5,871 4,987 $1.18 $4,189 4,993 $0.84
Dilutive Securities:
Stock Options $0 23 $0.01 $0 71 $0.01
Diluted net income $5,871 5,010 $1.17 $4,189 5,064 $0.83
====== ===== ===== ====== ===== =====
6
5. SEGMENT REPORTING
The Company manages and evaluates its operations in four operating
segments: Telephone Operations which relates to GT&T; Internet and Wireless
Cable which relates to Choice Communications; Radio and Paging which primarily
relates to ATN (Haiti) and Choice Communications; and Call Center which
relates to Atlantic Tele-Center, Inc. The operating segments are managed
separately because each offers different products and serves different
markets. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. All of the
revenues for GT&T were generated in Guyana and are shown in the accompanying
consolidated statements of operations as total operating revenues. Total
assets for GT&T were $134.0 million and $145.4 million at June 30, 2002 and
December 31, 2001, respectively. For the three and six month periods ended
June 30, 2001 and June 30, 2002, the Internet and Wireless Cable segment, the
Radio and Paging segment and the Call Center segment are not material for
separate disclosure under SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," and are reported as other operations in
the accompanying condensed consolidated statements of operations.
6. COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of a business during
a period, except for investments by owners and distributions to owners.
Comprehensive income includes net income and other comprehensive income. Other
comprehensive income is classified separately into foreign currency items and
unrealized gains and losses on certain investments in marketable securities.
There was no difference between the Company's net income and comprehensive
income for the three and six month periods ended June 30, 2001 and 2002,
respectively.
7. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
rescinds both SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and the amendment of SFAS No. 4, SFAS No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements". This statement amends SFAS
No. 13, "Accounting for Leases", to eliminate an inconsistency between the
accounting for sale-leaseback transactions and the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement are applicable for fiscal years
beginning after, transaction entered into after and financial statements
issued on or subsequent to May 15, 2002. The Company will adopt this
statement as required and does not expect it to have a material impact on its
consolidated financial statements.
In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost that is associated with an exit or disposal activity be
recognized when the liability is incurred. It nullifies the guidance of EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." Under EITF Issue No. 94-3, an entity recognized a
liability for an exit cost on the date that the entity committed itself to an
exit plan. In this statement, the Board acknowledges that an entity's
commitment to a plan does not, by itself, create a present obligation to other
parties that meets the definition of a liability. This statement also
establishes that fair value is the objective for the initial measurement of
the liability. The provisions of this statement will be effective for exit or
disposal activities that are initiated after December 31, 2002. We will adopt
this statement as required and do not expect it to have a material impact on
our financial statements.
7
On January 1, 2002 the Company adopted, SFAS No. 142 "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting standards
for acquired goodwill and other intangible assets and supersedes APB Opinion
No. 17. It addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business
combination) should be accounted for upon acquisition and on an ongoing basis.
Goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment.
Intangible assets that have finite useful lives (whether or not acquired in a
business combination) will continue to be amortized over their useful lives.
The Company recorded amortization expense related to goodwill arising
from business combinations (which had an indefinite useful life) of
approximately $66,000 and $120,000 for the three and six month periods ended
June 30, 2001, respectively. The adoption of the provisions of SFAS No. 142
has eliminated the amortization of goodwill during 2002 and has not had a
material impact on the Company's condensed consolidated financial statements.
In accordance with the requirements of FAS 142, the Company has performed
the first of the required impairment tests of goodwill existing as of January
1, 2002 and has determined that goodwill is not impaired.
Additionally in June 2001, the FASB issued SFAS No. 143, "Asset
Retirement Obligations," which establishes new accounting and reporting
standards for legal obligations associated with retiring assets. The fair
value of a liability for an asset retirement obligation must be recorded in
the period in which it is incurred, with the cost capitalized as part of the
related long-lived assets and depreciated over the asset's useful life.
Changes in the liability resulting from the passage of time will be recognized
as operating expenses. SFAS No. 143 must be adopted by 2003 and is not
expected to have a material impact on the Company's results of operations or
financial position.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting method for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations. The adoption of this statement
did not have a material impact on the Company's results of operations or
financial position.
8
8. CONTINGENCIES AND COMMITMENTS
Regulatory Matters
GT&T is subject to regulation in Guyana under the provisions of its
license and under the Guyana Public Utilities Commission Act of 1999 and the
Guyana Telecommunications Act of 1990. GT&T also has certain significant
rights and obligations under the agreement pursuant to which the Company
acquired its interest in GT&T in 1991, and because of the large volume of
traffic which GT&T has with the United States, GT&T can be significantly
affected by orders of U.S. regulatory agencies.
In 1997 the Federal Communications Commission (the "FCC") issued a report
and order in a rule-making proceeding in which it adopted mandatory
international accounting and settlement rate benchmarks for many countries.
The FCC adopted a mandatory settlement rate benchmark of $.23 per minute for
low-income countries, such as Guyana, and required that settlement rates
between the U.S. and low-income countries be reduced from $.85 to $.23 per
minute by January 1, 2002. The $.85 per minute provided a significant subsidy
to GT&T operations and network expansion activities. In 2001, the Company made
an application to the staff of the FCC for relief from the FCC's order, and
that application was denied by the FCC staff. The Company has appealed the
staff's determination to the full Commission.
In 2001, the Government of Guyana announced its intention to introduce
competition into Guyana's telecommunications sector. The changes under
consideration include terminating the monopoly provisions of GT&T's license
with appropriate compensation to GT&T, rebalancing rates so that the rates for
each service represent the real economic cost of such services, and shifting
from rate of return regulation to incentive rate-cap regulation. In February
2002, GT&T began negotiations with the Government on these issues and all
other outstanding issues between GT&T and the Government.
In July 2002 an individual sued the Attorney General of Guyana in the
Guyana courts asking, among other things, for a declaration that the section
of the Company's 1990 contract with the Government of Guyana granting to GT&T
an exclusive right to operate a telecommunications system in Guyana was null
and void as contrary to law and to the Constitution of Guyana. GT&T plans to
seek permission to join the action in order to defeat these claims.
On December 31, 1997, GT&T applied to the 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 million in additional annual revenues over
and above the interim rates then in effect. This was further updated on August
31, 2000 to reflect additional proposed revenues of $8.5 million per year. On
December 21, 2001 the PUC issued an order denying GT&T any further rate
increase and confirming as permanent the interim rates then in effect. GT&T
has appealed this PUC decision to the Guyana Court of Appeal. The PUC also
scheduled further hearings to assess the need to adjust GT&T local rates in
light of the FCC-mandated reduction in international settlement rates for
US-Guyana traffic from $.85 to $.23 per minute which was scheduled to come
into effect on January 1, 2002.
9
On December 31, 2001 GT&T filed an application with the PUC seeking $24.7
million of additional local revenues per year in light of the reduction in
international settlement rates for US-Guyana traffic. In connection with its
application, GT&T proposed that it receive a temporary rate increase designed
to generate $16.1 million per year of additional local revenues. On February
18, 2002, the PUC issued an order awarding GT&T interim rates designed to
produce $2.7 million per year of additional local revenues. The PUC indicated
that it would continue to hold hearings on the appropriate permanent increase
in rates with the objective of establishing permanent rates by June 2002, but
as of the date of this report no such rates have been established.
In 1997, after the Guyana High Court voided a PUC order of October 1995
reducing GT&T's rates for outbound long-distance calls to various countries,
GT&T put into effect a surcharge to recover the $9.5 million of lost revenues
from the period from October 1995 to the date of the High Court's order. The
Guyana Consumers Advisory Bureau instituted a suit challenging GT&T's rights
to institute this surcharge without PUC approval, and in the fourth quarter of
1999, the Guyana High Court ruled that GT&T should have first obtained PUC's
permission for such surcharge. GT&T has appealed this decision to the Guyana
Court of Appeal and that appeal is currently pending. Substantially all of the
$9.5 million of lost revenues were collected prior to the court's ruling, and
it is unclear whether GT&T will be required to make any refund even if the
High Court is upheld by the Court of Appeals since the High Court did not rule
on GT&T's contention that it was entitled to recover these lost revenues.
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 lines by the end of 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 1998. In issuing
this order, the PUC did not hear evidence or make any findings on the cost of
providing these lines and services, the adjustment in telephone rates which
may be necessary to give GT&T a fair return on its investment, or the ways and
means of financing the requirements of the PUC's order. GT&T has appealed the
PUC's order to the Guyana Court of Appeal; and that appeal is still pending.
No stay currently exists against this order.
Litigation
The Company is subject to lawsuits and claims which arise out of the
normal course of business, some of which involve claims for damages and taxes
that are substantial in amount. The Company believes that, 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 significantly expand 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 three-year period, but GT&T was unable to
get timely increases when the Guyanese 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. Since 1995, the PUC has
had pending a proceeding initiated by the minister of telecommunications of
Guyana with regard to the failure of GT&T to complete the Plan by February
1995. The PUC last held hearings on this matter in 1998. 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 of currency which occurred in 1991, provides
legal justification for GT&T's delay in completing the Plan. 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
its license, or other action by the PUC or the government which could have a
material adverse effect on the Company's business and prospects. The
requirements of the Plan were substantially completed more than three years
ago.
10
GT&T is contesting income tax assessments in the current equivalent of
approximately $8.3 million which it has received from the commissioner of
Inland Revenue for the years 1991 - 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. The deductibility of these advisory fees was upheld
for one of these years by a decision of the High Court in August 1995. The
Guyana Commission of Inland Revenue has appealed the High Court's decision to
the Guyana Court of Appeals, and the assessments for the other years are being
held in abeyance pending the Court of Appeals decision on that appeal.
Subsequent to December 31, 2001, GT&T received assessments for the years 1997
- - 2000 in the aggregate amount of approximately $7.4 million raising the same
issues. GT&T expects that proceedings on these assessments will also be held
in abeyance pending the Court of Appeals' decision.
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 an audit which the Guyana High Court stayed before it
was completed. Apparently, because the audit was cut short as a result of the
High Court's 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 Trade
Minister and the failure to give GT&T notice of, and opportunity to respond
to, the proposed assessments violated Guyanese law. The Guyana High Court has
issued an order effectively prohibiting any action on the assessments pending
the determination by the High Court of the merits of GT&T's application.
Negotiations have begun with the Revenue Authorities on the possible
settlement of the issues involved.
Should GT&T be held liable for any of the above tax liabilities the
Company believes that the government of Guyana, would be obligated to
reimburse GT&T for any amounts that would reduce GT&T's return on investment
to less than 15% per annum.
In early 2000, Inet Communications, Inc., an internet service provider in
Guyana, and the Guyana Consumers Association filed a suit in the high court
against the Attorney General of Guyana and GT&T. The suit claims that GT&T is
not entitled to rate increases based on the agreement between the Government
of Guyana and ATN and that the Civil Law of Guyana prohibits what is referred
to as GT&T's monopoly. As of the date of this report this suit is still
pending.
11
Atlantic Tele-Network, Inc. and Subsidiaries
Management Discussion and Analysis of Financial
Conditions and Results of Operations
Introduction
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 wholly owns Choice Communications, LLC ("Choice Communications")
formerly Wireless World, LLC, which holds Multichannel Multipoint Distribution
Service ("MMDS") and Local Multipoint Distribution Service ("LMDS") licenses
for the U.S. Virgin Islands and is engaged in the U.S. Virgin Islands in the
internet service provider, specialized mobile radio and paging businesses and
the wireless cable television business. The Company owns an 80% interest in
ATN (Haiti) S.A. ("ATN (Haiti)") and an 80% interest in Transnet, S.A.
("Transnet"), Haitian corporations which have been principally engaged in
dispatch radio, mobile telecommunications, paging, and internet access and
data services in Haiti and which the company is in the process of liquidating
or selling. Atlantic Tele-Center, Inc., a wholly owned subsidiary of ATN, is
currently developing a Web-enabled outsourcing call center in Guyana to
provide customer support to companies serving the U.S. and other markets. The
Company owns a 44% interest in Bermuda Digital Communications, Ltd. ("BDC"),
which provides cellular telephone services in Bermuda under the name "Cellular
One." ATN provides management, technical, financial, regulatory, and marketing
services for its subsidiaries and affiliates for a management fee equal to 6%
of their revenues.
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. Telephone operating expenses consist of plant
specific operations, plant non-specific (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.
Last year the government of Guyana announced its intention to introduce
competition into Guyana's telecommunications sector. The changes under
consideration include terminating the monopoly provisions of GT&T's license
with appropriate compensation to GT&T, rebalancing rates so that the rates for
each service represent the real economic cost of such services, and shifting
from rate of return regulation to incentive rate-cap regulation. GT&T entered
into negotiations with the Guyana government on these and related issues in
April of this year. The Company is unable at this time to assess the impact of
the government's proposals on the future financial position or results of
operations of the Company. See note 8 to the Consolidated Condensed Financial
Statements included in this Report.
On June 25, 2002, the Company initiated an action in the U.S. District
Court for the District of Columbia seeking an order directing the U.S.
Executive Director of the Inter-American Development Bank ("IADB") to vote
against a proposed $18 million loan to the Government of Guyana. This proposed
loan would be used in significant part to create a telecommunications system
in Guyana to compete with GT&T's existing system, thus violating the
exclusivity provisions of the license granted to GT&T by the Government of
Guyana in 1991 for 20 years, with an option to renew for an additional 20
years. The basis for this action is a provision of U.S. law which requires the
U.S. Executive Director to vote against a loan to any country that has, among
other things, nullified contractual rights of a U.S. investor. The Company
alleged in its District Court filing that the government of Guyana had
breached its 1990 Investment Agreement with ATN consistently since 1997 by
failing to provide ATN with a 15% return on its investment and was acting
contrary to that Agreement by announcing its intention to introduce
competition and furthering that intention with the proposed loan from the
IADB. The Government of Guyana sought leave to file an Amicus brief in the
District Court action, but the court refused the request and suggested that
the Company amend its complaint to include the Government of Guyana.
Accordingly, ATN filed an amended complaint on July 25, 2002 adding a claim
for damages against Guyana for the prior breaches of the 1990 Investment
Agreement.
12
From the period from inception of GT&T's operations through June 30,
2002, the majority of GT&T's cash receipts and expenditures have been in U.S.
dollars or other hard currencies. Accordingly, the U.S. dollar has been GT&T's
functional currency. With the decline in international settlement rates, the
expansion of GT&T's cellular business and the increases that GT&T has received
and hopes to receive in its rates for local service, the Guyana dollar may
become GT&T's functional currency in the future. If this were to occur, a
decline in value of the Guyana dollar in relation to the U.S. dollar might
give rise to an adverse impact on the Company's reported consolidated results
of operations.
RESULTS OF OPERATIONS
Three and Six months ended June 30, 2001 and 2002
The Company had earnings of $2.2 million, or $0.43 basic and diluted per
share, for the quarter ended June 30, 2002. This compares to earnings of $3.1
million, or $0.62 basic and diluted per share, for the quarter ended June 30,
2001. For the six months ended June 30, 2002 the Company had net income of
$4.2 million as compared to $5.9 million in the first six months of last year.
Per share earnings were $.84 basic and $.83 diluted for the six months ended
June 30, 2002 and $1.18 basic and $1.17 diluted for the first six months of
2001.
Telephone operating revenues for the quarter ending June 30, 2002 were
$16.5 million as compared to $21.4 million for the same period of 2001, a
decrease of $4.9 million, or 23%. Telephone operating revenues were $31.9
million for the six months ended June 30, 2002 as compared to $39.8 million
for the six months ended June 30, 2001, a decrease of $7.9 million, or 20%.
These decreases in telephone operating revenues are due to decreases in
international long distance revenues of $7.1 million, or 43% and $12.7
million, or 42% for the three and six months ended June 30, 2002,
respectively. This decrease was attributable in part to a decrease in inbound
international traffic which decreased by $6.6 million, or 53%, and $12.1
million, or 53%, for the three and six months ended June 30, 2002 as a result
of the FCC mandated reduction in settlement rates for US-Guyana traffic from
$.85 to $.23 per minute. Offsetting these decreases were increases of $2.1
million, or 48%, and $4.7 million, or 60%, in local exchange revenues due to
additional lines in service and increased cellular telephone operations as
fixed access lines increased from 75,136 to 82,043 from June 30, 2001 to June
30, 2002 and cellular access lines increased from 18,412 to 57,048 for the
same period.
Telephone operating expenses were $10.4 million and $20.6 million for the
three and six months ended June 30, 2002 as compared to $12.7 million and
$24.1 million for the corresponding periods of 2001 resulting in decreases of
$2.3 million, or 18% and $3.5 million, or 15%. These decreases were due
primarily to reductions in outbound international traffic expenses for traffic
from Guyana to the U.S. as a result of the reduced settlement rate for this
traffic. Additionally telephone operating expenses were lower due to
additional legal expenses in the first six months of 2001 relating to efforts
by the Company to become a Competitive Local Exchange Carrier in the U.S.
Virgin Islands. Telephone operating expenses were approximately 63% and 65% of
telephone operating revenues for the three and six months ended June 30, 2002,
respectively, as compared to 59% and 61% for the same periods of the prior
year. This percentage increase is principally the result of decreased inbound
international traffic revenues (which have no direct operating expenses)
discussed above.
13
Income from telephone operations was $6.1 and $11.3 million for the three
and six months ended June 30, 2002 as compared to $8.7 million and $15.7
million for the corresponding periods of 2001. This represents decreases of
$2.6 million, or 30%, and $4.4 million, or 28%, for the three and six months
ended June 30, 2002 over the corresponding periods of the prior year. These
changes are principally a result of the factors affecting revenues and
operating expenses discussed above.
Other operations revenues and expenses represent the operations of Choice
Communications and Atlantic Tele-Center, Inc., for the three and six months
ended June 30, 2002. Other operations revenues and expenses also include the
operations of ATN (Haiti) for the three and six months ended June 30, 2001.
Revenues of these operations were $860,000 and $1.9 million for the three and
six months ended June 30, 2002 as compared to $1.1 million and $2.3 million
for the same periods in 2001. These decreases were the result of the decreased
activity of ATN (Haiti) at December 31, 2001 and to a slight decrease in
revenues at Choice Communications.
Expenses of other operations were $2.1 million and $4.0 million for the
three and six months ended June 30, 2002 as compared to $1.8 million and $3.7
million for the same periods of 2001. These increases were due principally to
increased expenses at Choice Communications of $230,000 and $768,000 for the
three and six months ended June 30, 2002.
Equity in earnings of Bermuda Digital Cellular was $498,000 and $848,000
for the three and six months ended June 30, 2002 as compared to $408,000 and
$587,000 for the corresponding periods of 2001, representing increases of
$90,000, or 22% and $261,000, or 44%. This increase is due primarily to the
increase in cellular subscribers which climbed from 7,923 at June 30, 2001 to
15,008 at June 30, 2002, an increase of 89%.
The U.S. Guyana settlement rate reduction appears to be costing GT&T
about $1.7 million per month in reduced operating profits at current traffic
volumes. The February 2002 interim rate increase granted by the PUC was
designed to increase GT&T's operating profits by about $2.7 million a year.
The Company expects that during the year 2002 as the reduced settlement rate
is reflected in lower consumer prices in the U.S., increased volumes of
international traffic between the U.S. and Guyana along with the increased
rates for local services should enable GT&T to recover about half of these
lost operating profits.
The Company's effective tax rate for the three and six months ended June
30, 2002 was 54% and 53%, respectively, as compared to 52% for the three and
six months ended June 30, 2001.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
14
A substantial part of GT&T's international telecommunications traffic
during the periods covered by this report consisted of traffic with MCI
International, Inc., a subsidiary of WorldCom, Inc. which filed for
reorganization under Chapter XI of the US Bankruptcy Code in July 2002. The
Company does not think that the bankruptcy of WorldCom and MCI will have any
material adverse impact on the Company. WorldCom has announced its intentions
to continue its core domestic and international long-distance telephone
business. Should it be ultimately unable to do so, the Company believes that
the traffic currently carried by MCI will find its way to GT&T through other
carriers. At June 30, 2002, the Company's receivable from MCI was less than
$1.0 million, net of reserves, and WorldCom and MCI have sought permission of
the bankruptcy court to pay in full certain foreign carriers, including GT&T,
with which MCI and WorldCom engaged in their international telephone carrier
business.
Regulatory and Tax Issues
The Company is involved in a number of regulatory and tax proceedings.
See note 11 to the Company's Consolidated Financial Statements included in the
Company's 2001 Annual Report on Form 10-K, as filed with the SEC and note 8 to
the 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 it has adequate cash and credit facilities to meet
current operating and capital needs. The Company's current primary source of
funds at the parent company level is advisory fees and dividends from GT&T.
The tax and regulatory issues discussed in Note 11 to the Company's
Consolidated Financial Statements included in the Company's 2001 Annual Report
on Form 10-K and note 8 to the Consolidated Condensed Financial Statements
included in this Report 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.
The continued expansion of GT&T's network is dependent upon the ability
of GT&T to purchase equipment with U.S. dollars. As a result of the rate
increases recently awarded to and currently sought by GT&T, the order of the
U.S. FCC which reduced the settlement rate for U.S. - Guyana traffic and the
general trend toward lower international settlement rates, it is likely that
an increasing portion of the Company's revenues will be earned in Guyana
currency. While there are no legal restrictions on the conversion of Guyana
currency into U.S. dollars or other hard currencies, or on the expatriation of
Guyana currency or foreign currency from Guyana, there is currently little
liquidity in the foreign currency markets in Guyana. 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, 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, 2002, approximately $4.1 million of the Company's
total cash balances consisted of balances denominated in Guyana dollars.
On May 21, 2002, Bermuda Digital Communications paid $4.5 million to the
Company prepaying in full Bermuda Digital Communications long term debt to the
Company.
From time to time the Company explores opportunities to acquire
communications properties or licenses in the Caribbean and elsewhere. Such
acquisitions may require external financing. 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.
Inflation
The effect of devaluation and inflation on the Company's financial
results has not been significant in the periods presented.
15
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
(a.) Exhibit 99 Certification of CEO and CFO regarding this report.
(b.) On July 29, 2002 the Company filed a Report on Form 8K with respect
to change of accountants.
16
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 14, 2002 /s/ Cornelius B. Prior, Jr.
- ------------ -------- --- -----------------------
Cornelius B. Prior, Jr.
Chief Executive Officer and Chairman
of the Board
Date: August 14, 2002 /s/ Steven M. Ross
- --------------------- --- --------------
Steven M. Ross
Chief Accounting Officer, Treasurer
and Acting Chief Financial Officer
17