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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 [NO FEE REQUIRED] For the transition period from to.
COMMISSION FILE NUMBER 0-19551
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ATLANTIC TELE-NETWORK, INC.
(Exact name of registrant as specified in its charter)
19 ESTATE THOMAS
Delaware HAVENSITE
(State or other jurisdiction of P.O. BOX 12030
incorporation or organization) ST. THOMAS, U.S. VIRGIN ISLANDS
(Address of principal executive offices)
47-0728886 00801
(I.R.S. Employer Identification No.) (Zip Code)
(340) 777-8000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value American Stock Exchange
$.01 per Share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
-------------------
None
---------------
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 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the shares of all classes of voting stock of the
registrant held by non-affiliates of the registrant on March 17, 1999, was
approximately $15,522,020 computed upon the basis of the closing sales price of
the Common Stock on that date. For purposes of this computation, shares held by
directors (and shares held by any entities in which they serve as officers) and
officers of the registrant have been excluded. Such exclusion is not intended,
nor shall it be deemed, to be an admission that such persons are affiliates of
the registrant.
As of March 17, 1999, there were outstanding 4,659,000 shares of Common Stock,
$.01 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for the registrant's 1999 annual meeting
of stockholders are incorporated by reference into Part III of this Form 10-K.
ATLANTIC TELE-NETWORK, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Page
PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8K 24
SIGNATURES 26
Index to Combined and Consolidated Financial Statements F-1
1
PART I
Item 1. Business
Introduction
Atlantic Tele Network, Inc. ("the Company") was established in 1987 as a
holding company to acquire the Virgin Islands Telephone Corporation from ITT
Corporation. In January 1991 the Company acquired 80% of the stock of the
Guyana Telephone & Telegraph Company Limited ("GT&T"). The Company became a
public company in November of that year.
On December 30, 1997, the Company was split into two separate public
companies. One, a new company, Emerging Communications, Inc., contained all of
the Company's telephone operations in the U.S. Virgin Islands and was spun off
to Jeffrey J. Prosser and the public stockholders of the Company. The other,
the Company, continued to own GT&T. In connection with the transaction, the
number of outstanding shares of the Company's capital stock was reduced by 60%
(in effect, a reverse stock split of 1:2.5).
The Company from time to time evaluates opportunities for establishing or
acquiring other telecommunications business through privatization of
government-owned business or otherwise in the Caribbean area and in developing
countries in other parts of the world, and may make investments in such
businesses in the future. The Company has focused its attention on wireline
and cellular telephone businesses. In 1998, the Company acquired a 75%
interest in Digicom, S.A., which provides dispatch radio, wireless data,
network and paging services in Haiti; and a 30% interest in Bermuda Digital
Communications, which when operational will be the sole cellular and PCS
competitor to the Bermuda Telephone Company.
Cornelius P. Prior, Jr., formerly the Co-Chief Executive Officer, is now
Chairman of the Board and Chief Executive Officer of the Company and the owner
of approximately 60% of the outstanding common stock of the Company.
GT&T
General - GT&T supplies all public telecommunications service in Guyana.
GT&T is the successor to the Guyana Telecommunication Corporation ("GTC"), a
corporation wholly owned by the government of Guyana, which prior to 1991 had
been the exclusive provider of telecommunications services in Guyana for more
than 20 years.
International Traffic - GT&T's revenues and earnings are highly dependent
upon international long-distance calls, particularly international audiotext
traffic, other calls originating outside of Guyana and collect calls from
Guyana to foreign points.
2
The following table sets forth data with respect to the volume of GT&T's
international traffic for the past three years:
International Traffic
(in thousands of minutes)
1996 1997 1998
---- ---- ----
Inbound Paid and
Outbound Collect 40,350 (21%) 44,456 (27%) 49,796 (41%)
Audiotext 122,476 (64%) 97,913 (59%) 55,776 (46%)
------- --- ------ --- ------ ---
Total Inbound 162,826 (85%) 142,369 (86%) 105,572 (87%)
Outbound 29,768 (15%) 24,120 (14%) 16,440 (13%)
------ --- ------ --- ------ ---
Total 192,594 (100%) 166,489 (100%) 122,012 (100%)
======= ==== ======= ==== ======= ====
- -------------------------
GT&T has agreements with foreign telecommunications administrations and
private carriers covering all international calls into or out of Guyana. These
agreements govern the rates of payment by GT&T to the foreign carriers for the
use of their facilities in connecting international calls billed in Guyana,
and by the foreign carriers to GT&T for the use of its facilities in
connecting international calls billed abroad. The rates of payment under such
agreements are negotiated with each foreign carrier and are known as
"accounting rates."
The different classes of international traffic described in the above
table produce significantly different profit margins for GT&T. In the case of
regular inbound traffic and outbound collect traffic, GT&T receives a payment
from the foreign telecommunications carrier equal to one-half of the
applicable "accounting rate" (e.g., in the case of traffic from the United
States, a payment of 85 cents per minute), and GT&T has no significant direct
expenses associated with such traffic except for earth station and satellite
system costs which are applicable to all of GT&T's international traffic. In
the case of audiotext traffic, GT&T receives a payment from the foreign
carrier equal to one-half of the applicable accounting rate, and GT&T pays a
fee or commission to the audiotext traffic provider at rates which are
negotiated from time to time and are typically more than half of the amount
received by GT&T from the foreign carrier. In the case of outbound
international traffic, GT&T must pay the foreign carrier one-half of the
applicable international accounting rate, and GT&T collects from its
subscriber a rate which is regulated by the PUC. In 1997 and earlier, the
amount which GT&T collected from its subscribers for outbound international
traffic was usually significantly less than the amount which GT&T was required
to pay the foreign carrier (e.g., throughout most of 1997, for the United
States, GT&T collected approximately $.74 per minute and paid the U.S. carrier
$.85 per minute). Since February 1, 1998, when a temporary rate increase from
the Public Utility Commission ("PUC") went into effect, amounts collected by
GT&T for outbound international traffic have in the aggregate slightly
exceeded the payments due to foreign carriers for such traffic. GT&T does not
allow a significant volume of collect calls into Guyana.
Historically, the volume of calls into Guyana from the United States,
Canada and the United Kingdom (including credit card and collect calls from
Guyana) has greatly exceeded the volume of paid outbound calls from Guyana to
these countries. Except for audiotext traffic, the volume of traffic with
other countries has been more evenly balanced. Management of GT&T believes
that the disparity in traffic with these countries, which has produced a
steady stream of hard currency revenues for GT&T, stems from the fact that the
vast majority of GT&T's traffic with these countries consists of personal
calls between Guyanese expatriates and their friends and family in Guyana and
that the average income of most Guyanese residents is substantially lower than
that of their Guyanese expatriate friends or relatives in these countries.
There can be no assurance that, as GT&T expands and improves its local
telephone facilities and changes occur in the Guyanese economy, inbound
international traffic will continue to be as significant a part of GT&T's
total revenues. In addition, in response to a 1997 Report and Order by the
Federal Communications Commission ("FCC"), AT&T has been pressing GT&T for
significant reductions in the accounting rate applicable to telecommunications
traffic between the U.S. and Guyana. See "Business--Regulation." Any decrease
in the net margin of inbound over outbound traffic or in the accounting rate
applicable to traffic between Guyana and the United States is likely to have
an adverse effect on GT&T's earnings unless GT&T is able to achieve a
compensating increase in its regulated rates for local and outbound
international service.
3
A significant portion of GT&T's international traffic arises from the
provision by GT&T of telecommunications services to audiotext providers in a
number of foreign countries. GT&T began providing telecommunications services
to audiotext providers in June 1992. GT&T's audiotext traffic increased
significantly in each year through 1996, but declined sharply in 1997 and
1998. GT&T's profit margins from audiotext also significantly declined in
1997. Management attributes the continuing decline in audiotext's traffic to
increased competition, especially from domestic audiotext traffic and the
internet. Management believes that the decline in GT&T's profit margins from
audiotext traffic in 1997 was due to increased competition, changes in the
traffic mix, reduction in some accounting rates, the strength of the U.S.
dollar against certain foreign currencies, and a foreign carrier's mislabeling
the origin of certain traffic. Also, beginning in late 1996, a foreign carrier
required GT&T to bear part of the risk of non-collection for audiotext calls.
Previously, this risk was assumed by the sending carrier. As a result of the
decline in audiotext traffic revenues and profitability, on December 31, 1997,
GT&T filed an application to the PUC for a substantial increase in rates from
local service and outbound international calls and was awarded a significant
temporary increase in these rates effective February 1, 1998. Proceedings for
a permanent increase in these rates are still pending. See "Business --
Regulation".
Audiotext providers offer telephone information services comparable to
those available in the United States on an area code 900 basis. By making a
telephone call, the caller can obtain information (generally in the form of a
recorded message) on subjects such as weather, sports, business news or
material of a sexual nature. Some audiotext providers also establish "chat
lines" on which the callers can talk to one another. Audiotext traffic
utilizes only excess capacity on GT&T's international circuits and GT&T's main
switch in Georgetown. No use of GT&T's local network within Guyana is
involved, and none of the telephone numbers assigned to audiotext providers by
GT&T can be accessed by a normal telephone call made in Guyana.
At the present time, in the United States and many other countries,
audiotext calls to GT&T or another foreign telecommunications carrier are
treated as ordinary international traffic and are not subject to the
regulations applicable to domestic audiotext traffic. GT&T's agreements with
audiotext providers obligate such providers to comply with applicable
regulations in the countries in which they advertise their services and to
refrain from using obscene or indecent material. From time to time a country's
regulatory authorities or national telecommunications carrier have taken steps
to restrict or eliminate international audiotext traffic.
Domestic Service - At December 31, 1998, GT&T had approximately 60,000
subscriber access lines in service. This number of access lines represents
approximately 8 lines per 100 inhabitants. Of all lines in service, 85% were
in the largest urban areas, consisting of Georgetown, Linden, New Amsterdam,
Diamond and Beterverwagting. During 1998, GT&T extended service to a number of
small communities. However, most rural areas still do not have telephone
service.
In the past, GT&T's revenues from local telephone and other services have
not been significant (e.g. in 1997 local service revenues amounted to
approximately $2.9 million). In December 1997 and October 1998, GT&T applied
for rate increases to enable it to earn a 15% rate of return on its rate base.
In response to GT&T's December 1997 application, the PUC granted GT&T a
temporary rate increase in January 1998, which was subsequently reduced by the
PUC in March 1998, pending a final decision on GT&T's application. As a result
of the temporary rates for local service in effect throughout most of 1998,
GT&T's local service revenues more than tripled to approximately $9.4 million
in 1998.
GT&T's revenues for local service are derived from installation charges
for new lines, monthly line rental charges, monthly measured service charges
based on the number and duration of calls and other charges for maintenance
and other customer services. For each category of revenues, rates differ for
residential and commercial customers. Residential and commercial customers
have contributed approximately equally to GT&T's revenues from local service.
As of the end of 1998, GT&T's basic monthly charge per access line was
approximately $1.40 for residential customers and approximately $5.55 for
business customers, and the average monthly bill for residential and business
service (excluding charges for international calls and cellular service) was
$8.64 and $17.71, respectively.
4
GT&T currently provides mobile cellular telephone service in the
Georgetown area and along a portion of Guyana's coastal plain. GT&T plans to
complete cellular coverage of the coastal plain in 1999. Cellular subscribers
are offered various calling plans and are charged a monthly fee plus airtime
based on the selected plan. GT&T's current average monthly charge per cellular
subscriber is approximately $77, including monthly rental and airtime charges.
As of December 31, 1998, GT&T had approximately 1,450 active mobile cellular
subscribers.
Expansion - Since the Company acquired its interest in GT&T in January
1991, GT&T has significantly expanded and rebuilt its telecommunications
network. The number of access lines has increased from approximately 13,000
working lines in January 1991 to approximately 60,000 lines at December 31,
1998. Substantially all of GT&T's access lines are now digitally switched
lines. The Intelsat B earth station, which provides the principal link with
Guyana and the rest of the world, was upgraded and digitalized to increase the
number of circuits in operation from 75 in January 1991 to 1,048 currently. In
1997, GT&T installed a second Standard B earth station, which is currently
used to provide service through an Intelstat satellite to a number of
localities in the interior of Guyana. This earth station and the Intelstat
satellite may also be used in the future to provide a second satellite link
from Guyana for international traffic.
In the second quarter of 1997, GT&T completed a test installation of a
Northern Telecom Proximity I fixed wireless network in a rural area about 60
kilometers west of Georgetown. GT&T currently utilizes this technology to
provide wireless telephone service to about 1,800 subscribers in this area and
plans to provide service through this technology in 1999 to an additional
2,000 subscribers in the Georgetown area. The normal rates for land line
telephones apply to GT&T's fixed cellular and fixed wireless network services.
GT&T has installed over 400 public telephones in locations across the
country providing telecommunications for both local and international calls in
areas that had not previously enjoyed service. Currently, in addition to the
public telephones, GT&T maintains three public "telephone centers" at which
the public can, upon payment of the charges in cash to GT&T personnel who
staff these centers, use an ordinary residential-type telephone to make
international and domestic calls.
GT&T has purchased capacity in two international fiber optic cables - the
Americas I cable, which runs from Brazil to Trinidad, the United States Virgin
Islands and the United States mainland, and the Columbus II cable, which runs
from the Caribbean region to the Azores and Spain. The Company is presently
participating with other international carriers to build a third cable,
Americas II, that would provide a leg to Guyana, Suriname and French Guyana.
If and when GT&T's current regulatory and tax issues are resolved, the
Company anticipates that GT&T will further significantly expand its
facilities. GT&T is currently involved in a proceeding with regard to delays
in completing its original expansion program (the "Expansion Plan") and is
subject to a PUC order requiring additional expansion of services that GT&T
has not met. See "Business -- Regulation".
Other Services - GT&T is also licensed to provide various
telephone-related services that extend beyond basic telephone service,
including yellow pages and other directory services, and it has an exclusive
license to sell, lease or service various kinds of telecommunications
equipment. Under its license from the Government of Guyana (the "License"),
GT&T's rates for most of these services must be specified in a tariff approved
by the PUC. See "Business--Regulation."
Significant Revenue Sources
Revenues from the following carriers of international traffic to Guyana
constituted the following percentages of GT&T's revenues in the past three
years:
1996 1997 1998
AT&T.............. 36% 31% 27%
MCI .............. 21% 11% 11%
British Telecom... 12% 9% 9%
Teleglobe (Canada) 12% 18% 18%
5
A significant portion of GT&T's international long distance revenue
discussed above is generated by certain of GT&T's audiotext providers which
operate as service bureaus or intermediaries for a number of audiotext
information providers. The following service bureaus accounted for more than
10% of GT&T's total revenues in the years indicated below:
1996 1997 1998
Beylen Telecommunications, Ltd. 57% 33% 20%
Islands Telephone Company Limited 14% 15% 11%
No other revenue source accounted for more than 10% of GT&T's total
revenues in 1996, 1997 or 1998.
Competition
Local Service - Pursuant to a franchise from the government of Guyana,
GT&T has the exclusive right to provide, and is the sole provider of, local
telephone service in Guyana.
Long-Distance Service - GT&T is the exclusive provider of domestic
long-distance service and international telephone service in Guyana.
The provision of telecommunication services to international audiotext
providers is highly competitive. GT&T competes with many telephone companies
around the world that provide telecommunications services to international
audiotext providers. GT&T's contracts with audiotext providers are all
terminable on short notice, and such providers can quickly shift their traffic
to another foreign telecommunications carrier which offers higher compensation
or better services merely by changing the telephone numbers in their
advertisements. . Wireless Services. In Guyana, GT&T has a non-exclusive
franchise to provide cellular telephone services. Accordingly, there can be no
assurance that GT&T's cellular telephone business will not face competition in
Guyana. One other company began providing cellular service near the end of
1998.
Other Services - GT&T has the exclusive franchise to provide telephone
directories and directory advertising and to supply a wide variety of
telecommunications equipment in Guyana. GT&T's revenues from directory
advertising and the sale of telecommunications equipment have not been
significant to the Company.
Regulation
GT&T is subject to regulation in Guyana by virtue of the provisions of
the License and of the Guyana Public Utilities Commission Act 1990 ("PUC Law")
and the Guyana Telecommunications Act 1990 ("Telecommunications Law"). In
October 1997, the Guyana Parliament enacted the Public Utility Commission Act
1997 (the "1997 PUC Act") which will come into effect on such date as the
Minister of Trade, Tourism and Industry may appoint. The 1997 PUC Act, which
amends and restates the PUC Law, has not yet come into effect. Certain
provisions of the License, the PUC Law, the 1997 PUC Act and the
Telecommunications Law applicable to GT&T are summarized below.
License - The License, which was issued on December 19, 1990, grants GT&T
an exclusive franchise to provide in Guyana (i) for a period of 20 years
(renewable for 20 years at the option of GT&T), public telephone, radio
telephone (except private radio telephone systems which do not interconnect
with GT&T's network) and pay station telephone services and national and
international voice and data transmission, sale of advertising in any
directories of telephone subscribers and switched or non-switched private line
service; and (ii) for a period of 10 years (renewable for 10 years on a
non-exclusive basis at the option of GT&T) supply of terminal and customer
premises equipment and telefax, telex and telegraph service and telefax
network service (without prejudice to the right of any other person to
undertake any of the following operations: (a) sale of telefax or teleprinter
machines, (b) maintenance of telefax or teleprinter equipment, or (c)
operation of any facility for the sending or receiving of telefax copies or
teleprinter messages). In addition, GT&T was granted a non-exclusive license
to provide, for a period of 20 years (renewable for 20 years at the option of
GT&T), cellular radio telephone service provided that the license does not
prejudice the right of Guyana's Institute of Applied Sciences and Technology
to make provision for, or to provide, any telecommunications services in the
course of, or in connection with, the carrying out of its functions.
6
The Telecommunications Law, the License and the agreement between the
Government of Guyana and the Company pursuant to which the Company purchased
its interest in GT&T in 1991 (the "GT&T Agreement") include various provisions
under which the License may be terminated before its scheduled expiration
date. Under the applicable Guyana law and the GT&T Agreement, Guyana's
director of telecommunications may cause early termination of the License in
certain cases, including contravention of any of the provisions of the
Telecommunications Law or the conditions of the License, or the failure of
GT&T to implement the Expansion Plan in a timely fashion. If GT&T believes
that the License has been terminated unlawfully, it may appeal to the courts
of Guyana. Pursuant to the GT&T Agreement, upon non-renewal of the License,
the government will be entitled to purchase the Company's interest in GT&T or
the assets of GT&T on such terms as may be agreed upon by the Company and the
government or, upon failure to reach such agreement, as determined by
arbitration conducted by the International Centre for the Settlement of
Investment Disputes. The PUC is currently holding hearings in a proceeding
initiated by the government of Guyana, with regard to the noncompletion of the
Expansion Plan by its scheduled completion date of February 28, 1995. Under
the PUC Law, GT&T will have the opportunity to explain why the Expansion Plan
was not finished by that date. It is GT&T's position that its failure to
receive timely rate increases, to which GT&T was entitled, to compensate for
the devaluation in Guyana currency which occurred in 1991 provides legal
justification for GT&T's delay in completing the Expansion Plan. If the PUC
concludes that GT&T failed or refused to complete the Expansion Plan in a
timely manner without legal justification, it may impose a fine, which could
range from $56 (G $10,000) up to the cost of completing the Expansion Plan
(which GT&T estimates to be no more than $5 million). The PUC could also
recommend to the government that it cancel the License. The Guyana government
is not bound to act on a PUC recommendation. GT&T will have the right of
appeal to the Guyana High Court from any adverse ruling of the PUC.
PUC Law and Telecommunications Law - The PUC Law and the
Telecommunications Law provide the general framework for the regulation of
telecommunications services in Guyana. The PUC Law provides the basis for
setting the rates of a telecommunications licensee. The PUC is an independent
statutory body with the principal responsibility for regulating
telecommunications services in Guyana. The PUC has broad powers to monitor
GT&T's compliance with the License and to require GT&T to supply it with such
technical, administrative and financial information as it may request. Under
the 1997 PUC Act, which has not yet come into effect, the PUC also has broad
authority to review and amend any GT&T program for development and expansion
of facilities or services.
Subject to certain limitations applicable to the years 1991-1994, GT&T is
entitled, pursuant to the GT&T Agreement and the PUC Law, to a minimum return
of 15% per annum on its capital dedicated to public use ("rate base"). Absent
mutual agreement by the government of Guyana and the Company (and there has
been no such agreement) on a rate of return methodology, rates are to be
calculated on the basis of GT&T's entire property, plant and equipment
pursuant to a rate of return methodology consistent with the practices and
procedures of the United States Federal Communications Commission. GT&T
believes that its rate base at December 31, 1998 was approximately $110
million and that return on investment is to be calculated after deducting all
of GT&T's operating expenses (including income taxes) other than interest
expense. In an October 1995 order, discussed below, which was voided on other
grounds by the Guyana High Court, the PUC disallowed approximately $6.0
million of franchise rights which are included in the foregoing rate base
figure, and the PUC also disallowed management fees paid by GT&T to the
Company as an expense for purposes of calculating GT&T return on rate base. 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. As a result of the interim rates
in effect during most of 1998, GT&T's revenues from local service more than
tripled during 1998 from approximately $2.9 million in 1997 to approximately
$9.4 million in 1998. On October 27, 1998 to reflect changed conditions since
December 31, 1997, GT&T filed for an additional rate increase designed to
generate $19.0 million in additional revenues over and above the interim rates
currently in effect. GT&T's two applications for a permanent rate increase are
7
still pending before the PUC. In January 1999, after the chairman of the PUC
held a press conference which dealt extensively with the rate issues under
consideration by the PUC, GT&T applied to the Guyana High Court for an order
prohibiting the chairman from further participation in the rate case on the
grounds that this press conference and his statements at the press conference
revealed a predetermination and bias by the chairman against GT&T on the
pending issues. In response to this application, the Guyana High Court issued
an order directing the chairman and the PUC to show cause why such an order of
prohibition should not be issued. The Guyana High Court's order has the legal
effect of barring the chairman from further participation in the rate case
pending a determination by the Guyana High Court of the merits of GT&T's
application and, thus, is likely to further delay a decision by the PUC on
GT&T's pending applications.
Since GT&T commenced operations as a subsidiary of the Company in 1991,
GT&T has had difficulties in obtaining from the PUC the rate increases to
which it believed it was entitled. In February 1991 the official rate of
exchange for Guyanese currency was changed, allowing the currency to float.
This resulted in a devaluation of approximately 184% , and in April 1991, GT&T
filed for a rate increase of 184% to compensate for the devaluation. The PUC
in November 1991 granted GT&T, in principle, an increase in rates for
international calls which amounted to approximately 160% or less and, in
principle, authorized GT&T to impose a surcharge on these rates in order to
recover over a period of not less than 30 months the approximately $3.5
million difference between the rates actually in effect from May 1991 through
December 31, 1991 and the revenue which GT&T would have received during this
period if the newly approved rates had been in effect.
Shortly after the issuance of its initial November 1991 order, the PUC
authorized the collection of the new rates (but not any surcharge) for calls
to the United Kingdom, Canada, the United States and Antigua. The PUC declined
to authorize any increase in rates to 165 other countries covered by GT&T's
application on the grounds that GT&T had not submitted original documentary
evidence to the PUC regarding the accounting rates then in effect with these
countries. GT&T's failure to submit such documentation arose because neither
it nor its predecessor, the government-owned telephone company, had such
documentation in their records.
In October 1992, elections were held in Guyana and a new party came to
power. Shortly thereafter, several changes occurred in the membership of the
PUC. After considerable negotiation with the new government and further
applications to the PUC, in December 1993 the PUC authorized 70% of the
surcharges requested by GT&T on calls to the United States, United Kingdom,
Canada and Antigua, and in January 1994 the PUC temporarily authorized rate
adjustments in respect of 83 of the remaining countries which amounted to 70%
or less of the rate increases approved in principal by the PUC in its initial
November 1991 order. Later in 1994, the PUC authorized full surcharges as
requested by GT&T for the United Kingdom, Canada, the United States, and
Antigua, and in 1995, the PUC finally authorized full rates and surcharges for
the 83 countries covered by its temporary order of January 1994 and rejected
GT&T's application for any rate increases on the remaining 82 countries.
In May 1995, GT&T applied to the PUC for substantial increases in all of
its telephone rates to enable it to earn the minimum return of 15% per annum
on its rate base to which it is entitled under the terms of the GT&T
Agreement, and the PUC Law. In October 1995 the PUC rejected GT&T's
application for increased rates and temporarily reduced rates significantly.
GT&T filed a motion against the PUC's October 1995 order in the Guyana High
Court and in January 1997 obtained an order voiding the PUC's order in respect
of these rates. When the PUC thereafter scheduled a hearing to consider fixing
new temporary rates for GT&T and inquiring into the propriety of GT&T's
reinstating its pre-October 1995 rates, the Guyana High Court granted a
further stay of all PUC proceedings on these subjects. In May 1997, the
Consumer Advisory Bureau (a non-governmental group in Guyana) sought an
injunction from the Guyana High Court, restoring telephone rates to those
imposed by the PUC in its October 1995 order. The Consumer Advisory Bureau's
application is still pending. Effective on October 1, 1997, GT&T put into
effect a surcharge to recover the approximately $9.5 million of lost revenues
from the period October 1995 to January 1997 pending an ultimate trial on the
merits of the Consumer Advisory Bureau's application. As of December 31, 1998,
GT&T had collected approximately $6 million of the lost revenues. The 1997 PUC
Act, which has not yet come into effect, contains provisions which appear to
prohibit GT&T from collecting any portion of the lost revenues which remain
uncollected on the effective date of the Act and may require GT&T to refund
all amounts previously collected in excess of the rates in effect on January
1, 1996.
8
Since January 1991, the Company has had an agreement with GT&T, which was
approved at its inception by several officials of the Guyana government as
well as the government's representatives on GT&T's Board of Directors,
pursuant to which GT&T paid the Company an advisory fee equal to 6% of GT&T's
revenues for a variety of managerial and advisory services furnished by the
Company to GT&T. On January 2, 1997, the PUC ordered GT&T to cease paying
these advisory fees to the Company and to recover from the Company
approximately $25 million of fees paid under the agreement since January 1991.
GT&T has filed a motion against the PUC's order in the Guyana High Court and
has obtained an order staying the effectiveness of the PUC's order pending
determination of that motion.
In March 1997, GT&T owed the Company approximately $21 million for
advances made from time to time for working capital and capital expenditure
needs of GT&T. The PUC law requires permission of the PUC for GT&T to issue
any debentures or any other evidence of indebtedness payable more than one
year from the date of issue. GT&T's indebtedness to the Company was evidenced
by a series of promissory notes, many of which through clerical error had a
maturity of more than one year from the date of issue. In March 1997, the PUC
rejected GT&T's contention of clerical error, ordered that no payments be made
on any of the outstanding notes, and ordered that GT&T recover from the
Company all amounts theretofore paid. The order also provided that the PUC
would be willing to authorize the payment for any amounts properly proven to
the satisfaction of the PUC to be due and payable from GT&T to the Company.
GT&T has appealed the PUC's order to the Guyana High Court and obtained a stay
of the PUC's order pending determination of that appeal. As of December 31,
1998, GT&T had fully paid to the Company all of the amounts at issue.
In October 1997, the PUC ordered GT&T to increase the number of telephone
lines in service to a total of 69,278 lines by the end of 1998, 89,054 lines
by the end of 1999 and 102,126 by the end of the year 2000, to allocate and
connect an additional 9,331 telephone lines before the end of 1998 and to
provide to subscribers who request them facilities for call diversion, call
waiting, reminder call and three-way calling by the end of the year 1998. In
issuing this order, the PUC did not hear evidence or make any findings on the
cost of providing these lines and services, the adjustment in telephone rates
which may be necessary to give GT&T a fair return on its investment or the
ways and means of financing the requirements of the PUC's order. GT&T has
filed a motion against the PUC's order in the Guyana High Court and has
appealed the order on different grounds to the Guyana Court of Appeal. No stay
currently exists against this order.
In July 1998, the PUC gave notice that it would hold a public hearing on
August 25, 1998 in respect of the following matters; (i) "the validity of the
grant of monopoly rights to any owner or provider of services in the public
utility sector, having regard to the laws in force in Guyana at the relevant
time;" and (ii) "whether the Commission has power to request the Government to
issue a license to a new provider of services in the public utility sector,
where the existing provider in that sector fails to refuses to meet reasonable
demands for service in that public utility sector." While the PUC's notice did
not name GT&T as the service provider in question, the Company believes that
GT&T is the service provider which will be the subject of the hearing. This
intended hearing has been stayed by an order issued by the Guyana High Court
on an application by GT&T pending a hearing on the merits of GT&T's
application.
FCC Matters - On August 7, 1997, the FCC issued a Report and Order in a
rulemaking proceeding which it initiated in December 1996, in which it adopted
mandatory international accounting and settlement rate benchmarks for many
countries, including Guyana. The FCC classified countries as low-income,
middle-income or high-income based upon World Bank data. Guyana is classified
as a low-income country. The FCC adopted a mandatory settlement rate benchmark
of $.23 per minute for low-income countries and required that settlement rates
between the U.S. and low-income countries be reduced to $.23 per minute by
January 1, 2002. The FCC stated in the Report and Order that it expects U.S.
licensed carriers to negotiate proportionate annual reductions. GT&T and a
number of other non U.S. carriers filed an appeal from the FCC's August 7,
1997 Report and Order to the U.S. Court of Appeals for the District of
Columbia. On January 12, 1999, the Court of Appeals affirmed the FCC Report
and Order. The FCC also stated that it encourages foreign governments and
carriers to work with the United States toward an effective international
agreement that achieves lower settlement rates, and that it may refrain from
enforcing its Order if a satisfactory multilateral solution can be reached
that will produce substantially equivalent results in a timely manner.
9
The current settlement rate for U.S. - Guyana traffic is $.85 per minute.
AT&T recently sought a $0.125 per-minute decrease in the settlement rate, GT&T
declined to agree to this reduction, and AT&T gave GT&T notice terminating the
current operating agreement between AT&T and GT&T effective December 31, 1999.
The Company is unable to predict what further actions the FCC, AT&T or other
U.S. carriers may take in an effort to secure lower settlement rates on the
U.S.-Guyana route. Since inbound traffic from the United States to Guyana
significantly exceeds outbound traffic from Guyana to the United States, any
significant reduction in the settlement rate for U.S.-Guyana traffic could
have a significant adverse impact on GT&T's earnings. Any significant
reduction in the settlement rate also might make it difficult for GT&T to
continue to attract audiotext traffic from the United States on a profitable
basis. Any of these events would provide GT&T with a basis to seek a rate
increase so as to permit GT&T to earn its contractually provided 15% rate of
return. However, there can be no assurance as to when or whether GT&T would
receive such a rate increase.
FTC Matters - On October 30, 1998, the U.S. Federal Trade Commission (FTC)
issued for comments a proposed rule which would expand the statutory
definition of "pay-per-call" services to include audiotext services such as
those which GT&T terminates in Guyana. The FTC previously received comments
and conducted a workshop in 1997 in an earlier phase of this proceeding. If
adopted in its present form the FTC's proposed rule would require among other
things that a caller must receive a short preamble at the beginning of the
call advising the caller of the cost of the call and permitting the caller to
terminate the call without charge if terminated immediately. Although GT&T has
not completed its study of the ways and means of possibly complying with this
requirement, it may be technically impossible for recipients of international
audiotext traffic, such as GT&T, to separate audiotext traffic from other
incoming international traffic and permit a free preamble for audiotext calls.
The FTC's proposed rule would have the effect of prohibiting a local telephone
company from disconnecting a subscriber's telephone service for failure to pay
charges for an international audiotext call. This requirement currently
applies to area code 900 domestic audiotext but not to international audiotext
and provides a collection advantage for international audiotext over domestic
audiotext. The proposed rule would also include several requirements which, if
adopted, could make it more difficult to bill and collect for international
audiotext calls. If the proposed regulations are adopted, the provisions
described above may have a significant adverse impact on international
audiotext traffic from the United States to Guyana and other non-U.S.
termination points.
Taxation - United States
As a U.S. corporation, the Company is subject to U.S. federal income tax
on its worldwide net income, currently at rates up to 35%. GT&T is a
controlled foreign corporation ("CFC") for purposes of the Subpart F
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
Under those provisions, the Company may be required to include in income
certain earnings and profits ("E&P") of a CFC subsidiary at the time such E&P
are earned by the subsidiary, or at certain other times, prior to their being
distributed to the Company. At present, no material amount of such subsidiary
E&P is includible in the U.S. taxable income of the Company before being
distributed to it. Pursuant to the foreign tax credit provisions of the Code,
and subject to complex limitations contained in those provisions, the Company
would be entitled to credit foreign withholding taxes on dividends or interest
received, and foreign corporate income taxes of its subsidiaries paid with
respect to income distributed as dividends or deemed distributed under Subpart
F from such subsidiaries, against the Company's U.S. federal income tax.
A U.S. corporation is classified as a Personal Holding Company ("PHC") if
(a) more than 50% of its capital stock is owned directly or indirectly by or
for five or fewer individuals (or pension plans); and (b) at least 60% of its
adjusted ordinary gross income consists of certain types of income
(principally passive income, including interest and dividends) included in the
Code definition of "PHC Income." For any taxable year that a corporation is a
PHC, the "undistributed personal holding company income" of such corporation
for that year (i.e., the net income of the corporation as reflected on its
U.S. corporate income tax return, with certain adjustments, minus, in general,
federal income tax and dividends distributed or deemed distributed for this
purpose) would be subject to an additional PHC tax of 39.6%. The Company
currently satisfies the above ownership criterion but the Company believes
that it does not satisfy the income criterion for classification as a PHC.
10
Taxation - Guyana
GT&T's worldwide income is subject to Guyanese tax at an overall rate of
45%. The GT&T Agreement provides that the repatriation of dividends to the
Company and the payment of interest on GT&T debt denominated in foreign
currency are not subject to withholding taxes. It also provides that fees
payable by GT&T to the Company or any of its subsidiaries for management
services they are engaged to render shall be payable in foreign currency and
that their repatriation to the United States shall not be subject to currency
restrictions.
In May 1997, GT&T received a letter from the Guyana Commissioner of
Inland Revenue indicating that GT&T's tax returns for 1992 through 1996 had
been selected for an audit under the direct supervision of the Trade Minister
with particular focus on the withholding tax on payments to international
audiotext providers. In March and April 1997, the Guyanese Trade Minister
publicly announced that he had appointed a task force to probe whether GT&T
should pay withholding taxes on fees paid by GT&T to international audiotext
providers. The Minister announced that if GT&T were found guilty of tax
evasion it could owe as much as $40 million in back taxes. In July 1997, GT&T
applied to the Guyana High Court for an order prohibiting this audit on the
grounds that the decision of the Minister of Trade to set up this task force
and to control and direct its investigation was beyond his authority, violated
the provisions of the Guyanese Income Tax Act, interfered with the
independence of the Commissioner of Inland Revenue and was done in bad faith,
and the court issued an order effectively staying the audit pending a
determination by the court of the merits of GT&T's application.
In June 1997, GT&T received an assessment of the current equivalent of
approximately $3 million from the Guyana Commissioner of Inland Revenue for
taxes for 1996 based on the disallowance as a deduction for income tax
purposes of five-sixths of the advisory fees payable by GT&T to the Company
and for the timing of the taxation on certain surcharges to be billed by GT&T.
The deductibility of these advisory fees and the deferral of these surcharges
until they are actually billed had been upheld for an earlier year in a
decision of the High Court in August 1995. In July 1997, GT&T applied to the
High Court for an order prohibiting the Commissioner of Inland Revenue from
further proceeding with this assessment on the grounds that the assessment was
arbitrary and unreasonable and capriciously contrary to the August 1995
decision of the Guyana High Court, and GT&T obtained an order of the High
Court effectively prohibiting any action on the assessment pending the
determination by the court of the merits of GT&T's application.
In November 1997, GT&T received assessments totaling the current
equivalent of approximately $11 million from the Guyana Commissioner of Inland
Revenue for taxes for the years 1991 through 1996. It is GT&T's understanding
that these assessments stem from the same audit commenced in May 1997 which
the Guyana High Court stayed in its July 1997 order referred to above.
Apparently because the audit was cut short as a result of the Court's July
1997 order, GT&T did not receive notice of and an opportunity to respond to
the proposed assessments as is the customary practice in Guyana, and
substantially all of the issues raised in the assessments appear to be based
on mistaken facts. GT&T has applied to the Guyana High Court for an order
prohibiting the Commissioner of Inland Revenue from enforcing the assessments
on the grounds that the origin of the audit with the Minister of Trade and the
failure to give GT&T notice of and opportunity to respond to the proposed
assessment violated Guyana law. The Guyana High Court has issued an order
effectively prohibiting any action on the assessment pending the determination
by the Court of the merits of GT&T's application.
There can be no assurance as to the ultimate outcome of any of the above
described pending tax issues.
Year 2000 Compliance
The inability of computer hardware, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain data-based nformation.
The Company believes it has identified all significant applications in
its systems that will require modification or replacement to ensure Year 2000
Compliance. Internal and external resources are being used to make the
required modifications and replacements and test Year 2000 Compliance. The
modification process of all significant applications is under way. The Company
plans on completing the testing process of all significant applications by
June 30, 1999.
11
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position
or results of operations in any given year. These costs and the date on which
the Company plans to complete the Year 2000 modification and testing processes
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ from those plans.
Employees
As of December 31, 1998, GT&T employed approximately 712 persons of whom
approximately 535 are represented by the Guyana Postal and Telecommunications
Workers Union. GT&T's current contract with this union expires on September
30, 2000. The Company considers its employee relations to be satisfactory.
Item 2. Properties
At December 31, 1998, GT&T utilized approximately 254,000 square feet of
building space on approximately 41 acres of land in various locations
throughout Guyana, all of which is owned by GT&T. In addition, GT&T leases
approximately 3,000 square feet of office space in Georgetown, Guyana. For
additional information, see "Business--GT&T--Expansion" GT&T carries insurance
against damage to equipment and buildings, but not to outside plant.
Item 3. Legal Proceedings
GT&T is involved in various regulatory and court proceedings in Guyana
which are discussed in Item 1. "Business -- Regulation" and "Taxation --
Guyana."
The Company is involved in various other litigation, the ultimate
disposition of which, in the opinion of the Company's management, will not
have a material adverse effect on the financial position or operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
12
Executive Officers of the Registrant
Set forth below are the executive officers of the Company as of the date
hereof:
Name Age Position
Cornelius B. Prior, Jr. 65 Chief Executive Officer, Chairman of the Board
and Secretary of the Company;
Chairman of the Board of GT&T
Kevin P. Hemenway 38 Chief Financial Officer and Treasurer
Lawrence M. Fuccella 35 Vice President - Special Projects
Scott Van Derhei 55 Vice President
Steve Rohrlick 40 Vice President
H. William Humphrey 49 Vice President - Guyana Operations
Raymond Roopnauth 51 General Manager - GT&T
Cornelius B. Prior, Jr. has been Chief Executive Officer and Chairman of
the Board of the Company since December 30, 1997. From June 30, 1987 to
December 1997 he was Co-Chief Executive Officer and President of the Company.
He was Chairman of the Board of Virgin Islands Telephone Corporation from June
1987 to March 1997 and became Chairman of the Board of GT&T in April 1997.
From 1980 until June 1987, Mr. Prior was a managing director and stockholder
of Kidder, Peabody & Co. Incorporated, where he directed the
Telecommunications Finance Group.
Kevin P. Hemenway joined the Company in November 1998 as Controller and
was appointed as Chief Financial Officer in February 1999. From January 1990
to October 1998, as an independent consultant, Mr. Hemenway performed
extensive financial, accounting, management and rate making consulting
services for the Company. From 1986 through 1989, he was employed by Deloitte
and Touche, LLP as a C.P.A. and manager, performing both audit and consulting
services, including services for the Company. From 1983 to 1986, Mr. Hemenway
was employed by Grant Thornton as a C.P.A and senior staff accountant. Mr.
Hemenway graduated from Creighton University in 1982 with a B.S.B.A., majoring
in accounting, and is a non-practicing CPA certificate holder registered in the
State of Nebraska.
Lawrence M. Fuccella became a Vice President of the Company in 1998. Mr.
Fuccella joined GT&T as assisstant finance controller in July 1992 after
receiving his MBA from Virginia Commonwealth University. He became finance
controller of GT&T in 1993. Since 1994 he has been Special Projects Director
with responsibility for managing the Company's audiotext operations and its
relationships with foreign telecommunications administrations.
Scott Van Derhei joined the Company as Vice President in April 1998 and
has over 30 years experience in telecommunications and telecommunications
related information systems. From 1994 to 1997, Mr. Van Derhei was the
Managing Director of Donatel, a Hungarian Telephone Company (HTC), which grew
during Mr. Van Derhei's tenure from 9,000 analog lines to over 40,000 lines of
digital service. Before his assignment in Hungary he was for 15 years CEO of
Data Products, a telephone oriented software house and a division of Sugarland
Telephone. He has had significant international experience having directed
expansion to Spain. UK, New Zealand, Thailand and Mexico. He has served on the
USTA IMS committee and helped form the IMS committee for the Wisconsin
Telephone Association.
Steve Rohrlick joined the Company as Vice President of Marketing in 1998
and has 15 years experience in the telemarketing industry. Prior to joining
the Company, Mr. Rohrlick was President and CEO of The Joseph Stevens Group
(JSG), a call center based travel agency which was recognized as one of the
100 largest travel agencies in the U.S. Mr. Rohrlick spearheaded the merger of
JSG with 800 Travel Systems. The combined companies, with annual sales in
excess of $80 million, completed a successful IPO in January 1998 (NASDAQ
IFLY). Prior to the launch of the travel business, Mr. Rohrlick was a
telesolutions consultant to several National Football League teams as well as
to various large Health Maintenance Organizations. He has a B.A. in Marketing
Communications from the University of Connecticut and an M.B.A. in
Telecommunications from National University.
13
H. William Humphrey has been Vice President - Guyana Operations since
December 1, 1997. For more than the past five years, prior to his employment
with GT&T, Mr. Humphrey was a self-employed telecommunications consultant
providing project management and consulting services to telecommunications
companies domestically and internationally. Mr. Humphrey also has more than 20
years of experience with Southern Bell, where he achieved the position of
Manager, Outside Plant Construction Installation and Maintenance.
Raymond Roopnauth joined Guyana Telephone & Telegraph Company ("GT&T"), a
subsidiary of the Company, in 1991 as Director of Technical Operations and was
later appointed General Manager in 1997. As General Manager Mr. Roopnauth is
responsible for the daily operations and financial performance of GT&T,
including the expansion programs implemented by GT&T's Board. Prior to joining
GT&T, Mr. Roopnauth worked with Cable & Wireless in Guyana for over seventeen
years and in his last year he was Senior Engineer at International Services
responsible for the construction and commissioning of Guyana's First Standard
B Earth Station. Mr. Roopnauth graduated from Queens College in 1967 and was
trained primarily at Cable & Wireless.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, $.01 par value, was first listed on NASDAQ on
November 14, 1991 under the symbol ATNI. As of March 24, 1997, the Company's
Common Stock, $.01 par value, became listed on the American Stock Exchange
("AMEX") under the symbol "ANK". The following table sets forth quarterly
market price ranges for the Company's Common Stock in 1997 and 1998:
1997 Quarters High Low
------------- ---- ---
1st........................................... 17-1/22 11
2nd 13-13/16 10-1/4
3rd 14-1/4 11
4th (through December 30, 1997) 13-3/8 11-3/4
1998 Quarters High Low
------------- ---- ---
1st........................................... 15-1/2 7-5/8
2nd 16-1/4 10-7/8
3rd 14-1/8 6-3/4
4th 12-1/2 7-3/8
The foregoing market prices in 1997 all relate to the Company's Common
Stock before the split up transaction on December 30, 1997, in which the
Company was divided into two separate publicly-owned companies.and the
Company's capital stock was reduced by 60% (in effect, a reverse stock split
of 1:2.5).
The approximate number of holders of record of Common Stock as of March
17, 1999 was 53.
14
Dividends
On December 15, 1998 the Board of Directors of the Company adopted a
policy of paying quarterly dividends at the rate of $0.15 per share on the
Company's Common Stock. Dividends at this rate were declared for payment in
January and April 1999.
The declaration and payment of dividends on the Common Stock is at the
discretion of the Board of Directors of the Company. The continuation or
modification of the Company's current dividend policy will be dependent upon
future results of operations, financial condition, capital requirements,
contractual restrictions, regulatory actions, and profitability of the Company
and its subsidiaries and other factors deemed relevant at that time by the
Board of Directors.
15
Item 6. Selected Financial Data
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data have been derived from
and are qualified by reference to, the audited combined and consolidated
financial statements of the Company. The selected historical combined and
consolidated financial data should be read in conjunction with the audited
combined and consolidated financial statements and related notes thereto of
the Company as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998. All dollar amounts are in thousands,
except per share data.
Years Ended December 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------- ----------
Statement of Operations Data: Combined Consolidated
-------------------------------------------- ----------
Telephone operations
Revenues:
Local exchange service revenues $754 $1,631 $2,463 $2,933 $9,444
International long-distance revenues 76,820 128,939 145,080 113,865 84,028
Other revenues 582 600 710 817 1,172
-------- -------- --------- --------- --------
Total revenue 78,156 131,170 148,253 117,615 94,644
Total operating expenses 57,923 99,879 121,469 99,473 63,095
-------- -------- --------- --------- --------
Income from telephone operations 20,233 31,291 26,784 18,142 31,549
Loss from other operations - - - - (373)
Other income (expense), net (3,137) (2,544) (1,502) (1,117) 2,930
-------- -------- --------- --------- --------
Income from operations before income taxes
and minority interest 17,096 28,747 25,282 17,025 34,106
Income taxes 7,411 13,619 10,824 7,718 15,913
-------- -------- --------- --------- --------
Income from operations before minority
interest 9,685 15,128 14,458 9,307 18,193
Minority interest (1,696) (2,390) (2,096) (1,372) (2,281)
-------- -------- --------- --------- --------
Income from operations $7,989 $12,738 $12,362 $7,935 $15,912
======== ======== ========= ========= ========
Basic net income per share $3.25
========
Diluted net income per share $3.23
========
Pro Forma Net Income Per Share $1.69
=========
Years Ended December 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ----------- ----------
Balance Sheet Data: Combined Consolidated
---------------------------------------------------------
Fixed Assets, net $91,025 $92,102 $97,780 $36,042 $46,431
Total assets 162,688 185,481 194,493 108,049 126,260
Short-term debt (including current portion of
long-term debt) 11,515 15,626 11,047 3,298 3,403
Long-term debt, net 34,720 25,969 20,398 14,536 11,394
Stockholders' equity 85,526 98,264 110,626 54,244 68,874
Historical income per share amounts have not been presented as this
information is not considered meaningful.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company's revenues and income from operations are derived principally
from the operations of its telephone subsidiary, GT&T. GT&T derives almost all
of its revenues from international telephone services. In June 1998, the
Company acquired a 75% interest in Digicom S.A., a Haitian corporation
principally engaged in dispatch radio, mobile telecommunications and paging,
for $1.7 million in cash and 15,873 shares of the Company's common stock. In
July 1998, the Company acquired a 30% interest, with certain options to
increase that interest to 40%, in Bermuda Digital Communications, Ltd., a
Bermuda corporation which, when operational, will be the sole cellular and PCS
competitor in Bermuda to the Bermuda Telephone Company for $1.0 million in
cash. The Company also provided a loan to Bermuda Digital Communications, Ltd.
of $3.0 million at Citibank prime which was 7.75% at December 31, 1998 plus
3%. The Company has signed advisory fee contracts with both Digicom S.A. and
Bermuda Ditigal Communications Ltd. compensating it at 6% of gross revenues
for management services provided, effective from the respective acquisition
dates. The assets, liabilities, and operations of Digicom S.A. and Bermuda
Digital Communications, Ltd., individually and in the aggregate, are not
currently material to the assets, liabilities, and operations of the Company
on a consolidated basis.
The principal components of operating expenses for the Company's
telephone operations are plant specific operations expenses, plant
non-specific operations expenses, customer operations expenses, corporate
operations expenses, international long-distance expenses and taxes other than
income taxes. These categories are consistent with FCC accounting practices.
Plant specific operations expenses relate to support and maintenance of
telephone plant and equipment and include vehicle expense, land and building
expense, central office switching expense and cable and wire expense. Plant
non-specific operations expenses consist of depreciation charges for telephone
plant and equipment and expenses related to telephone plant and network
administration, engineering, power, materials and supplies, provisioning and
plant network testing. Customer operations expenses relate to marketing,
providing operator services for call completion and directory assistance, and
establishing and servicing customer accounts. Corporate operations expenses
include GT&T's expenses for executive management and administration, corporate
planning, accounting and finance, external relations, personnel, labor
relations, data processing, legal services, procurement and general insurance.
International long-distance expenses consist principally of charges from
international carriers for outbound international calls from Guyana and
payments to audiotext providers from whom GT&T derives international audiotext
traffic. Taxes other than income taxes include gross receipts taxes, property
taxes, and other miscellaneous taxes. General and administrative expenses
consist principally of parent company overheads and amortization.
For accounting purposes, the December 1997 split up transaction of the
Company into two separate publicly held companies (the Company and the
Emerging Communications, Inc.) has been treated as a non pro rata split off of
a business in which the split off entity is to be accounted for at fair value.
The Company has been considered to be the split off entity since Emerging
Communications, Inc. had a greater market capitalization and greater asset
value immediately after the transaction, retained more of the pre-transaction
top management of the Company and had greater net income in 1997. Accordingly,
the balance sheet of the Company at December 31, 1997 has been adjusted to
fair value as evidenced by the market capitalization of the Company
immediately after the consummation of the transaction. This adjustment
includes an approximately $60 million reduction in the Company's consolidated
net fixed assets, and an approximately $45 million reduction in the Company's
consolidated stockholder's equity. The fair value adjustment reduced the
carrying value on the Company's consolidated financial statements of its fixed
assets significantly below their historical cost and replacement value.
Therefore, depreciation expense for periods after December 31, 1997 is not a
reliable indicator of the Company's cost of replenishing its assets.
The combined financial statements included in this report are the
separate financial statements relating to Atlantic Tele-Network, Inc.'s
business and operations in Guyana including its majority owned subsidiary,
GT&T, and ATN's activities as the parent company of all of its subsidiaries
during the years ended December 31, 1996 and 1997. These combined financial
statements do not reflect the fair valuation adjustment arising from the split
up transaction. Moreover, the combined statements of operations include
interest income from indebtedness of subsidiaries which were transferred with
such indebtedness to Emerging Communications, Inc. in the split up transaction
and certain expenses for the period from May 1, 1997 to December 31, 1997
which were reimbursed by Emerging Communications, Inc. as part of the split up
transaction.
17
As a result of the decline in 1997 in GT&T revenues and profits from
audiotext traffic, on December 31, 1997 GT&T filed an application with 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. Subsequently on March 27, 1998, the PUC reduced its interim rate
increase effective in part on April 1, 1998 and in part on May 1, 1998. The
reduced rates represented a substantial increase over the rates in effect
during 1997 and earlier years. On October 27, 1998, to reflect changed
conditions since December 31, 1997, GT&T filed for an additional rate increase
designed to generate $19.0 million in additional revenues over and above the
interim rates currently in effect. GT&T's two applications for a permanent
rate increase are still pending before the PUC. No assurance can be given as
to what permanent rates the PUC will award GT&T or as to what changes the PUC
may make in the current interim rates. In January 1999, after the Chairman of
the PUC held a press conference which dealt extensively with the rate issues
under consideration by the PUC, GT&T applied to the Guyana High Court for an
order prohibiting the Chairman from further participating in the rate case on
the grounds that this press conference and his statements at the press
conference revealed a predetermination and bias by the Chairman against GT&T
on the pending issues. In response to this application, the Guyana High Court
issued an order directing the Chairman and the PUC to show cause why such an
order of prohibition should not be issued. The Guyana High Court's order has
the legal effect of barring the Chairman from further participation in the
rate case pending a determination by the Guyana High Court of the merits of
GT&T's application and, thus, is likely to further delay a decision by the PUC
on GT&T's pending applications.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1998
Telephone operating revenues for the year ended December 31, 1998 were
$94.6 million as compared to $117.6 million for 1997. Net income for 1998 was
$15.9 million or $3.25 per share ($3.23 per share on a fully diluted basis).
Pro forma net income for 1997 was $8.3 million or $1.69 per share. The 1997
pro forma results give effect to the December 30, 1997 split-off transaction
as if it had been completed at the beginning of 1997.
Operating results for 1998 include a fourth-quarter net gain to ATN of
$1.0 million arising from the devaluation during 1998 of the Guyana dollar,
$4.5 million of revenues recognized in the third quarter as a result of a
settlement with a foreign telecommunications carrier of a claim for the
interruption of international long-distance dial service to Guyana during
1995, and approximately $3.8 million in other non-operating income in the
first quarter of 1998 as a result of the settlement of a claim arising from
the cancellation of an insurance policy. After excluding these unusual items,
the Company's core operating revenues and earnings for 1998 were $90.1 million
and $10.6 million respectively or $2.16 per share.
The Company's revenues and pro forma net income for 1997 included the
recognition of $9.5 million of outbound international long-distance revenues
by GT&T for the period from October 1995 to January 1997 as a result of a
Guyana High Court decision in 1997. After excluding this unusual item, the
Company's core operating revenues and pro forma net income for 1997 were
$108.1 million and $4.0 million or $0.81 per share.
Excluding the one-time items in 1998 and 1997 discussed above, core
revenues in 1998 decreased by $18.0 million or 17%. This decrease was due
primarily to the expected decline in audiotext revenues at GT&T. GT&T's volume
of audiotext traffic fluctuated between 8 and 9 million minutes per month in
the first three quarters of 1997. In the fourth quarter of 1997, the volume of
audiotext traffic declined to approximately 6.6 million minutes per month. In
the four quarters of 1998, audiotext traffic further declined to an average of
approximately 5.3 million, 5.0 million, 4.5 million, and 3.9 million minutes
per month, respectively. The Company expects that audiotext traffic volumes
will continue to decline, although the Company is unable to predict future
audiotext revenues and traffic volumes with any degree of certainty.
18
The decrease in audiotext revenues was partially offset by an increase in
local exchange services, which increased from $2.9 million in 1997 to
$9.4 million in 1998, an increase of $6.5 million or 222%. This increase in
local exchange service revenues was primarily the result of the temporary
rates granted by the Guyana Public Utilities Commission ("PUC") in response to
a rate increase application filed by GT&T with the PUC on December 31, 1997.
The increase is also partially attributable to an increase in lines in service
to 60,000 at December 31, 1998 from approximately 55,000 at December 31, 1997,
an increase of 5,000 lines or 9%.
International long-distance inbound revenues other than audiotext
increased to $31.0 million as compared to $25.1 million in 1997. This
represents an increase in $5.9 million or 24% and correlates to an increase in
inbound minutes of traffic from 44.5 million in 1997 to 49.8 million in 1998;
an increase of 5.4 million minutes or 12%. The balance of the increase is due
to changes in traffic mix and other factors. Management believes that this
increase in inbound telephone traffic other than audiotext is indirectly the
result of the increase in temporary rates for outbound long-distance traffic
granted by the PUC in early 1998. Because a substantial portion of GT&T's
international traffic, other than audiotext, consists of personal calls
between Guyanese expatriates and their friends and families in Guyana,
management believes that an increase in rates for outbound calls results not
only in a decrease in the volume of outbound calls, but that decrease in
outbound calls in turn stimulates an increase in the volume of inbound calls.
As is noted elsewhere in this report (see "Business -- Regulation"), the
FCC has adopted mandatory international settlement rate benchmarks for
payments by U.S. telecommunications carriers to telecommunications carriers in
other countries including Guyana, and AT&T has taken steps, including giving a
notice of termination effective December 31, 1999 of the existing operating
agreement between AT&T and GT&T to force GT&T to agree to a lower settlement
rate for U.S.-Guyana traffic. Any significant reduction in the settlement rate
for this traffic could have a significant adverse impact on GT&T's earnings
since inbound traffic from the United States to Guyana significantly exceeds
outbound traffic and since any significant reduction in the settlement rate
for this traffic also might make it difficult for GT&T to continue to attract
audiotext traffic from the United States on a profitable basis. Any of these
events would provide GT&T with a basis to seek an increase in rates for local
and outbound international service so as to permit GT&T to earn its
contractually provided 15% rate of return. However, there can be no assurance
as to when or whether GT&T would receive such a rate increase.
Excluding the one-time accrual of $9.5 million of revenue in 1997
discussed above, international long-distance outbound revenues decreased from
$17.1 million in 1997 to $15.1 million in 1998, a decrease of $2.0 million or
12%. This decrease in core international long-distance outbound revenues is
primarily related to the increased rates awarded by the PUC, as the volume of
outbound international long-distance traffic declined approximately 32% in
1998.
After eliminating a $3 million gain from devaluation of the Guyana dollar
(which after Guyana tax expense arising from the devaluation and minority
interest results in the net gain to the Company of $1 million previously
mentioned), core telephone operating expenses were $66.1 million in 1998
compared to $99.5 million in 1997. This represents a decrease of $33.4 million
or 34%. This decrease was due principally to a decrease in audiotext and
outbound traffic expense at GT&T of $31.4 million due to decreased traffic
volumes. Core telephone operating expenses were approximately 73% of core
telephone operating revenues in 1998 as compared to approximately 92% of core
telephone operating revenues in 1997 (excluding from core operating revenues
in each year and from core operating expenses in 1998 the effects of the
one-time items discussed above). The decrease in core operating expense as a
percentage of core operating revenues from 1997 to 1998 is due primarily to
the decline in audiotext revenues, the decline in outbound traffic and
associated international long-distance expenses, and the increases in local
revenues as a result of the temporary rate increase awarded by the PUC.
Other operations, revenues and expenses represent the operations of
Digicom S.A. and are not material. The Company acquired a 75% interest in
Digicom on June 2, 1998.
Income from operations before interest expense, income taxes and minority
interest for 1998 was $31.1 million as compared to $18.1 million for 1997.
This represents an increase of $13 million or 72% and is principally a result
of the factors affecting revenues and operating expenses discussed above.
19
As has been noted above, in the first three months of 1998, the Company
recorded approximately $3.8 million in other non-operating income as a result
of the settlement of a claim arising from the cancellation of an insurance
policy. This settlement was intended to compensate the Company for the
increased cost of replacement insurance coverage over the remaining term of
the cancelled insurance policy, which was approximately ten years. The
increased cost of the Company's replacement insurance coverage will be
accounted for as an expense over the remaining term and should not be material
to the Company's results of operations in any period.
The Company's effective tax rate for the year ended December 31, 1998 was
46.7% as compared to 45.3% for 1997. The minority interest in earnings
consists primarily of the Guyana government's 20% interest in GT&T.
Years Ended December 31, 1996 and 1997
Operating revenues for 1997 were $117.6 million as compared to $148.3
million for 1996, a decrease of $30.7 million, or 21%.
The decrease was principally due to a $44.0 million, or 41%, decrease in
audiotext traffic revenues at GT&T. GT&T's volume of audiotext traffic
fluctuated between 9 and 10 million minutes per month in 1996. In 1997, the
volume of audiotext traffic declined during the year to approximately 6
million minutes per month in the fourth quarter. The reduction in traffic
volume is estimated to account for approximately $21.3 million, or 48% of the
$44.0 million decrease in audiotext revenues in 1997. Chargebacks from a
carrier for the year ended December 31, 1997 approximated $6.6 million,
representing 15% of the decline in revenues from audiotext traffic. The
remaining $16.1 million, or 37% of the decrease in audiotext revenues,
resulted from a combination of the following: the mislabeling of the origin of
certain traffic, changes in the traffic mix, certain accounting rate
reductions, and the strength of the U.S. dollar against certain foreign
currencies. Mislabeling of the origin of traffic occurs when a carrier reports
traffic as coming from one country when it actually originated in another.
Changes in traffic mix refers to the mix between countries of origins which
have different accounting rates, and accounting rate reductions occur when the
Company and a foreign administration (telephone company) agree to a change in
rates. As a result of the above factors, GT&T's profit margins from this
traffic also declined in 1997. Given the Company's recent experience, the
Company expects the negative trend in audiotext revenues to continue (which
could have a material adverse impact on the Company's total revenues),
although the Company is unable to predict the magnitude of the decline in
future revenues with any degree of certainty.
GT&T's outbound international revenues for 1997 were $26.6 million, an
increase of $14.3 million over the prior year even though traffic volumes were
approximately 19% lower in 1997 than in 1996. The increase in revenues was
principally a result of the recognition of $9.5 million in revenues relating
to outbound international long distance revenues at GT&T for the period from
October 1995 to January 1997. The balance of the increase is attributable to
the restoration in January 1997 of the higher rates that were in effect in
October 1995.
Operating expenses for 1997 were $99.5 million, a decrease of $22.0
million or 18%, from operating expenses of $121.5 million for the prior year.
The decrease was due principally to a decrease in audiotext and outbound
traffic expense at GT&T of $24.4 million, due to decreased traffic volumes.
Somewhat offsetting the decrease was an increase in plant specific and plant
non-specific expenses which increased as a result of increased plant in
service.
Income from operations before interest expense, income taxes and minority
interest for 1997 was $18.1 million, a decrease of $8.6 million or 32%, from
income from operations before interest expense, income taxes and minority
interest of $26.8 million for the prior year. This decrease is principally a
result of the factors affecting revenues and operating expenses discussed
above, even though GT&T recognized approximately $9.5 million of revenues
relating to outbound international long distance revenues for the period
October 1995 to January 1997 discussed above.
Net interest expense decreased $385,000 due to reduced debt resulting in
income before income taxes and minority interest for 1997 of $17.0 million, a
decrease of $8.3 million or 33%, compared to $25.3 million for the prior year.
The Company's effective tax rate for 1997 was 45.3% as compared to 42.8%
for the corresponding period of the prior year.
The minority interest in earnings consists of the Guyana government's 20%
interest in GT&T.
20
Regulatory and Tax Issues
The Company is involved in a number of regulatory and tax proceedings.
See Notes 12 and 13 to the Company's Combined and Consolidated Financial
Statements included in this Report. A material and adverse outcome in one or
more of these proceedings could have a material adverse impact on the
Company's financial condition and future operations.
Liquidity and Capital Resources
The Company believes its existing liquidity and capital resources will be
adequate to meet current operating and capital needs. Without external
financing, the Company expended a total of $2.7 illion in cash to acquire a
75% interest in Digicom S.A.and a 30% interst in Bermuda Digital
Communications, Ltd. during 1998.Additionally the Company provided a $3.0
million loan to BDC. During 1998, GT&T repaid to the Company all inter-company
loans. The Company's current primary source of funds is advisory fees from
GT&T. If and when the tax and regulatory issues discussed in Notes 12 and 13
to the Combined and Consolidated Financial Statement included in this Report
are resolved, the Company anticipates that GT&T may begin paying dividends to
its stockholders, the Company and the Government of Guyana. These tax and
regulatory issues 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.
If and when the Company settles outstanding tax and regulatory issues
with the Guyana government and the PUC, GT&T may require additional external
financing to enable GT&T to further expand its telecommunications facilities.
The Company has not estimated the cost to comply with the October 1997 PUC
order to increase the number of telephone lines in service, but believes such
a project would require significant capital expenditures that would require
external financing. There can be no assurance that the Company will be able to
obtain any such financing.
The continued expansion of GT&T's network is dependent upon the ability
of GT&T to purchase equipment with U.S. dollars. A portion of GT&T's taxes in
Guyana may be payable in U.S. dollars or other hard currencies. The Company
believes that the majority of GT&T's revenues will continue to be denominated
in U.S. dollars or other hard currencies. However, as a result of the rate
increases recently awarded to and currently sought by GT&T and the efforts of
the U.S. FCC, AT&T and carriers in other countries to reduce international
accounting rates, it is likely that an increasing portion of the Company's
revenues will be earned in Guyana currency. 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 little liquidity in the foreign currency markets in
Guyana. During 1998 and in recent months GT&T has had some difficulty in
converting significant amounts of Guyana currency into U.S. dollars. 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 December 31, 1998, approximately $3.4 million of the Company's
total cash balances consisted of balances denominated in Guyana dollars.
The Company is currently exploring several opportunities to acquire
communications properties or licenses in the Caribbean and elsewhere. The
Company believes it has adequate capital resources to acquire these properties
and licenses without any external financing. However, there can be no
assurance as to whether, when or on what terms the Company will be able to
acquire any of the businesses or licenses it is currently seeking.
21
Impact of Devaluation and Inflation
Although the majority of GT&T's revenues and expenditures are transacted
in U.S. dollars or other hard currencies, the results of operations
nevertheless may be affected by changes in the value of the Guyana dollar.
From February 1991 until early 1994, the Guyana dollar remained relatively
stable at the rate of approximately 125 to the U.S. dollar. In 1994, the
Guyana dollar declined in value to approximately 142 to the U.S. dollar. It
remained relatively stable at approximately that rate through 1997. Subsequent
to December 31, 1997, the Guyana dollar has declined in value to approximately
180 to the U.S. dollar at December 31, 1998.
The effect of devaluation and inflation on the Company's financial
results has not been significant in the periods presented, except that, as is
previously discussed in the comparison of 1998 and 1997 operating results, the
Company recognized a net gain of $1.0 million in 1998 as a result of the
devaluation of the Guyana dollar during 1998.
Forward Looking Statements and Analysts' Reports
This report contains forward looking statements within the meaning of the
federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability
and statements of management's expectations and beliefs. Actual results could
differ materially from these statements as a result of many factors, including
future economic and political conditions in Guyana, and the matters discussed
in Notes 12 and 13 to the Combined and Consolidated Financial Statements
Included in this Report.
Investors should also be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that the Company
agrees with any statement or report issued by an analyst irrespective of the
content of the statement or report. Furthermore, the Company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Thus, to the extent that reports issued by securities analysts contain
any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
Item 8. Financial Statements and Supplementary Data
Combined and consolidated financial statements of the Company and its
subsidiaries are submitted as a separate section of this Annual Report. See
Index to Financial Statements and Schedules which appears on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None not previously reported.
22
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be included in the Company's
definitive proxy statement for its 1999 Annual Meeting of Stockholders (the
"Proxy Statement"), or by an amendment to this report to be filed on or before
April 30, 1999, and such information is incorporated herein by reference,
except that the information regarding the Company's executive officers called
for by this item is included in Part I under the heading "Executive Officers
of the Registrant."
Item 11. Executive Compensation
The information required by this item will be included in the Proxy
Statement, and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included in the Proxy
Statement, and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be included in the Proxy
Statement, and such information is incorporated herein by reference.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Combined and consolidated financial statements of the Company and its
subsidiaries are submitted as a separate section of this Annual Report. See
Index to Financial Statements and Schedules which appears on page F-1 hereof.
2. Financial Statement Schedules
Financial statement schedules for the Company and its subsidiaries are
submitted as a separate section of this Annual Report. See Index to Financial
Statements and Schedules which appears on page F-1 hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
(c) Exhibits
Exhibit No. Description
- ----------- ------------
3. (a) Restated Certificate of Incorporation of the Company. ***
(b) By-Laws of the Company. ***
4. (a) Specimen Form of Company's Common Stock Certificate.*
10. Material contracts:
(a) Subscription Agreement, dated as of August 11, 1997, between the
Company and Emerging Communications, Inc.
(b) Repurchase and Recapitalization Agreement, dated as of August 11,
1997, among the Company, Cornelius B. Prior, Jr., individually and as trustee
of the 1994 Prior Charitable Remainder Trust, and Jeffrey J. Prosser.
(c) Agreement and Plan of Merger, dated as of August 11, 1997, between
ATN Merger Co, and the Company.
(d) Technical Assistance Agreement, dated as of December 30, 1997, among
Atlantic Tele-Network, Inc., Atlantic Tele-Network Co., Virgin Islands
Telephone Corporation and Vitelcom Cellular Inc.
(e) Non-Competition Agreement, dated as of December 30, 1997, among
Emerging Communications, Inc., Atlantic Tele-Network, Inc., and Jeffrey J.
Prosser.
(f) Indemnity Agreement, dated as of December 30, 1997, among Atlantic
Tele-Network, Inc., Emerging Communications, Inc., Cornelius B. Prior, Jr. and
Jeffrey J. Prosser.
(g) Employee Benefits Agreements, dated as of December 30, 1997, between
Emerging Communications, Inc. and Atlantic Tele-Network, Inc.
(h) Tax Sharing and Indemnification Agreement, dated as of December 30,
1997, among Atlantic Tele-Network, Inc., Emerging Communications, Inc.,
Cornelius B. Prior, Jr. and Jeffrey J. Prosser.
24
Exhibit No. Description
- ----------- -----------
(i) Equipment Financing Agreement, dated as of January 28, 1991, among
Guyana Telephone and Telegraph Company Limited, Atlantic Tele-Network, Inc.
and Northern Telecom International Finance B.V. (excluding exhibits).*
(j) First Amendment to Equipment Financing Agreement, dated as of January
28, 1991, among Guyana Telephone and Telegraph Company Limited, Atlantic
Tele-Network, Inc. and Northern Telecom International Finance B.V.*
(k) Second Amendment to Equipment Financing Agreement, dated as of
November 21, 1991, among Guyana Telephone and Telegraph Company Limited,
Atlantic Tele-Network, Inc. and Northern Telecom International Finance B.V.**
21. Subsidiaries of the Company.
* Filed as an exhibit to the Company's Registration Statement (File No.
33-43012) and incorporated herein by reference.
** Filed as an exhibit to the Company's Annual Report on Form 10K for
1991 and incorporated herein by reference.
*** Filed as an exhibit on Form 8-K dated February 16, 1996 and
incorporated herein by reference.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ATLANTIC TELE-NETWORK, INC.
March 26, 1999
By: /s/ Cornelius B. Prior, Jr.
----------------------------------
Cornelius B. Prior, Jr.
Chief Executive Officer, Chairman of the
Board and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Cornelius B. Prior, Jr. Chief Executive Officer, Chairman March 26, 1999
Cornelius B. Prior, Jr. of the Board and Secretary
/s/ Kevin P. Hemenway Chief Financial Officer and March 26, 1999
Kevin P. Hemenway Treasurer
/s/ James B. Ellis Director March 26, 1999
James B. Ellis
/s/ Ernst Burri Director March 26, 1999
Ernst Burri
/s/ Henry Wheatley Director March 26, 1999
Henry Wheatley
26
ATLANTIC TELE-NETWORK, INC.
AND SUBSIDIARIES
Combined and Consolidated Financial Statements
for the Years Ended December 31, 1996, 1997, and 1998 and
Report of Independent Public Accountants and
Independent Auditors' Report
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
- ------------------------------------------------------------------------------
INDEX
PAGE
Report of Independent Public Accountants F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets F-4
Combined and Consolidated Statements of Operations F-5
Combined and Consolidated Statements of Stockholders' Equity F-6
Combined and Consolidated Statements of Cash Flows F-7
Notes to Combined and Consolidated Financial Statements F-8
Financial Statement Schedules:
I - Condensed Financial Statements of Atlantic Tele-Network, Inc.
(Parent Company Only) F-24
II - Valuation and Qualifying Accounts F-28
All other schedules are omitted because they are not applicable or because the
required information is shown elsewhere herein.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Atlantic Tele-Network, Inc.
We have audited the accompanying consolidated balance sheet of ATLANTIC
TELE-NETWORK, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic
Tele-Network, Inc and subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
March 5, 1999
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Atlantic Tele-Network, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Atlantic
Tele-Network, Inc. and subsidiary as of December 31, 1997, and the related
combined statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. Our audits also
included the financial statements schedules listed in the Index on Item 14.
These financial statements are the responsibility of Atlantic Tele-Network,
Inc. and subsidiary's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined and consolidated financial statements
present fairly, in all material respects, the financial position of Atlantic
Tele-Network, Inc. and subsidiary as of December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic financial statements as a whole, present
fairly, in all material respects, the information set forth therein.
Deloitte & Touche LLP
Omaha, Nebraska
March 20, 1998
F-3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(Columnar Amounts in Thousands)
- ----------------------------------------------------------------------------------------------------------
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $15,803 $35,116
Accounts receivable, net 38,077 24,448
Materials and supplies 3,536 4,988
Prepayments and other current assets 1,039 1,861
------------ ------------
Total current assets 58,455 66,413
------------ ------------
Fixed assets:
Property, plant and equipment 39,042 51,126
Less accumulated depreciation - (4,695)
------------ ------------
Net fixed assets 39,042 46,431
------------ ------------
Uncollected surcharges, net of current portion 5,941 1,802
Investment in and advances to Bermuda Digital Communications, Ltd. - 3,944
Other assets 4,611 7,670
============ ============
Total assets $108,049 $126,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $10,382 $11,863
Accrued taxes 3,391 8,636
Advance payments and deposits 809 969
Other current liabilities 2,854 1,924
Current portion of long-term debt 3,298 3,403
------------ ------------
Total current liabilities 20,734 26,795
------------ ------------
Deferred income taxes 2,464 502
Long-term debt, excluding current portion 14,536 11,394
------------ ------------
Total liabilities 37,734 38,691
------------ ------------
Minority interests 16,071 18,695
------------ ------------
Contingencies and commitments (Notes 11 and 12)
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $.01 per share; 20,000,000 shares authorized;
4,909,000 shares issued and 4,909,000 and 4,847,400 outstanding, respectively 49 49
Treasury stock, at cost - (555)
Paid-in capital 54,195 54,195
Retained earnings - 15,185
------------ ------------
Total stockholders' equity 54,244 68,874
============ ============
Total liabilities and stockholders' equity $108,049 $126,260
============ ============
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-4
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(Columnar Amounts in Thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------
1996 1997 1998
Combined Combined Consolidated
------------- -------------- ---------------
Telephone Operations
Revenues:
Local exchange service revenues $2,463 $2,933 $9,444
International long-distance revenues 145,080 113,865 84,028
Other revenues 710 817 1,172
------------- -------------- ---------------
Total revenues 148,253 117,615 94,644
------------- -------------- ---------------
Operating expenses:
Plant specific operations 4,902 5,707 6,450
Plant nonspecific operations 6,017 7,099 6,377
Customer operations 2,474 2,538 2,799
Corporate operations 5,838 6,061 2,753
International long-distance expenses 94,457 70,094 38,689
Taxes other than income taxes 574 657 941
General and administrative expenses 7,207 7,317 5,086
------------- -------------- ---------------
Total operating expenses 121,469 99,473 63,095
------------- -------------- ---------------
Income from telephone operations 26,784 18,142 31,549
------------- -------------- ---------------
Other operations:
Revenues of other operations - - 1,011
Expenses of other operations - - 1,384
------------- -------------- ---------------
Loss from other operations - - (373)
------------- -------------- ---------------
Other income (expense):
Interest expense (3,991) (3,794) (2,290)
Interest income 2,489 2,677 1,643
Other income (expense), net - - 3,577
------------- -------------- ---------------
Other income (expense), net: (1,502) (1,117) 2,930
------------- -------------- ---------------
Income before income taxes and minority interests 25,282 17,025 34,106
Income taxes 10,824 7,718 15,913
------------- -------------- ---------------
Income before minority interests 14,458 9,307 18,193
Minority interests (2,096) (1,372) (2,281)
------------- -------------- ---------------
Net income $12,362 $7,935 $15,912
============= ============== ===============
Net income per share
Basic $3.25
===============
Diluted $3.23
===============
Weighted average common stock outstanding
Basic 4,901
===============
Diluted 4,923
===============
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-5
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(Columnar Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
--------- ---------- ---------- ----------- -------------
Combined Balance, December 31, 1995 $123 $ - $81,852 $16,289 $98,264
Net income - - - 12,362 12,362
--------- ---------- ---------- ----------- -----------
Combined Balance, December 31, 1996 123 - 81,852 28,651 110,626
Net income - - - 7,935 7,935
Purchase and cancellation of 765,562
shares of Company common stock (8) - - (17,392) (17,400)
Split-off of subsidiaries and fair valuation
of net assets (66) - (27,657) (19,194) (46,917)
--------- ---------- ---------- ----------- -----------
Consolidated Balance, December 31, 1997 49 - 54,195 - 54,244
Purchase of 61,600 treasury shares of common stock - (555) - - (555)
Dividend on common stock - - - (727) (727)
Net income - - - 15,912 15,912
--------- ---------- ---------- ----------- -----------
Consolidated Balance, December 31, 1998 $49 $(555) $54,195 $15,185 $68,874
========= ========== ========== =========== ===========
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-6
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(Columnar Amounts in Thousands)
- ------------------------------------------------------------------------------------------------------
1996 1997 1998
Combined Combined Consolidated
----------- ---------- ------------
Cash flows from operating activities:
Net income $12,362 $7,935 $15,912
Adjustments to reconcile net income to net
cash flows provided by operating activities
(excluding the effects of acquisitions):
Depreciation and amortization 4,890 5,289 4,307
Deferred income taxes 3,370 2,961 (2,897)
Minority interests 2,096 1,372 2,281
Equity in losses of Bermuda Digital Communications Ltd. - - 209
Changes in operating assets and liabilities:
Accounts receivable (253) 11,187 11,556
Materials and supplies, prepayments and other current assets 215 (894) (1,293)
Uncollected surcharges 1,220 (2,822) 6,327
Accounts payable and accrued liabilities 5,350 (4,038) 1,352
Accrued taxes (4,863) 1,970 5,210
Other 82 2,200 (2,279)
----------- ---------- ------------
Net cash flows provided by operating activities 24,469 25,160 40,685
----------- ---------- ------------
Cash flows from investing activities:
Capital expenditures (10,534) (7,633) (9,994)
Investment in consolidated subsidiary, net of cash received - - (1,842)
Investment in and advances to Bermuda Digital Communications Ltd. - - (4,153)
Split-off transaction costs - (4,509) -
Change in affiliate borrowings (261) 19,918 -
Other investments - - (750)
----------- ---------- ------------
Net cash flows (used in) provided by investing activities (10,795) 7,776 (16,739)
----------- ---------- ------------
Cash flows from financing activities:
Repayment of long-term debt (9,360) (7,693) (3,351)
Repayments on notes (790) (222) -
Purchase of common stock - (17,400) (555)
Dividends declared on common stock - - (727)
----------- ---------- ------------
Net cash flows used in financing activities (10,150) (25,315) (4,633)
----------- ---------- ------------
Net change in cash and cash equivalents 3,524 7,621 19,313
Cash and cash equivalents, beginning of year 4,658 8,182 15,803
----------- ---------- ------------
Cash and cash equivalents, end of year $8,182 $15,803 $35,116
=========== ========== ============
Supplemental cash flow information:
Interest paid $3,611 $3,035 $1,747
=========== ========== ============
Income taxes paid $11,186 $4,093 $7,784
=========== ========== ============
Non-cash activities:
Split-off of subsidiaries and fair valuation of net assets $ - $42,408 $ -
=========== ========== ============
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-7
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997, and 1998
(Columnar Amounts in Thousands)
1. ORGANIZATION AND BUSINESS OPERATIONS
Atlantic Tele-Network, Inc. (the "Company" or "ATN"), a Delaware
corporation, is engaged principally through its 80% owned subsidiary, Guyana
Telephone & Telegraph Company, Limited ("GT&T"), in providing
telecommunications services, including local telephone service, long-distance
services and cellular service in the Cooperative Republic of Guyana ("Guyana")
and international telecommunications service to and from Guyana. The Company
also owns a 75% interest in Digicom S.A. ("Digicom"), a Haitian corporation
principally engaged in dispatch radio, mobile telecommunications and paging
and a 30% interest in Bermuda Digital Communications, Ltd., ("BDC") a Bermuda
corporation which, when operational, will be the sole cellular and PCS
competitor in Bermuda to the Bermuda Telephone Company. ATN provides
management, technical, financial, regulatory and marketing services for GT&T,
Digicom and BDC for a management fee equal to 6% of gross revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Effective December 30, 1997, ATN split-off into
two separate public companies (the "Transaction"). One, Emerging
Communications, Inc., contained all of the operations of the Company and its
subsidiaries in the U.S. Virgin Islands. The other, ATN, continued the
business and operations of the Company in Guyana, including ownership of its
80% owned subsidiary, GT&T. The combined financial statements of ATN for the
years ended December 31, 1996 and 1997 are the separate financial statements
relating to ATN's business and operations in Guyana, including its 80% owned
subsidiary GT&T, and ATN's activities as the parent company of all of its
subsidiaries. ATN's investment in subsidiaries other than GT&T and operations
of these other subsidiaries have been carved out of the combined financial
statements. The combined financial statements of ATN present the results of
operations and cash flows for each of the two years in the period ended
December 31, 1997 as if the business, operations and activities included in
the combined financial statements were conducted by a separate entity. The
accompanying consolidated balance sheets as of December 31, 1997 and 1998 and
the results of operations and cash flows for the year ended December 31, 1998
include the accounts of the Company and its majority owned subsidiaries GT&T
and Digicom. All material intercompany transactions and balances have been
eliminated.
The Transaction was accounted for as a non-pro rata split-off of ATN from
the consolidated Company as it previously existed. Accordingly, ATN assets and
liabilities at December 31, 1997 have been accounted for in accordance with
Accounting Principles Board ("APB") Opinion No. 29, "Accounting for
Nonmonetary Transactions" and Emerging Issues Task Force ("EITF") 96-4,
"Accounting for Reorganizations Involving a Non-Pro Rata Split-off of Certain
Nonmonetary Assets to Owners" at values as determined by market capitalization
of ATN subsequent to the Transaction. The excess of original cost over fair
value has been allocated to reduce the values assigned to long-term assets,
primarily property, plant and equipment and intangibles.
F-8
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all investments with a maturity at acquisition of three
months or less to be cash equivalents.
Materials and Supplies - Materials and supplies are carried in inventory
principally at weighted average cost.
Fixed Assets - The cost of fixed assets in service and under construction
includes an allocation of indirect costs applicable to construction. The
Company provides for depreciation using the straight-line method. This has
resulted in a composite annualized rate of 4.5%, 4.5% and 9.2% for GT&T for
the years ended December 31, 1996, 1997 and 1998, respectively. With respect
to GT&T, the cost of depreciable property retired, together with removal cost
less any salvage realized, is charged to accumulated depreciation. No gain or
loss is recognized in connection with ordinary retirements of depreciable
property. Repairs and replacements of minor items of property are charged to
maintenance expense. At January 1, 1998, GT&T adopted new and generally
shorter lives in connection with a tariff application filed on December 31,
1997 with the Guyana Public Utilities Commission ("PUC"). The lives adopted
have neither been approved nor disapproved by the PUC as of the date of this
report.
Long-Lived Assets - In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the Company evaluates the
carrying value of property, plant and equipment and intangibles in relation to
the operating performance and future undiscounted cash flows of the underlying
business. The Company adjusts the net book value of the underlying assets if
the sum of expected future cash flows is less than book value. Management
believes that long-lived assets in the accompanying consolidated balance
sheets are appropriately valued.
Revenue Recognition - Local exchange service and international
long-distance revenues are recognized when earned, regardless of the period in
which they are billed. In determining revenue, the Company estimates the
country of origin of traffic it receives from foreign carriers to determine
the appropriate rate to apply to minutes of long distance traffic carried by
the Company. Additionally, the Company establishes reserves for possible
unreported or uncollectible minutes from foreign carriers and doubtful
accounts from customers. The amounts the Company will ultimately realize upon
settlement could differ significantly in the near term from the amounts
assumed in estimating these revenues and the related accounts receivable.
Income Taxes - The Company utilizes the liability method of accounting
for income taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Credit Concentrations and Significant Customers - Revenues from AT&T,
MCI, British Telecom and Teleglobe, consisting of international long-distance
revenues, comprised approximately 36%, 21%, 12% and 12%, respectively, of
total revenues for 1996, 31%, 11%, 9% and 18%, respectively, of total revenues
for 1997 and 27%, 11%, 9% and 18%, respectively, of total revenues for 1998.
No other customers accounted for more than 10% of total revenues.
Substantially all of the connecting companies accounts receivable are due from
these companies.
F-9
A significant portion of the Company's international long-distance
revenue discussed above is generated by GT&T's audiotext providers, which
operate as service bureaus or intermediaries for a number of audiotext
information providers. One such audiotext provider accounted for $83 million,
$39 million and $19 million of these revenues for the years ended December 31,
1996, 1997 and 1998, respectively, and another audiotext provider accounted
for $20 million, $18 million and $10 million of these revenues for the years
ended December 31, 1996, 1997 and 1998, respectively.
Foreign Currency Gains and Losses - With regard to GT&T operations, for
which the U.S. dollar is the functional currency, foreign currency transaction
gains and losses are included in determining net income for the period in
which the transaction is settled. At each balance sheet date, balances
denominated in foreign currency are adjusted to reflect the current exchange
rate. For the years ended December 31, 1996 and 1997, foreign currency gains
and losses related primarily to settlements with foreign carriers and
approximated $51,000 and $(1,507,000) respectively. In the year ended December
31, 1998, foreign currency gains and losses arose primarily from the
devaluation of the Guyana dollar during 1998 and amounted to a net gain of
$2,985,000. All of the foregoing gains and losses are included in the
accompanying combined and consolidated statements of operations.
Regulatory Accounting - GT&T accounts for costs in accordance with the
accounting principles for regulated enterprises prescribed by SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." This accounting
recognizes the economic effects of rate regulation by recording cost and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly under SFAS No. 71, plant and equipment is
depreciated over lives approved by regulators and certain costs and
obligations are deferred based upon approvals received from regulators to
permit recovery of such amounts in future years. GT&T's audiotext revenues are
not subject to regulation but are taken into account by the regulator in
setting regulated rates which permit the recovery of GT&T's costs and a return
on investment. These unregulated revenues and any costs which pertain solely
to these unregulated revenues are not accounted for under SFAS No. 71
principles.
Reclassifications - Certain reclassifications have been made to the
financial statements of 1996 to conform to the 1997 classification.
Business Segment Information - The Company and its subsidiaries operate
primarily in two reportable segments. The two segments are the telephone
operations segment which relates to GT&T and the radio and paging segment
which relates to Digicom. For 1998, the radio and paging segment is not
material for separate disclosure under SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information."
Fair Value of Financial Instruments - The Company's financial instruments
include cash and cash equivalents, debt, and other short-term assets and
liabilities. The fair value of long term debt is established using a
discounted cash flow analysis. As of December 31, 1997 and 1998, the estimated
fair value of the Company's financial instruments approximates their carrying
value.
F-10
Pro Forma Net Income Per Share - Historical income per share is not
presented in the combined financial statements for the years ended December
31, 1996 and 1997 as the information is not considered meaningful. Pro forma
net income per share as if the Transaction had occurred January 1, 1997 is
calculated as follows:
(Unaudited)
1997
-------------
Net income as reported $7,935
Reduction in depreciation 2,712
Elimination of interest income from subsidiary, net
of interest expense on debt transferred to ECI (1,716)
Tax effect (637)
-------------
Pro forma net income $8,294
=============
Pro forma net income per share $1.69
=============
Pro forma shares outstanding 4,909
=============
Net Income Per Share - Net income per share is computed in accordance
with SFAS 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. The Company's
stock options are potentially dilutive securities. In the year ended December
31, 1998, potentially dilutive securities were dilutive and, therefore, are
included in diluted net income per share. A reconcilation of basic net income
per share to diluted net income per share for the year ended December 31, 1998
follows:
Weighted Net Income
Net Income Average Shares Per Share
------------- ------------ -------------
Basic net income $15,912 4,901 $3.25
Dilutive securities:
Stock options - 22 (0.02)
------------- ------------ -------------
Diluted net income $15,912 4,923 $3.23
============= ============ =============
3. ACQUISITIONS
Effective June 2, 1998, the Company acquired a 75% interest in Digicom, a
Haitian corporation principally engaged in dispatch radio mobile
telecommunications and paging for $1.7 million in cash and a commitment to
issue in the future 15,873 shares of ATN common stock. The Company has signed
an advisory fee contract with Digicom compensating it at 6% of gross revenues
for management services provided, effective from the acquisition date. The
acquisition has been accounted for as a purchase in accordance with APB No.16,
"Business Combinations." Accordingly, the purchase price has been allocated to
the assets acquired based on the estimated fair values as of the acquisition
date. The excess of the cost over the estimated fair value of the net tangible
assets acquired amounts to $874,000 and has been included in other assets in
the accompanying consolidated balance sheet and is being amortized on a
straight line basis over 15 years.
On July 17, 1998, the Company acquired a 30% equity interest, plus
warrants which would enable the Company to increase its investment up to 40%
under certain circumstances, in BDC for $1.0 million in cash. The Company also
provided a loan to BDC of $3.0 million at Citibank prime of 7.75% at December
31, 1998, plus 3%. The Company has signed an advisory fee contract with BDC
compensating it at 6% of gross revenues for management services provided,
effective from the acquisition date.
F-11
BDC is a Bermuda corporation, which when operational, will be the sole
cellular and PCS competitor to a regional telephone company. This investment
is accounted for under the equity method of accounting. For the year ended
December 31, 1998, the Company recorded equity in losses of BDC of $209,000
which are included in the accompanying combined and consolidated statements of
operations in other income (expense), net.
4. ACCOUNTS RECEIVABLE
As of December 31, 1997 and 1998 accounts receivable consist of the
following:
1997 1998
------------------------
Subscribers, net of allowance for doubtful accounts of $502,000
and $651,000, respectively $2,406 $2,878
Connecting companies, net of allowance for doubtful accounts
of $0 and $2,000,000, respectively 29,834 17,884
Uncollected surcharges - current portion 5,479 3,291
Other 358 395
------- -------
$38,077 $24,448
======== ========
5. FIXED ASSETS
As of December 31, 1997 and 1998, fixed assets consist of the following:
1997 1998
-------------------------
Outside plant $17,057 $19,914
Central office equipment 13,502 22,025
Land and building 3,248 4,428
Station equipment 1,178 1,715
Furniture and office equipment 382 899
Construction in process 3,245 983
Other 430 1,162
-------------------------
Total property, plant and equipment $39,042 $51,126
=========================
As a result of the valuation of net assets in the split-off Transaction
in accordance with APB Opinion No. 29 and EITF 96-4, net property values at
December 31, 1997 were reduced by approximately $49.2 million from their
previous carrying value, which was based primarily on historical cost. The
reduced carrying value of property, plant and equipment is significantly below
replacement value.
F-12
6. OTHER ASSETS
As of December 31, 1997 and 1998, other assets consist of the following:
1997 1998
------------------------
Debt service reserve fund and escrow account $3,900 $3,900
Goodwill, net of accumulated amortization of $34,000 - 840
Prepaid pension 425 497
Equipment Deposits - 1,392
Other 286 1,041
--------- --------
$4,611 $7,670
========= ========
7. LONG-TERM DEBT
As of December 31, 1997 and 1998, long term-debt consist of the
following:
1997 1998
------------------------
Notes payable to Northern Telecom International Finance B.V.
(NTIF) by GT&T under a $34 million equipment financing
agreement (the GT&T Equipment Loan) $17,834 $14,536
Other - 261
--------- ---------
17,834 14,797
Less current portion 3,298 3,403
--------- ---------
$14,536 $11,394
========= =========
The GT&T Equipment Loan requires monthly principal payments totaling
$275,000 plus interest with all outstanding balances maturing in 2004. The
interest rates on the GT&T Equipment Loan are at fixed rates ranging from
9.17% to 11.29% as of December 31, 1997 and 1998.
The GT&T Equipment Loan is guaranteed by ATN and secured by a pledge of
all the GT&T stock owned by ATN and a security interest in all net toll
revenues due to GT&T from significant carriers. GT&T is also required to
maintain a debt service reserve fund under this loan agreement. The balance of
this fund, included in other assets in the accompanying consolidated balance
sheets, was $3.9 million at December 31, 1997 and 1998.
Future maturities of the long-term debt at December 31, 1998 are as
follows:
1999 $3,403
2000 3,409
2001 3,272
2002 2,742
2003 1,496
Thereafter 475
===========
$14,797
===========
F-13
8. EQUITY
Common Stock
During 1998, the Board of Directors of the Company authorized a quarterly
dividend of $0.15 per share. The first dividend was declared in 1998 to be
paid January 13, 1999 to stockholders of record as of December 29, 1998 and is
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheet.
Treasury Stock
During 1998, the Board of Directors authorized a stock repurchase program
under which up to 250,000 shares of the Company's common stock may be
repurchased by the Company. The shares of common stock repurchased will be
available for compensation plans of the Company. During 1998, the Company paid
$555,000 to repurchase 61,600 shares of common stock.
Stock Options
During the year ended December 31, 1998, the Board of Directors of the
Company adopted a stock option plan for the Company, reserved 250,000 shares
of common stock for options to be granted under the plan and granted options
to employees to purchase 130,000 shares of the Company's common stock at an
exercise price of $ 9.625 per share (the estimated fair value per share of the
common stock at the date of grant). The options have terms of 10 years and
vest ratably over a period of 4 years. The adoption of the plan and the grant
of the options are subject to approval by the stockholders of the Company on
or before October 30, 1999.
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for
employee stock options or similar equity instruments and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting methodology required by APB Opinion No.
25 must make pro forma disclosures of net income and earnings per share as if
the fair value-based method of accounting defined in SFAS No. 123 was used.
The Company has elected to continue to account for its stock-based
compensation plans under APB Opinion No. 25, under which the Company has
recognized no compensation cost. However, the Company has computed for pro
forma disclosure purposes, the estimated fair value of all options for shares
of the Company's common stock granted to employees during the year December
31, 1998 using the Black-Scholes option pricing model, as allowed under SFAS
No. 123 and based on the following assumptions:
1998
------------
Risk-free interest rate 4.49%
Expected dividend yield 6%
Expected lives 5 years
Expected volatility 72%
F-14
At December 31, 1998 there were 130,000 options outstanding with a
weighted average remaining contractual life of 9.8 years and a weighted
average exercise price of $9.625 per share. The weighted average fair value of
options granted during the year ended December 31, 1998 was $3.95 per share
subject to option, or $514,000 in aggregate. If the Company had accounted for
these options in accordance with SFAS No. 123, the Company would have
amortized this fair value over the vesting period of the options resulting in
$9,000 compensation expense for the year ended December 31, 1998. The
Company's reported net income and net income per share for the year ended
December 31, 1998 would have been as follows:
Net income:
As reported- Basic and diluted: $15,912
============
Pro forma- Basic and diluted: $15,903
============
Earnings per share
As reported and pro forma - Basic $3.25
============
As reported and pro forma - Diluted $3.23
============
9. INCOME TAXES
The following is a reconciliation from the tax computed at statutory
income tax rates to the Company's income tax expense:
Years Ended December 31,
-------------------------------------
1996 1997 1998
-------------------------------------
Tax computed at statutory U.S. federal income
tax rates $8,849 $5,959 $11,937
Guyana income taxes in excess of statutory U.S. rates 1,965 1,314 2,914
Other, net 10 445 1,062
--------- -------- --------
Income tax expense $10,824 $7,718 $15,913
========= ======== ========
The components of income tax expense are comprised of the following:
Years Ended December 31,
-------------------------------------
1996 1997 1998
Current:
United States $1,302 $1,445 $2,087
Foreign 4,948 3,312 12,142
Deferred 4,574 2,961 1,684
--------- -------- --------
$10,824 $7,718 $15,913
========= ======== ========
F-15
The significant components of deferred tax assets and liabilities are as
follows:
December 31,
-------------------------
1997 1998
-------------------------
Deferred tax assets:
Differences between book and tax basis of property $ - $308
Non-deductible expense 659 1,534
-------- ---------
659 1,842
Deferred tax liabilities:
Differences between book and tax basis of property 1,229 -
Revenues not recognized for tax purposes 1,520 1,035
-------- ---------
2,749 1,035
-------- ---------
Net deferred tax assets (liabilities) (2,090) 807
Portion included in current assets 374 1,309
========= =========
Non - current deferred tax liabilities $(2,464) $(502)
========= =========
At December 31, 1997 and 1998, unremitted earnings of foreign
subsidiaries were approximately $47,782,000 and $57,048,000, respectively.
Since it is the Company's intention to indefinitely reinvest these earnings,
no U.S. taxes have been provided for. The determination of the amount of U.S.
tax which would be payable if such unremitted foreign earnings were
repatriated through dividend remittances is not practicable in that any U.S.
taxes payable on such dividends would be significantly offset by foreign tax
credits. Pursuant to the term of the purchase agreement with the government of
Guyana, there are no withholding taxes applicable to distributions from GT&T.
10. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan for
eligible employees of GT&T who meet certain age and employment criteria.
Contributions are intended to provide not only for benefits attributed for
service to date, but also for those expected to be earned in the future. The
Company's funding policy is to contribute to the plan such amounts that are
actuarially determined to meet funding requirements. The benefits are based on
the participants' average salary or hourly wages during the last three years
of employment and credited service years. In 1998, the Company adopted, SFAS
No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits" which revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans.
The weighted average rates assumed in the actuarial calculations for the
pension plan were:
1997 1998
---- ----
Discount 8.25% 10.50%
Annual salary increase 7.50% 7.50%
Expected long-term return on plan assets 9.25% 9.25%
F-16
Changes during the year in the projected benefit obligations and in the
fair value of plan assets were as follows:
1997 1998
---- ----
Projected benefit obligations:
Balance at beginning of year $1,050 $2,266
Adjustments at the beginning of the year (39) (240)
Service cost 167 294
Interest cost 130 146
Benefits paid - (59)
Foreign currency exchange rate changes (11) (459)
Actuarial (gain) loss 969 (681)
---------- --------
Balance at end of year $2,266 $1,267
========== ========
Plan assets:
Balance at beginning of year $625 $1,328
Actual return on plan assets 10 126
Company contributions 700 603
Benefits paid - (66)
Foreign currency exchange rate changes (7) (411)
---------- ----------
Balance at end of year $1,328 $1,580
========== ==========
The accrued pension costs recognized in the balance sheets were as
follows:
1997 1998
---- ----
Funded status $(938) $313
Unrecognized prior service cost 230 168
Unrecognized net actuarial loss 1,133 16
-------- --------
Prepaid asset recognized in the
accompanying consolidated balance sheets $425 $497
======== ========
Components of the plans net periodic pension cost were as follows:
1996 1997 1998
---- ---- ----
Service cost $135 $168 $294
Interest cost 101 131 146
Expected return on plan assets (65) (62) (131)
Net amortization 16 17 45
------- -------- -------
Net periodic pension cost $187 $254 $354
======= ======== =======
F-17
11. REGULATORY MATTERS
On December 31, 1997, GT&T applied to the Guyana Public Utilities
Commission ("PUC") for a significant increase in rates for local and outbound
international long-distance service so as to enable GT&T to earn a 15% return
on its rate base. Effective February 1, 1998, GT&T was awarded an interim
increase in rates which represented a substantial increase over the rates in
effect during 1997 and earlier years. Subsequently, on March 27, 1998, the PUC
reduced the interim rate increase effective in part on April 1, 1998 and in
part on May 1, 1998. On October 27, 1998, to reflect changed conditions since
December 31, 1997, GT&T filed for an additional rate increase designed to
generate $19.0 million in additional revenues over and above the interim rates
currently in effect. GT&T's two applications for a permanent rate increase are
still pending before the PUC. In January 1999, after the chairman of the PUC
held a press conference which dealt extensively with the rate issues under
consideration by the PUC, GT&T applied to the Guyana High Court for an order
prohibiting the chairman from further participation in the rate case on the
grounds that this press conference and his statements at the press conference
revealed a predetermination and bias by the chairman against GT&T on the
pending issues. In response to this application, the Guyana High Court issued
an order directing the chairman and the PUC to show cause why such an order of
prohibition should not be issued. The Guyana High Court's order has the legal
effect of barring the chairman from further participation in the rate case
pending a determination by the Guyana High Court of the merits of GT&T's
application and, thus, is likely to further delay a decision by the PUC on
GT&T's pending applications.
In October 1995, the PUC issued an order that rejected the request of
GT&T for substantial increases in all telephone rates and temporarily reduced
rates for outbound long-distance calls to certain countries. In most cases,
the existing rates were already less than GT&T's payment obligations to
foreign carriers. In January 1997, on an appeal by GT&T, the Guyana High Court
voided the PUC's order in regard to rates and the rates were returned to the
rates in existence in October 1995. The lost revenue was approximately $9.5
million for the period when the order was effective. GT&T initially instituted
a surcharge effective May 1, 1997 to collect the lost revenue, but temporarily
withdrew it when the Guyana Consumers Advisory Bureau (a non-governmental
group in Guyana) instituted a suit to block it. The consumer advisory bureau's
suit is still pending. Effective on October 1, 1997, GT&T put into effect a
surcharge to recover the approximately $9.5 million of lost revenues from the
period of October 1995 to January 1997 pending an ultimate trial on the merits
of the Consumer Advisory Bureau's suit and the Company recognized the
approximately $9.5 million of lost revenues in the third quarter of 1997. As
of December 31, 1998, GT&T had collected approximately $6 million of the lost
revenues. The 1997 PUC Act, which has not yet come into effect, contains
provisions which appear to prohibit GT&T from collecting any portion of the
lost revenues which remain uncollected on the effective date of the Act and
may require GT&T to refund all amounts previously collected in excess of the
rates in effect on January 1, 1996.
In January 1997, the PUC ordered GT&T to cease paying management fees to
the Company and to recover from the Company approximately $25 million of such
fees paid by GT&T to the Company since January 1991. GT&T has appealed the
PUC's order to the Guyana High Court and obtained a stay of the PUC's order
pending determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital
expenditure needs of GT&T. GT&T's indebtedness to the Company was evidenced by
a series of promissory notes. In March 1997, the PUC voided substantially all
of the promissory notes then outstanding for failure to comply with certain
provisions of the PUC law. The PUC ordered that no further payments be made on
any of the outstanding notes and that GT&T recover from the Company all
amounts theretofore paid. The order also provided that the PUC would be
willing to authorize the payment of any amounts properly proven to the
satisfaction of the PUC to be due and payable from GT&T to the Company. GT&T
has appealed the PUC's order to the Guyana High Court and obtained a stay of
the PUC's order pending determination of that appeal. As of December 31, 1998
GT&T had fully paid to the Company all of the amounts at issue.
F-18
In April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
In October 1997, the PUC ordered GT&T to increase the number of telephone
lines in service to a total of 69,278 lines by the end of 1998, 89,054 lines
by the end of 1999 and 102,126 by the end of the year 2000, to allocate and
connect an additional 9,331 telephone lines before the end of 1998 and to
provide to subscribers who request them facilities for call diversion, call
waiting, reminder call and three-way calling by the end of the year 1998. In
issuing this order, the PUC did not hear evidence or make any findings on the
cost of providing these lines and services, the adjustment in telephone rates
which may be necessary to give GT&T a fair return on its investment or the
ways and means of financing the requirements of the PUC's order. GT&T has
filed a motion against the PUC's order in the Guyana High Court and has
appealed the order on different grounds to the Guyana Court of Appeal. No stay
currently exists against this order.
In July 1998, the PUC gave notice that it would hold a public hearing on
August 25, 1998 in respect of the following matters; (i) "the validity of the
grant of monopoly rights to any owner or provider of services in the public
utility sector, having regard to the laws in force in Guyana at the relevant
time;" and (ii) "whether the Commission has power to request the Government to
issue a license to a new provider of services in the public utility sector,
where the existing provider in that sector fails to refuses to meet reasonable
demands for service in that public utility sector." While the PUC's notice did
not name GT&T as the service provider in question, the Company believes that
GT&T is the service provider which will be the subject of the hearing. This
intended hearing has been stayed by an order issued by the Guyana High Court
on an application by GT&T pending a hearing on the merits of GT&T's
application.
On October 30, 1998, the U.S. Federal Trade Commission ("FTC") issued for
comments a proposed rule which would expand the definition of "pay-per-call"
services to include audiotext services such as those which GT&T terminates in
Guyana. The FTC previously received comments and conducted a workshop in 1997
in an earlier phase of this proceeding. If adopted in its present form the
FTC's proposed rule would require, among other things, that a caller must
receive a short preamble at the beginning of the call advising the caller of
the cost of the call and permitting the caller to terminate the call without
charge if terminated immediately. Although GT&T has not completed its study of
the ways and means of possibly complying with this requirement, it may be
technically impossible for recipients of international audiotext traffic, such
as GT&T, to separate audiotext traffic from other incoming international
traffic and permit a free preamble for audiotext calls. The FTC's proposed
rule would have the effect of prohibiting a local telephone company from
disconnecting a subscriber's telephone service for failure to pay charges for
an international audiotext call. This requirement currently applies to area
code 900 domestic audiotext but not to international audiotext, and provides a
collection advantage for international audiotext over domestic audiotext. The
proposed rule would also include several requirements which, if adopted, could
make it more difficult to bill and collect for international audiotext calls.
If the proposed regulations are adopted, the provisions described above may
have a significant adverse impact on international audiotext traffic from the
United States to Guyana and other non-U.S. termination points.
F-19
12. CONTINGENCIES AND COMMITMENTS
The Company is subject to lawsuits and claims which arise out of the
normal course of business, some of which involve claims for damages that are
substantial in amount. The Company believes, except for the items discussed
below for which the Company is currently unable to predict the outcome, the
disposition of claims currently pending will not have a material adverse
effect on the Company's financial position or results of operations.
Upon the acquisition of GT&T in January 1991, ATN entered into an
agreement with the government of Guyana to expand significantly GT&T's
existing facilities and telecommunications operations and to improve service
within a three-year period pursuant to an expansion and service improvement
plan (the Plan). The government agreed to permit rate increases in the event
of currency devaluation within the 3 year period, but GT&T was unable to get
timely increases when the Guyana currency suffered a sharp decline in March
1991. The Plan was modified in certain respects and the date for completion of
the Plan was extended to February 1995. The government has referred to the PUC
the failure of GT&T to complete the Plan by February 1995. The PUC is
currently holding hearings on this matter. If the PUC were to find that GT&T
was not excused from fulfilling the terms of the Plan by February 1995, GT&T
could be subject to monetary penalties, cancellation of the License, or other
action by the PUC or the government which could have a material adverse affect
on the Company's business and prospects. The requirements of the Plan have now
been substantially completed.
In May 1997, GT&T received a letter from the Commissioner of Inland
Revenue indicating that GT&T's tax returns for 1992 through 1996 had been
selected for an audit under the direct supervision of the Trade Minister with
particular focus on the withholding tax on payments to international audiotext
providers. In March and April 1997, the Guyanese Trade Minister publicly
announced that he had appointed a task force to probe whether GT&T should pay
withholding taxes on fees paid by GT&T to international audiotext providers.
The Minister announced that if GT&T were found guilty of tax evasion it could
owe as much as $40 million in back taxes. In July 1997, GT&T applied to the
Guyana High Court for an order prohibiting this audit on the grounds that the
decision of the Minister of Trade to set up this task force and to control and
direct its investigation was beyond his authority, violated the provisions of
the Guyanese Income Tax Act, interfered with the independence of the
Commissioner of Inland Revenue and was done in bad faith, and the court issued
an order effectively staying the audit pending a determination by the court of
the merits of GT&T's application.
In June 1997, GT&T received an assessment of the current equivalent of
approximately $3 million from the Commissioner of Inland Revenue for taxes for
1997 based on the disallowance as a deduction for income tax purposes of
five-sixths of the advisory fees payable by GT&T to the Company and for the
timing of the taxation on certain surcharges to be billed by GT&T. The
deductibility of these advisory fees and the deferral of these surcharges
until they are actually billed had been upheld for an earlier year in a
decision of the High Court in August 1995. In July 1997, GT&T applied to the
High Court for an order prohibiting the Commissioner of Inland Revenue from
further proceeding with this assessment on the grounds that the assessment was
arbitrary and unreasonable and capriciously contrary to the August 1995
decision of the Guyana High Court, and GT&T obtained an order of the High
Court effectively prohibiting any action on the assessment pending the
determination by the court of the merits of GT&T's application.
In November 1997, GT&T received assessments of the current equivalent of
approximately $11 million from the Commissioner of Inland Revenue for taxes
for the years 1991 through 1996. It is GT&T's understanding that these
assessments stem from the same audit commenced in May 1997 which the Guyana
High Court stayed in its July 1997 order referred to above. Apparently because
the audit was cut short as a result of the Court's July 1997 order, GT&T did
not receive notice of and an opportunity to respond to the proposed
assessments as is the customary practice in Guyana, and substantially all of
the issues raised in the assessments appear to be based on mistaken facts.
GT&T has applied to the Guyana High Court for an order prohibiting the
Commissioner of Inland Revenue from enforcing the assessments on the grounds
that the origin of the audit with the Minister of Trade and the failure to
give GT&T notice of and opportunity to respond to the proposed assessments
violated Guyana law. The Guyana High Court has issued an order effectively
prohibiting any action on the assessments pending the determination by the
Court of the merits of GT&T's application.
F-20
The Federal Communications Commission ("FCC") has issued a Report and
Order in a rule making proceeding in which it adopted mandatory international
accounting and settlement rate benchmarks for many countries, including
Guyana. The FCC classified countries as low-income, middle-income, high-income
based upon World Bank data. Guyana is classified as a low-income country. The
FCC adopted a mandatory settlement rate benchmark of $.23 per minute for
low-income countries and required that settlement rates between the U.S. and
low-income countries be reduced to $.23 per minute by January 1, 2002. The
current settlement rate is $.85 per minute. The FCC stated in the Report and
Order that it expects U.S. licensed carriers to negotiate proportionate annual
reductions. AT&T recently sought a $.125 per minute decrease in the settlement
rate for traffic between Guyana and the United States. GT&T has declined to
agree to this reduction, and AT&T has given GT&T notice terminating the
current operating agreement between AT&T and GT&T effective December 31, 1999.
Any significant reduction in the settlement rates for U.S. - Guyana traffic
could have a significant adverse impact on GT&T's earnings. While such an
event would also provide GT&T with a basis to seek a rate increase from the
PUC so as to permit GT&T to earn its contractually provided 15% rate of
return, there can be no assurances to when or whether GT&T would receive such
a rate increase.
13. RELATED PARTY TRANSACTIONS
Prior to December 30, 1997, the Company previously shared certain general
and administrative costs with its former affiliate, Atlantic Tele-Network Co.
These shared costs were allocated in approximately the same proportion as
operating revenues of the affiliate bore to total operating revenues of the
Company. Management believes the allocation methods used were reasonable.
However, such allocation was not necessarily indicative of the costs that
would have been incurred if the companies had been operated as unaffiliated
entities. It is not practical to estimate these costs on a stand-alone basis.
The Company retired interest bearing notes receivable from its former
affiliates of $25,136,000 at December 30, 1997. The notes bore interest at
prime plus 1.5% which was 8.5% at December 30, 1997. Interest income for the
years ended December 31, 1996 and 1997, was $2,155,000 and $2,228,000,
respectively. Interest was not charged on certain other notes receivable from
affiliates.
During 1997 the Company retired demand notes payable to a stockholder of
$222,000 with an interest rate of 9.58%.
F-21
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations
for the year ended December 31, 1998:
Consolidated - Three Months Ended
--------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ ------------ ------------- ------------
1998
Revenues $22,362 $23,742 $27,308 $21,232
Operating expenses 16,797 17,232 17,336 11,730
--------- --------- ---------- ---------
Income from telephone operations 5,565 6,510 9,972 9,502
Loss from other operations - - (77) (296)
Other income (expense), net 3,407 (112) (147) (218)
--------- --------- ---------- ---------
Income before income taxes and
minority interests 8,972 6,398 9,748 8,988
Income taxes 3,690 2,842 4,445 4,936
--------- --------- ---------- ---------
Income before minority interests 5,282 3,556 5,303 4,052
Minority interests (411) (461) (856) (553)
--------- --------- ---------- ---------
Net income $4,871 $3,095 $4,447 $3,499
========= ========= ========== =========
Following is a summary of the Company's quarterly results of operations
for the year ended December 31, 1997:
Combined - Three Months Ended
--------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ ------------ ------------- ------------
1997
Revenues $31,742 $27,160 $36,796 $21,917
Operating expenses 26,606 26,229 24,908 21,730
--------- --------- ---------- ---------
Income from telephone operations 5,136 931 11,888 187
Other income (expense), net (352) (338) (252) (175)
--------- --------- ---------- ---------
Income before income taxes and
minority interests 4,784 593 11,636 12
Income taxes 2,044 347 5,167 160
--------- --------- ---------- ---------
Income before minority interests 2,740 246 6,469 (148)
Minority interests (300) (4) (1,067) (1)
--------- --------- ---------- ---------
Net income (loss) $2,440 $242 $5,402 ($149)
========= ========= ========== =========
F-22
15. SUBSEQUENT EVENTS (UNAUDITED)
During the period subsequent to December 31, 1998, the Company
repurchased 188,400 shares of its common stock at an aggregate cost of $1.8
million or an average price of $9.43 per share under a stock repurchase
program authorized by the Board of Directors during 1998. This repurchase
completed the program which authorized 250,000 shares of common stock to be
repurchased by the management of the Company.
During the period subsequent to December 31, 1998, 50,000 stock options
were forfeited by an employee.
On March 11, 1999, the Company announced that its Board of Directors
declared a quarterly dividend of $0.15 per share payable on April 14, 1999 on
all its common shares outstanding, to shareholders of record as of March 31,
1999.
F-23
SCHEDULE I
ATLANTIC TELE-NETWORK, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL POSITION
December 31, 1997 and 1998
(Columnar Amounts in Thousands)
1997 1998
---------- ---------
ASSETS
Current assets:
Cash $5,482 $20,979
Other current assets 103 124
---------- ---------
5,585 21,103
---------- ---------
Property and equipment 118 458
Less accumulated depreciation - (93)
---------- ---------
118 365
Investment in consolidated subsidiaries 28,566 42,826
Advances to consolidated subsidiaries 23,705 2,640
Investment in and advances to Bermuda Digital Communications Ltd. - 3,944
Other assets 164 843
========== =========
Total Assets $58,138 $71,721
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,792 $1,673
Accrued taxes 927 1,082
Other current liabilities 175 92
---------- ---------
3,894 2,847
---------- ---------
Contingencies and commitments
Stockholders' equity:
Preferred stock - -
Common stock 49 49
Treasury stock - (555)
Paid-in capital 54,195 54,195
Retained earnings - 15,185
---------- ---------
54,244 68,874
---------- ---------
Total Liabilities and stockholders' equity $58,138 $71,721
========== =========
See note to condensed financial statements.
F-24
SCHEDULE I
(Continued)
ATLANTIC TELE-NETWORK, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(Columnar Amounts in Thousands, Except Per Share Amounts)
Years Ended December 31,
-----------------------------------------
1996 1997 1998
Combined Combined
--------- --------- ---------
Management fees $8,895 $7,057 $5,739
Interest income 4,490 4,645 2,066
Other income, net - 36 3,075
--------- --------- ---------
13,385 11,738 10,880
Expenses:
Interest 548 533 2
General and administrative 7,207 7,317 5,122
--------- --------- ---------
7,755 7,850 5,124
--------- --------- ---------
Income before income taxes and equity in undistributed
earnings of subsidiaries 5,630 3,888 5,756
Income taxes 1,651 1,445 2,102
--------- --------- ---------
Income before equity in undistributed earnings of subsidiaries 3,979 2,443 3,654
Equity in undistributed earnings of subsidiaries 8,383 5,492 12,467
Equity in loss of Bermuda Digital Communications Ltd. - - (209)
--------- --------- ---------
Net income $12,362 $7,935 $15,912
========= ========= =========
Net income per share
Basic $3.25
=========
Diluted $3.23
=========
Weighted average common stock outstanding
Basic 4,901
=========
Diluted 4,923
=========
Pro forma net income per share $1.69
=========
Pro forma common stock outstanding 4,909
=========
See note to condensed financial statements.
F-25
SCHEDULE I
(Continued)
ATLANTIC TELE-NETWORK, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(Columnar Amounts in Thousands)
Years Ended December 31,
-----------------------------------------
1996 1997 1998
Combined Combined
---------- ---------- ------------
Cash flow from operating activities:
Net income $12,362 $7,935 $15,912
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in undistributed earnings of subsidiaries (8,383) (5,492) (12,467)
Equity in losses of Bermuda Digital Communications Ltd. - - 209
Deferred income taxes (348) - -
Depreciation and amortization 784 518 142
Change in operating assets and liabilities:
Other assets (1,120) 1,727 50
Other liabilities (7) 895 (1,047)
Other 138 364 -
--------- --------- ---------
Net cash flows from operating activities 3,426 5,947 2,799
Cash flows from investing activities:
Change in affiliate borrowings 669 21,205 21,065
Investment in consolidated subsidiary, net of cash received - - (1,842)
Investment in and advances to Bermuda Digital Communications Ltd. - - (4,153)
Capital expenditures - (36) (340)
Split-off transaction costs - (4,509) -
Other investments - - (750)
--------- --------- ---------
Net cash flows from investing activities 669 16,660 13,980
Cash flows from financing activities:
Net repayments on notes (790) (222) -
Repayment of long-term debt (4,342) (81) -
Purchase of Company stock - (17,400) (555)
Dividends declared on common stock - - (727)
--------- --------- ---------
Net cash flows from financing activities (5,132) (17,703) (1,282)
--------- --------- ---------
Net change in cash (1,037) 4,904 15,497
Cash, beginning of year 1,615 578 5,482
--------- --------- ---------
Cash, end of year $578 $5,482 $20,979
========= ========= =========
Supplemental cash flow information:
Interest paid $542 $515 $2
========= ========= =========
Income taxes paid $620 $2,310 $1,580
========= ========= =========
Non-cash activities:
Split-off of subsidiaries $ - $42,408 $ -
========= ========= =========
See note to condensed financial statements.
F-26
ATLANTIC TELE-NETWORK, INC.
(PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
- -----------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
Investment in Subsidiaries - Atlantic Tele-Network, Inc.'s investment in
subsidiaries is accounted for using the equity method.
Basis of Presentation - Effective December 30, 1997, Atlantic
Tele-Network, ("ATN or the Company") split-off into two separate public
companies (the "Transaction"). One, Emerging Communications, Inc., contained
all of the operations of the Company and its subsidiaries in the U.S. Virgin
Islands. The other, ATN, continued the business and operations of the Company
in Guyana, including ownership of its 80% owned subsidiary, GT&T. The
condensed financial statements of ATN for the years ended December 31, 1996
and 1997 are the separate financial statements relating to ATN's business and
operations in Guyana, including its 80% owned subsidiary GT&T, and ATN's
activities as the parent company of all of its subsidiaries. ATN's investment
in subsidiaries other than GT&T and operations of these other subsidiaries
have been carved out of the condensed financial statements for these years
The Transaction was accounted for as a non-pro rata split-off of ATN from
the consolidated Company as it previously existed. Accordingly, ATN assets and
liabilities at December 31, 1997 have been accounted for in accordance with
Accounting Principles Board Opinion No. 29 entitled, "Accounting for
Nonmonetary Transactions" and Emerging Issues Task Force 96-4 entitled,
"Accounting for Reorganizations Involving a Non-Pro Rata Split-off of Certain
Nonmonetary Assets to Owners" at values as determined by market capitalization
of ATN subsequent to the Transaction. The excess of original cost over fair
value has been allocated to reduce the values assigned to long-term assets,
primarily property, plant and equipment and intangibles.
F-27
Schedule II
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
- ----------------------------------------------------------------------------------------------------------------
Balance at Charged to Net Balance
Beginning Costs and Charge at End
of Period Expenses Offs of Period
--------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1996:
Description:
Allowance for doubtful accounts $1,378 $(165) $656 $557
------------------------------- ------ ------ ---- ----
YEAR ENDED DECEMBER 31, 1997:
Description:
Allowance for doubtful accounts $557 $159 $214 $502
---- ---- ---- ----
YEAR ENDED DECEMBER 31, 1998:
Description:
Allowance for doubtful accounts $502 $2,291 $142 $2,651
==== ====== ==== ======
F-28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of ATLANTIC TELE-NETWORK, INC. AND
SUBSIDIARIES included in this Form 10-K and have issued our report thereon
dated March 5, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedules
listed in the index are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 5, 1999
F-29