January 25, 2005

On November 1, 2004, Governor Camacho signed into law P.L. 27-109, which authorized the sale of the Guam Telephone Authority to TeleGuam Holdings LLC effective December 31, 2004. The FY 2004 audited financial statements represents the last full fiscal year audit of GTA as a government run entity. GTA’s FY 2004 audited financial statements is also the first among the Government of Guam entities to be released; nearly five months earlier than the submission deadline.

For FY 2004, the independent auditors of Ernst & Young issued a clean, unqualified opinion on GTA’s financial statements. Operating revenues increased by $4 million, while operating expenses decreased by $2 million. We noted, however, that salaries and benefits increased slightly by $.1 million, while overtime increased by nearly $1 million.

Despite the increase in revenues and decrease in operating expenses, overall, GTA incurred a $2 million loss or decrease in net assets. This was still a significant improvement from prior year’s $10 million loss. The overall improvement is partly attributed to prior year’s recognition of a $2 million casualty loss and a $2 million inventory valuation loss, both of which were unique for FY 2003.

GTA’s cash increased by nearly 89% from $9 million in FY 2003 to $16 million in FY 2004. GTA stated that the increase was due to delays in the procurement and completion of capital projects. GTA expects the cash to be used for capital improvement purposes.

The privatization of the Guam Telephone Authority (GTA) has been a 5-year endeavor. Privatization costs accumulated to $11 million as of the 2004 fiscal year end. A break down of the costs per year is as follows:

      FY 2004         FY 2003           FY 2002              FY 2001            FY 2000          Total
$1,674,762       $589,368      $5,509,327       $1,800,403       $1,371,856     $10,945,715

The compliance report cited 12 findings for FY 2004. This is a significant improvement from FY 2003, when the independent auditors cited 43 findings. One of the major findings concern GTA’s continued failure to maintain an average Times Interest Earned Ratio (TIER) of 1.5 required by the Rural Telephone Bank (RTB) Supplemental Indenture. This level of TIER would show whether GTA has sufficient working capital to meet its obligation. GTA’s average TIER for FY 2004 was .42.

Other findings included the following:
• Insufficient management of GTA’s inactive and disputed receivable accounts;
• Continued delays in completing construction work in progress;
• Not performing periodic assessments of its inventory for damage and obsolescence;
• Unaccounted open purchase orders;
• The lack of a capitalization policy; and
• Several procurement-related non-compliance.

These findings though relevant for a government-run entity may not be as relevant for a private business.

Financial statements for the first quarter of FY 2005, which ended on December 31, 2004 shall be GTA’s final financial audit. The Asset Purchase Agreement with TeleGuam Holdings LLC, however, does require certain accounts to be subsequently audited as of March 31, 2005 and June 30, 2005.