________________________________________________________________________
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 September 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 5,003,792 shares of its common stock
($.01 par value).
________________________________________________________________________
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------------
------------------------------
December 31, September 30,
2001 2002
------------ --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $17,536 $28,784
Marketable securities 6,385 -
Accounts receivable, net 16,561 10,420
Materials and supplies 4,498 4,305
Prepayments and other current assets 2,784 4,628
------------ --------------
Total current assets 47,764 48,137
------------ --------------
Fixed assets:
Property, plant and equipment 107,603 118,613
Less accumulated depreciation (25,651) (33,468)
------------ --------------
Total fixed assets, net 81,952 85,145
------------ --------------
Investment in and advances to Bermuda Digital Communications, Ltd. 6,700 4,171
Other assets 5,590 4,940
------------ --------------
Total assets $142,006 $142,393
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $7,876 $5,441
Accrued taxes 4,082 6,239
Advance payments and deposits 1,800 3,022
Other current liabilities 4,147 1,140
Current portion of long-term debt 2,402 2,032
------------ --------------
Total current liabilities 20,307 17,874
Deferred income taxes 5,953 7,415
Long-term debt, excluding current portion 5,582 4,195
------------ --------------
Total liabilities 31,842 29,484
------------ --------------
Minority interests 21,221 20,168
------------ --------------
Contingencies and commitments (Note 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 5,003,792 outstanding 52 52
Treasury stock, at cost (1,501) (1,477)
Paid-in capital 55,787 55,787
Retained earnings 34,571 38,379
Unrealized gain on marketable securities 34 -
------------ --------------
Total stockholders' equity 88,943 92,741
------------ --------------
Total liabilities and stockholders' equity $142,006 $142,393
============ ==============
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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Columnar Amounts in Thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
2001 2002 2001 2002
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
Telephone operations
Revenues:
International long-distance revenues $17,276 $11,394 $47,744 $29,173
Local exchange service revenues 5,070 7,392 13,000 20,052
Other revenues 551 874 1,964 2,293
------------- ------------- ------------- -------------
Total revenues 22,897 19,660 62,708 51,518
------------- ------------- ------------- -------------
Operating expenses:
International long-distance expenses 4,527 2,321 12,720 7,406
Telephone operating expenses 6,695 7,572 19,709 20,808
General and administrative expenses 1,558 1,806 4,440 4,074
------------- ------------- ------------- -------------
Total operating expenses 12,780 11,699 36,869 32,288
------------- ------------- ------------- -------------
Income from telephone operations 10,117 7,961 25,839 19,230
------------- ------------- ------------- -------------
Other operations:
Revenues of other operations 1,165 793 3,432 2,738
Expenses of other operations 2,042 2,457 5,726 6,487
------------- ------------- ------------- -------------
Loss from other operations (877) (1,664) (2,294) (3,749)
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (199) (227) (545) (513)
Interest income 336 185 1,261 836
Equity in earnings of Bermuda Digital Communications, Ltd. 388 679 975 1,527
Other income (expense), net (618) 250 (932) 658
------------- ------------- ------------- -------------
Other income (expense), net: (93) 887 759 2,508
------------- ------------- ------------- -------------
Income before income taxes and minority interests 9,147 7,184 24,304 17,989
Income taxes 4,992 3,674 12,841 9,357
------------- ------------- ------------- -------------
Income before minority interests 4,155 3,510 11,463 8,632
Minority interests (934) (764) (2,371) (1,697)
------------- ------------- ------------- -------------
Net income $3,221 $2,746 $9,092 $6,935
============= ============= ============= =============
Net income per share:
Basic $0.65 $0.55 $1.82 $1.39
============= ============= ============= =============
Diluted $0.64 $0.54 $1.81 $1.37
============= ============= ============= =============
Weighted average common stock outstanding:
Basic 4,987 5,000 4,988 5,000
============= ============= ============= =============
Diluted 5,020 5,071 5,011 5,071
============= ============= ============= =============
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
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(Columnar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
2001 2002
-----------------------------------
(Unaudited)
Net cash flows provided by operating activities: $15,156 $19,907
------------ --------------
Cash flows from investing activities:
Sale (purchase) of marketable securities (6,579) 6,385
Capital expenditures (14,458) (11,010)
(Advances to,) repayments by Bermuda Digital Communications, Ltd., net 10 3,769
Investment in Lightrade Inc. (5,250) (320)
------------ --------------
Net cash flows used in investing activities (26,277) (1,176)
------------ --------------
Cash flows from financing activities:
Issuance of long-term debt 3,200 -
Repayment of long-term debt (1,364) (1,758)
Issuance (purchase) of common stock (68) 24
Dividends paid on common stock (2,867) (2,999)
Dividend to minority stockholder in GT&T (3,050) (2,750)
------------ --------------
Net cash flows used in financing activities (4,149) (7,483)
------------ --------------
Net change in cash and cash equivalents (15,270) 11,248
Cash and cash equivalents, beginning of period 24,495 17,536
------------ --------------
Cash and cash equivalents, end of period $9,225 $28,784
============ ==============
Supplemental cash flow information:
Interest paid $321 $677
============ ==============
Income taxes paid $10,363 $12,360
============ ==============
Supplemental non cash information:
Depreciation and Amortization Expense $6,444 $7,817
============ ==============
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 Nine Months Ended September 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 has written down and will either
sell or operate as a joint venture. Atlantic Tele-Center, Inc., a wholly owned
subsidiary of ATN, has currently developed and built a Web-enabled
telemarketing and service outsourcing call center in Guyana to provide sales
and customer support to companies serving the U.S. and Caribbean markets. The
Company owns a 43% interest in Bermuda Digital Communications, Ltd. ("BDC"),
which provides cellular telephone services in Bermuda under the name "Cellular
One," and has begun negotiations to acquire a 100% interest, subject to
Bermuda Monetary Authority approval. 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") governing
quarterly financial information. 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
5
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.
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 nine month periods ended September 30, 2002 and
September 30, 2001 is as follows (in thousands, except per share data):
Three Months Ended
Sept 30, 2001 Sept 30, 2002
Weighted Net Weighted Net
Net Average Income Net Average Income
Income Shares Per Share Income Shares Per Share
Basic net income $3,221 4,987 $0.65 $2,746 5,000 $0.55
Dilutive Securities:
Stock Options $0 33 $0.01 $0 71 $0.01
Diluted net income $3,221 5,020 $0.64 $2,746 5,071 $0.54
====== ===== ===== ====== ===== =====
Nine Months Ended
Sept 30, 2001 Sept 30, 2002
Weighted Net Weighted Net
Net Average Income Net Average Income
Income Shares Per Share Income Shares Per Share
Basic net income $9,092 4,988 $1.82 $6,935 5,000 $1.39
Dilutive Securities:
Stock Options $0 23 $0.01 $0 71 $0.02
Diluted net income $9,092 5,011 $1.81 $6,935 5,071 $1.37
====== ===== ===== ====== ===== =====
6
5. SEGMENT REPORTING
The Company's operations fall into four separate 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 included in the Company's Form 10K
for 2001. All of the revenues for GT&T were generated in Guyana and are shown
in the accompanying consolidated statements of operations as total revenues
from telephone operation. Total assets for GT&T were $137.7 million and $145.4
million at September 30, 2002 and December 31, 2001, respectively. For the
three and nine month periods ended September 30, 2001 and September 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.
The Company's comprehensive income was $3.3 million and $9.2 million for the
three and nine months ended September 30, 2001, respectively. There was no
difference between the Company's net income and comprehensive income for the
three and nine month periods ended September 30, 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, transactions 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.
7
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. The Company
will adopt this statement as required and does not expect it to have a
material impact on its financial statements.
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 $60,000 and $180,000 for the three and nine month periods ended
September 30, 2001, respectively. The Company included in other assets
goodwill of $1.7 million at September 30, 2001 and $1.6 million at September
30, 2002. 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. The FCC required that the settlement
rates between the U.S. and Guyana be reduced from $.85 to $.23 per minute by
January 1, 2002. The $.85 per minute rate provided a significant subsidy to
GT&T operations and network expansion activities. In 2001, the Company made an
application to the FCC for relief from the FCC's order, and that application
was denied by the FCC staff. The Company initially appealed the staff's
determination to the full Commission but has recently withdrawn its appeal and
initiated a Proceeding seeking to reduce the collection rates of U.S. carriers
for traffic to Guyana.
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, but negotiations
were terminated by the Government in March 2002. (See Litigation.)
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.
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 has joined
the suit to contest 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,
9
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.
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 and recovered $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, 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. In July 2002, the Guyana Court of Appeal ruled that GT&T
properly instituted the surcharge and quashed the order of the High Court.
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 in 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.
10
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.
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.
11
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. On November 6, 2002 the Court set December 13, 2002 as the date for
oral arguments, indicating its preliminary inclination to dismiss the
Company's claims.
12
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 has written down and will either
sell or operate as a joint venture. Atlantic Tele-Center, Inc., a wholly owned
subsidiary of ATN, has currently developed and built a Web-enabled
telemarketing and service outsourcing call center in Guyana to provide sales
and customer support to companies serving the U.S. and Caribbean markets. The
Company owns a 43% interest in Bermuda Digital Communications, Ltd. ("BDC"),
which provides cellular telephone services in Bermuda under the name "Cellular
One," and has begun negotiations to acquire a 100% interest, subject to
Bermuda Monetary Authority approval. 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 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.
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
February 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.
From the period from inception of GT&T's operations through September 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.
13
RESULTS OF OPERATIONS
Three and Nine months ended September 30, 2001 and 2002
The Company had earnings of $2.7 million, or $0.55 basic and $0.54
diluted per share, for the quarter ended September 30, 2002. This compares to
earnings of $3.2 million, or $0.65 basic and $0.64 diluted per share, for the
quarter ended September 30, 2001. For the nine months ended September 30, 2002
the Company had net income of $6.9 million as compared to $9.1 million in the
first nine months of last year. Per share earnings were $1.39 basic and $1.37
diluted for the nine months ended September 30, 2002 and $1.82 basic and $1.81
diluted for the first nine months of 2001.
Telephone operating revenues for the quarter ending September 30, 2002
were $19.7 million as compared to $22.9 million for the same period of 2001, a
decrease of $3.2 million, or 14%. Telephone operating revenues for the nine
months ended September 30, 2002 were $51.5 million as compared to $62.7
million for the nine months ended September 30, 2001, a decrease of $11.2
million, or 18%. These decreases in telephone operating revenues are due to
decreases in international long distance revenues of $5.9 million, or 34% and
$18.6 million, or 39% for the three and nine months ended September 30, 2002,
respectively. This decrease was attributable in part to a decrease in inbound
international traffic revenues which decreased by $5.1 million, or 38%, and
$17.4 million, or 46%, for the three and nine months ended September 30, 2002,
respectively, as a result of the FCC mandated reduction in settlement rates
for US-Guyana traffic from $.85 to $.23 per minute. During the quarter ended
September 30, 2002 the Company recorded revenues of $1.5 million representing
the collection of a settlement from an international telecommunications
carrier which had previously been reserved. Offsetting the revenue decreases
mentioned above were increases of $2.3 million, or 46%, for the third quarter
and $7.1 million, or 54%, for the nine month period in local exchange revenues
due to additional lines in service and increased cellular telephone
operations, as cellular access lines increased from 25,862 to 67,931 from
September 30, 2001 to September 30, 2002 and fixed access lines increased from
77,497 to 83,791 and for the same period.
Telephone operating expenses were $11.7 million and $32.3 million for the
three and nine months ended September 30, 2002 as compared to $12.8 million
and $36.9 million for the corresponding periods of 2001 resulting in decreases
of $1.1 million, or 9% and $4.6 million, or 12%. 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. Partially offsetting these decreases in international long distance
expense were increases in telephone operating expenses of $877,000, or 13% and
$1.1 million, or 6% for the three and nine months ended September due to
additional legal expenses and additional lines in service. Also offsetting the
decrease in international long distance expense for the three months ended
September 30, 2002 was an increase in general and administrative expense of
$248,000, or 16% as a result of the Company taking a reserve of $793,000
against an advance made to a telecommunications company.
14
Telephone operating expenses were approximately 60% and 63% of telephone
operating revenues for the three and nine months ended September 30, 2002,
respectively, as compared to 56% and 59% 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.
Income from telephone operations was $8.0 and $19.2 million for the three
and nine months ended September 30, 2002 as compared to $10.1 million and
$25.8 million for the corresponding periods of 2001. This represents decreases
of $2.1 million, or 21%, and $6.6 million, or 26%, for the three and nine
months ended September 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 nine months
ended September 30, 2002. Other operations revenues and expenses also include
the operations of ATN (Haiti) for the three and nine months ended September
30, 2001. Revenues of these operations were $793,000 and $2.7 million for the
three and nine months ended September 30, 2002 as compared to $1.2 million and
$3.4 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 its decrease
in revenues at Choice Communications.
Expenses of other operations were $2.5 million and $6.5 million for the
three and nine months ended September 30, 2002 as compared to $2.0 million and
$5.7 million for the same periods of 2001. These increases were due
principally to increased expenses at Choice Communications of $600,000 and
$1.4 million for the three and nine months ended September 30, 2002. The
expenses include an expense of $250,000 for unpaid employee benefits which
were applicable to 2001 and the six months ended June 30, 2002 which Choice
Communications recorded in the quarter ended September 30, 2002.
Equity in earnings of Bermuda Digital Cellular was $679,000 and
$1,527,000 for the three and nine months ended September 30, 2002 as compared
to $388,000 and $975,000 for the corresponding periods of 2001, representing
increases of $291,000, or 75% and $552,000, or 57%. These increases were due
primarily to increases in cellular subscribers, which climbed from 9,843 at
September 30, 2001 to 15,670 at September 30, 2002, an increase of 60%.
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 nine months ended
September 30, 2002 was 51% and 52%, respectively, as compared to 55% and 53%
for the three and nine months ended September 30, 2001.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
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
15
bankruptcy of WorldCom and MCI does not appear to 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 September
30, 2002, the Company's receivable from MCI was less than $1.0 million, net of
reserves, and WorldCom and MCI have obtained permission of the bankruptcy
court to pay in full certain foreign carriers, including GT&T, with which MCI
and WorldCom engages 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 September 30, 2002, approximately $7.0 million of the
Company's total cash balances of $28.8 million consisted of balances
denominated in Guyana dollars.
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.
16
Inflation
The effect of devaluation and inflation on the Company's financial
results has not been significant in the periods presented.
New Accounting Pronouncements
See Note 7 to the consolidated condensed financial statements contained
in this Report.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
See Item 7a. to the Company's Report on Form 10K for the year ended
December 31, 2001.
Item 4. Disclosure Controls and Procedures
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Subsequent to the date of their most recent evaluation, there were no
significant changes in the Company's internal controls or in other factors
that could significantly affect the Company's internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
17
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
18
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: November 13, 2002 /s/ Cornelius B. Prior, Jr.
- ----------------------- --- -----------------------
Cornelius B. Prior, Jr.
Chief Executive Officer and Chairman
of the Board
Date: November 13, 2002 /s/ Steven M. Ross
- ----------------------- --- --------------
Steven M. Ross
Chief Accounting Officer, Treasurer
and Acting Chief Financial Officer
19
CERTIFICATIONS
I, Cornelius B. Prior, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic
Tele-Network, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Atlantic Tele-Network, Inc.
Date: November 13, 2002 /s/ Cornelius B. Prior, Jr.
Cornelius B. Prior, Jr.
Chief Executive Officer and Chairman
of the Board
20
CERTIFICATIONS
I, Steven M. Ross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic
Tele-Network, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Atlantic Tele-Network, Inc.
Date: November 13, 2002 /s/ Steven M. Ross
-------------- -------- --- --------------
Steven M. Ross
Chief Accounting Officer,
Treasurer and Acting Chief
Financial Officer
21