ATNI

ATN International, Inc. (Atlantic Tele-Network, Inc.) - 10-Q Summary

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the three-month period ended March 31, 2000. Atlantic Tele-Network, Inc. (ATN) operates primarily through its 80%-owned subsidiary, Guyana Telephone & Telegraph Company, Ltd. (GT&T), providing local, long-distance, and cellular services in Guyana. ATN also holds interests in Digicom S.A. (Haiti), Bermuda Digital Communications, Ltd. (Bermuda), and Wireless World, LLC (U.S. Virgin Islands), which recently acquired Antilles Wireless Cable T.V. Company.

Key Financial Metrics

Note: All figures are in thousands of dollars. Total debt is the sum of "Current portion of long-term debt" and "Long-term debt, excluding current portion."

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by 7.7% ($1.6 million) to $19.1 million. This was driven by a 12.7% drop in international long-distance revenues, attributed to a reduction in audiotext traffic (down 45% in minutes) and suspected re-origination of traffic through France Telecom via AT&T.
• Profitability Increase: Despite lower revenues, Net Income increased by 31.4% to $2.6 million. Income from telephone operations rose 25% to $6.1 million.
• Expense Reduction: Total operating expenses fell 17.7% to $13.1 million. International long-distance expenses dropped $2.7 million due to reduced audiotext traffic. Telephone operating expenses as a percentage of revenue improved from 77% in 1999 to 68% in 2000.
• Cash Flow Improvement: Net cash provided by operating activities more than doubled to $9.7 million from $3.9 million.
• Acquisitions: In March 2000, Wireless World acquired Antilles Wireless Cable T.V. Company for $1.5 million in cash and 242,424 shares of ATN stock. The transaction was accounted for as a pooling of interests.

Guidance, Outlook, Risks, and Contingencies

Outlook and Commentary: Management expects audiotext traffic volumes to continue declining. On April 28, 2000, MCI WorldCom notified GT&T it would cease carrying audiotext traffic effective May 1, 2000, which could impact future revenues. Management suspects MCI's action may be a breach of their operating agreement.

Regulatory Risks (Guyana):

• Rate Case: GT&T has a pending application with the Public Utilities Commission (PUC) for a significant rate increase to earn a 15% return. The PUC staff previously recommended a rate reduction. A High Court order prohibiting the PUC chairman from participating in the case is currently under appeal.
• Expansion Order: The PUC ordered GT&T to increase telephone lines to specific targets by 2000. GT&T has appealed this order, citing lack of cost evidence and financing mechanisms. Compliance may require significant external financing.
• Settlement Rates: The U.S. FCC mandated a reduction in international settlement rates for low-income countries like Guyana to $0.23/minute by 2002 (from $0.85). GT&T terminated its agreement with AT&T in December 1999 rather than accept a reduction, seeking to maintain higher rates with other carriers. A significant reduction in settlement rates could materially adversely impact earnings.

Tax Contingencies:

• Withholding Tax Audit: A task force appointed by the Guyanese Trade Minister in 1997 is probing withholding taxes on audiotext fees, with potential back taxes estimated at up to $40 million. A High Court order has stayed the audit pending a determination of the Minister's authority.
• Income Tax Assessments: GT&T received assessments totaling approximately $14 million (current equivalent) for years 1991-1996 regarding advisory fees and surcharge timing. High Court orders have stayed enforcement of these assessments.
• License Challenge: In April 2000, private parties filed a lawsuit seeking to invalidate GT&T's exclusive license, alleging it conflicts with Guyana's anti-monopoly laws. The company has not yet been served.

Liquidity: The company believes current resources are adequate for operations, though external financing may be needed for Wireless World expansion or to comply with PUC line expansion orders. Approximately $8.2 million of cash balances are denominated in Guyana dollars, posing potential currency conversion risks.

Investor Verification Checklist

• Audiotext Revenue Exposure: Verify the impact of MCI WorldCom's decision to stop carrying audiotext traffic on Q2 2000 and future revenues.
• Regulatory Rate Case Status: Monitor the appeal of the High Court order regarding the PUC chairman and the final outcome of the rate increase application.
• Tax Liability Resolution: Track the status of the High Court proceedings regarding the $40 million potential withholding tax audit and the $14 million income tax assessments.
• Settlement Rate Negotiations: Assess the success of GT&T's efforts to maintain $0.85/minute settlement rates with carriers other than AT&T in light of FCC mandates.
• Capital Requirements: Evaluate the cost and financing availability for the PUC-mandated expansion of telephone lines in Guyana.