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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, 1997
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
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None
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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 16, 1998, was
approximately $31,319,400 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 16, 1998, there were outstanding 4,909,000 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 1998 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, 1997
Page
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......... 11
Executive Officers of the Registrant......................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 12
Item 6. Selected Financial Data...................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 15
Item 8. Financial Statements and Supplementary Data.................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 20
PART III
Item 10. Directors and Executive Officers of the Registrant........... 21
Item 11. Executive Compensation....................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 21
Item 13. Certain Relationships and Related Transactions............... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 22
i
PART I
Item 1. Business
INTRODUCTION
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., contains 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, continues 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).
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 57% of the outstanding common stock of the Company.
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. However, there can be no assurance the Company
will be able to acquire or establish any such businesses.
GT&T
General. GT&T supplies all public telecommunications service in
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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
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dependent upon international long-distance calls, particularly international
audiotext traffic, other calls originating outside of Guyana and collect calls
from Guyana to foreign points.
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)
-------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
Inbound Paid and
Outbound Collect 37,920 (24%) 40,350 (21%) 44,456 (27%)
Audiotext 101,763 (63%) 122,476 (64%) 97,913 (59%)
Total Inbound 139,683 (87%) 162,826 (85%) 142,369 (86%)
Outbound 20,725 (13%) 29,768 (15%) 24,120 (14%)
Total 160,408 (100%) 192,594 (100%) 166,489 (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, satellite and
troposcatter 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 1995, 1996 and 1997, the amount which
GT&T collected from its subscribers for outbound international traffic was
usually 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 PUC went into effect,
outbound international traffic has generally had a positive profit margin (e.g.
on calls to the United States, GT&T has been collecting between $1.00 and $1.41
per minute (including a surcharge of $.30 per minute), depending on the time of
day). 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 August 1997 the
FCC issued a Report and Order requiring significant reductions over the next
four years in the accounting rates used by U.S. carriers in paying GT&T for
terminating U.S. traffic in 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.
2
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. GT&T's
profit margins from audiotext also significantly declined in 1997. Management
attributes these declines 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 the rates effective February 1, 1998. (See "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.
GT&T competes with many telephone companies around the world that
provide telecommunications services to international audiotext providers.
GT&T's agreements with audiotext providers are subject to termination by either
party on short notice, and an audiotext provider can readily shift its
operations to another foreign telecommunications carrier merely by changing the
telephone numbers in its advertisements, if the other carrier provides better
service or higher compensation.
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, 1997, GT&T had approximately 55,000
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subscriber access lines in service. This number of access lines represents
approximately 8 lines per 100 inhabitants. Of all lines in service, 50% were in
the area of Georgetown (the nation's capital), and 85% were in the largest urban
areas, consisting of Georgetown, Linden, New Amsterdam, Diamond and
Beterverwagting. Ninety percent of Guyana's population lives on the coastal
plain where Georgetown, Beterverwagting, and New Amsterdam are located. Most
rural areas 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). However, on December 31, 1997, GT&T applied for a
rate increase to enable it to earn a 15% rate of return on its rate base. This
application contemplates that, GT&T's annual revenues from local service would
increase to approximately $17.7 million. Effective February 1, 1998, the PUC
granted GT&T temporary rates, pending a final decision on GT&T's application,
designed by the PUC to provide GT&T with approximately $12.9 million in revenues
from local service. (See "Regulation"). 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. During 1997, GT&T's basic monthly charge per
access line was approximately $.25 for residential customers and approximately
$.60 for business customers, and the average monthly bill for residential and
business service (excluding charges for international calls and cellular
service) was $2.07 and
3
$2.34, respectively. Under the temporary rates put into effect by PUC order on
February 1, 1998, the basic monthly charge per access line was increased to
approximately $3.50 for residential customers and $14.00 for business customers
and a number of new or increased usage-based rates were also put into effect.
See "Business--Regulation."
GT&T began providing mobile cellular telephone service within a
thirty-mile radius of Georgetown in December 1991, although authorization to
charge for local service was not obtained from the PUC until July 1995. See
"Business--Regulation." 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 $82
including monthly rental and airtime charges. As of December 31, 1997, GT&T had
approximately 1,400 active mobile cellular subscribers.
Expansion Program. Pursuant to the purchase agreement between the
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government of Guyana and the Company (the "GT&T Agreement") and GT&T's license
from the government of Guyana (the "License"), the Company and GT&T agreed to
implement an expansion plan (the "Expansion Plan"), which required substantially
expanding and improving the service provided by GT&T's predecessor. Pursuant to
the Expansion Plan, 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 55,000 lines
at December 31, 1997. Approximately 95% 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 1,026 currently. In 1997, GT&T installed a 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 is currently in the process of installing
this wireless telephone service to about 2,000 subscribers in the same area.
GT&T may use this system in lieu of wireline network for a portion of GT&T's
future expansion of its network. The normal rates for land line telephones
apply to GT&T's fixed cellular and fixed wireless network services.
GT&T has installed public telephones in over 150 locations across the
country providing telecommunications for both local and international calls to
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 an Americas
II cable that would provide a leg to Guyana, Suriname and French Guyana.
The Company and GT&T were originally required to complete the
Expansion Plan by January 28, 1994. With the Government's consent, this date
was extended first to August 28, 1994 and then to February 28, 1995. The
Company and GT&T repeatedly advised the government that their inability to
obtain adjusted rates fully to compensate for the 1991 devaluation in Guyana's
currency severely hampered their ability to obtain financing needed to complete
the Expansion Plan. The Company and GT&T also repeatedly sought to negotiate
changes in the Expansion Plan in order to reflect current needs and technology.
Through December 31, 1997, GT&T had expended nearly $93 million on the Expansion
Plan and the Company had advanced an aggregate of approximately $24 million to
GT&T principally for the Expansion Plan.
4
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, is pending before the PUC. See "Business--Regulation."
Other Services. GT&T is also licensed to provide various telephone-
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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 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:
1995 1996 1997
--------- ---------- ----------
AT&T............................................................................. 37% 36% 31%
MCI.............................................................................. 21% 21% 11%
British Telecom.................................................................. 19% 12% 9%
Teleglobe (Canada)............................................................... 13% 12% 18%
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:
1995 1996 1997
---------- --------- --------
Beylen Telecommunications, Ltd.................................................... 60% 57% 33%
Islands Telephone Company Limited................................................. 10% 14% 15%
No other revenue source accounted for more than 10% of GT&T's total
revenues in 1995, 1996 or 1997.
COMPETITION
Local Service. Pursuant to a franchise from the government of Guyana,
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GT&T has the exclusive right to provide, and is the sole provider of, local
telephone service in Guyana. See "Business--Regulation--Guyana."
Long-Distance Service. GT&T is the exclusive provider of domestic long-
---------------------
distance service and international telephone service in Guyana. See "Business--
GT&T--International Traffic."
The provision of telecommunication services to international audiotext
providers is highly competitive. 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. See "Business--GT&T--International Traffic."
Wireless Services. In Guyana, GT&T has a non-exclusive franchise to provide
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cellular telephone services. Accordingly, there can be no assurance that GT&T's
cellular telephone business will not face competition in Guyana. At the date of
this Report, there is another company licensed to provide cellular service;
however, the service is not yet commercially available.
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.
5
POLITICAL RISK INSURANCE
At the time of its initial investment in GT&T, the Company obtained political
risk insurance with respect to its investment in GT&T (including its guarantee
of GT&T's obligations to Northern Telecom International Finance, B.V. ("NTIF")
from the Overseas Private Investment Corporation ("OPIC"), an agency of the
United States Government. While OPIC has not formally announced that is has
suspended writing political risk insurance or guarantees for U.S. investments in
Guyana, it is the Company's understanding that since the beginning of 1993 OPIC
has provided no new insurance or guarantees for investments in that country
because of its concern about developments between the Guyana government and two
U.S. companies which had been insured by OPIC. The Company's difficulties in
obtaining rate increases from the PUC was one of OPIC's concerns. Separately, on
December 31, 1996, OPIC terminated the Company's political risk insurance
because of OPIC's objections to GT&T's provision of telecommunication services
to international audiotext providers. Following such termination, the Company
obtained other political risk insurance with respect to its investment in GT&T
in the private insurance market. Under the Company's current insurance policies,
the Company is insured against risks of currency inconvertibility, expropriation
and political violence. The Company's current insurance is limited to 60% of the
book value of the affected property up to a maximum insured amount of $35
million plus 85% of any amounts which the Company is called upon to pay with
respect to its guaranty of GT&T obligations to NTIF as a result of an insured
risk. The insurance policies cover only specified risks and contain a number of
limitations and exclusions. The aggregate insurance coverage is significantly
less than the fair market value of the Company's investment in GT&T.
REGULATION
Prior to the Company's acquisition of its 80% interest in GT&T in January
1991, the government of Guyana had no experience in regulating a privately-owned
public utility. GT&T is subject to regulation in Guyana by virtue of the
provisions of the License and of the Guyana Public Utilities Commission Bill
1990 ("PUC Law") and the Guyana Telecommunications Bill 1990
("Telecommunications Law"). Certain provisions of the License, the PUC Law, 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
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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.
The Telecommunications Law, the GT&T Agreement and the License 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. See "Business--GT&T--
Expansion Program." 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
6
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 is unfinished. 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
$71 (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. It is possible that, if the Company
ceased doing business within a short period of time (e.g. six months) after the
consummation of the December 30, 1997 split up of the Company as a result of a
termination of the License, the IRS might revoke the tax ruling which the
Company received with respect to the split up transaction with the result that
the distribution in that transaction of ECI Common Stock might not be tax free
for U.S. federal income tax purposes to the Company and holders of Company Stock
and Class A Common Stock. If the distribution of ECI Common Stock were not tax
free then (i) the Company would be taxable on the gain (computed as the
difference between the fair market value of the ECI Common Stock distributed and
the Company's adjusted basis in such stock) recognized by the Company on the
distribution of ECI Common Stock, (ii) the Company would be entitled to be
indemnified by Emerging Communications, Inc. for 50% of such tax liability, and
(iii) each holder of Company Common Stock who received shares of ECI Common
Stock in the transaction would be treated as if such stockholder received a
taxable distribution from the Company in an amount equal to the fair market
value of the ECI Common Stock received.
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.
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 ATN (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, 1997 was approximately $120 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 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 ATN as an expense for purposes of calculating GT&T return on rate
base. On December 31, 1997, GT&T filed an application with the PUC seeking
rate increases for local and outbound international traffic, designed to
generate approximately $26 million in additional revenues in 1998, so as to
enable GT&T to earn a 15% return on its rate base. In January 1998, GT&T was
awarded an interim increase effective February 1, 1998 designed by the PUC to
generate the equivalent of approximately $18 million in additional annual
revenues for GT&T. In its report to the PUC recommending the interim rate
increase, the staff of the PUC appeared to accept for purposes of calculating
the interim rate increase all of GT&T's calculations of rate base and rate of
return except for the franchise rights and management fees which the PUC had
disallowed in its October 1995 order. 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.
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
7
approximately 184 percent, and in April 1991, GT&T filed for a rate increase of
184 percent 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 percent or less and, in principal, 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 percent 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 percent 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. On October 11, 1995 the PUC issued an order that rejected GT&T's
application for increased rates and temporarily reduced rates for outbound
international calls by 10%, and during off-peak hours by an additional 50% of
the reduced rate. GT&T filed a motion against the October 11, 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 11, 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. In September 1997, the Guyana High Court denied
an order which the Consumer Advisory Bureau had sought to temporarily enjoin
GT&T from putting into effect a surcharge to recover the approximately $9.5
million of lost revenues from the period October 1995 to January 1997. GT&T put
such surcharge into effect as of October 1, 1997 pending an ultimate trial on
the merits.
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.
At December 31, 1996, GT&T owed the Company approximately $23 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
8
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 and
voided all of the promissory notes then outstanding, with a few in excess of one
year as well as a number which had less than one year maturities which were
issued in consolidation or renewal of earlier notes which had a more than one
year maturity. The total of these voided notes was approximately $21 million.
The PUC ordered that no 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 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.
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 PUC 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. GT&T intends to take such steps to seek a stay or
modification of this order as seem appropriate after the level of demand for
telephone service can be assessed in light of the temporary rates which came
into effect on February 1, 1998.
FCC Matters. On August 7, 1997, the FCC issued a Report and Order in a
-----------
rulemaking procedure 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 release that it expects U.S. licensed
carriers to negotiate proportionate annual reductions.
Numerous foreign carriers and Government authorities have opposed the FCC's
proceedings in this area, and GT&T and a number of other carriers have 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. In general, those parties believe that
accounting and settlement rates should continue to be established, as they are
today, through bilateral negotiations between carriers. Opponents of the FCC's
proposal believe that the proposal is contrary to binding treaty obligations of
the United States relating to duly-constituted multilateral organizations, and
that the FCC does not possess the necessary legal authority to adopt such
proposals. Opponents also believe that the FCC's proposals are legally and
factually deficient in other ways.
The FCC stated in the release 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.
The current settlement rate for U.S.-Guyana traffic is $.85 per minute. AT&T
has previously sought the Company's agreement to a reduction in that settlement
rate. GT&T has taken the position that the settlement rate was fixed through
bilateral negotiations and sees no reason to change the rate at this time. GT&T
believes that the rate should remain the same until the parties mutually agree
to change it. The Company is unable to predict what actions the FCC or U.S.
carriers may take in an effort to secure lower settlement rates on the U.S.-
Guyana route.
9
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. The Federal Trade Commission ("FTC") has pending a proceeding in
-----------
which it has asked parties for comments and information as to whether the FTC
should expand the definition of "pay-per-call" services to include audiotext
services such as those which GT&T terminates in Guyana. The FTC has received
formal comments and conducted a workshop in connection with the proceeding but
has taken no action. It is unclear what the exact impact would be if the FTC
were to include international audiotext traffic from the United States in the
definition of "pay-per-call." Two requirements which currently apply in the
United States to area code 900 traffic, but not to international audiotext
traffic which, in general, is treated like any other international telephone
call, are: (i) the 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, and (ii) local
telephone companies are not permitted to disconnect a subscriber's telephone
service for failure to pay charges for area code 900 calls. If the effect of
the FTC's including international audiotext traffic from the United States in
the definition of "pay-per-call" were to apply these requirements to
international audiotext traffic from the United States, it would probably be
technically impossible for recipients of international audiotext traffic, such
as GT&T, to comply with the free preamble requirement. Moreover, the loss of
the collection advantage which international audiotext has under existing
regulations may make it difficult for international audiotext providers who use
Guyana and other foreign telephone companies to compete on a cost basis with
domestic U.S. providers of area code 900 services.
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.
TAXATION--GUYANA
In 1991, GT&T's worldwide income was subject to Guyanese tax at an overall
rate of 45%. The tax rate was reduced to 35% effective for GT&T as of January
1, 1992 and was again increased to 45% effective for GT&T
10
as of January 1, 1993. 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 approximately $3.9 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 for an
earlier year had been upheld in a decision of the High Court in August 1995. In
July 1997, GT&T applied to the High Court for an order prohibiting the
Commissioner of Inland Revenue from further proceeding with this assessment on
the grounds that the assessment was arbitrary and unreasonable and capriciously
contrary to the August 1995 decision of the Guyana High Court, and GT&T obtained
an order of the High Court effectively prohibiting any action on the assessment
pending the determination by the court of the merits of GT&T's application.
In November 1997, GT&T received assessments totaling approximately $14 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 information.
The Company 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 December 31,
1998.
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 data 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, 1997, GT&T employed approximately 723 persons of whom
approximately 528 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, 1997, 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
11
addition, GT&T leases approximately 3,000 square feet of office space in
Georgetown, Guyana. For additional information, see "Business--GT&T--Expansion
Program." 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."
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
On December 30, 1997, the division of the Company into two separate publicly-
owned companies was approved at a Special Meeting of stockholders. One, a new
company, Emerging Communications, Inc. ("ECI"), contains 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,
continues to own GT&T and is controlled by Cornelius B. Prior, Jr.
In the split-up transaction, holders of Company Common Stock (other than
Cornelius B. Prior, Jr. and Jeffrey J. Prosser) received one share of ECI Common
Stock and 0.4 shares of Company Common Stock for each share of Company Common
Stock held. Mr. Prosser received 5,704,231 shares (52%) of ECI Common Stock in
exchange for 3,325,000 shares of Company Common Stock, and Mr. Prior and a trust
of which he is the trustee received 2,807,040 shares (57%) of Company Common
Stock and $17.4 million in cash for 3,692,600 shares of Company Common Stock
held by them prior to the transaction.
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. 64 Chief Executive Officer and Chairman of the Board of the
Company; Chairman of the Board of GT&T
Craig A. Knock 34 Chief Financial Officer, Treasurer and Secretary of the Company
H. William Humphrey 48 Vice President - Guyana Operations
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.
Craig Knock has been Chief Financial Officer of the Company since April 1993.
From April 1993 to December 1997 he was also a Vice-President of the Company.
He became the Treasurer of the Company in December 1997 and the Secretary of the
Company in March 1998. From July 1992 until April 1993, he was an
12
Assistant Controller of the Company. From 1987 to 1992, Mr. Knock was a C.P.A.
and Audit Manager at Deloitte & Touche LLP, an international accounting firm.
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.
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 1996 and 1997:
1996 QUARTERS High Low
- ------------- ------ -----
1st.......................................................................... 23 1/8 10 5/8
2nd.......................................................................... 27 1/2 20 1/2
3rd.......................................................................... 25 3/4 18
4th.......................................................................... 22 14 5/8
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
All of the foregoing market prices 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. From December 31, 1997 through
March 16, 1998 the closing price of the Company's Common Stock on the AMEX has
ranged from a low of 7 5/8 to a high of 15 1/2.
The approximate number of holders of record of Common Stock as of March 16,
1998 was 300.
DIVIDENDS
The Company has paid no dividends on its Common Stock since June 30, 1993.
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company and will be dependent upon the results of operations,
financial condition, capital requirements, contractual restrictions, regulatory
actions, future prospects and profitability of the Company and its principal
subsidiaries and other factors deemed relevant at that time by the Board of
Directors. There can be no assurance that the Company will pay any dividends at
any time in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
13
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 and from the unaudited combined financial statements
of the Company for the year ended December 31, 1993. The selected historical
combined 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, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997. All dollar amounts are in thousands, except per share
data.
Year Ended December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
Statement of Operations Data: Combined
Revenues:
Local exchange service................................................ $ 566 $ 754 $ 1,631 $ 2,463 $ 2,933
International long-distance revenues.................................. 44,299 76,820 128,939 145,080 113,865
Other revenues........................................................ 280 582 600 710 817
------- ------- -------- -------- --------
Total revenue......................................................... 45,145 78,156 131,170 148,253 117,615
Total expense........................................................... 31,111 57,923 99,879 121,469 99,473
------- ------- -------- -------- --------
Income from continuing operations before interest expense,
income taxes and minority interest..................................... 14,034 20,233 31,291 26,784 18,142
Interest expense, net................................................... 1,509 3,137 2,544 1,502 1,117
------- ------- -------- -------- --------
Income from continuing operations before income taxes and
minority interest...................................................... 12,525 17,096 28,747 25,282 17,025
Income taxes............................................................ 5,211 7,411 13,619 10,824 7,718
------- ------- -------- -------- --------
Income from continuing operations before minority
interest............................................................... 7,314 9,685 15,128 14,458 9,307
Minority interest....................................................... (1,008) (1,696) (2,390) (2,096) (1,372)
------- ------- -------- -------- --------
Income from continuing operations....................................... $ 6,306 $ 7,989 $ 12,738 $ 12,362 $ 7,935
======= ======= ======== ======== ========
Pro Forma Net Income Per Share (1)...................................... $1.69
========
Year Ended December 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ------------
Balance Sheet Data: Combined Consolidated
Fixed Assets, net....................................................... $ 88,672 $ 91,025 $ 92,102 $ 97,780 $ 36,042
Total assets............................................................ 159,297 162,688 185,481 194,493 108,049
Short-term debt (including current portion of
long-term debt)........................................................ 10,903 11,515 15,626 11,047 3,298
Long-term debt, net..................................................... 37,830 34,720 25,969 20,398 14,536
Stockholders equity..................................................... 77,537 85,526 98,264 110,626 54,244
(1) Historical income and dividend per share amounts have not been presented as
this information is not considered meaningful.
14
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.
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 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 the Company. The Company
has been considered to be the split off entity since Emerging Communications 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. In accordance with Accounting Principles
Board Opinion No. 29 entitled Accounting for Nonmonetary Transactions and
Emerging Issues Task Force 96-4 entitled Accounting for Reorganizations
Involving a Non-Pro Rata Split-off of Certain Nonmonetary Assets to Owners, the
balance sheet of the Company at December 31, 1997 has been adjusted to
values determined by the market capitalization of the Company immediately after
the consummation of the transaction. This adjustment includes an approximately
$60 million reduction in the Company's consolidated net fixed assets, and an
approximately $45 million reduction in the Company's consolidated stockholder's
equity. The fair value adjustment reduced the carrying value on the Company's
consolidated financial statements of its fixed assets significantly below their
historical cost and replacement value. Therefore, depreciation expense in the
future not will be a reliable indicator of the Company's cost of replenishing
its assets.
The 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 periods included
herein. Except for the consolidated balance sheet at December 31, 1997, these
financial statements do not reflect the fair valuation adjustment arising from
the split up transaction. Moreover, the 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.
As a result of the decline in 1997 in GT&T's revenues and profits from
audiotext traffic, GT&T filed on December 31, 1997 an application with the PUC
seeking rates designed to generate approximately $26 million in additional
revenues in 1998 for local and outbound international traffic. In January 1998,
GT&T was awarded an interim increase effective February 1, 1998 designed by the
PUC to generate the equivalent of approximately $18 million in additional annual
revenues for GT&T. The interim rates are intended to remain in effect while the
PUC holds hearings and reaches a decision on GT&T's application for permanent
rates, although the PUC may increase
15
or decrease these interim rates before reaching a decision on GT&T's permanent
rates. 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.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
Operating revenues for the year ended December 31, 1997 were $117.6 million as
compared to $148.3 million for the corresponding period of the prior year, 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 for the year ended December 31, 1997. 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. While subject to change, the Company anticipates that it will
experience chargebacks in the future as a proportion of audiotext revenue
similar to that experienced for the year ended December 31, 1997. The remaining
$16.1 million, or 37% of the decrease in audiotext revenues, results 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. The changes in volume of traffic
and lower accounting rates are subject to a number of influences beyond the
Company's control, and may change significantly in the future, positively or
negatively. As a result of the above factors, GT&T's profit margins from this
traffic also declined. 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 the year ended December 31, 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 then in 1996. See
"Business--Regulatory Considerations" for further discussion. 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 the year ended December 31, 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 for the year ended December
31, 1997, 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. As a percentage of operating revenues,
operating expenses increased to approximately 85% for the year ended December
31, 1997 from approximately 82% for the prior year.
Income from operations before interest expense, income taxes and minority
interest for the year ended December 31, 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.
16
Net interest expense decreased $385,000 due to reduced debt resulting in
income before income taxes and minority interest for the year ended December 31,
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 the year ended December 31, 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.
Pro forma net income per share adjusts the Company's depreciation expense,
interest expense, and shares outstanding as if the split-off Transaction had
occurred on January 1, 1997. No adjustment is made for any reduction in the
Company's general and administrative expense which may result from the
Transaction or for the interim rate increase awarded to GT&T by the PUC
effective February 1, 1998 or for any further changes in GT&T's rates.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Operating revenues for the year ended December 31, 1996 were $148.3 million as
compared to $131.2 million for the prior year, an increase of $17.1 million, or
13%. The increase was due principally to a $14.9 million increase in audiotext
traffic revenues at GT&T.
Operating expenses for the year ended December 31, 1996 were $121.5 million as
compared to $99.9 million for the prior year, an increase of $21.6 million, or
22%. This increase was due principally to increases in audiotext and outbound
traffic expenses at GT&T of $20.1 million due to increased traffic volume. As a
result of a rate decrease ordered by the Guyana PUC on October 11, 1995, GT&T's
outbound international traffic increased by approximately 44% during the year
ended December 31, 1996 resulting in an approximately $6.5 million increase in
outbound traffic expenses. An additional factor contributing to the increase in
operating expenses was plant specific expense which increased as a result of
increased plant in service.
Overall, income from operations before interest expense, income taxes and
minority interest for the year ended December 31, 1996 was $26.8 million as
compared to $31.3 million for the prior year, a decrease of $4.5 million, or
14%. The decrease occurred principally because of negative margins on outbound
traffic at GT&T which in turn, was caused principally by rate decreases ordered
by the PUC in October 1995. In January 1997, the Guyana High Court voided the
PUC's order and permitted GT&T to restore its rates for outbound traffic to
their pre-October 1995 level. While these rates are also less than the
associated outbound expense, had these rates been in effect throughout 1996, the
Company estimates that GT&T's income from telephone operations in 1996 would
have been approximately $8.5 million greater than it was, assuming GT&T's volume
of traffic remained unchanged. Audiotext traffic increased 20.7 million minutes
and other GT&T inbound paid and outcollect traffic increased 2.4 million minutes
for the year ended December 31, 1996. However, these revenue increases at GT&T
were more than offset by increased international long distance, plant, and other
operating expenses discussed above.
GT&T's audiotext traffic increased sharply in the first 8 months of 1995
hitting a peak of 11.7 million minutes for the month of August 1995. From
August 1995 through December 1996 audiotext traffic fluctuated between
approximately 9 million and 11 million minutes per month. Profit margins from
this traffic decreased approximately 4% in 1996 principally due to a shift in
traffic mix to less profitable countries and reductions some in accounting
rates.
Income before income taxes and minority interest for the year ended December
31, 1996 was $25.3 million as compared to $28.7 million for the prior year, a
decrease of $3.5 million, or 12%. The significant factors that contributed to
this decrease for the year ended December 31, 1996 were the $4.5 million
decrease in income from operations discussed above and the $1.0 million decrease
in net interest expense due to decreased interest rates and lower outstanding
debt.
17
The Company's effective tax rate for the year ended December 31, 1996 was
42.8% as compared to 47.4% for the prior year. The $2.8 million decrease in
income tax expense was principally due to lower taxable income.
The minority interest in earnings consists of the Guyana government's 20%
interest in GT&T.
REGULATORY CONSIDERATIONS
As is discussed above under "Introduction," GT&T has applied to the PUC for
a significant increase in rates for local and outbound international service and
has received interim rates which substantially increases the rates in effect
during 1997 and earlier years.
Upon the acquisition of GT&T in January 1991, GT&T entered into an agreement
with the government of Guyana to expand significantly GT&T's existing facilities
and telecommunications operations and to improve service within a three-year
period pursuant to an expansion and service improvement plan (the "Plan"). The
Plan was modified in certain respects and the date for completion of the Plan
was extended to February 1995. The government has referred to the Guyana Public
Utilities Commission ("PUC") the failure of GT&T to complete the Plan by
February 1995. The PUC is currently holding hearings on this matter. 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. Failure to timely fulfill the terms of the Plan without legal
justification could result in monetary penalties, cancellation of the License,
or other action by the PUC or the government which could have a material adverse
affect on the Company's business and prospects.
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected a 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 such a surcharge effective May 1, 1997, but temporarily
withdrew it when the Guyana Consumers Advisory Bureau (a non-governmental group
in Guyana) instituted a suit to block it. In May 1997 the Consumer Advisory
Bureau sought an injunction from the Guyana High Court restoring telephone rates
to those imposed by the PUC in its October 1995 order. The Consumer Advisory
Bureau's application is still pending. In September 1997, the Guyana High Court
denied an order which the Consumer Advisory Bureau had sought to temporarily
enjoin GT&T from putting into effect a surcharge to recover the approximately
$9.5 million over a period of 18 months. GT&T put such surcharge into effect on
October 1, 1997 pending an ultimate trial on the merits, and the Company
recognized the approximately $9.5 million of lost revenues in the third quarter
of 1997.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to the
Company and to recover from the Company approximately $25 million of such fees
paid by GT&T to the Company since January 1991. GT&T has appealed the PUC's
order to the Guyana High Court and obtained a stay of the PUC's order pending
determination of that appeal.
At December 31, 1996, GT&T owed the Company approximately $23 million for
advances made from time to time for the working capital and capital expenditure
needs of GT&T. GT&T's indebtedness to the Company was evidenced by a series of
promissory notes. In March 1997, the PUC voided 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.
18
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above. The
PUC's application is still pending.
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 the 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, but recently the PUC requested further information from GT&T
on this matter. GT&T intends to take such steps to seek a stay or modification
of this order as seem appropriate after the level of demand for telephone
service can be assessed in light of the temporary rates which came into effect
on February 1, 1998.
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 approximately $3.9 million from
the 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 for an earlier
year had been upheld in a decision of the High Court in August 1995. In July
1997, GT&T applied to the High Court for an order prohibiting the Commissioner
of Inland Revenue from further proceeding with this assessment on the grounds
that the assessment was arbitrary and unreasonable and capriciously contrary to
the August 1995 decision of the Guyana High Court, and GT&T obtained an order of
the High Court effectively prohibiting any action on the assessment pending the
determination by the court of the merits of GT&T's application.
In November 1997, GT&T received assessments of approximately $14 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.
There can be no assurance as to the ultimate outcome of any of the above
described pending tax issues.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company has depended upon funds received from its subsidiaries to meet its
capital needs, including servicing existing debt and its ongoing program of
seeking to acquire telecommunications licenses and businesses. As a result of
the split-up of the Company into two separate public companies, the Company's
capital resources have changed significantly, and the Company has fewer
resources and significantly reduced operations. For the near-term future, the
Company's primary sources of funds will be advisory fees, repayment of loans,
and interest from GT&T. The PUC orders in January, March, and October 1997,
discussed above under " Regulatory Considerations," 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. However, GT&T's own capital needs and debt service obligations have
precluded GT&T in recent years, from paying any significant funds to the Company
other than the advisory fees and interest on intercompany debt mentioned above.
If and when the Company settles outstanding issues with the Guyana government
and the PUC with regard to GT&T's Expansion Plan and its rates for service, GT&T
may require additional external financing to enable GT&T to further expand its
telecommunications facilities. 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
anticipates that GT&T's foreign currency earnings will enable GT&T to service
its debt and pay its hard currency tax obligations. There are no Guyana legal
restrictions on the conversion of Guyana's currency into U.S. dollars or on the
expatriation of foreign currency from Guyana.
IMPACT OF DEVALUATION AND INFLATION
Although the majority of GT&T's revenues and expenditures are transacted in
U.S. dollars or other hard currencies, the results of operations nevertheless
may be affected by changes in the value of the Guyana dollar. From February
1991 until early 1994, the Guyana dollar remained relatively stable at the rate
of approximately 125 to the U.S. dollar. In 1994, however, the Guyana dollar
has declined in value to approximately 142 to the U.S. dollar, and it has
remained relatively stable at approximately that rate since 1994. Subsequent to
December 31, 1997, the Guyana dollar has declined in value to approximately 150
to the U.S. dollar.
The effect of devaluation and inflation on the Company's financial results has
not been significant in the periods presented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company and its subsidiary 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.
20
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 1998 Annual Meeting of Stockholders (the
"Proxy Statement"), or by an amendment to this report to be filed on or before
April 30, 1998, 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.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Consolidated financial statements of the Company and its subsidiary 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 subsidiary 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 1997.
(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 Jeffery 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.
22
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.
23
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
INDEX
- -----------------------------------------------------------------------------------------
PAGE
Independent Auditors' Report F-2
Combined and Consolidated Balance Sheets F-3
Combined Statements of Operations F-4
Combined Statements of Stockholders' Equity F-5
Combined Statements of Cash Flows F-6
Notes to Combined and Consolidated Financial Statements F-7
Financial Statement Schedules Furnished Pursuant to the Requirements of Form 10-K:
I. - Combined Condensed Financial Statements of Atlantic Tele-Network, Inc.
(Parent Company Only) F-18
II - Valuation and Qualifying Accounts F-22
All other schedules are omitted because of they are not applicable or because
the required information is shown elsewhere herein.
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Atlantic Tele-Network, Inc. and subsidiary
We have audited the accompanying combined balance sheet of Atlantic Tele-
Network, Inc. and subsidiary as of December 31, 1996 and the 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 three 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, 1996 and 1997, and the results
of their operations and their cash flows for each of the three 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-2
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
COMBINED AND CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1997
COMBINED CONSOLIDATED
ASSETS
Current assets:
Cash $ 8,182 $ 15,803
Accounts receivable, net 49,264 38,077
Materials and supplies 2,642 3,536
Prepayments and other current assets 589 1,039
-------- --------
Total current assets 60,677 58,455
Fixed assets:
Property, plant and equipment 104,141 39,042
Less accumulated depreciation (17,987) -
Franchise rights and cost in excess of underlying
book value, less accumulated amortization of
$2,301,000 in 1996 11,626 -
-------- --------
Net fixed assets 97,780 39,042
Due from affiliates 26,883 -
Uncollected surcharges 3,119 5,941
Other assets 6,034 4,611
-------- --------
$194,493 $108,049
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,722 $ -
Accounts payable 14,545 10,382
Accrued taxes 1,776 3,391
Advance payments and deposits 627 809
Other current liabilities 1,940 2,854
Current portion of long-term debt 5,325 3,298
-------- --------
Total current liabilities 29,935 20,734
Deferred income taxes 18,835 2,464
Long-term debt, excluding current portion 20,398 14,536
Minority interest 14,699 16,071
Contingencies and commitments (Notes I and J)
Stockholders' equity:
Preferred stock, par value $.01 per share;
10,000,000 shares authorized; none issued
and outstanding - -
Common stock, par value $.01 per share; 20,000,000
shares authorized; 12,272,500 and 4,909,000 shares
issued and outstanding 123 49
Paid-in capital 81,852 54,195
Retained earnings 28,651 -
-------- --------
Total stockholders' equity 110,626 54,244
-------- --------
$194,493 $108,049
======== ========
See notes to combined and consolidated financial statements.
F-3
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1995 1996 1997
Revenues:
Local exchange service $ 1,631 $ 2,463 $ 2,933
International long-distance revenues 128,939 145,080 113,865
Other revenues 600 710 817
-------- -------- --------
Total revenues 131,170 148,253 117,615
Expenses:
Plant specific operations 3,820 4,902 5,707
Plant nonspecific operations 5,944 6,017 7,099
Customer operations 1,822 2,474 2,538
Corporate operations 6,178 5,838 6,061
International long-distance expenses 74,335 94,457 70,094
Taxes other than income 475 574 657
General and administrative expenses 7,305 7,207 7,317
-------- -------- --------
Total expenses 99,879 121,469 99,473
-------- -------- --------
Income from operations 31,291 26,874 18,142
Interest Expense and Interest Income:
Interest expense (4,950) (3,991) (3,794)
Interest income 2,406 2,489 2,677
-------- -------- --------
Interest expense, net (2,544) (1,502) (1,117)
-------- -------- --------
Income before income taxes and
minority interest 28,747 25,282 17,025
Income taxes 13,619 10,824 7,718
-------- -------- --------
Income before minority interest 15,128 14,458 9,307
Minority interest (2,390) (2,096) (1,372)
-------- -------- --------
Net income $ 12,738 $ 12,362 $ 7,935
======== ======== ========
Pro forma net income per share $ 1.69
========
See notes to combined and consolidated financial statements.
F-4
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Columnar Amounts in Thousands)
- -------------------------------------------------------------------------------------------------------
Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
Balance, January 1, 1995 $123 $81,852 $ 3,551 $ 85,526
Net Income -- -- 12,738 12,738
------ -------- -------- ------------
Balance, December 31, 1995 123 81,852 16,289 98,264
Net income -- -- 12,362 12,362
------ -------- -------- ------------
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 stock (8) -- (17,392) (17,400)
Split-off of subsidiaries and fair
valuation of net assets (66) (27,657) (19,194) (46,917)
------ -------- --------- ------------
Balance, December 31, 1997 $ 49 $54,195 $ -- $ 54,244
====== ======== ======== ============
See notes to combined and consolidated financial statements.
F-5
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Columnar Amounts in Thousands)
- -----------------------------------------------------------------------------------------------
1995 1996 1997
Cash flows from operating activities:
Net income $ 12,738 $ 12,362 $ 7,935
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 4,418 4,890 5,289
Deferred income taxes 1,886 3,370 2,961
Minority interest 2,390 2,096 1,372
Changes in operating assets and liabilities:
Accounts receivable (26,893) (253) 11,187
Materials, supplies and other current assets 2,167 215 (894)
Uncollected surcharges 2,946 1,220 (2,822)
Accounts payable 3,411 5,350 (4,038)
Accrued taxes 6,387 (4,863) 1,970
Other 3,555 82 2,200
-------- -------- -------
Net cash flows from operating activities 13,005 24,469 25,160
Cash flows from investing activities:
Capital expenditures (5,455) (10,534) (7,633)
Split-off transaction costs -- -- (4,509)
Change in affiliate borrowings 133 (261) 19,918
-------- -------- -------
Net cash flows from investing activities (5,322) (10,795) 7,776
Cash flows from financing activities:
Repayment of long-term debt (4,640) (9,360) (7,693)
Repayments on notes -- (790) (222)
Purchase of Company stock -- -- (17,400)
-------- -------- -------
Net cash flow from financing activities (4,640) (10,150) (25,315)
-------- -------- -------
Net change in cash 3,043 3,524 7,621
Cash, beginning of Year 1,615 4,658 8,182
-------- -------- -------
Cash, end of Year $ 4,658 $ 8,182 $15,803
======== ======== =======
Supplemental cash flow information:
Interest paid $ 4,665 $ 3,611 $ 3,035
======== ======== =======
Income taxes paid $ 2,213 $ 11,186 $ 4,093
Non-cash activities:
Split-off of subsidiaries and fair
valuation of net assets $ -- $ -- $42,408
======== ======== =======
See notes to combined and consolidated financial statements.
F-6
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Effective December 30, 1997, Atlantic Tele-Network,
Inc. (ATN or the Company) split-off into two separate public companies (the
Transaction). One, Emerging Communications, Inc. (ECI), 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 majority owned subsidiary, Guyana
Telephone & Telegraph Company, Limited (GT&T). The combined financial
statements of ATN are the separate financial statements relating to ATN'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.
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 financial position as of
December 31, 1996 and the results of operations and cash flows for each of
the three 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. 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 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 by the 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.
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.
GENERAL - The Company is engaged principally in providing telecommunications
services, including local telephone service, long-distance service and
cellular service in the Cooperative Republic of Guyana and international
telecommunications service to and from Guyana. ATN provides management,
technical, financial and marketing services to GT&T for a management fee
equal to 6% of GT&T's revenues. All of GT&T's operations are located in
Guyana.
REGULATORY ACCOUNTING - The Company's telephone subsidiary, GT&T, accounts
for costs in accordance with the accounting principles for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71). 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 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
F-7
amounts in future years. GT&T's audiotext revenues are not subject to
regulation but are never the less 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 71
principles.
CASH - 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 4.8%, 4.5% and 4.5% for GT&T for
the years ended December 31, 1995, 1996 and 1997, respectively. With respect
to the regulated subsidiary, 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.
REVENUE - 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 usage by foreign exchanges of
the Company's local exchange network to determine the appropriate rate to
apply to long distance minutes carried by the Company. Additionally, the
Company establishes reserves for possible unreported or uncollectible minutes
from foreign exchange 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.
FOREIGN CURRENCY TRANSACTIONS - 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.
Transaction gains and (losses), which relate primarily to settlement with
foreign carriers, approximated $1,808,000, $51,000 and $(1,507,000) for the
years ended December 31, 1995, 1996 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121).
The Statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets. Under provisions of the Statement, impairment losses are recognized
when expected future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, 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. The adoption of SFAS 121 did not have a material effect on the
Company's financial statements.
F-8
PRO FORMA NET INCOME PER SHARE - Historical income per share is not presented
for the combined statement of operations 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:
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 shares outstanding 4,909
=======
Pro forma net income per share $1.69
=======
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
year's financial statements to conform to the current year presentation.
B. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31,
--------------------------------
1996 1997
Subscribers, net of allowance for doubtful accounts of $557,000
and $502,000 $ 1,670 $ 2,406
Connecting companies 46,519 29,834
Uncollected surcharges - current portion 632 5,479
Other 443 358
-------------- --------------
$49,264 $38,077
============== ==============
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
------------------------------
1996 1997
Outside plant $ 44,759 $ 17,057
Central office equipment 37,634 13,502
Land and building 7,562 3,248
Station equipment 3,766 1,178
Furniture and office equipment 1,977 382
Construction in process 3,259 3,245
Other 5,184 430
-------------- --------------
$104,141 $ 39,042
============== ==============
F-9
As a result of the valuation of net assets in the split-off Transaction 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, net property values at December 31, 1997 were
reduced by approximately $49,233,000 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.
D. OTHER ASSETS
Other assets consist of the following:
December 31,
--------------------
1996 1997
Debt service reserve fund and escrow account $3,900 $3,900
Deferred costs and intangibles, net 824 -
Prepaid pension - 425
Other 1,310 286
------ ------
$6,034 $4,611
====== ======
E. NOTES PAYABLE
At December 31, 1996, the Company had in place a $5.5 million line of credit,
bearing interest at 0.75% over prime rate (9% at December 31, 1996), which
had expired and was verbally extended to October 1997. As of December 31,
1996, $5.5 million was outstanding under this arrangement. The line of
credit was transferred to ECI in the split-off Transaction.
At December 31, 1996, the Company had demand notes payable to a stockholder
of $222,000 with an interest rate of 9.58%. The notes were retired in 1997.
F. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
--------------------------
1996 1997
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) $21,133 $17,834
Notes payable to Northern Telecom International Finance B.V.
(NTIF) by GT&T under an $11,500,000 supply loan (the GT&T
Supply Loan) paid in 1997 4,314 -
Other 276 -
-------- ---------
Less current portion 25,723 17,834
5,325 3,298
-------- ---------
$20,398 $14,536
======== =========
F-10
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 from 9.17% to 11.29%.
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, was $3.9 million at December 31, 1996 and
1997.
The annual requirements for principal payments are as follows:
Years Ending December 31, Total
1998 $ 3,298
1999 3,298
2000 3,298
2001 3,298
2002 3,298
Thereafter 1,344
-------
$17,834
=======
G. 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,
----------------------------
1995 1996 1997
Tax computed at statutory U.S. federal income
tax rates $10,061 $ 8,849 $5,959
Guyana income taxes in excess of statutory U.S rate 2,452 1,965 1,314
Write off of tax regulatory asset 600 - -
Other, net 506 10 445
------- ------- ------
Income tax expense $13,619 $10,824 $7,718
======= ======= =======
The components of income tax expense are comprised of the following:
Years Ended December 31,
---------------------------
1995 1996 1997
Current:
United States $ - $ 1,302 $1,445
Foreign 9,770 4,948 3,312
Deferred 3,849 4,574 2,961
------- ------- ------
$13,619 $10,824 $7,718
======= ======= =======
The components of income tax expense are comprised of the following:
F-11
The significant components of deferred tax liabilities and assets are as
follows:
December 31,
------------------------
1996 1997
Deferred tax liabilities:
Differences between book and tax basis of
property $17,509 $ 1,229
Revenues not recognized for tax purposes 1,680 1,520
------- -------
19,189 2,749
Deferred tax assets:
Non-deductible expense 341 659
Other 13 -
------- -------
354 659
------- -------
Net deferred tax liabilities $18,835 $ 2,090
======= =======
At December 31, 1997, unremitted earnings of foreign subsidiaries were
approximately $47,782,000. Since it is the Company's intention to
indefinitely reinvest these earnings, no U.S. taxes have been provided. 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.
H. RETIREMENT PLANS
The Company has noncontributory defined benefit pension plans 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
benefits are based on the participants' average salary during the last three
years of employment and credited service years.
Net periodic pension cost was:
Years Ended December 31,
-----------------------------
1995 1996 1997
Service cost $ 103 $ 135 $ 168
Interest on projected benefit obligation 65 101 131
Actual return on assets (75) (79) (10)
Net amortization and deferral 45 30 (35)
----- ----- -----
Net periodic pension cost $ 138 $ 187 $ 254
===== ===== =====
F-12
The following table sets forth the funded status, the amounts recognized in
the balance sheet of the Company at December 31, 1996 and 1997, and the
principal assumptions of the Company's plan:
December 31,
-----------------------
1996 1997
Actuarial present value of benefit obligations:
Vested benefits $ 317 $ 871
Nonvested benefits 79 175
------- -------
Accumulated plan benefits $ 396 $ 1,046
======= =======
Projected benefit obligation $(1,045) $(2,279)
Fair value of plan assets 622 1,336
------- -------
Plan projected benefit obligation in excess
of assets (423) (943)
Unrecognized net loss 152 1,138
Unrecognized prior service costs 247 230
------- -------
Prepaid (accrued) pension included in the
balance sheet $ (24) $ 425
======= =======
The discount rate was 13.0% and 8.25% and the expected rate of return on
invested assets was 10.0% and 9.25% for the plan at December 31, 1996 and
1997.
I. 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 service and was awarded an interim increase in rates effective
February 1, 1998 which was a substantial increase over the rates in effect
during 1997 and earlier years. The interim rates are intended to remain in
effect while the PUC holds hearings and reaches a decision on GT&T's
application, although the PUC may increase or decrease these interim rates
before reaching a decision on GT&T's permanent rates.
In October 1995, the Guyana Public Utilities Commission 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. In May 1997 the Consumer Advisory Bureau sought an
injunction from the Guyana High Court restoring telephone rates to those
imposed by the PUC in its October 1995 order. The Consumer Advisory Bureau's
application is still pending. In September 1997, the Guyana High Court denied
an order which the Consumer Advisory Bureau had sought to temporarily enjoin
GT&T from putting into effect a surcharge to recover the approximately $9.5
million over a period of 18 months. GT&T put such surcharge into effect on
October 1, 1997 pending an ultimate trial on the merits, and the Company
recognized the approximately $9.5 million of lost revenues in the third
quarter of 1997.
F-13
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.
In late April 1997, the PUC applied to the Guyana High Court for orders
prohibiting GT&T from paying any monies to the Company on account of
intercompany debt, advisory fees or otherwise pending the determination of
GT&T's appeals from the January 1997 and March 1997 orders mentioned above.
The PUC's application is still pending.
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, but recently the PUC requested
further information from GT&T on this matter. GT&T intends to take such
steps as seem appropriate after the level of the demand for telephone service
can be assessed in light of the temporary rates which came into effect on
February 1, 1998.
J. 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 Plan was modified in certain respects and the date for completion
of the Plan was extended to February 1995. The government has referred to the
PUC the failure of GT&T to complete the Plan by February 1995. The PUC is
currently holding hearings on this matter. Failure to timely fulfill the
terms of the Plan could result in monetary penalties, cancellation of the
License, or other action by the PUC or the government which could have a
material adverse affect on the Company's business and prospects.
F-14
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 approximately $3.9 million from
the Commissioner of Inland Revenue for taxes for the current year based on
the disallowance as a deduction for income tax purposes of five-sixths of the
advisory fees payable by GT&T to the Company 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 in an earlier year had been upheld in a decision of the High
Court in August 1995. In July 1997, GT&T applied to the High Court for an
order prohibiting the Commissioner of Inland Revenue from further proceeding
with this assessment on the grounds that the assessment was arbitrary and
unreasonable and capriciously contrary to the August 1995 decision of the
Guyana High Court, and GT&T obtained an order of the High Court effectively
prohibiting any action on the assessment pending the determination by the
court of the merits of GT&T's application.
In November 1997, GT&T received assessments of approximately $14 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.
K. FAIR VALUE DISCLOSURE
Management has determined the carrying amounts of cash, accounts receivable,
accounts payable and notes payable are a reasonable estimate of fair value.
The fair value of long-term debt is estimated using a discounted cash flow
analysis. At December 31, 1996 and 1997, the carrying value of long-term
debt was $25,723,000 and $17,834,000 and the estimated fair value was
$25,443,000 and $17,834,000, respectively.
F-15
L. CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS
Revenues from AT&T, MCI, British Telecom and Teleglobe, consisting of
international long-distance service, comprised approximately 37%, 21%, 19%
and 13%, respectively, of total revenues for 1995, 36%, 21%, 12% and 12%,
respectively, of total revenues for 1996 and 31%, 11%, 9% and 18%,
respectively, of total revenues for 1997. No other customers accounted for
more than 10% of total revenues. Substantially all of the connecting
companies accounts receivable are due from these companies.
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 $78 million, $83
million and $39 million of these revenues for the years ended December 31,
1995, 1996 and 1997, respectively, and another audiotext provider accounted
for $13 million, $20 million and $18 million of these revenues for the years
ended December 31, 1995, 1996 and 1997, respectively.
M. TRANSACTIONS WITH AFFILIATES
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 costs are 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 had interest bearing notes receivable from its former affiliates
of $23,219,000 at December 31, 1996. The notes bore interest at prime plus
1.5% which was 9.75% at December 31, 1996. Interest income for the years
ended December 31, 1995, 1996 and 1997, was $2,250,000, $2,155,000 and
$2,228,000, respectively. Interest was not charged on the remaining notes
receivable from affiliates.
N. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations for
the years ended December 31, 1996 and 1997:
THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1997
Revenues $31,742 $27,160 $36,796 $21,917
Expenses 26,606 26,229 24,908 21,730
------- ------- ------- -------
Income from operations 5,136 931 11,888 187
Interest expense, net 352 338 252 175
------- ------- ------- -------
Income before income taxes and
minority interest 4,784 593 11,636 12
Income taxes 2,044 347 5,167 160
------- ------- ------- -------
Income before minority interest 2,740 246 6,469 (148)
Minority interest 300 4 1,067 1
------- ------- ------- -------
Net income (loss) $ 2,440 $ 242 $ 5,402 $ (149)
======= ======= ======= =======
F-16
THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1996
Revenues $36,009 $38,991 $39,618 $33,635
Expenses 30,888 31,009 31,713 27,859
------- ------- ------- -------
Income from operations 5,121 7,982 7,905 5,776
Interest expense, net 453 344 372 333
------- ------- ------- -------
Income before income taxes and
minority interest 4,668 7,638 7,533 5,443
Income taxes 2,331 3,375 2,937 2,181
------- ------- ------- -------
Income before minority interest 2,337 4,263 4,596 3,262
Minority interest 562 647 570 317
------- ------- ------- -------
Net income $ 1,775 $ 3,616 $ 4,026 $ 2,945
======= ======= ======= =======
F-17
ATLANTIC TELE-NETWORK, INC. SCHEDULE I
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1997
COMBINED
Current assets:
Cash $ 578 $ 5,482
Other current assets 192 103
-------- -------
770 5,585
Property and equipment 3,149 118
Less accumulated depreciation (2,094) -
-------- -------
1,055 118
Investment in and advances to subsidiaries 115,876 52,271
Other assets 2,044 164
-------- -------
$119,745 $58,138
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,722 $ -
Accounts payable 827 2,792
Accrued taxes 1,268 927
Other current liabilities 1,026 175
Current portion of long-term debt 88 -
-------- -------
Total current liabilities 8,931 3,894
Long-term debt, excluding current portion 188 -
Contingencies and commitments
Stockholders' equity:
Preferred stock - -
Common stock 123 49
Paid-in capital 81,852 54,195
Retained earnings 28,651 -
-------- -------
Total stockholders' equity 110,626 54,244
-------- -------
$119,745 $58,138
======== =======
See note to combined and consolidated condensed financial statements.
F-18
ATLANTIC TELE-NETWORK, INC. SCHEDULE I
(Parent Company Only) (CONTINUED)
COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Amounts in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
Management fees $ 7,870 $ 8,895 $ 7,057
Interest income 4,555 4,490 4,681
------- ------- -------
12,425 13,385 11,738
Expenses:
Interest 893 548 533
General and administrative 7,305 7,207 7,317
------- ------- -------
8,198 7,755 7,850
------- ------- -------
Income before income taxes and equity in undistributed earnings
of subsidiaries 4,227 5,630 3,888
Income taxes (1,049) (1,651) (1,445)
------- ------- -------
Income before equity in undistributed earnings of subsidiaries 3,178 3,979 2,443
Equity in undistributed earnings of subsidiaries 9,560 8,383 5,492
------- ------- -------
Net income $12,738 $12,362 $ 7,935
======= ======= =======
Pro forma net income per share $1.69
=======
See note to combined and consolidated condensed financial statements.
F-19
ATLANTIC TELE-NETWORK, INC. SCHEDULE I
(Parent Company Only) (CONTINUED)
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
Cash flow from operating activities:
Net income $12,738 $12,362 $ 7,935
Adjustments to reconcile net income to net cash flows
from operating activities:
Equity in undistributed earnings of subsidiaries (9,560) (8,383) (5,492)
Deferred income taxes (225) (348) -
Depreciation and amortization 752 784 518
Change in operating assets and liabilities:
Other assets 1,138 (1,120) 1,727
Other liabilities 1,267 (7) 895
Other 395 138 364
------- ------- --------
Net cash flows from operating activities 6,505 3,426 5,947
Cash flows from investing activities:
Change in affiliate borrowings (4,844) 669 21,205
Capital expenditures (377) - (36)
Split-off transaction costs - - (4,509)
------- ------- --------
Net cash flows from investing activities (5,221) 669 16,660
Cash flows from financing activities:
Net repayments on notes - (790) (222)
Issuance of long-term debt 356 - -
Repayment of long-term debt (204) (4,342) (81)
Purchase of Company stock - - (17,400)
------- ------- --------
Net cash flows from financing activities 152 (5,132) (17,703)
------- ------- --------
Net change in cash 1,436 (1,037) 4,904
Cash, beginning of year 179 1,615 578
------- ------- --------
Cash, end of year $ 1,615 $ 578 $ 5,482
======= ======= ========
Supplemental cash flow information:
Interest paid $ 1,037 $ 542 $ 515
======= ======= ========
Income taxes paid $ 260 $ 620 $ 2,310
======= ======= ========
Non-cash activities:
Split-off of subsidiaries $ - $ - $ 42,408
============== ============== ========
See note to combined and consolidated condensed financial statements.
F-20
SCHEDULE I
(CONTINUED)
ATLANTIC TELE-NETWORK, INC.
(PARENT COMPANY ONLY)
NOTE TO COMBINED CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
A. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN SUBSIDIARIES - Atlantic Tele-Network, Inc.'s investment in
subsidiary is accounted for using the equity method.
BASIS OF PRESENTATION - Effective December 30, 1997, Atlantic Tele-Network,
Inc. (ATN or the Company) split-off into two separate public companies (the
Transaction). One, Emerging Communications, Inc. (ECI), 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 majority owned subsidiary, Guyana
Telephone & Telegraph Company, Limited (GT&T). The combined financial
statements of ATN are the separate financial statements relating to ATN'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.
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 financial position as of
December 31, 1996 and the results of operations and cash flows for each of
the three 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 Transaction was accounted for as a non-pro rata split-off of ATN from the
Company as it previously existed. Accordingly, ATN's assets and liabilities
at December 31, 1997 have been accounted for at fair value as evidenced by
the market capitalization of ATN. The excess of original cost over fair
value has been allocated to reduce the values assigned to long-term assets,
primarily investment in subsidiaries.
F-21
SCHEDULE II
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARY
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, 1995:
Description:
Allowance for doubtful accounts $ 886 $ 814 $322 $1,378
=============== ================= ============== ==============
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
=============== ================= ============== ==============
F-22
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 27, 1998
By: /s/ Cornelius B. Prior, Jr.
----------------------------------------
Cornelius B. Prior, Jr.
Chief Executive Officer and Chairman of
the Board
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 and Chairman of the Board March __, 1998
- ------------------------------------
Cornelius B. Prior, Jr.
/s/ Craig A. Knock Chief Financial Officer, Secretary and Treasurer March __, 1998
- ------------------------------------
Craig A. Knock
/s/ James B. Ellis Director March __, 1998
- ------------------------------------
James B. Ellis
/s/ Andrew F. Lane Director March __, 1998
- ------------------------------------
Andrew F. Lane
/s/ Robert A.R. Maclennan Director March __, 1998
- ------------------------------------
Robert A.R. Maclennan
/s/ Henry Wheatley Director March __, 1998
- ------------------------------------
Henry Wheatley