ATNI

ATN International, Inc. (Atlantic Tele-Network, Inc.) - Q1 1998 10-Q Summary

Business Context and Reporting Period

This report covers the three months ended March 31, 1998. The Company, Atlantic Tele-Network, Inc. (ATN), operates primarily through its majority-owned subsidiary, Guyana Telephone & Telegraph Company, Limited (GT&T), providing international and local telephone services in Guyana. Effective December 30, 1997, ATN completed a split-off transaction, separating its U.S. Virgin Islands operations into a new entity, Emerging Communications, Inc. (ECI). The 1998 financial statements reflect ATN's standalone operations in Guyana, while 1997 comparative figures are presented on a combined basis to reflect the pre-split-off structure.

Key Financial Metrics

Note: Q1 1997 figures are combined; Q1 1998 figures are consolidated for ATN only. Net income per share for Q1 1998 was $0.99.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 30% to $22.4 million, driven primarily by a 50% drop in international long-distance revenues ($19.9M vs $30.9M). This was caused by a significant decline in audiotext traffic volume (down to 5.3 million minutes/month from 8-9 million in prior quarters).
• Local Service Growth: Local exchange service revenues increased 243% to $2.2 million, resulting from interim rate increases granted by the Guyana Public Utilities Commission (PUC) effective February 1, 1998.
• Profitability Improvement: Despite lower revenues, Net Income doubled to $4.9 million. This was largely due to a $3.75 million non-operating gain from the settlement of an insurance policy cancellation claim and a reduction in operating expenses (down 37%) which tracked the decline in traffic volume.
• Liquidity: Operating cash flow turned positive, increasing from a negative $405k in Q1 1997 to $11.1 million in Q1 1998, resulting in a cash balance increase of $7.7 million.

Guidance, Outlook, Risks, and Contingencies

Outlook and Guidance: Management expects the negative trend in audiotext revenues to continue, though the magnitude is uncertain. The Company anticipates that interim rate increases will generate approximately $14 million in additional annual revenue compared to 1997 levels. Future depreciation is not expected to be a reliable indicator of asset replacement costs due to the accounting write-down associated with the 1997 split-off.

Regulatory Risks:

• Rate Disputes: The PUC ordered GT&T to cease collecting a surcharge intended to recover $9.5 million in lost revenue from a prior rate dispute. GT&T has appealed and obtained a stay, but the outcome is uncertain.
• Expansion Plan: The PUC is holding hearings regarding GT&T's failure to complete a 1991 expansion plan by the 1995 deadline. Failure to resolve this could result in penalties or license cancellation.
• Infrastructure Mandate: The PUC ordered GT&T to add significant telephone lines and services by the end of 1998 without determining the cost or financing mechanism. This may require significant external capital.

Tax Contingencies:

• Audit Risks: GT&T faces potential tax assessments totaling up to $40 million related to withholding taxes on audiotext fees. A High Court order has stayed the audit, but the risk remains.
• Assessments: GT&T received assessments of approximately $14 million for taxes from 1991-1996 and $3.9 million for 1996. Court orders have stayed enforcement pending litigation.
• Intercompany Fees: The PUC previously ordered the recovery of $25 million in advisory fees paid to ATN. This order is stayed pending appeal.

Investor Verification Checklist

• Regulatory Stays: Verify the current status of the High Court stays regarding the $9.5M surcharge, the $25M advisory fee recovery, and the $14M+ tax assessments.
• Expansion Costs: Assess the capital requirements to meet the PUC's October 1997 order for new telephone lines and services, and the availability of external financing.
• Audiotext Trend: Monitor monthly audiotext traffic volumes to confirm if the decline stabilizes or accelerates, as this is the primary revenue driver.
• Permanent Rates: Track the PUC's final decision on permanent rate increases, as current interim rates are temporary and subject to change.
• Currency Exposure: Review the impact of Guyana dollar devaluation (approx. 150 to 1 USD in 1998) on operating costs and tax obligations payable in hard currency.