<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1997
Registration No. 333-33401
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
EMERGING COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 66-0547028
(PRIMARY STANDARD (I.R.S.
(STATE OR OTHER INDUSTRIALCLASSIFICATION EMPLOYERIDENTIFICATION
JURISDICTION CODE NUMBER) NUMBER)
OFINCORPORATION OR
ORGANIZATION)
---------------
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
TELEPHONE: 340-777-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY J. PROSSER
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
TELEPHONE: 340-777-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ROGER MELTZER, ESQ.
CAHILL GORDON & REINDEL
80 PINE STREET
NEW YORK, NEW YORK 10005
TELEPHONE: (212) 701-3000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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<PAGE>
ATLANTIC TELE-NETWORK, INC.
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
(809) 777-8000
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1997
To the Stockholders of Atlantic Tele-Network, Inc.:
Notice is Hereby Given that a Special Meeting of Stockholders (including any
adjournments or postponements thereof, the "Special Meeting") of Atlantic
Tele-Network, Inc., a Delaware corporation (the "Company"), will be held on
December 30, 1997 at 9:00 a.m., local time, at the offices of Fried, Frank,
Harris, Shriver & Jacobson, 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20004, for the following purposes, which are more fully described in the
accompanying Proxy Statement-Prospectus:
To consider and vote upon a single, unified proposal relating to the
proposed reorganization of the Company (the "Transaction"):
A. to approve and adopt the Subscription Agreement, dated as of August
11, 1997 (as such may be amended, supplemented or modified from time to
time, the "Subscription Agreement"), between the Company and Emerging
Communications, Inc., a Delaware corporation and newly formed wholly owned
subsidiary of the Company ("ECI"), pursuant to which the Company will
transfer certain assets and liabilities to ECI so that all of the assets,
liabilities and operations of (i) the Company's business and operations in
the Virgin Islands will be owned by ECI and (ii) the Company's business and
operations in Guyana will continue to be owned by the Company;
B. to approve and adopt the Repurchase and Recapitalization Agreement,
dated as of August 11, 1997 (as such may be amended, modified or
supplemented from time to time, the "Recapitalization Agreement"), among
the Company, Cornelius B. Prior Jr., individually and as trustee of the
1994 Prior Charitable Remainder Trust (the "Trust"), and Jeffrey J.
Prosser, pursuant to which the Company will repurchase 416,998 shares of
common stock of the Company, par value $.01 per share ("Company Common
Stock"), owned by Mr. Prior and 348,564 shares of Company Common Stock
owned by the Trust at a repurchase price of $22.7284 per share, Mr. Prior
will exchange all of his remaining 2,927,038 shares of Company Common Stock
for a like number of shares of a new class of common stock of the Company
to be designated Class B Common Stock, and Mr. Prosser will exchange all of
his 3,325,000 shares of Company Common Stock for a like number of shares of
a new class of common stock of the Company to be designated Class A Common
Stock;
C. to approve and adopt the Agreement and Plan of Merger, dated as of
August 11, 1997 (as such may be amended, supplemented or modified from time
to time, the "Merger Agreement"), between ATN Merger Co., a newly organized
Delaware corporation and a wholly owned subsidiary of the Company
("Mergerco"), and the Company, pursuant to which (i) Mergerco will be
merged with and into the Company (the "Merger"), (ii) each share of Company
Common Stock (but not the newly created Class A Common Stock and Class B
Common Stock to be issued prior to the Merger to Mr. Prosser and Mr. Prior,
respectively, pursuant to the Recapitalization Agreement) will be converted
into the right to receive four-tenths (0.4) of a share of Company Common
Stock and one share of ECI Common Stock; (iii) the outstanding shares of
Class A Common Stock of the Company held by Mr. Prosser will be converted
into the right to receive in the aggregate 5,704,231 shares of ECI Common
Stock, and (iv) the outstanding shares of Class B Common Stock of the
Company held by Mr. Prior will be converted into the right to receive in
the aggregate 2,807,040 shares of Company Common Stock;
D. to approve an amendment (the "Charter Amendment") to the Certificate
of Incorporation of the Company, as amended, which will create and
authorize a new class of Class A Common Stock of the Company and a new
class of Class B Common Stock of the Company to be issued prior to the
Merger to Mr. Prosser and Mr. Prior pursuant to the Recapitalization
Agreement;
E. to approve the following agreements attached as exhibits to the
Subscription Agreement (as they may be amended, supplemented or modified
from time to time): (i) the Non-Competition Agreement, (the "Non-
Competition
<PAGE>
Agreement"), among the Company, ECI and Mr. Prosser, (ii) the Indemnity
Agreement (the "Indemnity Agreement"), among the Company, ECI, Mr. Prior
and Mr. Prosser, (iii) the Technical Assistance Agreement (the "Technical
Assistance Agreement"), among the Company, Atlantic Tele-Network, Co.,
Virgin Islands Telephone Corporation, and Vitelcom Cellular, Inc., (iv) the
Tax Sharing and Indemnification Agreement (the "Tax Sharing and
Indemnification Agreement"), among the Company, ECI, Mr. Prior and Mr.
Prosser and (v) the Employee Benefits Agreement (the "Employee Benefits
Agreement") between the Company and ECI; and
F. to approve the transactions contemplated by the foregoing agreements
and the Charter Amendment.
II. To transact such other business, including, without limitation, the
adjournment of the Special Meeting (including an adjournment of the Special
Meeting to allow for the fulfillment of certain conditions precedent to the
Transaction) as may properly come before the Special Meeting or any
adjournments or postponements thereof.
The Subscription Agreement, Recapitalization Agreement, Merger Agreement,
Charter Amendment, Non-Competition Agreement, Indemnity Agreement, Technical
Assistance Agreement, Tax Sharing and Indemnification Agreement and Employee
Benefits Agreement will all be voted upon together as part of the Transaction,
and none of these agreements will be effected separately.
The Board of Directors of the Company has fixed the close of business on
November 18, 1997 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of and to vote at the Special Meeting and
any adjournments or postponements thereof. Only holders of record of shares of
the Company Common Stock at the close of business on the Record Date are
entitled to notice of, and to vote at, the Special Meeting. A list of such
stockholders will be available for examination at the offices of Fried, Frank,
Harris, Shriver & Jacobson, 1001 Pennsylvania Avenue, N.W., Washington, D.C.
20001, for a period of at least ten days prior to the Special Meeting.
A Proxy Statement-Prospectus containing more detailed information with
respect to the matters to be considered at the Special Meeting accompanies
this notice.
Your vote is very important regardless of how many shares of Company Common
Stock you own. Whether or not you plan to attend the special meeting, you are
requested to sign, date and return the enclosed proxy without delay in the
enclosed postage-paid envelope. You may revoke your proxy at any time prior to
its exercise. If you are present at the special meeting or any adjournments or
postponements thereof, you may revoke your proxy and vote personally on the
matters properly brought before the special meeting.
By Order of the Board of Directors,
Jeffrey J. Prosser
Secretary
St. Croix, U.S. Virgin Islands
December 9, 1997
IMPORTANT
All stockholders are cordially invited to attend the Special Meeting in
person.
Whether or not you plan to attend the Special Meeting in person, in order
to assure your representation at the meeting, you are urged to complete,
sign, and date the enclosed proxy card, which is being solicited by the
Board of Directors, and promptly return it in the self-addressed return
envelope enclosed for that purpose. The envelope requires no postage if
mailed in the United States. Any stockholder who signs and sends in a proxy
card may revoke it at any time prior to the vote at the Special Meeting by
following the procedures set forth above and in the accompanying Proxy
Statement-Prospectus.
DO NOT SEND ANY STOCK
CERTIFICATES AT THIS TIME.
<PAGE>
PROXY STATEMENT-PROSPECTUS
PROSPECTUS
EMERGING COMMUNICATIONS, INC.
SHARES OF COMMON STOCK
AND
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
OF
ATLANTIC TELE-NETWORK, INC.
TO BE HELD ON DECEMBER 30, 1997
---------------
This Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") is being
furnished to the stockholders of Atlantic Tele-Network, Inc., a Delaware
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company (the "Company Board") in the form
enclosed to be used at the Company's special meeting of stockholders (the
"Special Meeting") to be held on December 30, 1997, at the time and place and
for the purposes set forth in the Company's accompanying Notice of Special
Meeting of Stockholders. This Proxy Statement-Prospectus is first being mailed
to the Company's stockholders on or about December 8, 1997. This Proxy
Statement-Prospectus relates to the proposed reorganization of the Company,
whereby the Company will transfer certain assets and liabilities to Emerging
Communications, Inc., a Delaware corporation and newly formed wholly owned
subsidiary of the Company ("ECI"), and the Company will undertake an amendment
to its certificate of incorporation (the "Charter Amendment"), a
recapitalization and a merger (the "Merger") with ATN Merger Co., a newly
organized Delaware corporation and a wholly owned subsidiary of the Company
("Mergerco"), pursuant to which the Company will repurchase 416,998 shares of
Company Common Stock owned by Cornelius B. Prior Jr. and 348,564 shares of
Company Common Stock owned by the 1994 Prior Charitable Remainder Trust (the
"Trust") at a repurchase price of $22.7284 per share, Mr. Prior will exchange
all of his remaining 2,927,038 shares of Company Common Stock for a like
number of shares of Class B Common Stock, and the outstanding shares of common
stock of ECI, par value $.01 per share ("ECI Common Stock") will be
distributed to Jeffrey J. Prosser and the remaining stockholders of the
Company (other than Mr. Prior). Collectively, the above transactions herein
are referred to as the "Transaction."
This Proxy-Statement-Prospectus also constitutes a prospectus of ECI with
respect to the shares of ECI Common Stock to be distributed to holders of
Company Common Stock and Class A Common Stock in the Merger.
Pursuant to the Transaction, (a) the Company has entered into a Subscription
Agreement, dated as of August 11, 1997 (as such may be amended, supplemented
or modified from time to time, the "Subscription Agreement"), with ECI,
pursuant to which the Company will transfer certain assets and liabilities to
ECI so that all of the assets, liabilities and operations of (i) the Company's
business and operations in the Virgin Islands will be owned and operated by
ECI and (ii) the Company's business and operations in Guyana will continue to
be owned and operated by the Company; (b) the Company, Mr. Prior, individually
and as trustee of the Trust, and Mr. Prosser have entered into a Repurchase
and Recapitalization Agreement, dated as of August 11, 1997 (as such may be
amended, modified or supplemented from time to time, the "Recapitalization
Agreement"), pursuant to which the Company will repurchase 416,998 shares of
Company Common Stock owned by Mr. Prior and 348,564 shares of Company Common
Stock owned by the Trust at a repurchase price of $22.7284 per share, Mr.
Prior will exchange all of his remaining 2,927,038 shares of Company Common
Stock for a like number of shares of a new class of common stock of the
Company to be designated Class B Common Stock, and Mr. Prosser will exchange
all of his 3,325,000 shares of Company Common Stock for a like number of
shares of a new class of common stock of the Company to be designated Class A
Common Stock; (c) the Company has entered into an Agreement and Plan of
Merger, dated as of August 11, 1997 (as such may be amended, supplemented or
modified from time to time, the "Merger Agreement"), with Mergerco, pursuant
to which (i) Mergerco will be merged with and into the Company, (ii) each
share of Company Common Stock (but not the newly created Class A Common Stock
and Class B Common Stock to be issued prior to the Merger) will be converted
into the right to receive four-tenths (0.4) of a share of Company Common Stock
and one share of ECI Common Stock; (iii) the outstanding shares of Class A
Common Stock of the Company will be converted into the right to receive in the
aggregate 5,704,231 shares of ECI Common Stock, and (iv) the outstanding
shares of Class B Common Stock of the Company will be converted into the right
to receive in the aggregate 2,807,040 shares of Company Common Stock; (d) the
Company will amend (the "Charter Amendment") its Certificate of Incorporation,
as amended, to create and authorize the Company Class A Common Stock and the
Class B Common Stock to be issued prior to the Merger to Mr. Prosser and Mr.
Prior, respectively, pursuant to the Recapitalization Agreement; and (e) the
following agreements attached as exhibits to the Subscription Agreement (as
they may be amended, supplemented or modified from time to time) will be
entered into on or prior to the effective date (the "Effective Date") of the
Transaction: (i) the Non-Competition Agreement, among the Company, ECI, Mr.
Prior and Mr. Prosser (the "Non-Competition Agreement"), (ii) the Indemnity
Agreement, among the Company, ECI, Mr. Prior and Mr. Prosser (the "Indemnity
Agreement"), (iii) the Technical Assistance Agreement, among the Company,
Atlantic Tele-Network, Co., Virgin Islands Telephone Corporation, and Vitelcom
Cellular, Inc. (the "Technical Assistance Agreement"), (iv) the Tax Sharing
and Indemnification Agreement among the Company, ECI, Mr. Prior and Mr.
Prosser (the "Tax Sharing and Indemnification Agreement"), and (v) the
Employee Benefits Agreement, between the Company and ECI (the "Employee
Benefits Agreement").
THE COMPANY BOARD HAS UNANIMOUSLY (WITH MR. PRIOR AND MR. PROSSER
ABSTAINING) APPROVED THE TRANSACTION AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE TRANSACTION.
FOR MATTERS THAT SHOULD BE CONSIDERED WITH RESPECT TO THE TRANSACTION, THE
ECI COMMON STOCK ISSUABLE IN CONNECTION THEREWITH, AND THE COMPANY COMMON
STOCK THAT WILL REMAIN OUTSTANDING AFTER CONSUMMATION OF THE TRANSACTION SEE
"RISK FACTORS" BEGINNING ON PAGE 14 HEREOF.
It is expected that after the Transaction the Company Common Stock will
continue to be listed on the American Stock Exchange (the "AMEX") under the
symbol "ANK."
There has not been a trading market in ECI Common Stock. ECI Common Stock
has been approved for listing, on notice of issuance, on the AMEX under the
symbol "ECM."
---------------
THE SECURITIES TO BE ISSUED IN THE TRANSACTION HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS DECEMBER 9, 1997.
<PAGE>
(COVER PAGE CONTINUED)
The Transaction is conditioned upon, among other things, approval of the
Transaction at the Special Meeting by the holders of a majority of the
outstanding shares of Company Common Stock, completion of at least $17.4
million of long-term financing by ECI or Atlantic Tele-Network, Co. (which
will become a subsidiary of ECI), and the absence of any material adverse
change in the businesses to be conducted after the Effective Date by the
Company and ECI, respectively. The Company has received a ruling (the "Tax
Ruling") from the Internal Revenue Service ("IRS") that the transactions
contemplated by the Subscription Agreement and the Merger Agreement will be
tax-free for U.S. federal income tax purposes to the Company and ECI and to
the holders of Company Common Stock and Class A Common Stock.
Mr. Prosser and Mr. Prior, who in the aggregate own a majority of the
outstanding shares of Company Common Stock, have agreed to vote in favor of
approval of the Transaction at the Special Meeting.
The Transaction is currently expected to become effective as promptly as
practicable after the Special Meeting. Each holder of record of Company Common
Stock on the Effective Date will be entitled to receive one share of ECI
Common Stock and four-tenths (0.4) of a share of Company Common Stock for each
share of Company Common Stock held on that date. No fractional shares of
Company Common Stock will be issued. In lieu thereof, an Exchange Agent
selected by the Company will aggregate all fractional shares of Company Common
Stock and sell such shares at the prevailing market prices. Each holder of
record of Company Common Stock who would otherwise have been entitled to a
fraction of a share of Company Common Stock will receive cash (without
interest) in an amount equal to such holder's proportionate interest in the
net proceeds from such sale or sales by the Exchange Agent.
After the Effective Date, (i) the "public stockholders" of the Company
(i.e., all stockholders other than Mr. Prior, the Trust and Mr. Prosser and
his family) will continue to hold approximately 43% of the Company Common
Stock (the same percentage as they hold on the date of this Proxy Statement-
Prospectus) and Mr. Prior will hold the remaining 57%, although the number of
shares of Company Common Stock will have been reduced by 60% from 12,272,500
shares to 4,909,000, (ii) the public stockholders will hold 5,254,900 shares
of ECI Common Stock (the same number of shares as they hold in the Company on
the date of this Proxy Statement-Prospectus) and (iii) Mr. Prosser will hold
the remaining 5,704,231 shares of ECI Common Stock, with the result that the
public stockholders' percentage interest in ECI will be approximately 48% and
Mr. Prosser's percentage interest will be approximately 52%.
After the Effective Date, the Company and ECI will be independent companies
with separate boards of directors and management. Mr. Prior and Mr. Prosser,
through their ownership of a majority of the outstanding common stock of the
Company and ECI, respectively, will have the ability to elect all of the
directors of the Company and ECI, respectively, and generally to exercise
significant control over the affairs of such companies. Although consummation
of the Transaction is conditioned on receipt of the Tax Ruling, such a Ruling
is based on certain facts and representations contained in the Company's
request for the Tax Ruling, and if such facts or representations were to be
incomplete or untrue in any material respect, or if the facts upon which the
Tax Ruling was based were to be materially different from the facts at the
time of the Transaction, the IRS could modify or revoke its ruling
retroactively. If the Tax Ruling were to be revoked retroactively, the Company
and ECI could have substantial federal income tax liabilities and public
stockholders of the Company could recognize dividend income and gain from the
sale or exchange of Company Common Stock by reason of their receipt of ECI
Common Stock in the Transaction. See "The Transaction--Certain US Federal
Income Tax Consequences".
After the Effective Date, the Company and ECI will each be a smaller, less
diversified company than the Company is today. The Company will continue to
own the Company's Guyana operations. ECI will own the Company's Virgin Islands
operations. A subsidiary of ECI will have incurred $18.3 million of long term
debt, and $17.4 million of the proceeds of such debt will have been paid to
the Company and used to repurchase from Mr. Prior and the Trust of a portion
of their shares of ATN Common Stock in the Transaction. The Company's Guyana
operations and Virgin Islands operations are each subject to a number of
separate and distinct risk factors, and each of these risk factors will have a
greater potential adverse impact on the Company or ECI individually after the
Effective Date than they currently have on the combined operations of the
Company. See "Risk Factors--Risks Relating to New ATN" and "Risk Factors--
Risks Relating to ECI".
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................... 1
SUMMARY.................................................................... 3
RISK FACTORS............................................................... 14
Risks Relating to the Transaction........................................ 14
Risks Relating to New ATN................................................ 15
Risks Relating to ECI.................................................... 18
THE SPECIAL MEETING........................................................ 20
Introduction............................................................. 20
Matters to be Considered................................................. 20
Company Board Recommendation............................................. 21
Voting Rights and Proxy Information...................................... 21
Solicitation of Proxies.................................................. 22
No Appraisal Rights...................................................... 22
Adjournment of the Special Meeting....................................... 22
THE TRANSACTION............................................................ 23
Background and Reasons for the Transaction............................... 23
Recommendation of the Company Board...................................... 25
Opinion of Investment Banker............................................. 26
Documentation for the Transaction........................................ 29
The Credit Facility...................................................... 34
Manner of Effecting the Transaction...................................... 36
Listing and Trading of ECI Common Stock.................................. 36
Listing and Trading of New ATN Common Stock.............................. 37
Expenses................................................................. 38
Conditions; Termination.................................................. 38
Certain U.S. Federal Income Tax Consequences............................. 38
Accounting Treatment of the Transaction.................................. 41
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY.......................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY...................................... 44
Introduction............................................................. 44
Results of Operations.................................................... 44
Regulatory Considerations................................................ 47
Liquidity and Capital Resources.......................................... 49
Impact of Devaluation and Inflation...................................... 51
SELECTED HISTORICAL FINANCIAL DATA OF NEW ATN.............................. 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF NEW ATN.......................................... 54
Introduction............................................................. 54
Results of Operations.................................................... 54
Regulatory Considerations................................................ 57
Liquidity and Capital Resources.......................................... 58
Impact of Devaluation and Inflation...................................... 59
NEW ATN PRO FORMA FINANCIAL DATA........................................... 60
BUSINESS AND PROPERTIES OF NEW ATN......................................... 65
International Traffic.................................................... 65
Domestic Service......................................................... 68
Expansion Program........................................................ 68
Other Services........................................................... 69
Significant Revenue Sources.............................................. 69
</TABLE>
i
<PAGE>
<TABLE>
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PAGE
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<S> <C>
Political Risk Insurance................................................. 69
Regulation............................................................... 70
Taxation--United States.................................................. 74
Taxation--Guyana......................................................... 74
Employees................................................................ 75
Properties............................................................... 75
SELECTED HISTORICAL FINANCIAL DATA OF ATN-VI............................... 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ATN-VI........................................... 78
Introduction............................................................. 78
Results of Operations.................................................... 78
Liquidity and Capital Resources.......................................... 80
Impact of Inflation...................................................... 81
ECI PRO FORMA FINANCIAL DATA............................................... 82
BUSINESS AND PROPERTIES OF ECI............................................. 86
Local Service............................................................ 86
Access for Long-Distance Services........................................ 87
Other Services........................................................... 87
Significant Revenue Sources.............................................. 87
Physical Plant........................................................... 87
Cellular and Other Operations............................................ 88
Competition.............................................................. 88
Regulation............................................................... 90
Taxation--United States.................................................. 93
Taxation--U.S. Virgin Islands............................................ 93
Employees................................................................ 94
Properties............................................................... 94
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF THE COMPANY
COMMON STOCK.............................................................. 95
Principal Stockholders................................................... 95
Security Ownership of Directors and Officers............................. 96
DIRECTORS AND MANAGEMENT OF NEW ATN........................................ 97
Directors Of New ATN..................................................... 97
Executive Officers of New ATN............................................ 97
Executive Officers of GT&T............................................... 98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF ECI COMMON STOCK........ 99
DIRECTORS AND MANAGEMENT OF ECI............................................ 100
Executive Officers and Directors of ECI.................................. 100
Directors Of ECI......................................................... 100
ECI Board Committees..................................................... 101
Officers of ECI.......................................................... 101
COMPENSATION OF EXECUTIVE OFFICERS OF ECI.................................. 102
Employment Agreement..................................................... 102
Stock Option Plans....................................................... 103
CERTAIN TRANSACTIONS....................................................... 103
PRICE RANGE AND DIVIDEND HISTORY OF THE COMPANY COMMON STOCK............... 104
DESCRIPTION OF NEW ATN CAPITAL STOCK....................................... 104
Authorized Capital Stock................................................. 104
New ATN Common Stock..................................................... 104
New ATN Preferred Stock.................................................. 104
</TABLE>
ii
<PAGE>
<TABLE>
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PAGE
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<S> <C>
DESCRIPTION OF ECI CAPITAL STOCK.......................................... 105
Authorized Capital Stock................................................ 105
ECI Common Stock........................................................ 105
ECI Preferred Stock..................................................... 105
Antitakeover Effects of Certain Provisions of the Certificate and By-
laws................................................................... 106
LEGAL MATTERS............................................................. 109
EXPERTS................................................................... 109
INDEX TO FINANCIAL STATEMENTS............................................. F-1
ANNEX A--SUBSCRIPTION AGREEMENT
ANNEX B--OPINION OF PRUDENTIAL SECURITIES INCORPORATED
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
ECI has filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
ECI Common Stock issuable in connection with the Transaction. As permitted by
the rules and regulations of the SEC, this Proxy Statement-Prospectus does not
contain all of the information set forth in the Registration Statement or the
exhibits thereto. Statements contained herein concerning provisions of
documents are necessarily summaries of the documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. Information regarding ECI can be found under "Risk
Factors," "ATN-VI Management Discussion and Analysis of Financial Condition
and Results of Operations" and "Business and Properties of ECI." Information
regarding the Company can be found under "Risk Factors" and "Business and
Properties of New ATN."
The Company is (and, upon the effectiveness of the Registration Statement,
ECI will be) subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files (or will file) reports, proxy statements and other
information with the SEC.
The Registration Statement and exhibits thereto filed by ECI, and the
reports, proxy statements, and other information filed with the SEC by the
Company and ECI can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's Regional Offices located at 7 World Trade Center, 13th
Floor, New York, New York, 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago Illinois 60661. Copies of such materials may be obtained
by mail, at prescribed rates, from the Public Reference Section of the SEC at
450 Fifth Street, N.W. Washington D.C. 20549 or accessed electronically on the
SEC's Web site at (http://www.sec.gov). The Company Common Stock is listed on
the AMEX, and reports and other information concerning the Company can be
inspected at the AMEX, 86 Trinity Place, New York, New York 10006.
----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THE PROXY STATEMENT-
PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ECI. THIS
PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED HEREBY, NOR DOES
IT CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES AS CONTEMPLATED HEREIN SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY OR ECI SINCE THE DATE HEREOF, OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
Until March 11, 1998 (90 days after the effective date of this Registration
Statement), all dealers effecting transactions in the ECI Common Stock may be
required to deliver a Proxy Statement-Prospectus.
1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement-Prospectus. Reference is made to the more detailed information
contained or incorporated by reference in this Proxy Statement-Prospectus.
Stockholders of the Company are urged to read this Proxy Statement-Prospectus
and the Annexes attached hereto in their entirety. As used in this Proxy
Statement-Prospectus, unless the context otherwise requires: the "Company"
means Atlantic Tele-Network, Inc.; "New ATN" means the Company as it will be
constituted after the Effective Date; and "ECI" means, with respect to periods
prior to the Effective Date, the Company's business and operations in the
Virgin Islands (all of which is conducted by the Company's subsidiary, Atlantic
Tele-Network Co., a Virgin Islands corporation ("ATN-VI") and its
subsidiaries), and, with respect to periods subsequent to the Effective Date,
Emerging Communications, Inc., a Delaware corporation, which will own the
Company's Virgin Islands business and operations.
SPECIAL MEETING
Date, Time and Place of
Special Meeting............ The Special Meeting of stockholders of the
Company, will be held at the offices of Fried,
Frank, Harris, Shriver & Jacobson, 1001
Pennsylvania Avenue, N.W., Washington, D.C.
20004, at 9:00 A.M., local time, on December 30,
1997.
Purposes of the Special At the Special Meeting the stockholders will be
Meeting.................... asked to consider and vote upon:
(1) a single, unified proposal relating to the
Transaction:
(a) to approve and adopt the Subscription
Agreement, pursuant to which the Company will
transfer certain assets and liabilities to
ECI so that all of the assets, liabilities
and operations of (i) the Company's business
and operations in the Virgin Islands will be
owned and operated by ECI and (ii) the
Company's business and operations in Guyana
will continue to be owned and operated by the
Company;
(b) to approve and adopt the Recapitalization
Agreement, pursuant to which the Company will
repurchase 416,998 shares of Company Common
Stock owned by Mr. Prior and 348,564 shares
of Company Common Stock owned by the Trust at
a repurchase price of $22.7284 per share, Mr.
Prior will exchange all of his remaining
2,927,038 shares of Company Common Stock for
a like number of shares of a new class of
common stock of the company to be designated
Class B Common Stock, and Mr. Prosser will
exchange all of his 3,325,000 shares of
Company Common Stock for a like number of
shares of a new class of common stock of the
Company to be designated Class A Common
Stock;
(c) to approve and adopt the Merger
Agreement, pursuant to which (i) Mergerco
will be merged with and into the Company,
(ii) each share of Company Common Stock (but
not the newly created Class A Common Stock
and Class B Common Stock to
3
<PAGE>
be issued prior to the Merger) will be
converted into the right to receive four-
tenths (0.4) of a share of Company Common
Stock and one share of ECI Common Stock;
(iii) the outstanding shares of Class A
Common Stock of the Company will be converted
into the right to receive in the aggregate
5,704,231 shares of ECI Common Stock, and
(iv) the outstanding shares of Class B Common
Stock of the Company will be converted into
the right to receive in the aggregate
2,807,040 shares of Company Common Stock;
(d) to approve the Charter Amendment to the
Certificate of Incorporation of the Company,
as amended, which will create and authorize
the Class A Common Stock and the Class B
Common Stock to be issued prior to the Merger
to Mr. Prosser and Mr. Prior, respectively,
pursuant to the Recapitalization Agreement;
(e) to approve the Non-Competition Agreement,
the Indemnity Agreement, the Technical
Assistance Agreement, the Tax Sharing and
Indemnification Agreement and the Employee
Benefits Agreement; and
(f) to approve the transactions contemplated
by the foregoing agreements and the Charter
Amendment; and
(2) to transact such other business, including,
without limitation, the adjournment of the
Special Meeting (including an adjournment of the
Special Meeting to allow for the fulfillment of
certain conditions precedent to the Transaction)
as may properly come before the Special Meeting
or any adjournments or postponements thereof.
Record Date................. November 18, 1997
Voting...................... At the Special Meeting, each holder of record as
of the Record Date of the Company Common Stock is
entitled to one vote for each share held. The
affirmative vote of at least a majority of the
outstanding shares of the Company Common Stock as
of the Record Date is required to approve the
Transaction. As of the Record Date, Cornelius B.
Prior, Jr., held voting authority over 3,692,600
shares of the Company Common Stock, or
approximately 30.1% of the outstanding shares of
the Company Common Stock, and Jeffrey J. Prosser,
held voting authority over 3,011,250 shares of
the Company Common Stock, or approximately 25% of
the outstanding shares of the Company Common
Stock. Mr. Prior and Mr. Prosser together have
the necessary votes to ensure approval of the
Transaction, and they have agreed to vote their
shares in favor of the Transaction. See "The
Special Meeting--Voting Rights and Proxy
Information."
No Appraisal Rights......... Stockholders of the Company will not be entitled
to appraisal rights in connection with the
Transaction.
4
<PAGE>
THE COMPANIES PRIOR TO THE TRANSACTION
The Company................. Atlantic Tele-Network, Inc. is a Delaware
corporation that provides telecommunications
services primarily through its two principal
subsidiaries, the Guyana Telephone and Telegraph
Company Limited ("GT&T") and ATN-VI and its
primary subsidiary the Virgin Islands Telephone
Corporation ("Vitelco"). Vitelco provides
subscribers with local telephone service in the
U.S. Virgin Islands, access to long-distance
companies for interstate and international
telephone service, and provides those companies
with access to its local network. ATN-VI also
provides cellular telephone service and sells and
leases telecommunications equipment in the U.S.
Virgin Islands through its other subsidiaries.
GT&T provides local service and domestic long-
distance telecommunications service within the
Co-operative Republic of Guyana and international
telephone service between Guyana and foreign
points.
Principal Executive Offices
of the Company............. The principal executive offices of the Company
are located at Chase Financial Center, P.O. Box
1730, St. Croix, U.S. Virgin Islands 00821. Its
telephone number is (340) 777-8000.
ECI......................... Emerging Communications, Inc. is a newly formed
Delaware corporation which, prior to the
Effective Date, will be a wholly owned subsidiary
of the Company with no operations.
Principal Executive Offices The principal executive offices of ECI are
of ECI..................... located at Chase Financial Center, P.O. Box 1730,
St. Croix, U.S. Virgin Islands 00821. Its
telephone number is (340) 777-7700.
THE TRANSACTION
Organization of Emerging
Communications, Inc........ The Company will transfer to ECI all of the
assets and liabilities associated with the
Company's business and operations in the Virgin
Islands and certain other assets and liabilities
in exchange for all of the capital stock of ECI.
Charter Amendment........... The Company will amend its Certificate of
Incorporation to create a class of Class A Common
Stock and a class of Class B Common Stock.
Repurchase and The Company will repurchase 416,998 shares of
Recapitalization........... Company Common Stock owned by Mr. Prior and
348,564 shares of Company Common Stock owned by
the Trust at a repurchase price of $22.7284 per
share, or $17,400,000 in the aggregate. Mr. Prior
will exchange all of his remaining 2,927,038
shares of Company Common Stock for a like number
of shares of a new class of common stock of the
Company to be designated Class B Common Stock,
and Mr. Prosser will exchange all of his
3,325,000 shares of Company Common Stock for a
like number of shares of a new class of common
stock of the Company to be designated Class A
Common Stock.
5
<PAGE>
Merger...................... Mergerco will be merged with and into the
Company, with the Company surviving in the
Merger. Pursuant to the Merger, each share of
Company Common Stock (but not the newly created
Class A Common Stock and Class B Common Stock to
be issued prior to the Merger) will be converted
into the right to receive four-tenths (0.4) of a
share of Company Common Stock and one share of
ECI Common Stock; the outstanding shares of Class
A Common Stock of the Company will be converted
into the right to receive in the aggregate
5,704,231 shares of ECI Common Stock; and the
outstanding shares of Class B Common Stock of the
Company will be converted into the right to
receive in the aggregate 2,807,040 shares of
Company Common Stock.
Fractional Shares........... No fractional shares of Company Common Stock will
be issued. In lieu thereof, an Exchange Agent
selected by the Company will aggregate all
fractional shares of Company Common Stock and
sell such shares at the prevailing market prices.
Each holder of record of Company Common Stock who
would otherwise have been entitled to a fraction
of a share of Company Common Stock will receive
cash (without interest) in an amount equal to
such holder's proportionate interest in the net
proceeds from such sale or sales by the Exchange
Agent.
Effective Date.............. The Transaction is currently expected to become
effective as soon as practicable after the
Special Meeting of stockholders has been held.
Conditions to the The Transaction is conditioned upon, among other
Transaction................ things, approval of the Transaction at the
Special Meeting by the holders of a majority of
the outstanding shares of Company Common Stock,
completion of at least $17.4 million of long-term
financing by ECI or ATN-VI, the listing of ECI
Common Stock on the AMEX, the continued listing
of New ATN Common Stock on the AMEX and the
absence of any material adverse change in the
businesses to be conducted after the Effective
Date by the Company and ECI, respectively. Mr.
Prosser and Mr. Prior, who in the aggregate own a
majority of the outstanding shares of Company
Common Stock, have agreed to vote in favor of
approval of the Transaction at the Special
Meeting.
Reasons for the The Company Board has determined unanimously that
Transaction................ the long-term prospects of the Company's business
will be improved if the Company is divided into
two separate publicly-owned companies.
Consummation of the Transaction will resolve
material disagreements that have arisen between
Mr. Prior and Mr. Prosser, the Company's two
principal stockholders and co-chief executive
officers, pertaining to the management and
direction of the Company. The material
disagreements between Mr. Prior and Mr. Prosser
concerning the management and direction of the
Company and related matters have resulted in
litigation between the two and a management
deadlock that has impaired the Company's ability
to
6
<PAGE>
function other than in the ordinary course of
business. After devoting considerable time and
effort to resolving these differences, Mr.
Prosser, Mr. Prior and the Company Board have
unanimously (with Mr. Prosser and Mr. Prior
abstaining) approved the Transaction and the
agreements for the Transaction. ECI will be owned
by Mr. Prosser and the Company's public
stockholders, and New ATN will be owned by Mr.
Prior and the Company's public stockholders.
Recommendation of the
Company Board.............. At its July 7, 1997 meeting, the Company Board
unanimously (with Mr. Prosser and Mr. Prior
abstaining) approved the Transaction and the
transactions contemplated thereby, including the
Merger, and recommended that stockholders vote
for the Transaction. See "The Transaction--
Recommendation of the Company Board."
Investment Banker's Prudential Securities Incorporated ("Prudential
Opinion.................... Securities") has rendered an opinion (the
"Opinion") to the Company Board to the effect
that, as of the date of the Opinion, the basic
economic terms of the transaction as provided for
in the Subscription Agreement, the
Recapitalization Agreement and the Merger
Agreement, are fair to the public stockholders
(i.e. all stockholders of the Company other than
Mr. Prior, the Trust, and Mr. Prosser and his
family) from a financial point of view. A copy of
the Opinion, which sets forth the assumptions
made, matters considered, and the limits of
review, is attached to this Proxy Statement-
Prospectus as Annex B, and should be read
carefully by the holders of the Company Common
Stock. On December 5, 1997, Prudential Securities
confirmed the Opinion as of that date. See "The
Transaction--Opinion of Investment Banker."
Financing................... ATN-VI, which will become a subsidiary of ECI,
has received a commitment for a long-term loan in
the amount of $18.3 million (the "Credit
Facility") from Rural Telephone Finance
Cooperative ("RTFC") to provide $17.4 million of
funds needed by the Company to repurchase a
portion of the Company Common Stock held by Mr.
Prior and all of such stock held by the Trust in
connection with the Transaction as described
above under "Repurchase and Recapitalization."
See "The Transaction--The Credit Facility."
Certain U.S. Federal Tax
Consequences............... The Company has received a Tax Ruling from the
IRS to the effect, among other things, that for
U.S. federal income tax purposes the Company's
transfer of various of its assets and liabilities
to ECI and the distribution of ECI Common Stock
to the holders of Company Common Stock and Class
A Common Stock will be tax free to the Company
and ECI and to such holders. The Transaction
should result in no federal income tax to the
Company, ECI or any of the stockholders of the
Company, except for taxes payable by Mr. Prior
7
<PAGE>
in respect of the repurchase of shares of Company
Common Stock from him and the Trust and those
payable under certain circumstances by
stockholders of the Company as a result of their
receipt of cash in lieu of fractional shares of
New ATN Common Stock.
The Company's request for the Tax Ruling
contains certain facts and representations. If
these facts and representations were to be
incomplete or untrue in any material respect, or
if the facts upon which the Tax Ruling was based
are materially different from the facts at the
time of the Transaction, the IRS could modify or
revoke its ruling retroactively. If the
Transaction were to be consummated in reliance on
the Tax Ruling and the Ruling were subsequently
to be revoked, the Company and ECI could incur
substantial federal income tax liabilities and
public stockholders of the Company could
recognize dividend income and gain from the sale
or exchange of Company Common Stock as a result
of the Transaction. See "Risk Factors--Risks
Relating to the Transaction--Potential U.S.
Federal Income Tax Liabilities" and "The
Transaction--Certain U.S. Federal Income Tax
Consequences."
Accounting Treatment of the
Transaction................ For accounting purposes the Transaction is a
non-pro rata split-off of a business and is
accounted for at fair value. New ATN is
considered to be the split-off entity and
accounted for at fair value since management
anticipates ECI will have greater market
capitalization (based on the Opinion), ECI will
have greater asset value, ECI will retain more of
the top management of the Company, and ECI had
greater net income for the nine months ended
September 30, 1997. Accordingly, the historical
consolidated financial statements of the Company
included elsewhere in this Proxy Statement-
Prospectus will become the historical financial
statements of ECI after the Transaction. After
the Transaction, ECI financial statements will
reflect the split-off as of the Effective Date
and will not be restated to remove the effects of
the prior operating results of New ATN. The
combined financial results of New ATN included
elsewhere in this Proxy Statement-Prospectus are
the separate financial statements relating to the
Company's business and operations in Guyana. The
historical financial statements of New ATN for
reporting purposes after the Transaction will
consist solely of the separate combined financial
statements of New ATN and will not correspond to
the historical consolidated financial statements
of the Company.
NEW ATN
New ATN..................... The Company will retain the Company's business
and operations in Guyana. In this Proxy
Statement-Prospectus, the Company as it will be
constituted on and after the Effective Date is
sometimes referred to as "New ATN." See "Business
and Properties of New ATN."
8
<PAGE>
Principal Office............ The principal office of New ATN will be at 19
Estate Thomas, Havensite, P.O. Box 12030, St.
Thomas, U.S. Virgin Islands 00802. Its telephone
number will be 340-777-8000.
Board of Directors.......... On the Effective Date, the Board of Directors of
New ATN is expected to consist of the following
five individuals: James B. Ellis, Andrew F. Lane,
Robert A.R. Maclennan, Cornelius B. Prior, Jr.,
and Henry Wheatley. Except for Mr. Ellis and Mr.
Wheatley, each of the proposed directors is
currently a director of the Company. See
"Directors and Management of New ATN--Directors
of New ATN."
Shares Outstanding.......... On the Effective Date, New ATN will have
4,909,000 shares of Common Stock outstanding, of
which Mr. Prior will own 2,807,040 shares (57%)
and Mr. Prosser will own none.
Trading Market.............. The New ATN Common Stock is expected to continue
to be listed on the AMEX under the symbol "ANK."
The trading prices of the New ATN Common Stock
will be substantially affected by the
Transaction. See "The Transaction--Listing and
Trading of New ATN Common Stock."
EMERGING COMMUNICATIONS, INC.
Emerging Communications, Emerging Communications, Inc. ("ECI"), is a newly
Inc........................ formed Delaware corporation which, following the
Effective Date, will own and operate the
Company's business and operations in the Virgin
Islands. See "Business and Properties of ECI."
Principal Office............ The principal office of ECI will be at Chase
Financial Center, P.O. Box 1730, St. Croix, U.S.
Virgin Islands 00821. Its telephone number will
be 340-777-7700.
Board of Directors.......... On the Effective Date, the Board of Directors of
ECI is expected to consist of the following six
individuals: Jeffrey J. Prosser, John P. Raynor,
Sir Shridath S. Rampal, Salvatore Muoio, John G.
Vondras and Richard N. Goodwin. Except for Mr.
Muoio, Mr. Vondras and Mr. Goodwin, each of the
proposed ECI directors is currently a director of
the Company. See "Directors and Management of
ECI--Directors of ECI."
Shares Outstanding.......... On the Effective Date, ECI will have 10,959,131
shares of Common Stock outstanding, of which Mr.
Prosser will own 5,704,231 shares (52%) and Mr.
Prior will own none.
Trading Market.............. There is currently no public market for ECI
Common Stock. ECI Common Stock has been approved
for listing, on notice of issuance, on the AMEX
under the symbol "ECM." Listing is a condition to
consummation of the Transaction. See "The
Transaction--Listing and Trading of ECI Common
Stock."
Certain Provisions of
Restated Certificate of Certain provisions of ECI's Restated Certificate
Incorporation and By-laws.. of Incorporation and By-laws may have the effect
of making an acquisition of control of ECI more
difficult or expensive. See "Description of ECI
Capital Stock--Anti-takeover Effects of Certain
Provisions of the Certificate and By-Laws."
9
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA AND
SUMMARY PRO FORMA FINANCIAL DATA OF NEW ATN
The combined financial statements of New ATN are the separate financial
statements relating to the Company's business and operations in Guyana,
including its majority-owned subsidiary, Guyana Telephone and Telegraph Company
Limited (GT&T), and the Company's activities as the parent company of its
subsidiaries. The Company's investment in subsidiaries other than GT&T and the
operations of these other subsidiaries have been carved out of New ATN's
financial statements. The combined financial statements present the financial
position, results of operations and cash flows of New ATN as if it were a
separate entity for all periods presented. The Company's historical basis in
the assets and liabilities of New ATN have been carried over.
The following summary historical financial data of New ATN as of and for the
years ended December 31, 1996, 1995 and 1994 have been derived from New ATN's
audited combined financial statements. The following summary historical
financial data for the nine months ended September 30, 1997 and 1996 have been
derived from the unaudited combined condensed interim financial statements
which, in the opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments) considered necessary for a fair presentation.
The combined financial data for the nine months ended September 30, 1997 are
not necessarily indicative of the operating results to be expected for the
entire fiscal year.
Also set forth below are summary unaudited pro forma combined statements of
operations data and combined balance sheet data for New ATN. The pro forma
combined balance sheet data as of September 30, 1997 give effect to the
Transaction, as if it occurred on September 30, 1997. The pro forma combined
statement of operations data for the year ended December 31, 1996 and the nine
months ended September 30, 1997 give effect to the Transaction, as if it
occurred on January 1, 1996. The Transaction is accounted for as a non-pro rata
split-off of New ATN, and accordingly New ATN is accounted for at fair value.
New ATN is considered to be the split-off entity since management anticipates
that ECI will have larger market capitalization (based on the Opinion), ECI
will have greater asset value, ECI will retain more of the top management of
the Company, and ECI had greater net income for the nine months ended September
30, 1997. The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial
position that would have occurred if the Transaction had occurred at the
beginning of the periods indicated, nor is it necessarily indicative of future
operating results or financial position.
The summary historical and pro forma financial data should be read in
conjunction with the New ATN's combined financial statements and notes thereto,
as of and for each of the three years in the period ended December 31, 1996,
New ATN's unaudited combined condensed interim financial statements and notes
thereto as of September 30, 1997 and for the nine months ended September 30,
1997 and 1996 and the unaudited pro forma combined condensed balance sheet of
New ATN as of September 30, 1997 and the unaudited pro forma combined condensed
statements of operations of New ATN for the year ended December 31, 1996 and
the nine months ended September 30, 1997, all of which are included elsewhere
in this Proxy Statement-Prospectus. All dollar amounts are in thousands, except
per share data.
10
<PAGE>
SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL DATA OF NEW ATN
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------------------
PRO FORMA PRO FORMA
STATEMENT OF OPERATIONS 1994 1995 1996 1996(3) 1996 1997 1997
DATA: ------- -------- -------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue (1)....... $78,156 $131,170 $148,253 $148,253 $114,618 $95,698 $95,698
Total expense........... 57,782 99,745 121,222 118,145 93,422 77,560 75,253
------- -------- -------- -------- -------- ------- -------
Income from operations.. 20,374 31,425 27,031 30,108 21,196 18,138 20,445
Interest expense, net... 3,278 2,678 1,749 3,399 1,357 1,125 2,400
------- -------- -------- -------- -------- ------- -------
Income from continuing
operations before
income taxes and
minority interest...... 17,096 28,747 25,282 26,709 19,839 17,013 18,045
Income taxes............ 7,411 13,619 10,824 11,647 8,643 7,558 8,162
------- -------- -------- -------- -------- ------- -------
Income from continuing
operations before
minority interest...... 9,685 15,128 14,458 15,062 11,196 9,455 9,883
Minority interest....... (1,696) (2,390) (2,096) (2,096) (1,779) (1,371) (1,371)
------- -------- -------- -------- -------- ------- -------
Income from continuing
operations............. $ 7,989 $ 12,738 $ 12,362 $ 12,966 $ 9,417 $ 8,084 $ 8,512
======= ======== ======== ======== ======== ======= =======
Income per share from
continuing operations
(2).................... $ 2.64 $ 1.73
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
AS OF DECEMBER 31, 30,
-------------------------- ------------------
PRO FORMA
1994 1995 1996 1997 1997
BALANCE SHEET DATA: -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Fixed assets, net................ $ 91,025 $ 92,102 $ 97,780 $ 99,360 $ 29,046
Total assets..................... 162,688 185,481 194,493 198,434 100,393
Short-term debt (including
current portion of long-term
debt)........................... 11,515 15,626 11,047 11,047 5,371
Long-term debt, net.............. 34,720 25,969 20,398 16,427 16,305
Stockholders' equity............. 85,526 98,264 110,626 118,710 45,286
</TABLE>
- --------
(1) 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 approximately $9.5 million of lost revenues
over a period of 18 months relating to an October 1995 PUC order which
temporarily reduced rates for outbound long-distance calls to certain
countries. These reduced rates were in effect for the period of October
1995 through January 1997. In January 1997, on an appeal by GT&T, the
Guyana High Court voided the PUC's order in regards to the reduced rates
described above and rates were returned to the rates in existence in
October 1995. GT&T put such surcharge into effect on October 1, 1997
pending an ultimate trial on the merits. The Company has recognized the
approximately $9.5 million of lost revenues in the nine months ended
September 30, 1997.
(2) Historical income per share amounts have not been presented as this
information is not considered meaningful.
(3) Does not reflect the estimated pro-forma non-recurring loss of $55 million
on the split-off and fair valuation of the net assets of New ATN.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF ECI
The following summary historical financial data have been derived from the
audited consolidated financial statements of the Company, the predecessor
company to ECI, as of and for the years ended December 31, 1996, 1995 and 1994.
The historical data presented below includes the financial data of the business
to be retained by New ATN as well as those businesses to be transferred to ECI
in the Transaction. The historical consolidated financial statements of the
Company will become the historical financial statements of ECI after the
Transaction. After the Transaction, ECI financial statements will reflect the
split-off as of the Effective Date and will not be restated to remove the
effects of the prior operating results of New ATN. The following summary
historical financial data for the nine months ended September 30, 1997 and 1996
have been derived from the unaudited consolidated condensed interim financial
statements of the Company which, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation. The consolidated financial data for the nine
months ended September 30, 1997 are not necessarily indicative of the operating
results to be expected for the entire fiscal year.
Also set forth below are summary unaudited pro forma consolidated statement
of operations data and consolidated balance sheet data for ECI. The pro forma
consolidated balance sheet data as of September 30, 1997 give effect to the
Transaction, as if it occurred on September 30, 1997. The pro forma
consolidated statement of operations data for the year ended December 31, 1996
and the nine months ended September 30, 1997 give effect to the Transaction, as
if it occurred on January 1, 1996. The Transaction is accounted for as a non-
pro rata split-off of New ATN and New ATN is accounted for at fair value. New
ATN is considered to be the split-off entity since it is anticipated that ECI
will have greater market capitalization (based on the Opinion), ECI will have
greater asset value, ECI will retain more of the top management of the Company,
and ECI had greater net income for the nine months ended September 30, 1997.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Transaction had occurred at the beginning of the
periods indicated, nor is it necessarily indicative of future operating results
or financial position.
The summary historical and pro forma financial data should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company and ATN-VI, as of and for each of the three years in the period ended
December 31, 1996, the Company's and ATN-VI's unaudited consolidated condensed
interim financial statements and notes thereto as of September 30, 1997 and for
the nine months ended September 30, 1997 and 1996, the unaudited pro forma
consolidated condensed balance sheet of ECI as of September 30, 1997 and the
unaudited pro forma consolidated condensed statements of operations of ECI for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
all of which are included elsewhere in this Proxy Statement-Prospectus. All
dollar amounts are in thousands, except per share data.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF ECI
<TABLE>
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(3) 1996 1997 1997
-------- -------- -------- --------- --------- -------- ---------
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STATEMENT OF OPERATIONS
DATA:
Total revenue........... $143,362 $195,670 $216,917 $ 68,664 $165,237 $149,725 $ 54,027
Total expense........... 105,214 149,193 172,863 51,990 131,505 116,683 39,385
-------- -------- -------- -------- -------- -------- --------
Income from telephone
operations............. 38,148 46,477 44,054 16,674 33,732 33,042 14,642
Interest expense, net... 12,798 11,540 10,831 8,714 8,285 7,743 6,305
-------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes and
minority interest...... 25,350 34,937 33,223 7,960 25,447 25,299 8,337
Income taxes (1)........ 10,465 15,250 13,039 2,250 10,484 (739) (8,256)
-------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
minority interest...... 14,885 19,687 20,184 5,710 14,963 26,038 16,593
Minority interest....... (1,743) (2,477) (2,177) (81) (1,860) (1,358) 13
-------- -------- -------- -------- -------- -------- --------
Income from continuing
operations............. $ 13,142 $ 17,210 $ 18,007 $ 5,629 $ 13,103 $ 24,680 $ 16,606
======== ======== ======== ======== ======== ======== ========
Income per share from
continuing operations
(2).................... $ 0.51 $ 1.52
======== ========
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AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------- --------------------
PRO FORMA
1994 1995 1996 1997 1997
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BALANCE SHEET DATA:
Fixed assets, net....... $242,548 $226,660 $251,996 $251,648 $152,680
Total assets............ 340,113 371,939 389,324 391,819 218,420
Short-term debt
(including current
portion of long-term
debt).................. 19,249 24,841 30,095 29,217 23,450
Long-term debt, net..... 141,214 128,362 116,227 106,469 108,480
Stockholders' equity.... 114,861 130,956 149,791 174,471 56,770
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(1) In May 1997, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1,
1998) from 90% of Virgin Islands income taxes and 100% of Virgin Islands
gross receipts, excise and property taxes. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, the
Company has adjusted its deferred tax assets and liabilities to reflect the
change in tax rates applicable to Vitelco during the benefit period. This
change resulted in the Company recording a non-recurring credit to income
tax expense of approximately $10.9 million in the nine months ended
September 30, 1997.
(2)Historical income per share amounts have not been presented as this
information is not considered meaningful.
(3)Does not reflect the estimated pro-forma non-recurring loss of $55 million
on the split-off and fair valuation of the net assets of New ATN.
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RISK FACTORS
The following factors, in conjunction with the other information included in
this Proxy Statement-Prospectus (including the documents incorporated by
reference herein), should be considered by stockholders of the Company in
evaluating the matters presented herein.
RISKS RELATING TO THE TRANSACTION
Conditions to the Transaction. Consummation of the Transaction is
conditioned upon, among other things, (i) the completion of at least $17.4
million of long-term financing by ECI or ATN-VI to provide the funds needed by
the Company to repurchase certain shares of Company Common Stock owned by Mr.
Prior and the Trust, and (ii) no material adverse changes having occurred in
the businesses to be conducted by either New ATN or ECI after the Effective
Date. There can be no assurance that such conditions will be satisfied
favorably to the Company or at all. Even if all conditions are satisfied, Mr.
Prior, Mr. Prosser and the Company Board may, if they all agree, abandon,
defer or modify the Transaction at any time prior to the Effective Date. The
Company Board will not, however, consent to any changes in the terms of the
Transaction after the Transaction is approved by stockholders unless the
Company Board determines that such changes would not be materially adverse to
the Company's stockholders.
Less Diversification. After the Effective Date, each of ECI and New ATN will
be a smaller and less diversified company than the Company is prior to the
Effective Date. The operations and business of the Guyana Telephone &
Telegraph Company Limited ("GT&T"), which will be retained by New ATN, and the
operations and businesses of ATN-VI and its subsidiaries, which will be
acquired by ECI, are each subject to a number of separate and distinct risk
factors. After the Effective Date, each of these separate risk factors will
have a greater potential for adverse impact on New ATN or ECI individually
than they currently have on the combined operations of the Company. See "--
Risks Relating to New ATN" and "--Risks Relating to ECI."
Potential Disruptions in Operations. The division of the staff and
operations of the Company between ECI and New ATN may result in some temporary
dislocations and inefficiencies in the business operations of New ATN and ECI,
and may also result in the duplication of certain personnel, administrative
and other expenses required for the operation of ECI and New ATN as
independent companies. There can be no assurance that such transition in the
management of the current businesses of the Company will not disrupt, at least
temporarily, the operations of these businesses. Nevertheless, the Company
Board believes that the separation of the businesses of the Company between
New ATN and ECI will also result in long-term operating efficiencies as a
result of eliminating the difficulties and disagreements which have adversely
affected the Company's operations in the past and allowing the management of
ECI and New ATN and their respective subsidiaries to focus on their respective
businesses.
Repurchase Price for Mr. Prior's Stock. As a part of the Transaction, the
Company will repurchase 416,998 shares of Company Common Stock owned by Mr.
Prior and 348,564 shares of Company Common Stock owned by the Trust at a
repurchase price of $22.7284 per share, or $17,400,000 in the aggregate. The
repurchase price was determined by arm's length negotiations between Mr. Prior
and Mr. Prosser. At December 4, 1997, the closing market price for Company
Common Stock on the American Stock Exchange (the "AMEX") was $12 per share.
The repurchase price is also likely to be significantly higher than the market
price of Company Common Stock on the Effective Date.
Potential Responsibility for Liabilities Not Expressly Assumed. The
Subscription Agreement, the Indemnity Agreement and the Tax Sharing and
Indemnification Agreement allocate among New ATN and ECI responsibility for
various debts, liabilities and obligations of the Company. It is possible that
a court would disregard this contractual allocation of debts, liabilities and
obligations among the parties and require either New ATN or ECI or their
respective subsidiaries to assume responsibility for obligations allocated to
another party, particularly if such other party were to refuse or be unable to
pay or perform any of its allocated obligations.
Potential U.S. Federal Income Tax Liabilities. The Company has received the
Tax Ruling, a ruling letter from the Internal Revenue Service ("IRS") to the
effect that the Company's transfer of various of the assets and liabilities to
ECI and the distribution of ECI Common Stock to holders of Company Common
Stock and Class A
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Common Stock will be tax free for U.S. federal income tax purposes to the
Company and ECI and to such holders. Such a ruling, while generally binding
upon the IRS, is based upon certain facts and representations contained in the
Company's request for the Tax Ruling. If such facts or representations were to
be incomplete or untrue in any material respect, or if the facts upon which
the Tax Ruling was based are materially different from the facts at the time
of the Transaction, the IRS could modify or revoke its ruling retroactively.
Each of Mr. Prior, Mr. Prosser, New ATN and ECI has agreed to certain
restrictions on his or its future actions, including certain mergers or
acquisitions involving New ATN or ECI, certain stock issuances or redemptions
by New ATN or ECI, and discontinuances or dispositions of any of New ATN's or
ECI's businesses, which might jeopardize the tax-free treatment of the
Transaction for U.S. federal income tax purposes. See the discussion of the
Tax Sharing and Indemnification Agreement under "The Transaction--
Documentation for the Transaction."
If the distribution of ECI Common Stock were not to qualify as a tax free
distribution under Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code"), the Company would recognize taxable gain for U.S.
federal income tax purposes on the difference between the fair market value of
the ECI Common Stock distributed and the Company's adjusted tax basis in such
stock. Furthermore, if the distribution of ECI Common Stock were not to
qualify as a tax-free distribution under Section 355 of the Code, each holder
of Company Common Stock who received shares of ECI Common Stock in the
Transaction would be treated as if such holder received a taxable distribution
in an amount equal to the fair market value of the ECI Common Stock received,
which would result in (i) a dividend to the extent of such holder's pro rata
share of the Company's earnings and profits for 1997, which would include any
gain recognized by the Company on the distribution (the Company did not have
any accumulated earnings and profits as of the beginning of 1997); (ii) a
reduction in such stockholder's tax basis in Company Common Stock to the
extent that the amount received exceeded the amount referenced in clause (i);
and then (iii) gain from the sale or exchange of Company Common Stock to the
extent the amount received exceeded the sum of the amounts referenced in
clauses (i) and (ii). The result for Mr. Prosser would be a taxable capital
gain to the extent the fair market value of the ECI Common Stock received by
him exceeded his tax basis in his Class A Common Stock exchanged therefor. See
"The Transaction--Certain U.S. Federal Income Tax Consequences."
Uncertainty Regarding Trading Prices of and Markets for Stock Following the
Transaction. It is a condition to consummation of the Transaction that the
Common Stock of New ATN remain listed on the AMEX and that the ECI Common
Stock be listed on the AMEX. However, there is currently no public market for
the ECI Common Stock, and the Company Common Stock currently represents an
investment in a larger and more diversified company than New ATN will be
immediately after the Effective Date. ECI and New ATN will each have a smaller
number of shares outstanding and a smaller market capitalization than the
Company currently has. There can be no assurance that a public trading market
will continue for New ATN Common Stock or will develop for ECI Common Stock
or, assuming such public trading markets develop, as to the prices at which
New ATN Common Stock or ECI Common Stock will trade after the Effective Date.
Upon completion of the Transaction, the market prices of ECI Common Stock and
New ATN Common Stock may be influenced by many factors, including the depth
and liquidity of the market for each of these stocks, investor perceptions of
ECI and of New ATN and general economic and other conditions. There also can
be no assurance as to whether the combined market value after the Effective
Date of one share of ECI Common Stock and 0.4 of a share of New ATN Common
Stock will be less than, equal to or greater than the market value of one
share of Company Common Stock prior to the Effective Date. Until shares of ECI
Common Stock and New ATN Common Stock are fully distributed and an orderly
market develops, the prices at which trading in such shares occurs may
fluctuate significantly.
RISKS RELATING TO NEW ATN
Sole Dependence on GT&T. Following the Effective Date, New ATN will continue
to own 80% of the outstanding capital stock of GT&T, and GT&T will be New
ATN's only operating subsidiary and the only source of New ATN's revenues and
income.
Regulatory Risks. Many aspects of GT&T's business and operations are subject
to regulation by the Guyana Public Utilities Commission (the "PUC"). Since
GT&T's commencement of operations as a subsidiary
15
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of the Company in 1991, GT&T has had delays and difficulties in obtaining from
the PUC the rate increases that GT&T believed it was entitled to receive under
applicable Guyana law. The PUC has also issued orders prohibiting GT&T from
paying advisory fees and intercompany debt to the Company, and there are
currently pending before the Guyana courts proceedings with respect to these
matters. There is also pending an appeal by the PUC from a court order
invalidating a PUC rate decrease order. In October 1997 the PUC ordered GT&T
substantially to expand its network and to provide a variety of new services
to subscribers.
The PUC is currently holding hearings on a complaint by the Guyana
government with regard to the failure of GT&T to complete an expansion plan
which was established in connection with the commencement of GT&T's operations
as a subsidiary of the Company in January 1991. These proceedings could result
in monetary penalties to GT&T, cancellation of its license as the sole
telecommunications carrier in Guyana or other action by the PUC or the
government of Guyana which could have a material adverse effect on GT&T's
business and prospects. There can be no assurance that any of these actions
will be resolved favorably to the Company. See "Business and Properties of New
ATN--Regulation." 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
Transaction as a result of a termination of the License, the IRS might revoke
the Tax Ruling retroactively, with the result that the distribution of ECI
Common Stock might not be tax free for U.S. federal income tax purposes to the
Company and the holders of Company Stock and Class A Common Stock. See "The
Transaction--Certain U.S. Federal Income Tax Consequences."
In August 1997, the United States FCC adopted a future mandatory settlement
rate benchmark for countries, including Guyana, which is significantly less
than the current settlement rate, and the FCC stated that it expects U.S.
licensed carriers to negotiate annual reductions in rates. Any significant
reduction in the international accounting rate for U.S.--Guyana traffic could
have a significant adverse impact on GT&T's earnings. See "Business and
Properties of New ATN--Regulation--FCC Matters".
The United States FTC has pending a proceeding to consider expanding its
definition of "pay per call" services to include audiotext services such as
those which GT&T terminates in Guyana. While it is unclear what the exact
impact of expanding this definition would be, it might effectively bar
audiotext traffic from the U.S. to foreign carriers such as GT&T. See
"Business and Properties of New ATN--Regulation--FTC Matters".
Political Risks. The Company's presence in Guyana exposes it to potential
economic and political risks. Since 1985, Guyana has been making the
transition to a market economy with private industry from a socialist system
with nationalized industry which was in effect since the mid-1970s. Although
the country is rich in natural resources, it has had a low per-capita gross
national product and substantial unemployment. Guyana was governed from 1968
until 1992 by a single political party, the PNC. It was under this party that
industry was nationalized in the mid-1970s and that the basic steps to change
to a market economy were made between 1985 and 1992. One of the most
significant of these steps was the transfer of the operations of the country's
monopoly telephone company from government ownership to GT&T in January 1991.
In October 1992, elections were held in Guyana and a new government,
consisting of a coalition of the PPC and Civic parties and headed by Dr.
Cheddi Jagan, came to power. That government has been less active than the
previous government in seeking to privatize government-owned businesses and to
encourage foreign private investment. Dr. Jagan died in March, 1997. He was
succeeded as President by Mr. Samuel Hinds, the Prime Minister and the head of
the Civic party (which is by far the smaller of the two parties in the
government coalition), and Mrs. Janet Jagan, Dr. Jagan's widow, became Prime
Minister. Under the Guyana constitution, new elections must be held by the end
of 1997.
When the Company made its initial investment in Guyana in 1991, the Company
obtained political risk insurance for its investment from the Overseas Private
Investment Corporation ("OPIC"), an agency of the U.S. government. While OPIC
has never, to the Company's knowledge, formally announced that it has
suspended writing political risk insurance for U.S. investments in Guyana, it
is the Company's understanding that OPIC ceased providing such insurance
around the beginning of 1993 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.
16
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Separately, in December 1996, OPIC canceled the Company's political risk
insurance because of OPIC's objections to GT&T's provision of
telecommunications services to international audiotext providers, and the
Company was able to obtain other political risk insurance with respect to its
investment in GT&T in the private insurance market at substantially higher
rates than the Company had received from OPIC. These 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 and does not insure against loss of future
revenues or profits. See "Business and Properties of New ATN--Political Risk
Insurance."
Audiotext Traffic Risks. A substantial portion of New ATN's revenues have
been derived from GT&T's provision of telecommunication services to
international audiotext providers. GT&T is one of many companies around the
world which provides such services. The business is highly competitive, and
GT&T's revenues and profits from this traffic have declined substantially in
1997. 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 that offers higher compensation or better service.
A substantial portion of GT&T's audiotext business comes from two service
bureaus which act as intermediaries with many other audiotext providers.
GT&T's profit margins for these services have been declining and may decline
further as a result of competition from other foreign carriers, regulatory
pressures from the Federal Communications Commission ("FCC") to reduce the
rates paid by U.S. carriers to GT&T for the portion of this traffic that
originates in the United States, future regulation by the FCC of the portion
of the traffic that originates in the United States, pressure from foreign
carriers for receiving carriers such as GT&T to bear a portion of the
relatively high risk of non-collection for audiotext calls which have
heretofore been borne by the sending carriers, activities of one foreign
carrier in mislabeling the origin of certain traffic, and the strength of the
U.S. dollar against various foreign currencies.
A substantial portion of the audiotext traffic is sexual in nature. As a
result, GT&T has from time to time been subject to criticism and pressure from
governmental and other sources in Guyana to limit or discontinue carrying such
traffic. See "Business and Properties of New ATN--International Traffic."
In connection with the Opinion, with the intention of being conservative in
view of the volatile nature and many uncertainties which affect audiotext
revenues and profit margins (including substantial competition which impacts
on GT&T's volume of audiotext traffic and the profitability of that traffic
and regulatory proceedings which seek to reduce the rates paid to GT&T and to
eliminate audiotext traffic of a sexual nature (See "Risk Factors--Risks
Relating to New ATN--Regulatory Risks")), the management of the Company
furnished to Prudential Securities projections which projected that GT&T's
operating results from audiotext traffic would continue to sharply decline in
1998 and the next two years. However, because of these same uncertainties, the
Company is unable to predict whether this decline will in fact occur. See
"Business and Properties of New ATN--International Traffic." A continued
decline in audiotext results would have a material adverse impact on New ATN's
total revenues and (unless offset by an increase in GT&T's regulated rates) on
New ATN's cash flows and earnings. As is discussed below under "Business and
Properties of New ATN--Regulation," GT&T is entitled under the GT&T Agreement
and the PUC Law to a minimum return of 15% per annum on its rate base.
However, there can be no assurance as to whether or when GT&T would receive
any rate increase which might be warranted by a continuing decline in
operating results from audiotext traffic. The failure of GT&T to receive such
a rate increase, if accompanied by the projected decline in operating results
from audiotext traffic, could have a material adverse effect on New ATN's
financial condition and results of operations.
Currency Risks. From February 1991 until early 1994, the Guyana dollar
remained relatively stable at the rate of approximately 125 to the U.S.
dollar. In 1994, the Guyana dollar declined in value to approximately 142 to
the U.S. dollar, and it has remained relatively stable at approximately that
rate since 1994. Although the majority of GT&T revenues and expenditures are
transacted in U.S. dollars or other hard currencies, GT&T's results of
operations nevertheless could be adversely affected by a devaluation of the
Guyana dollar unless and until GT&T obtained regulatory permission to adjust
its rates to local subscribers for such devaluation. Following a significant
devaluation of the Guyana dollar in January 1991, GT&T encountered substantial
regulatory delays in obtaining permission to adjust its rates. See "Business
and Properties of New ATN--Regulation--PUC Law and Telecommunications Law."
The Company has not in the past, and has no plans for the future, to hedge
against this currency risk.
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Tax Issues. Since March 1997, the government of Guyana has levied two
substantial tax assessments against GT&T (for $3.9 million and $14 million,
respectively) and initiated an audit with respect to payments by GT&T to
international audiotext providers with an advance public announcement that the
audit could result in an assessment against GT&T of as much as $40 million in
back taxes. While one of these assessments and the audit have been stayed
pending the determination of applications made by GT&T to the Guyana High
Court, no assurance can be given as to the ultimate outcome of these issues.
See "Business and Properties of New ATN--Taxation--Guyana."
Capital Resources. If and when New ATN settles outstanding issues with the
Guyana government and the PUC with regard to GT&T's expansion plan and its
rates for service, or if a recent order of the PUC requiring a substantial
expansion of GT&T's facilities comes into effect, GT&T may require substantial
external financing to enable GT&T to further expand its telecommunications
facilities. There can be no assurance that New ATN or GT&T will be able to
obtain any such financing.
Control by a Single Stockholder. After the Effective Date, Cornelius B.
Prior, Jr. will own approximately 57% of the New ATN Common Stock then
outstanding. As a result, he will have the power to significantly control the
affairs of New ATN, including to amend New ATN's Certificate of Incorporation,
to elect all of its directors, to effect fundamental corporate transactions
such as mergers, acquisitions, asset sales and the sale of New ATN and
otherwise direct New ATN's business and affairs without the approval of any
other stockholder.
Future Acquisitions. It is the intention of Mr. Prior, as the controlling
stockholder of New ATN, after the Effective Date to endeavor to expand New
ATN's operations through the acquisition of other telecommunications
businesses, primarily in the Caribbean region. New ATN cannot predict whether
it will be successful in pursuing such acquisition opportunities or what the
consequences of any such acquisition would be. The evaluation and negotiation
of such business acquisitions may involve significant expenditures by New ATN.
There can be no assurance that New ATN will be able to acquire or successfully
integrate any such businesses, and acquisitions that are consummated may
involve the incurrence of significant amounts of debt by New ATN and/or the
dilution of existing stockholders' interests in New ATN through the issuance
of additional shares of New ATN capital stock. In addition, pursuant to the
terms of the Tax Sharing Agreement, each of Mr. Prior and New ATN have agreed
to certain restrictions on his or its future actions which may limit the
ability of New ATN to pursue certain future acquisitions. See "The
Transaction--Certain U.S. Federal Income Tax Consequences--Disqualifying
Acquisitions."
Accounting Treatment. After the Transaction, the net assets of New ATN will
be adjusted to their fair value based on the average market price of New ATN
common stock during a short period after the Effective Date. This adjustment
is likely to reduce the carrying value of New ATN's fixed assets significantly
below their historical cost and replacement value; and significantly reduce
New ATN's charges for depreciation after the Effective Date. The New ATN Pro
Forma Financial Data included elsewhere herein assumes, for purposes of
determining such fair value, that such average price of New ATN common stock
will be $9.23 per share, which is the midpoint in the range of implied values
for New ATN common stock determined by Prudential Securities in connection
with the Opinion (See "The Transaction--Opinion of Investment Banker") and
represents management's current best estimate of fair value. Based on such
assumption, the New ATN Pro Forma Financial Data reflects a pro forma
reduction of net fixed assets of approximately $70.3 million, from $99.4
million to $29.0 million and a pro forma reduction in depreciation expense of
approximately $3.1 million for the year ended December 31, 1996 and
approximately $2.3 million for the nine months ended September 30, 1997. See
"New ATN Pro Forma Financial Data." The reduction in net fixed assets and
depreciation expense may be greater or less than that reflected in the New ATN
Pro Forma Financial Data if the actual average market price of New ATN common
stock is less or greater, respectively, than the $9.23 per share assumed for
purposes of such pro forma data.
RISKS RELATING TO ECI
Sole Dependence on Virgin Islands Operations. Following the Effective Date,
ECI will own all of the outstanding capital stock of ATN-VI, which in turn
will own all of the outstanding capital stock of the Virgin Islands Telephone
Corporation ("Vitelco") and 90% of the outstanding capital stock of Vitelcom
Cellular, Inc. ("VitelCellular") and will continue to conduct directly the
business currently conducted by Vitelcom, Inc. ("Vitelcom"). These companies,
which currently conduct all of the Company's operations in the Virgin Islands,
will be ECI's only operating subsidiaries.
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Regulatory Risks. Vitelco's local telephone operations, including the
services offered and the rates for these services, are subject to the
jurisdiction of the U.S. Virgin Islands Public Service Commission (the "PSC").
Since 1987 when the Company acquired Vitelco, each time the PSC has dealt with
Vitelco's rates for local service, rates have been reduced as a result of
settlement agreements between Vitelco and PSC. The latest agreement provided
that Vitelco's local rates would remain unchanged until January 1, 1995 at the
earliest, and that either Vitelco or the PSC could initiate proceedings to
change local rates with effect after that date. See "Business and Properties
of ECI--Regulation."
In May 1997, Vitelco received a five year rebate of 90% of its Virgin
Islands income taxes and 100% of its Virgin Islands gross receipts, excise and
property taxes from the Virgin Islands Industrial Development Commission to
assist Vitelco in recovering these Hurricane-related costs without a rate
increase. On October 9, 1997 the Virgin Islands' Public Service Commission
instituted a proceeding to determine whether Vitelco's rates were just and
reasonable in light of this tax rebate. There can be no assurance as to the
outcome of this proceeding.
The Telecommunications Act of 1996 has eliminated Vitelco's legally
protected monopoly as the sole provider of wired local telephone service in
the U.S. Virgin Islands. There can be no assurance that Vitelco will
successfully compete in a more open market. The 1996 Act also requires local
exchange carriers such as Vitelco to provide various services to competitive
carriers for compensation to be fixed by the local public service commission.
There can be no assurance that Vitelco will receive adequate compensation for
providing these services. See "Business and Properties of ECI--Competition."
Wind Storm Risks. Although the U.S. Virgin Islands are in an area where
hurricanes frequently occur, from 1928 until 1989 they escaped any substantial
hurricane damage. Vitelco's outside plant suffered substantial damage in
September 1989 from Hurricane Hugo, and again in September 1995 from Hurricane
Marilyn. Capital expenditures by Vitelco to repair and upgrade its facilities
following these two hurricanes amounted to approximately $60 million following
Hurricane Hugo and approximately $41 million following Hurricane Marilyn. The
Company recently obtained insurance coverage for damage caused by windstorm to
its outside plant in the amount of $30 million per storm and $55 million in
the aggregate.
Control by a Single Stockholder. After the Effective Date, Jeffrey J.
Prosser will own approximately 52% of the ECI Common Stock then outstanding.
As a result, he will have the power to significantly control the affairs of
New ATN, including to amend ECI's Certificate of Incorporation, to elect all
of its directors, to effect fundamental corporate transaction, such as
mergers, acquisitions, asset sales and the sale of ECI and otherwise direct
ECI's business and affairs without the approval of any other stockholder.
Future Acquisitions. It is the intention of Mr. Prosser, as the controlling
stockholder of ECI, after the Effective Date to endeavor to expand ECI's
operations through the acquisition of other businesses. ECI cannot predict
whether it will be successful in pursuing such acquisition opportunities or
what the consequences of any such acquisition would be. The evaluation and
negotiation of such business acquisitions may involve significant expenditures
by ECI. There can be no assurance that ECI will be able to acquire or
successfully integrate any such businesses, and acquisitions that are
consummated may involve the incurrence of significant amounts of debt by ECI
and/or the dilution of existing stockholders' interests in ECI through the
issuance of additional shares of ECI capital stock. No assurances can be given
that any such acquisitions will be consummated or that, if completed, they
will be successful. Furthermore, there can be no assurance that ECI's
management will be able to manage effectively any resulting business or that
any acquisition will benefit ECI. Depending upon the nature, size and timing
of acquisitions, ECI may be required to raise financing. There can be no
assurance that the Credit Facility, or any other loan agreements to which ECI
may become a party will permit such additional financing or that such
additional financing will be available to ECI on terms acceptable to its
management or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of ECI--Liquidity and Capital Resources."
In addition, pursuant to the terms of the Tax Sharing Agreement, each of Mr.
Prosser and ECI have agreed to certain restrictions on his or its future
actions which may limit the ability of ECI to pursue certain future
acquisitions. See "The Transaction--Certain U.S. Federal Income Tax
Consequences--Disqualifying Acquisitions."
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THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement-Prospectus is being furnished to the stockholders of
Atlantic Tele-Network, Inc. in connection with the solicitation of proxies by
the Company Board from holders of record of the Company's outstanding shares
of Company Common Stock, as of the close of business on November 18, 1997 (the
"Record Date") for use at the Special Meeting of Stockholders of the Company
(the "Special Meeting") to be held on December 30, 1997 at the time and place
specified in the accompanying Notice of Special Meeting of Stockholders, or
any adjournment or postponement thereof. This Proxy Statement-Prospectus is
first being mailed to the Company stockholders on or about December 9, 1997.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to consider and vote upon the proposed
Transaction including: (a) the approval and adoption of the Subscription
Agreement, as a result of which (i) the Company's business and operations in
the Virgin Islands will be owned and operated by ECI, and (ii) the Company's
business and operations in Guyana will continue to be owned and operated by
the Company; (b) the approval and adoption of the Repurchase and
Recapitalization Agreement pursuant to which the Company will repurchase
418,998 shares of Company Common Stock owned by Mr. Prior and 348,564 shares
of Company Common Stock owned by the Trust at a repurchase price of $22.7284
per share, Mr. Prior will exchange all of his remaining 2,927,038 shares of
Company Common Stock for a like number of shares of a new class of common
stock of the Company to be designated Class B Common Stock and Mr. Prosser
will exchange all of his 3,325,000 shares of Company Common Stock for a like
number of shares of a new class of common stock of the Company to be
designated Class A Common Stock; (c) the approval and adoption of the Merger
Agreement pursuant to which (i) Mergerco will be merged with and into the
Company, (ii) each share of Company Common Stock (but not the newly created
Class A Common Stock and Class B Common Stock to be issued prior to the
Merger) will be converted into the right to receive four-tenths (0.4) of a
share of Company Common Stock and one share of ECI Common Stock, (iii) the
outstanding shares of Class A Common Stock of the Company will be converted
into the right to receive in the aggregate 5,704,231 shares of ECI Common
Stock and (iv) the outstanding shares of Class B Common Stock of the Company
will be converted into the right to receive in the aggregate 2,807,040 shares
of Company Common Stock; (d) the approval of the Charter Amendment which will
create and authorize the Company Class A Common Stock and the Company Class B
Common Stock to be issued prior to the Merger to Mr. Prosser and Mr. Prior
pursuant to the Recapitalization Agreement; (e) the approval of (i) the Non-
Competition Agreement, (ii) the Indemnity Agreement, (iii) the Technical
Assistance Agreement, (iv) the Tax Sharing and Indemnification Agreement and
(v) the Employee Benefits Agreement; and (f) the approval of the transactions
contemplated by the foregoing agreements and the Charter Amendment.
The purpose of the Special Meeting also is to transact such other business,
including, without limitation, the adjournment of the Special Meeting
(including an adjournment of the Special Meeting to allow for the fulfillment
of certain conditions precedent to the Transaction) as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The Subscription Agreement, Recapitalization Agreement, Merger Agreement,
Charter Amendment, Non-Competition Agreement, Indemnity Agreement, Technical
Assistance Agreement, Tax Sharing and Indemnification Agreement and Employee
Benefits Agreement will all be voted upon together as part of the Transaction,
and none of these agreements will be effected unless the Transaction as a
whole is approved at the Special Meeting.
Each copy of this Proxy Statement-Prospectus mailed to the Company
stockholders is accompanied by a form of proxy for use at the Special Meeting.
This Proxy Statement-Prospectus is also being furnished to the Company
stockholders as a prospectus of ECI with respect to the shares of ECI Common
Stock issuable to the Company stockholders upon consummation of the Merger.
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COMPANY BOARD RECOMMENDATION
THE COMPANY BOARD (WITH MR. PROSSER AND MR. PRIOR ABSTAINING) RECOMMENDS
THAT THE COMPANY STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
TRANSACTION.
VOTING RIGHTS AND PROXY INFORMATION
Only holders of record of shares of the Company Common Stock as of the close
of business on November 18, 1997 (the "Record Date") will be entitled to
notice of and to vote at the Special Meeting. On the Record Date 12,272,500
shares of the Company Common Stock were outstanding. Each share of Company
Common Stock entitles the holder thereof as of the Record Date to one vote on
each matter to be considered at the Special Meeting. The holders of at least a
majority of the outstanding shares of the Company Common Stock as of the
Record Date must be present in person or represented by proxy at the Special
Meeting in order to establish a quorum for the consideration of the
Transaction or for the transaction of any additional business to properly come
before the Special Meeting (except as may otherwise be provided by applicable
law, the Certificate of Incorporation or the Company's By-laws) at the Special
Meeting.
Approval and adoption of the Transaction by the Company stockholders at the
Special Meeting requires the affirmative vote of holders of a majority of the
outstanding shares of the Company Common Stock as of the Record Date. Any
other business to properly come before the Special Meeting (except as
otherwise provided by applicable law, the Certificate of Incorporation or the
Company's By-laws) will require the affirmative vote of holders of a majority
of the shares of the Company Common Stock present in person or by proxy at the
Special Meeting. Abstentions will be counted for purposes of determining the
presence or absence of a quorum at the Special Meeting. Broker non-votes
(which occur when brokers holding shares as nominees for their customers do
not have authority to vote on a matter absent specific instructions from the
beneficial owners of the shares) will be counted for purposes of determining
the presence or absence of a quorum at the Special Meeting. Because approval
of the Transaction requires the affirmative vote of the majority of the
outstanding shares of the Company Common Stock, abstentions, broker non-votes
and failures to vote in person or by proxy at the Special Meeting will have
the effect of votes against the Transaction. With respect to all other
business to properly come before the Special Meeting, abstentions, broker non-
votes and failures to vote shares represented and entitled to vote will have
the effect of votes cast against.
Cornelius B. Prior, Jr. and Jeffrey J. Prosser, holders of voting authority
over 3,692,600 and 3,011,250 shares of the Company Common Stock, respectively,
as of the Record Date, have agreed to vote all such shares in favor of the
Transaction. Because such shares will represent more than a majority of the
outstanding shares of the Company Common Stock as of the Record Date, it thus
is expected that the requisite vote as described in the immediately preceding
paragraph will be effectively secured.
Stockholders of record as of the Record Date are entitled to cast their
votes, in person or by properly executed proxy, at the Special Meeting. All
shares of the Company Stock represented at the Special Meeting by properly
executed proxies received prior to the Special Meeting, unless properly
revoked, will be voted at the Special Meeting in accordance with the
instructions indicated on such proxies. IF A PROXY IS SIGNED AND RETURNED BY A
HOLDER OF THE COMPANY STOCK WITHOUT INDICATING ANY VOTING INSTRUCTIONS, THE
SHARES OF THE COMPANY STOCK REPRESENTED BY SUCH PROXY WILL BE VOTED FOR
APPROVAL AND ADOPTION OF THE TRANSACTION. Any proxy given by a Company
stockholder pursuant to this solicitation may be revoked by the person giving
it at any time before the proxy is voted by (a) filing with the Secretary of
the Company, at or before the Special Meeting, a written notice of revocation
bearing a date later than the date of the proxy; (b) duly executing a
subsequent proxy relating to the same shares and delivering it to the
Secretary of the Company before the Special Meeting; or (c) attending the
Special Meeting and voting in person (although attendance at the Special
Meeting will not in and of itself constitute a revocation of a proxy).
The Company Board is not aware of any business to be acted upon at the
Special Meeting other than as described in this Proxy Statement-Prospectus.
If, however, other business is properly brought before the Special
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<PAGE>
Meeting, the persons appointed as proxies or their substitutes will have
discretion to vote or act thereon according to their best judgment and
applicable law unless the proxy indicates otherwise, except that no proxy that
directs the proxy holders to vote the shares represented thereby against, or
to abstain from voting on, the Transaction shall be voted in favor of any
adjournment or postponement of the Special Meeting.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
SOLICITATION OF PROXIES
In connection with the Special Meeting, proxies are being solicited by and
on behalf of the Company Board. In addition to solicitation by use of the
mails, proxies may be solicited by directors, officers and employees of the
Company in person, by telephone, telegram or other means of communication.
Such directors, officers and employees will not be specifically compensated
for such services but may be reimbursed for out-of-pocket expenses in
connection with such solicitation. Arrangements will be made with brokerage
houses, nominees, fiduciaries and custodians for forwarding of proxy
solicitation materials to beneficial owners of the Company Stock held of
record by such persons, and the Company may reimburse such nominees,
fiduciaries and custodians for their reasonable expenses incurred in
connection therewith.
All expenses of the solicitation of proxies from the Company stockholders in
connection with the Special Meeting will be borne by the Company. However, ECI
must reimburse the Company for 50% of all such expenses if the Transaction is
consummated. See "The Transaction--Expenses."
NO APPRAISAL RIGHTS
The stockholders of the Company will not be entitled to any appraisal rights
under Delaware law in connection with the Transaction and the Merger.
ADJOURNMENT OF THE SPECIAL MEETING
If the Special Meeting is adjourned to another time and place, notice of the
adjourned meeting will not be given if the time and place of the adjourned
meeting are announced at the Special Meeting. If the adjournment is for more
than 30 days, or if after the adjournment the Company Board fixes a new record
date for the adjourned meeting, a notice of the Special Meeting will be given
to each of the Company's stockholders of record entitled to vote at the
adjourned meeting.
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<PAGE>
THE TRANSACTION
BACKGROUND AND REASONS FOR THE TRANSACTION
The Company Board has determined, for the reasons set forth below, that the
long-term prospects of the Company's businesses will be improved if the
Company is divided into two separate publicly-owned companies.
The Company's two principal stockholders and co-chief executive officers,
Mr. Prior and Mr. Prosser, organized the Company in 1987 to acquire the Virgin
Islands Telephone Corporation ("Vitelco"). Under the joint leadership of Mr.
Prior and Mr. Prosser, the Company completed that acquisition, refinanced its
acquisition debt, substantially rebuilt Vitelco's telephone network following
devastating destruction from Hurricane Hugo in September 1989, acquired an 80%
equity interest in GT&T in January 1991 and successfully completed an initial
public offering of the Company Common Stock in November 1991.
Since early 1993, material disagreements have arisen between Mr. Prior and
Mr. Prosser pertaining to the management and direction of the Company and its
businesses. These disagreements related to many aspects of the Company's
business, including: (i) the merits of various acquisition opportunities, (ii)
the level of expenditures for acquisition exploratory efforts, (iii) the
timing and structuring of long term financing for the Company, (iv) strategy
and tactics in dealing with regulatory issues in the Virgin Islands and Guyana
and before the FCC, (v) strategy and tactics in dealing with litigation
involving the Company, (vi) whether and how to sell or terminate the Company's
former business of providing cellular telephone services to ships in coastal
waters, (vii) whether and how to sell or terminate the Company's former long
distance telephone business in the Virgin Islands, (viii) how to sell or
terminate the Company's former long distance telephone business in Puerto
Rico, and (ix) whether to enter the cable television business or the business
of "wireless cable television" distribution in the Virgin Islands, and (x) a
number of executive personnel issues.
These disagreements created a management deadlock which resulted in
extensive litigation between Mr. Prior and Mr. Prosser from June 1995 to
February 1996 and has significantly impaired the Company's ability to function
other than in the ordinary course of business. The management deadlock has
hindered strategic and corporate planning and hiring of employees relating to
the Company's businesses and has contributed to the Company's failure to
complete any additional significant acquisitions or to undertake any other
major initiatives out of the ordinary course of business (other than Vitelco's
making major repairs to its telecommunications network following damage from a
hurricane in September 1995). Since October 1993, Mr. Prosser, Mr. Prior and
the Company Board have devoted considerable time and effort to resolving these
differences, with limited success.
In early February 1996, Mr. Prior and Mr. Prosser entered into a Global
Settlement Agreement and Release in which they agreed to terminate, settle
with prejudice and release all claims they had against each other and the
other parties to such litigation, without admitting any wrongdoing or
liability. In connection with this settlement, the Company hired two
nationally recognized investment banking firms, Prudential Securities
Incorporated and PaineWebber Incorporated, to find an acquirer for the
Company. After contacting 36 potential acquirers, it became apparent by the
latter part of 1996 that an acquirer for the Company as a whole or any
substantial part of the Company on economically attractive terms could not be
found. Shortly thereafter, on January 29, 1997, Mr. Prosser, Mr. Prior and the
Company Board approved a Principal Terms Agreement (the "Principal Terms
Agreement") for the Transaction, the consummation of which will result in two
separate public companies: ECI, which will own all of the Company's Virgin
Islands operations and will be controlled by Mr. Prosser; and New ATN which
will continue to own the Company's Guyana operations and will be controlled by
Mr. Prior.
The basic economic terms of the Transaction were established by arms-length
negotiation between Mr. Prosser and Mr. Prior. The major objective of these
negotiations was that as a result of the consummation of the Transaction: (i)
Mr. Prosser and Mr. Prior would not have any economic interest in the company
controlled by the other; (ii) the public stockholders of the Company would not
have any reduction in their economic interest in
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<PAGE>
the Company's businesses as a result of the Transaction; and (iii) the agreed
value received or retained in the Transaction by each of Mr. Prosser, Mr.
Prior, and the public stockholders would be equal to the agreed value of their
current respective interests in the Company's businesses. In these
negotiations, Mr. Prosser and Mr. Prior recognized that the value of the
Company's businesses to be transferred to ECI in the Transaction would
significantly exceed the value of the businesses to be retained by New ATN,
and that immediately prior to the consummation of the transaction, the
outstanding shares of Company Common Stock would be held as follows:
<TABLE>
<S> <C>
Mr. Prior............................ 3,692,600 shares
Mr. Prosser.......................... 3,325,000 shares
Others............................... 5,254,900 shares
-----------------
TOTAL.............................. 12,272,500 shares
</TABLE>
The foregoing share ownership numbers include as shares owned by Mr. Prior and
Mr. Prosser, respectively, shares owned by the Trust and by Mr. Prosser's
children and certain additional shares as to which Mr. Prosser holds an option
to purchase.
By arm's length negotiation during late 1996 and January 1997, Mr. Prosser
and Mr. Prior reached agreement that the Company's Virgin Islands operations
had a value equivalent to $13.00 per share of Company Common Stock and that
the Company's Guyana operations had a value of $9.48 per share of Company
Common Stock. On this basis, the value of Mr. Prior's interest in the
Company's Guyana operations was approximately $31,500,000, the value of Mr.
Prior's interest in the Company's Virgin Islands operations was approximately
$48,000,000, and for Mr. Prior to receive securities in the Transaction
equivalent to the interest in the Virgin Islands operations which he then
owned, he would need to receive $16.5 million in value of securities in the
company (ECI) which would own the Company's Virgin Islands operations. At
$13.00 per share, this would have amounted to approximately 1,269,000 shares
or slightly in excess of 10% of the ECI Common Stock to be outstanding after
consummation of the Transaction.
On January 29, 1997, the Company Board, including Mr. Prior and Mr. Prosser,
unanimously approved the Principal Terms Agreement, establishing basic terms
for the Transaction. The Principal Terms Agreement provided that the Company
would transfer to a newly-organized corporation substantially the same assets
and liabilities as are to be transferred to ECI in the Transaction and that
the stock of this newly-organized corporation would be distributed to the
stockholders in such fashion that Mr. Prior would own or control approximately
60% of the outstanding voting securities of the Company and Mr. Prosser would
own or control approximately 60% of the outstanding voting securities of the
newly-organized corporation. Under the Principal Terms Agreement, Mr. Prosser
or the newly organized corporation was to purchase from Mr. Prior for
$16,500,000 the approximately 1,269,000 share interest in the newly-organized
corporation which Mr. Prior would otherwise have been entitled to receive in
the Transaction. The Principal Terms Agreement also specifically contemplated
that the purchase by Mr. Prosser of Mr. Prior's excess shares would be treated
as long term capital gain for income tax purposes. The Principal Terms
Agreement contained summary provisions, substantially the same in purpose and
intent as the Subscription Agreement and Exhibits thereto attached to this
Proxy Statement--Prospectus, with regard to closing adjustments, the
allocation of employees between the Company and the newly-organized
corporation, responsibility for unknown or contingent liabilities, non-
competition by Mr. Prosser with the Company in the audiotext business, use of
the name "Atlantic Tele-Network, Inc." and a prohibition on Mr. Prior from
acquiring more than 5% of the outstanding voting securities of ECI and on Mr.
Prosser from acquiring more than 5% of the outstanding voting securities of
the Company. Although, the Principal Terms Agreement expired by its terms on
March 31, 1997, Mr. Prosser and Mr. Prior continued thereafter to negotiate
the agreements for the Transaction.
Subsequent to the execution of the Principal Terms Agreement, Mr. Prosser
determined that ECI, rather than he personally, should obtain the financing
for the funds needed to purchase Mr. Prior's excess interest in the Company as
contemplated by the Principal Terms Agreement, and there was a concern that a
sale by Mr. Prior of his interest to Mr. Prosser would be inconsistent with
the transaction qualifying as a tax-free spin-off for
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<PAGE>
U.S. federal income tax purposes. Accordingly, three refinements were made to
the terms of the Transaction as established by the Principal Terms Agreement:
first, the Company, with funds borrowed by ECI or its subsidiary ATN-VI, is to
repurchase the excess interest which Mr. Prior currently holds in the Company,
and this repurchase will be taxable to Mr. Prior as ordinary income to the
extent of the earnings and profits of the Company for 1997 (and for 1998 if
the Transaction does not close in 1997), rather than being taxable entirely as
long-term capital gain (this change appears to be consistent with the
transaction qualifying as a tax-free spin-off); second, the price to be paid
to Mr. Prior was increased to $17.4 million to compensate for the additional
income taxes estimated to be payable by Mr. Prior in respect of this
repurchase (to accomplish the price increase, the agreed value of the
Company's Virgin Islands operations was increased from $13.00 to $13.2484 per
share of the Company Common Stock); and third, the number of shares in ECI to
be held by Mr. Prosser immediately after the transaction was reduced from
7,017,600 (58%) to 5,704,231 (52%) to reflect the fact that ECI, rather than
Mr. Prosser personally, would be financing the Company's acquisition of Mr.
Prior's excess shares. The economic effect on ECI and its stockholders of this
reduction in the number of ECI shares is the same as if ECI had issued one
share for each outstanding share of the Company and then repurchased 1,313,369
shares of ECI Common Stock at $13.2484 per share. The repurchase price to be
paid to Mr. Prior and the Trust is $22.7284 per share of Company Common Stock
(i.e. the sum of the agreed values of $9.48 and $13.2484 for the Company's
Guyana and Virgin Islands operations). These values were established by arms-
length bargaining between Mr. Prosser and Mr. Prior.
In negotiating and agreeing on these values, Mr. Prosser and Mr. Prior each
relied on his own knowledge of the business and affairs of the Company. They
each took note of the fact that the shares of the Company common stock traded
at prices in excess of $22.7284 per share on many days in 1996, during the
period when the Company was seeking to find an acquiror. No detailed financial
analysis of the values of the Company's Guyana or Virgin Islands operations
was prepared by Mr. Prior or Mr. Prosser in connection with their negotiations
of these values, and neither of them was assisted in these negotiations by any
professional financial advisor. The agreed values established by Mr. Prosser
and Mr. Prior as outlined above are indicative only of the intrinsic values
each of them place on the assets and businesses of the Company. They are not
necessarily indicative of what the market price of Company Common Stock, New
ATN Common Stock or ECI Common Stock will be immediately prior to the
Transaction, immediately after the Transaction or at any other time. The
agreed value of $13.2484 per share of Company Common Stock for the Company's
Virgin Islands operations is within the range of implied per share values
($7.12 to $14.92) determined by Prudential Securities in arriving at the
Opinion discussed under "Opinion of Investment Banker" below, while the agreed
value of $9.48 per share of Company Common Stock for the Company's Guyana
operations is significantly higher than the implied per share value determined
by Prudential Securities for the New ATN Common Stock (this valuation per
share of Company Common Stock amounts to $2.69 to $4.69 after multiplying
Prudential Securities' derived implied per share valuation of the New ATN
Common Stock of $6.72 to $11.73 by 0.4 to reflect the 60% reduction in the
number of outstanding shares of the Company as a result of the Transaction).
RECOMMENDATION OF THE COMPANY BOARD
At its July 7, 1997 meeting, the Company Board unanimously (with Mr. Prosser
and Mr. Prior abstaining) approved the Transaction and found that the
Transaction, considered as a whole, was fair to the public stockholders of the
Company (i.e., all stockholders of the Company other than Mr. Prior, the Trust
and Mr. Prosser and his family) and recommended that stockholders vote for the
approval of the Transaction and the various documents needed to consummate the
Transaction. In making their determination and recommendation, the members of
the Company Board other than Mr. Prosser and Mr. Prior (the "disinterested
directors"), took into account (i) the opinion of Prudential Securities
discussed below (see "Opinion of Investment Banker"), (ii) the comparable
company analysis employed by Prudential Securities to establish an implied
valuation range for the ECI Common Stock and the discounted cash flow analysis
employed by Prudential Securities to establish an implied valuation for the
ECI Common Stock and for the New ATN Common Stock, as discussed below under
"Opinion of Investment Banker," (iii) the then current market value of the
Company Common Stock, and (iv) the prices at which the Company Common Stock
traded in the past. The disinterested directors, also took into account (i)
the legal, political and regulatory problems facing GT&T, (ii) the resources
which New ATN would have standing alone to fund regulatory and court
proceedings necessary to protect its interests, (iii) the fact that
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<PAGE>
the Transaction was structured so that public shareholders would increase
their percentage interests in ECI and would retain their current percentage in
New ATN, and (iv) the fact that the Transaction would be consummated only if a
favorable Tax Ruling was obtained. The disinterested directors also took into
account the terms of the Non-Competition Agreement, the Indemnity Agreement,
the Technical Assistance Agreement, the Tax Sharing and Indemnification
Agreement, and the Employee Benefits Agreement, but did not consider these
agreements to have any material impact on the fairness of the Transaction,
considered as a whole, to the public stockholders. In considering the
Transaction, the disinterested directors did not assign relative weights or
priorities to the various factors considered by them.
The Opinion of Prudential Securities discussed below addresses only the
basic economic terms of the Transaction as provided for in the Subscription
Agreement, the Recapitalization Agreement and the Merger Agreement, and not
the legal, operational and other terms set forth therein and in the various
ancillary agreements related thereto, while Section 6.04 of the Subscription
Agreement contemplates generally an opinion that the Transaction is fair from
a financial point of view to the public stockholders of the Company. The
disinterested directors accepted Prudential Securities' opinion as fully
complying in scope and substance with the intent and meaning of Section 6.04
and Prudential Securities' engagement agreement with the Company.
OPINION OF INVESTMENT BANKER
On July 7, 1997, Prudential Securities Incorporated ("Prudential
Securities") delivered an opinion (the "Opinion") to the Company Board that,
as of such date, the basic economic terms of the transaction as provided for
in the Subscription Agreement, the Recapitalization Agreement and the Merger
Agreement, were fair from a financial point of view to the public stockholders
of the Company (i.e., all stockholders of the Company other than Mr. Prior,
the Trust, and Mr. Prosser and his family) (the "Public Stockholders").
Prudential Securities made a presentation of the financial analysis underlying
the Opinion at a meeting of the Company Board on July 7, 1997. This analysis,
as presented to the Company Board, is summarized below. All of the members of
the Company Board were present at the meeting (one via teleconference) and had
an opportunity to ask questions regarding the presentation and the Opinion. At
one point, Mr. Prior, Mr. Prosser, and their respective counsel withdrew and
the remaining directors had an opportunity to ask questions regarding the
presentation and the Opinion and to discuss the economic terms of the
transaction, as provided for in the Subscription Agreement, the
Recapitalization Agreement and the Merger Agreement, in the absence of these
persons. Prudential Securities discussed with the Company Board the financial
data and other factors considered by Prudential Securities in conducting its
analysis, all of which are summarized below. On December 5, 1997, Prudential
Securities confirmed its Opinion as of that date.
In requesting the Opinion, the Company Board did not give any special
instructions to Prudential Securities or impose any limitations upon the scope
of the investigation that Prudential Securities deemed necessary to enable it
to deliver the Opinion. A copy of the Opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached to this Proxy Statement-Prospectus as Annex B and is incorporated
herein by reference. The summary of the Opinion set forth below is qualified
in its entirety by reference to the full text of the Opinion. The Public
Stockholders are urged to read the Opinion in its entirety.
THE OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE BASIC ECONOMIC TERMS OF
THE TRANSACTION, AS PROVIDED FOR IN THE SUBSCRIPTION AGREEMENT, THE
RECAPITALIZATION AGREEMENT AND THE MERGER AGREEMENT, TO THE PUBLIC
STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. THE OPINION DOES NOT ADDRESS ANY
OF THE PROVISIONS OF THE SUBSCRIPTION AGREEMENT, THE RECAPITALIZATION
AGREEMENT OR THE MERGER AGREEMENT WHICH ARE NOT SPECIFICALLY SUMMARIZED UNDER
THE CAPTIONS "DOCUMENTATION FOR THE TRANSACTION--DIVISION OF PROPERTIES AND
ASSETS, --DIVISION OF LIABILITIES, --CLOSING ADJUSTMENTS, --REPURCHASE AND
RECAPITALIZATION, OR --MERGER" OR ANY OF THE PROVISIONS OF THE NON-COMPETITION
AGREEMENT, THE INDEMNITY AGREEMENT, THE TECHNICAL ASSISTANCE AGREEMENT, THE
TAX SHARING AND INDEMNIFICATION AGREEMENT AND THE EMPLOYEE BENEFITS AGREEMENT.
THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
26
<PAGE>
In conducting its analysis and arriving at the Opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed relevant under the
circumstances, including, among others, the following: (i) drafts, dated June
16, 1997, of the Subscription Agreement (excluding the schedules to the
Subscription Agreement), the Recapitalization Agreement, the Merger Agreement
and certain ancillary agreements and exhibits to the Subscription Agreement;
(ii) a draft dated June 27, 1997 of the Proxy Statement-Prospectus; (iii) a
copy of the Rural Telephone Finance Cooperative loan commitment letter, dated
April 14, 1997; (iv) certain publicly-available historical financial and
operating data of the Company, including, but not limited to, (a) the Annual
Reports on Form 10-K of the Company for the fiscal years ended December 31,
1994, 1995 and 1996, (b) the Quarterly Report on Form 10-Q of the Company for
the quarter ended March 31, 1997, (c) the Proxy Statement for the Annual
Meeting of the Company Stockholders held on April 30, 1997; (v) certain
information relating to New ATN and ECI, including projected income
statements, balance sheets and cash flow data for the fiscal years ending
December 31, 1997, 1998, 1999 and 2000 which were prepared by the management
of the Company; (vi) publicly available financial, operating, and stock market
data concerning certain companies engaged in businesses Prudential Securities
deemed comparable to ECI, or otherwise relevant to Prudential Securities'
inquiry; (vii) the historical stock prices and trading volumes, and current
trading multiplies of the Company Common Stock; and (viii) such other
financial studies, analyses, reviews and investigations that Prudential
Securities deemed appropriate. Prudential Securities assumed, with the
Company's consent, that the drafts of the Subscription Agreement, the
Recapitalization Agreement and the Merger Agreement which Prudential
Securities reviewed would conform in all material respects to those documents
when in final form. In connection with its confirmation of the Opinion on ,
1997, Prudential Securities reviewed (i) executed copies of the Subscription
Agreement, the Recapitalization Agreement and the Merger Agreement, and (ii)
the forms of the Indemnity Agreement, the Technical Assistance Agreement and
the Tax Sharing and Indemnification Agreement attached as Annex A to this
Proxy Statement-Prospectus (which agreements Prudential Securities assumed,
with the Company's consent, would conform in all material respects to those
agreements when finally executed at or prior to the Effective Date).
Prudential Securities met with the senior management of the Company to
discuss (i) the prospects for the respective businesses of New ATN and ECI,
(ii) their estimates of such businesses' future financial performance, (iii)
the financial impact of the transaction as provided for by the Subscription
Agreement, the Recapitalization Agreement and the Merger Agreement on the
respective companies and (iv) such other matters that Prudential Securities
deemed relevant.
In connection with its review and analysis and in arriving at the Opinion,
Prudential Securities assumed and relied upon the accuracy and completeness of
the financial and other information provided to it by the Company, and
Prudential Securities has not assumed any responsibility for the verification
of such information or any independent valuation or appraisal of any of the
assets or liabilities of New ATN or these to be transferred to or assumed by
ECI. With respect to certain projected financial data provided to Prudential
Securities by the Company for New ATN and for ECI, Prudential Securities has
assumed that such information (and the assumptions and bases therefor) has
been reasonably prepared and represents management's best currently available
estimate as to the future financial performance of New ATN and of ECI. The
Opinion is predicated on (i) the Company's transfer of certain of its assets
and liabilities to ECI qualifying as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the distribution of ECI Common Stock to the holders of
the Company Common Stock being treated as tax-free for federal income tax
purposes to the Company under Section 355(c)(1) or 361(c)(1) of the Code and
to such holders under Section 355(a) of the Code. Further, the Opinion is
necessarily based on economic, financial and market conditions as they
existed, and can only be evaluated, as of the date of the Opinion.
The Opinion does not address nor should it be construed to address the
relative merits of the Transaction as compared to other strategic
alternatives. In addition, the Opinion does not in any manner address the
prices at which the New ATN Common Stock or the ECI Common Stock will trade
following consummation of the Transaction.
In arriving at the Opinion, Prudential Securities performed a variety of
financial analyses, including those summarized herein. The summary set forth
below of the analyses presented to the Company Board at the July 7,
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<PAGE>
1997 meeting does not purport to be a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not necessarily
susceptible to partial analyses or summary description. Prudential Securities
believes that its analysis must be considered as a whole and that selecting
portions thereof or portions of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying the Opinion. Prudential Securities made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond
the control of the Company, New ATN and ECI. Any estimates contained in
Prudential Securities' analyses are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable
than suggested by such analyses. Additionally, estimates of the values of
businesses and securities do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
Subject to the foregoing, the following is a summary of the material financial
analyses presented by Prudential Securities to the Company Board in connection
with the Opinion.
Comparable Company Analysis. A comparable company analysis was employed by
Prudential Securities to establish an implied per share valuation range for
the ECI Common Stock. Prudential Securities analyzed publicly-available
historical and projected financial results, including multiples of current
stock price to latest twelve months ("LTM") net income ("LTM Net Income"),
projected calendar year 1997 earnings per share ("1997 EPS") and projected
calendar year 1998 earnings per share ("1998 EPS"), enterprise value (defined
as current stock price multiplied by the number of shares outstanding plus net
indebtedness) to LTM earnings before interest and taxes ("LTM EBIT") and LTM
earnings before interest, taxes, depreciation and amortization ("LTM EBITDA")
of certain companies considered by Prudential Securities to be reasonably
similar to ECI. The companies analyzed included: Alltel Corporation, Aliant
Communications, Inc., Cincinnati Bell Telephone Company, Century Telephone
Enterprises, Inc., Frontier Corporation and Southern New England
Telecommunications Corporation (together, the "Comparable Companies"). All of
the trading multiples of the Comparable Companies were based on closing stock
prices on July 3, 1997 (the "July 3rd Closing Price") and all of the earnings
per share estimates of the Comparable Companies were published by First Call,
an on-line data service available to subscribers which compiles estimates
developed by research analysts. The estimates published by First Call were not
prepared in connection with the Transaction or at the request of Prudential
Securities. The Company provided the projected 1997 EPS and 1998 EPS estimates
of ECI.
The Comparable Companies were found to have a July 3rd Closing Price
estimated to be equal to 13.2x to 16.3x LTM Net Income, 12.6x to 21.6x 1997
EPS and 12.5x to 18.6x 1998 EPS, and an enterprise value estimated to be equal
to 7.6x to 10.9x LTM EBIT and 4.8x to 9.8x LTM EBITDA. Applying such multiples
to ECI's pro forma LTM Net Income ($6.8 million), 1997 EPS ($0.81), 1998 EPS
($0.96), pro forma LTM EBIT ($18.0 million) and pro forma LTM EBITDA ($33.6
million) resulted in an implied per share valuation of the ECI Common Stock of
$7.12 to $14.29.
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to ECI. Accordingly, a complete analysis of
the results of the foregoing calculations cannot be limited to a quantitative
review of such results and involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Comparable Companies and other factors that could affect the public trading
value of the Comparable Companies as well as that of ECI.
Discounted Cash Flow Analysis--ECI. A discounted cash flow analysis was
employed by Prudential Securities to establish an implied per share valuation
for the ECI Common Stock. Prudential Securities calculated the net present
value of ECI's projected four-year stream of unlevered free cash flows and
projected fiscal year 2000 terminal values, which in turn, were based on a
range of multiples of ECI's projected fiscal year 2000 earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The Company
provided the financial projections that Prudential Securities utilized in this
analysis. Prudential Securities applied discount rates ranging from 6.0% to
8.0% and multiples of fiscal year 2000 EBITDA ranging from 5.75x to 7.00x. The
discount rates utilized reflect ECI's pro forma cost of capital, and the
terminal EBITDA multiples reflect the range of trading
28
<PAGE>
multiples of the Comparable Companies. Based on this analysis, Prudential
Securities derived an implied per share valuation of the ECI Common Stock of
$9.86 to $14.92.
Discounted Cash Flow Analysis--New ATN. A discounted cash flow analysis was
employed by Prudential Securities to establish an implied per share valuation
for the New ATN Common Stock. Prudential Securities calculated the net present
value of New ATN's projected four year stream of unlevered free cash flows and
projected fiscal year 2000 terminal values, which in turn, were based on a
range of multiples of New ATN's projected fiscal year 2000 EBITDA. The Company
provided the financial projections that Prudential Securities utilized in this
analysis. Prudential Securities applied discount rates ranging from 20.0% to
30.0% and multiples of fiscal year 2000 EBITDA ranging from 2.50x to 3.50x.
The discount rates and terminal multiples reflect the declining profit margins
and volumes associated with audiotext and certain political and regulatory
risks. Prudential Securities adjusted for the 20% minority interest in Guyana
Telephone & Telegraph Company Limited. Prudential Securities derived an
implied per share valuation of the New ATN Common Stock of $6.72 to $11.73.
Projected financial and other information concerning New ATN and ECI are not
necessarily indicative of future results. All projected financial information
is subject to numerous contingencies, many of which are beyond the control of
management of the Company, New ATN and ECI.
Stock Trading History and Current Trading Multiples. Prudential Securities
also analyzed the history of the trading prices and volume for the Company
Common Stock. Prudential Securities observed that between the Company's
initial public offering on November 14, 1991 and July 2, 1997, the Company
Common Stock traded in the range of $6.375 and $27.250 a share. Prudential
Securities also analyzed the trading multiples (as of July 2, 1997) of the
Company Common Stock. Prudential Securities analyzed that the Company was
trading (as of July 2, 1997) at 7.2x LTM earnings per share, 4.1x LTM EBITDA,
and 5.9x LTM EBIT.
The Company selected Prudential Securities to provide a fairness opinion
because it is a nationally recognized investment banking firm engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions and for other purposes, because it has substantial experience in
transactions similar to the Transaction and because it already had substantial
information about the Company as a result of its engagement by the Company in
1996 as described below. The engagement letter with Prudential Securities
provides that Prudential Securities will be paid an advisory fee equal to
$500,000. In addition, the engagement letter with Prudential Securities
provides that Prudential Securities will be reimbursed for its out-of-pocket
expenses and the Company, New ATN and ECI will indemnify Prudential Securities
and certain related persons against certain liabilities, including liabilities
under securities laws, arising out of the Transaction or its engagement. The
Company has also agreed to engage Prudential Securities for a fee of $50,000
to evaluate the relative values of certain assets of ATN-VI in connection with
the Company's application for the Tax Ruling. In 1996, the Company engaged
Prudential Securities as its financial advisor in connection with the
Company's exploration of strategic alternatives. In the ordinary course of
business, Prudential Securities may actively trade the shares of the Company
Common Stock for its own account and for the accounts of customers and
accordingly, may at any time hold a long or short position in such security.
DOCUMENTATION FOR THE TRANSACTION
The Transaction will be effected pursuant to the Subscription Agreement,
Recapitalization Agreement, Merger Agreement, Charter Amendment, Non-
Competition Agreement, Indemnity Agreement, Technical Assistance Agreement,
Tax Sharing and Indemnification Agreement and Employee Benefits Agreement
(collectively, the "Agreements"), copies of which are attached as Annex A to
this Proxy Statement-Prospectus. The following description of the terms and
conditions of these Agreements is qualified in its entirety by reference to
the Agreements. In the event of any inconsistency between the provisions of
any of the Agreements and the description thereof in this Proxy Statement-
Prospectus, the provisions of the Agreements shall control.
29
<PAGE>
Division of Properties and Assets. The Subscription Agreement defines the
properties and assets to be transferred to ECI or retained by New ATN.
Pursuant to the Subscription Agreement, the Company will transfer to ECI the
following properties and assets of the Company in exchange for 10,959,131
shares of ECI Common Stock which will be distributed to Mr. Prosser and all
other holders of Company Common Stock other than Mr. Prior and the Trust:
(i) all of the outstanding capital stock of ATN-VI, which together with
its subsidiaries, Vitelco, Vitel Cellular and Vitelcom, currently conduct
all of the Company's Virgin Islands operations;
(ii) all of the outstanding capital stock of Atlantic Aircraft, Inc., a
subsidiary of the Company which owns and operates a jet aircraft and a
propeller aircraft used in the Company's business;
(iii) all indebtedness of any of the foregoing subsidiaries of the
Company (the "Transferred Subsidiaries") to the Company except $23 million
(the "Retained Indebtedness") currently owing from ATN-VI to the Company
(the remaining balance of Retained Indebtedness after giving effect to the
Closing Adjustment discussed below will be transferred to ECI); and
(iv) certain miscellaneous assets.
New ATN will retain:
(i) all of the Company's stock and debt investments in the Guyana
Telephone & Telegraph Company Limited ("GT&T");
(ii) the Company's advisory agreement with GT&T, pursuant to which the
Company provides a wide variety of managerial, technical, sales and
marketing services to GT&T for a fee equal to 6% of GT&T's revenues; and
(iii) certain miscellaneous assets.
Division of Liabilities. Pursuant to the Subscription Agreement, (i) ECI
will assume all liabilities of the Company pertaining to the Transferred
Subsidiaries, the lease and other liabilities pertaining to the Company's St.
Croix executive office, and certain miscellaneous liabilities, (ii) New ATN
will remain responsible for all liabilities of the Company pertaining to GT&T,
the lease and other liabilities pertaining to the Company's St. Thomas
executive office, and certain miscellaneous liabilities and (iii), except as
otherwise described under "Indemnity" below, ECI and New ATN will each be
responsible for one-half of all remaining liabilities of the Company on the
Effective Date including contingent liabilities arising out of events
occurring on or prior to the Effective Date.
Closing Adjustments. The Subscription Agreement provides that ECI will cause
ATN-VI to pay New ATN in repayment of the $23 million of Retained Indebtedness
(or ECI will pay directly to New ATN if the Retained Indebtedness is
exhausted) $17.4 million plus (or minus) a Closing Adjustment. After the
Closing Adjustment has been finally determined and paid, New ATN will transfer
to ECI any remaining Retained Indebtedness. As the Closing Adjustment, ECI
will be credited with one-half of the carrying value on the Company's
unconsolidated balance sheet as of April 30, 1997 of all assets of the Company
other than capital stock of GT&T or the Transferred Subsidiaries or the
principal amount of indebtedness of GT&T or any of the Transferred
Subsidiaries to the Company, and ECI will be charged with one half of all
accrued liabilities on the unconsolidated balance sheet of the Company as of
April 30, 1997. Credits or charges also will be made for various cash
transfers to or from GT&T or the Retained Subsidiaries and for operating
expenses of the Company between April 30, 1997 and the Effective Date.
Repurchase and Recapitalization. In accordance with the terms of the
Recapitalization Agreement, the Company will repurchase 416,998 shares of
Company Common Stock owned by Mr. Prior and 348,564 shares of Company Common
Stock owned by the Trust at a repurchase price of $22.7284 per share, Mr.
Prior will exchange all of his remaining 2,927,038 shares of Company Common
Stock for a like number of shares of a new class of common stock of the
company to be designated Class B Common Stock, and Mr. Prosser will
30
<PAGE>
exchange all of his 3,325,000 shares of Company Common Stock for a like number
of shares of a new class of common stock of the Company to be designated Class
A Common Stock. The Company will adopt the Charter Amendment to create Company
Class A Common Stock and Company Class B Common Stock to be exchanged with Mr.
Prior and Mr. Prosser, respectively, for their shares of Company Common Stock
as described above. The Class A Common Stock and Class B Common Stock will
vote together with the Company Common Stock (except where a separate class
vote is required by law) and will otherwise have the same attributes as the
Company Common Stock except that each of the new classes of Common Stock will
be entitled to receive different consideration than the other class or the
Company Common Stock receives in a merger, consolidation or liquidation of the
Company as determined by the Company Board.
Merger. In accordance with the terms of the Merger Agreement, Mergerco will
be merged with and into the Company with the Company surviving the Merger,
each share of Company Common Stock (but not the newly created Class A Common
Stock and Class B Common Stock to be issued prior to the Merger) will be
converted into the right to receive four-tenths (0.4) of a share of Company
Common Stock and one share of ECI Common Stock; the outstanding shares of
Class A Common Stock of the Company will be converted into the right to
receive in the aggregate 5,704,231 shares of ECI Common Stock, and the
outstanding shares of Class B Common Stock of the Company will be converted
into the right to receive in the aggregate 2,807,040 shares of Company Common
Stock. Immediately after the Merger, the outstanding common stock of New ATN
and ECI will be held as follows:
<TABLE>
<CAPTION>
NEW ATN ECI
---------------- -----------------
SHARES % SHARES %
--------- ------ ---------- ------
<S> <C> <C> <C> <C>
Mr. Prosser............................ -- -- 5,704,231 52.05
Mr. Prior.............................. 2,807,040 57.18 -- --
Public................................. 2,101,960 42.82 5,254,900 47.95
--------- ------ ---------- ------
Total................................ 4,909,000 100.00 10,959,131 100.00
========= ====== ========== ======
</TABLE>
In the Merger, the Certificate of Incorporation of the Company will be
amended (i) to eliminate the Class A and Class B Common Stock created by the
Charter Amendment and (ii) to eliminate Article Eleventh of the current
Certificate of Incorporation (a provision added in February 1996 which
required supermajority votes of stockholders or directors for certain
corporate actions and which expired by its terms in February 1997).
Non-Competition. Pursuant to the Non-Competition Agreement, ECI and Mr.
Prosser are to agree not to engage in, or assist others in engaging in any
business which competes anywhere in the world in any material respect with the
provision by New ATN or any of its subsidiaries of telecommunications services
to persons who generate international audiotext telecommunications traffic
(except for the provision of any telecommunications services as a common
carrier which does not involve the installation of special equipment to
facilitate the generation of international audiotext telecommunications
traffic or the payment of any fee, commission or other compensation through
sharing of accounting or settlement rates, rate discounts or otherwise to
persons generating such traffic). The term of the Non-Competition Agreement
will be a period of 10 years after the Effective Date. The telecommunications
service covered by the Non-Competition Agreement include both carrying and/or
terminating telecommunications traffic. The agreement covers the provision of
services directly, or indirectly through service bureaus or other
intermediaries, to persons who generate the traffic, and the traffic covered
includes both telephone and computer traffic. Although international audiotext
traffic accounts for only a small percentage of the total minutes of
telecommunications traffic (including both local and international traffic)
carried by GT&T and although this traffic utilizes only a small fraction of
GT&T's physical facilities, international audiotext traffic generated
approximately 72% of GT&T's total revenues in 1996 and approximately 61% of
its total revenues in the first six months of 1997. In the Non-Competition
Agreement, ECI and Mr. Prosser will also agree to hold in strict confidence
all information of the proprietary nature relating to GT&T's and New ATN's
business of providing telecommunications services with regard to international
audiotext traffic.
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<PAGE>
Indemnity. In accordance with the provisions of the Indemnity Agreement:
(i) Mr. Prosser is to agree to indemnify New ATN, its subsidiaries after
the Effective Date, their respective officers, directors and agents and Mr.
Prior, individually and as Trustee of the Trust, from and against any and
all losses, liabilities, damages, costs and expenses ("Losses") relating to
or arising out of (a) any action, suit or proceeding brought by or on
behalf of any stockholder of the Company or of ECI arising out of or
relating to the repurchase by the Company of shares of Company Common Stock
owned by Mr. Prior and/or the Trust pursuant to the Recapitalization
Agreement or the number of shares of ECI Common Stock to be received by Mr.
Prosser or members of his family pursuant to the Merger Agreement or (b)
any action, suit or proceeding of any kind arising out of or relating to
any untrue or alleged untrue statement of a material fact contained in this
Proxy Statement-Prospectus, or the omission or alleged omission to state
herein a material fact required to be stated herein or necessary to make
the statements herein not misleading, but the indemnity described in this
clause (b) applies only with respect to the biographical information of Mr.
Prosser contained in this Proxy Statement-Prospectus and the information
contained herein concerning the beneficial ownership of Company Common
Stock by Mr. Prosser and the members of his family and his or their
affiliates,
(ii) Mr. Prior has agreed to indemnify ECI, the entities that will become
its subsidiaries after the Effective Date, their respective officers,
directors and agents and Mr. Prosser from and against any and all Losses
relating to or arising out of (a) any action, suit or proceeding brought by
or on behalf of any stockholder of the Company or ECI arising out of or
relating to the number of shares of Company Common Stock to be received by
Mr. Prior or members of his family pursuant to the Merger Agreement or (b)
any action, suit or proceeding of any kind arising out of or relating to
any untrue or alleged untrue statement of a material fact contained in this
Proxy Statement-Prospectus, or the omission or alleged omission to state
herein a material fact required to be stated herein or necessary to make
the statements herein not misleading, but the indemnity described in this
clause (b) applies only with respect to the biographical information of Mr.
Prior contained in this Proxy Statement-Prospectus and the information
contained herein concerning the beneficial ownership of Company Common
Stock by Mr. Prior and the members of his family and his or their
affiliates,
(iii) ECI has agreed to indemnify New ATN, its subsidiaries after the
Effective Date, their respective officers, directors and agents and Mr.
Prior from and against any and all Losses relating to or arising out of (a)
the business or operations of ECI and the Transferred Subsidiaries before
or after the Effective Date or any other subsidiaries of ECI after the
Effective Date, or any of the liabilities specifically to be assumed by ECI
pursuant to the Subscription Agreement or (b) any action, suit or
proceeding arising out of or relating to any untrue or alleged untrue
statement of a material fact contained in this Proxy Statement-Prospectus
or the omission or alleged omission to state herein a material fact
required to be stated herein or necessary to make the statements herein not
misleading, but the indemnity described in this clause (b) applies only
with respect to the information contained in this Proxy Statement-
Prospectus concerning the business, prospects or planned or proposed
activities of ECI and its Subsidiaries after the Effective Date, the
activities of ECI or the Transferred Subsidiaries after April 30, 1997, and
prospective acquisitions of businesses or other transactions not in the
ordinary course of business planned or contemplated by ECI, the Transferred
Subsidiaries or Mr. Prosser.
(iv) New ATN has agreed to indemnify ECI and the entities which will
become its subsidiaries after the Effective Date, their respective
officers, directors and agents and Mr. Prosser from and against any and all
Losses relating to or arising out of (a) the business or operations
conducted by GT&T before or after the Effective Date or the business and
operations of New ATN after the Effective Date, or any of the liabilities
of the Company specifically excluded by the Subscription Agreement from the
liabilities to be assumed by ECI or (b) any action, suit or proceeding
arising out of or relating to any untrue or alleged untrue statement of a
material fact contained in this Proxy Statement-Prospectus or the omission
or alleged omission to state herein a material fact required to be stated
herein or necessary to make the statements herein not misleading, but the
indemnity described in this clause (b) applies only with respect to the
information contained in this Proxy Statement-Prospectus concerning the
business, prospects or planned or proposed activities of New
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<PAGE>
ATN and its Subsidiaries after the Effective Date, the activities of GT&T
and New ATN with respect to GT&T after April 30, 1997, and prospective
acquisitions of businesses or other transactions not in the ordinary course
of business planned or contemplated by GT&T or Mr. Prior.
Technical Assistance. New ATN and the Transferred Subsidiaries are to enter
into a Technical Assistance Agreement in connection with the Transaction. In
accordance with the terms of the Technical Assistance Agreement, each of the
Transferred Subsidiaries will agree to provide, at the request of the Company,
personnel and facilities to assist and support the Company in carrying out the
Company's continuing obligations to provide technical and professional
service, advice and assistance under an advisory contract it has entered into
with GT&T. The Transferred Subsidiaries are to be paid approximately 200% of
the direct compensation cost incurred by them in performing services at the
request of New ATN under the Technical Assistance Agreement and 100% of all
"out-of-pocket" expenses incurred by them in performing such services.
Tax Sharing and Indemnification. In accordance with the terms of the Tax
Sharing and Indemnification Agreement:
(i) New ATN, ECI, Mr. Prior and Mr. Prosser will each agree not to take
certain actions after the Effective Date which might jeopardize the
Transaction qualifying for tax-free treatment under the Code. Under the
terms of the Tax Sharing Agreement, unless otherwise approved by the IRS or
legal counsel or agreed to by both the Company and ECI, the Company and ECI
will not at any time after the Effective Date take any action which may be
inconsistent with the tax treatment of the Transaction as contemplated in
the Company's Ruling request. Without limiting the generality of the
foregoing, the Company and ECI will not, within two years after the
Effective Date: (a) liquidate or merge with or into any other corporation;
(b) issue any capital stock that in the aggregate exceeds 45%, by vote or
value, of its capital stock issued and outstanding immediately after the
Distribution; (c), with certain exceptions, redeem, purchase or otherwise
reacquire its capital stock issued and outstanding immediately after the
Distribution; (d) make a material disposition or cessation of operations by
means of a sale or exchange of assets or capital stock, a distribution to
stockholders, or otherwise, of the assets constituting the trades or
businesses relied upon in the Company's Ruling request to satisfy Section
355(b) of the Code; or (e) discontinue the active conduct of the trades or
businesses relied upon in the Ruling request to satisfy Section 355(b) of
the Code.
(ii) New ATN is to agree to be liable for, and shall indemnify and hold
harmless ECI and its affiliates from and against, (a) any taxes resulting
from any income or gain recognized as a result of the Transaction,
including any taxes resulting from any income or gain recognized as a
result of the Transaction failing to qualify for tax-free treatment under
the Code, which arise from any breach by New ATN of its representations or
covenants under the Tax Sharing and Indemnification Agreement, or from
certain actions by New ATN or its affiliates which may be inconsistent with
the tax treatment of the Transaction as contemplated in the application for
the Tax Ruling, or the inaccuracy of any factual statements or
representations made in or in connection with the application for the Tax
Ruling with respect to the activities of New ATN and its affiliates after
the Effective Date, (b) any taxes taken into account as debits for purposes
of calculating the Final Closing Adjustment under the terms of the
Subscription Agreement, (c) certain taxes arising from the Company's
operations between April 30, 1997 and the Effective Date, (d) any
withholding of foreign income taxes imposed with respect to payments from
GT&T to the Company and (e) fifty percent (50%) of all other taxes of the
Company or Aircraft Corp. with respect to any period prior to and including
the Effective Date, except for taxes described in clauses (a), (b) or (c)
of the following section (iii).
(iii) ECI is to agree to be liable for, and shall indemnify and hold
harmless New ATN and its affiliates from and against, (a) any taxes
resulting from any income or gain recognized as a result of the
Transaction, including any taxes resulting from any income or gain
recognized as a result of the Transaction failing to qualify for tax-free
treatment under the Code, which arise from any breach by ECI of its
representations or covenants under the Tax Sharing and Indemnification
Agreement, or from certain actions by ECI or its affiliates which may be
inconsistent with the tax treatment of the Transaction as contemplated the
application for the Tax Ruling, or the inaccuracy of any factual statements
or representations made in or in
33
<PAGE>
connection with the application for the Tax Ruling with respect to the
activities of ECI and its affiliates after the Effective Date, (b) one
hundred percent (100%) of all taxes of ECI (computed on a separate company
basis) with respect to any period prior to and including the Effective
Date, (c) any withholding of foreign income taxes imposed with respect to
payments from ATN-VI or any of its subsidiaries to the Company except to
the extent taken into account as debits for purposes of computing the Final
Closing Adjustment under the terms of the Subscription Agreement, and (d)
fifty percent (50%) of all other taxes of the Company or Aircraft Corp.
with respect to any period prior to and including the Effective Date,
except for taxes described in clauses (a), (b), (c) and (d) of the
preceding section (ii).
(iv) Mr. Prior is to agree to be liable for, and to indemnify and hold
harmless the Company, ECI, and their respective affiliates from and
against, any taxes resulting from any income or gain recognized as a result
of the Transaction, including any taxes resulting from any income or gain
recognized as a result of the Transaction failing to qualify for tax-free
treatment under the Code, which arise from (a) any breach of Mr. Prior's
representations and covenants under the Tax Sharing and Indemnification
Agreement or (b) the inaccuracy of any factual statements or
representations relating to Mr. Prior or members of Mr. Prior's family made
in the application for the Tax Ruling or in any certificate provided by Mr.
Prior in connection with the application for the Tax Ruling or in
connection with an opinion of tax counsel with respect to the Transaction.
(v) Mr. Prosser is to agree to be liable for, and to indemnify and hold
harmless the Company, ECI, and their respective affiliates from and against
any liability for any taxes resulting from any income or gain recognized as
a result of the Transaction, including any taxes resulting from any income
or gain recognized as a result of the Transaction failing to qualify for
tax-free treatment under the Code, which arise from (a) any breach of Mr.
Prosser's representations and covenants under the Tax Sharing and
Indemnification Agreement or (b) the inaccuracy of any factual statements
or representations relating to Mr. Prosser or members of Mr. Prosser's
family made in the application for the Tax Ruling or in any certificate
provided by Mr. Prosser in connection with the application for the Tax
Ruling or in connection with an opinion of tax counsel with respect to the
Transaction.
Employee Benefits. The Company and ECI are to enter into an Employee
Benefits Agreement in connection with the Transaction. In accordance with the
terms of the Employee Benefits Agreement, ECI is to agree to adopt as its own
the Company's Defined Benefit Plan for Salaried Employees, the Company's
Management Employees' Savings Plan, and the Company's Employees' Stock
Ownership Plan, each of the trusts (and all assets thereof) forming a part of
such plans will be assumed by ECI, and ECI and the Company are to agree to
take all necessary actions, including amendments to such plans (or the trusts
forming a part thereof) in order for ECI to be the sponsor and "Employer" as
defined under such plans. All employee benefit plans previously maintained by
ATN-VI or Vitelco will continue to be sponsored by such entities after the
Effective Date. As of the Effective Date, employees of New ATN and its
subsidiaries will cease participation in all the employee benefit plans
maintained by ECI or any of its subsidiaries.
THE CREDIT FACILITY
In order to finance the repurchase of Company Common Stock from Mr. Prior
and the Trust, ATN-VI will enter into the Credit Facility with Rural Telephone
Finance Corporation ("RTFC"), as lender (the "Lender"). A copy of the form of
Credit Facility has been filed as an exhibit to the Registration Statement of
which this Proxy Statement--Prospectus forms a part, and the following summary
of the material terms of the Credit Facility is qualified in its entirety by
reference thereto.
Borrower. The borrower under the Credit Facility will be ATN-VI (the
"Borrower").
Structure. The Credit Facility will consist of a fifteen year secured term
loan facility in the amount of $18,315,789, including $915,789 for the
purchase of RTFC 5% Subordinated Capital Certificates ("SCCs"). Borrowings
under the Credit Facility will be utilized by the Borrower to fund the
repurchase of 765,562 shares of Company Common Stock currently owned by Mr.
Prior and the Trust.
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<PAGE>
Availability. The funds will be immediately available upon the satisfaction
of customary terms and conditions contained in the Credit Facility but in no
event later than the second anniversary of the date of the Credit Facility.
Security. The Credit Facility will be secured (i) by a first mortgage lien
on the assets and revenue of the Borrower and; (ii) pledges from the Borrower
of all of the present and future outstanding common stock of Vitelco, Vitelcom
and Vitel Cellular owned by the Borrower.
Interest. Borrowings under the term loan facility will bear interest at
Lender's standard variable rate and/or fixed rate for long-term loans with 5%
SCC's. As of December 5, 1997, these rates were 6.65% and 7.90% per annum,
respectively. The Borrower may, at any time, convert all or a portion of
outstanding loan funds from a variable rate to a fixed interest rate for a
Borrower-specified period of time without a fee.
Equity Requirement. The Borrower will be required to purchase a non-interest
bearing amortizing SCC equal to 5% of the total amount borrowed. The SCC is
amortized annually, beginning one year after purchase of the SCC, in order to
maintain a 5% SCC-to-outstanding loan ratio. Amounts amortized are paid in
cash to the Borrower. The Borrower may elect to purchase the SCC using either
(a) the Borrowing Option pursuant to which the SCC is included in the loan
amount and is purchased with each advance of loan funds or (b) the Installment
Plan Option pursuant to which the Borrower purchases the SCCs in full with its
general funds over 5 years in 20 equal quarterly installments. If the Borrower
elects this option, the amount of equity requirement will be reduced to equal
5% of the loan proceeds.
Patronage Capital. Subject to approval of the Lender, Borrower will receive
a share of Lender's net margins in the form of patronage capital refunds.
Patronage capital is allocated annually to Borrower based on the percentage
that Borrower's interest payments contributed to Lender's gross margins.
Patronage capital is currently paid in cash (retired) in the following two
classes: Class One pursuant to which 70% of the allocation will be retired
during the year in which it is allocated and Class Two pursuant the balance of
the allocation will be retired on RTFC's Board approval rotation cycle
(currently 15 years).
Commitment Fee. A refundable commitment fee of $36,632 was paid to the
Lender. The total commitment fee will be refunded in its entirety at the time
of the final advance of the Loan. If the Loan if not fully advanced the fee
will be refunded on a pro rata basis. The commitment fee will also be refunded
if the Transaction does not occur for reasons that, in Lender's reasonable
belief, are beyond the Borrower's control. Under all other circumstances, the
Commitment Fee will be retained by RTFC.
Covenants. The Credit Facility will contain the following material covenants
that restrict the Borrower from, among other things (i) with certain
exceptions, engaging in consolidations, mergers and sales of assets; (ii) with
certain exceptions, creating, incurring, assuming or suffering to exist other
indebtedness; (iii) with certain exceptions, making investments or loans in
any other person or entity; (iv) acquiring assets or capital stock of other
entities except for certain permitted acquisitions; and (v) redeeming,
retiring or purchasing capital stock of the Borrower or declaring or paying
dividends on the capital stock of the Borrower, without, in each case, the
prior written approval of the Lender. In addition, the Credit Facility will
also require the Borrower to maintain (a) a specified average "TIER," defined
as, for a single year, interest on total net income plus income taxes plus
interest payable on long-term debt for such year divided by interest on long-
term debt payable for such year, as measured on a consolidated basis for the
two highest of the last three years and (b) a specified average "DSC" ratio,
defined, for a single year, as total net income plus depreciation and
amortization plus interest payable on long-term debt for such years divided by
principal and interest payable on long-term debt in such year, as measured on
a consolidated basis for the two highest of the last three years. Such ratios
are determined by averaging each of the two highest annual ratios during the
three most recent fiscal years. The Credit Facility requires the Borrower to
maintain a TIER of not less than 1.50 and a DSC of not less than 1.25. For the
twelve months ended December 31, 1996, the Borrower's TIER was 1.84 and it's
DSC was 1.80.
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<PAGE>
MANNER OF EFFECTING THE TRANSACTION
The Transaction will occur promptly following the satisfaction of the
conditions described herein.
Prior to the Effective Date, the Company will select The Bank of New York
(or such other person or persons reasonably satisfactory to the Company) to
act as Exchange Agent for the Merger (the "Exchange Agent"). As soon as
practicable after the Effective Date, the Company will make available, and
each holder of record of Company Common Stock will be entitled to receive,
upon surrender to the Exchange Agent of one or more certificates
("Certificates") representing such Company Common Stock for cancellation,
certificates representing the number of shares of New ATN Common Stock and ECI
Common Stock into which such shares are converted in the Merger and cash in
consideration of fractional shares.
No certificates representing less than one full share of Company Common
Stock will be issued upon the surrender for exchange of Certificates
representing Company Common Stock pursuant to the Merger. In lieu of any such
fractional share, each holder of record of Company Common Stock who would
otherwise have been entitled to a fraction of a share of Company Common Stock
upon surrender of Certificates for exchange pursuant to the Merger will be
paid upon such surrender cash (without interest) in an amount equal to such
holder's proportionate interest in the net proceeds from the sale or sales in
the open market by the Exchange Agent, on behalf of all such holders, of the
aggregate fractional Company Common Stock issued pursuant to the Merger.
As soon as practicable following the Effective Date, the Exchange Agent
shall determine the excess of (i) the number of full shares of Company Common
Stock delivered to the Exchange Agent by the Company over (ii) the aggregate
number of full shares of Company Common Stock to be distributed to holders of
record of Company Common Stock (such excess being herein called the "Excess
Shares") pursuant to the Merger, and the Exchange Agent, as agent for the
former holders of record of Company Common Stock, will sell the Excess Shares
at the prevailing prices on the American Stock Exchange ("AMEX"). The sale of
the Excess Shares by the Exchange Agent will be executed on the AMEX through
one or more member firms of the AMEX and will be executed in round lots to the
extent practicable. New ATN and ECI will each bear one-half of the cost of all
commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Shares. Until the net proceeds of such
sale have been distributed to the former holders of record of Company Common
Stock, the Exchange Agent will hold such proceeds in trust for such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former holders of record
of Company Common Stock in lieu of any fractional interests, the Exchange
Agent will make available in accordance with the Merger Agreement such amount
to such former stockholders.
No holder of Company Common Stock will be required to pay cash or other
consideration for the shares of ECI Common Stock received in the Merger.
LISTING AND TRADING OF ECI COMMON STOCK
There is currently no public market for ECI Common Stock. Prices at which
ECI Common Stock may trade prior to the Transaction on a "when-issued" basis
or after the Transaction cannot be predicted. Until the ECI Common Stock is
fully distributed and an orderly market develops, the price at which trading
in such stock occurs may fluctuate significantly. The prices at which ECI
Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including among others, the depth and liquidity of
the market for ECI Common Stock, investor perception of ECI and the Virgin
Islands economy generally, ECI's dividend policy and general economic and
market conditions.
ECI Common Stock has been approved for listing, on notice of issuance, on
the AMEX under the symbol "ECM."
Shares of ECI Common Stock distributed to the Company's stockholders in the
Transaction will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of ECI within the
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<PAGE>
meaning of Rule 145 under the Securities Act of 1933 as amended (the
"Securities Act"). Such affiliates may not publicly offer or sell the ECI
Common Stock received in connection with the Transaction except pursuant to a
registration statement under the Securities Act or pursuant to Rule 145 under
the Securities Act.
LISTING AND TRADING OF NEW ATN COMMON STOCK
It is a condition to the Transaction that the Company Common Stock will
continue to be listed and traded on the AMEX after the Transaction under the
symbol "ANK." Following the Transaction, because of the transfer of the Virgin
Islands' operations of the Company to ECI, which will be a separate publicly-
traded company, New ATN's consolidated earnings will be substantially lower
than the Company's consolidated earnings prior to the Transaction.
Accordingly, as a result of the Transaction, the aggregate market value of New
ATN Common Stock immediately after the Effective Date is expected to be
significantly lower than the aggregate market value of Company Common Stock
immediately prior to the Effective Date. However, since the number of
outstanding shares of New ATN will be only 40% of the number of outstanding
shares immediately prior to the Effective Date, the Company is unable to
predict whether the trading price of one share of New ATN Common Stock will be
less than, equal to or more than the trading price of one share of Company
Common Stock prior to the Effective Date.
The combined trading prices of four-tenths (0.4) of a share of New ATN
Common Stock and one share of ECI Common Stock after the distribution of ECI
Common Stock to the holders of Company Common Stock and Class A Common Stock
(the "Distribution") may be less than, equal to or greater than the trading
price of the Company Common Stock prior to the Distribution. The prices at
which New ATN Common Stock trades after the Distribution will be determined by
the marketplace and may be influenced by many factors, including, among
others, the continuing depth and liquidity of the market for New ATN Common
Stock, investor perception of New ATN, investment conditions in Guyana
generally and general economic and market conditions.
EXPENSES
New ATN and ECI will each pay fifty percent (50%) of all costs and expenses
incurred by the Company, Mr. Prosser or Mr. Prior in connection with the
Transaction.
CONDITIONS; TERMINATION
The Transaction is conditioned upon (i) approval of the Transaction at the
Special Meeting by the holders of a majority of the outstanding shares of
Company Common Stock, (ii) completion of $17.4 million of long-term financing
by ECI or ATN-VI, (iii) receipt of the Tax Ruling from the Internal Revenue
Service ("IRS") with respect to the tax-free treatment for U.S. federal income
tax purposes of the transactions contemplated by the Subscription Agreement
and the Merger Agreement to the Company and ECI and to the holders of Company
Common Stock and Class A Common Stock, (iv) the absence of any material
adverse changes in the businesses to be conducted after the Effective Date by
New ATN or ECI, respectively, (v) the Registration Statement on Form S-4 under
the Securities Act filed by ECI with the SEC having become effective and no
stop order being in effect, (vi) the listing of ECI Common Stock on the AMEX,
and (vii) the continued listing of New ATN Common Stock on the AMEX. The Tax
Ruling has been received. Even if all conditions are satisfied, Mr. Prior, Mr.
Prosser and the Company Board may, if they all agree, abandon, defer or modify
the Transaction at any time prior to the Effective Date. The Company Board
will not, however, consent to any changes in the terms of the Transaction
after the Transaction is approved by stockholders unless the Company Board
determines that such changes would not be materially adverse to the Company's
stockholders.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material U.S. federal income
tax consequences of the Transaction. This summary is for general information
purposes only and is not intended as a complete description of all of the tax
consequences of the Transaction and does not discuss tax consequences under
the laws of any
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state or local government or of any other jurisdiction. Moreover, the tax
treatment of a stockholder may vary depending upon his, her or its particular
situation. In this regard, certain stockholders (including, without
limitation, (i) insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, certain U.S. expatriates and persons who are
not citizens or residents of the United States or who are foreign
corporations, foreign partnerships or foreign trusts or estates as defined for
U.S. federal income tax purposes, and (ii) stockholders that hold shares as
part of a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for U.S. federal income tax purposes and stockholders with a
"functional currency" other than the U.S. dollar) may be subject to special
rules not discussed below. In addition, this summary applies only to shares
which are held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code").
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, FINAL AND TEMPORARY TREASURY REGULATIONS THEREUNDER AND CURRENT
ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT
TO CHANGE WHICH MAY OR MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD
AFFECT THE VALIDITY OF THE FOLLOWING DISCUSSION.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
Tax Ruling The Company has received the Tax Ruling from the IRS, to the
effect, among other things, that for U.S. federal income tax purposes:
(a) the Company's transfer of certain of its assets and liabilities to
ECI (the "Contribution") will be a tax-free reorganization under Section
368(a)(1)(D) of the Code and, therefore, will be tax-free to the Company
and ECI; and
(b) the distribution of ECI Common Stock to the holders of Company Common
Stock and Class A Common Stock (the "Distribution") will be tax-free to the
Company under Section 355(c)(1) or 361(c)(1) of the Code and to such
holders under Section 355(a) of the Code.
The Company's request for the Tax Ruling contains certain representations as
to factual matters, including among other representations, that (i) there is
no plan or intention by Mr. Prior or Mr. Prosser, and the management of the
Company, to its best knowledge, is not aware of any plan or intention on the
part of any particular remaining shareholder of the Company, to sell,
exchange, transfer by gift, or otherwise dispose of any stock in either the
Company or ECI after the Transaction, (ii) there is no plan or intention by
either the Company or ECI to purchase any of its outstanding stock after the
Transaction (subject to certain exceptions), and (iii) there is no plan or
intention to liquidate either the Company or ECI, to merge either the Company
or ECI with any other corporation, or to sell or otherwise dispose of the
assets of either the Company or ECI after the Transaction, except in the
ordinary course of business. The Company's request for the Tax Ruling also
contains certain factual statements regarding the Company's provision of a
wide variety of managerial, technical, sales and marketing services to GT&T
pursuant to the advisory agreement with GT&T and a representation to the
effect that the Company will continue to provide such services to GT&T as
described in the request for the Tax Ruling.
The Tax Ruling, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The Tax Ruling
will be based on the facts and representations contained in the Company's
request for the Tax Ruling. Generally, the Tax Ruling would not be revoked or
modified retroactively provided that (i) there has been no misstatement or
omission of material facts, (ii) the facts at the time of the Transaction are
not materially different from the facts upon which the Tax Ruling was based,
(iii) the representations upon which the Tax Ruling was based are not
incomplete or untrue in any material respect, and
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(iv) there has been no change in the applicable law. See "Risk Factors--Risks
Relating to the Transaction--Potential Federal Income Tax Liabilities."
The Contribution. The Tax Ruling provides that the Contribution will qualify
as a tax-free reorganization under Section 368(a)(1)(D) of the Code. Assuming
that the Contribution so qualifies, (i) no gain or loss will be recognized by,
and no amount will be included in the income of, the Company or ECI as a
result of the Contribution, (ii) the tax basis of the property received by ECI
in the Contribution will be the same as the tax basis of such property in the
hands of the Company immediately prior to the Contribution, and (iii) the
holding period of the property received by ECI in the Contribution will
include the period during which such property was held by the Company.
The Repurchase. It is expected that, assuming the Transaction is consummated
in 1997, the cash received by Mr. Prior and the Trust pursuant to the
repurchase of all of the Trust's and certain of Mr. Prior's shares of Company
Common Stock will be treated as a dividend to the extent of the Company's
earnings and profits (as calculated for U.S. federal income tax purposes) for
1997 (the Company had no accumulated earnings and profits as of the beginning
of 1997) and, to the extent the cash received exceeds the sum of the Company's
earnings and profits for 1997 and the tax basis of Mr. Prior's and the Trust's
shares so repurchased, as gain from the sale of the shares so repurchased.
The Distribution. The Tax Ruling provides that the Distribution will qualify
as a tax-free distribution under Section 355 of the Code. Assuming that the
Distribution so qualifies, (i) the holders of Company Common Stock will not
recognize any gain or loss upon receipt solely of shares of ECI Common Stock,
(ii) each holder of Company Common Stock will allocate his, her or its
aggregate tax basis in the Company Common Stock immediately before the
Distribution between the Company Common Stock and the ECI Common Stock in
proportion to their respective fair market values at the time of the
Distribution, (iii) the holding period of each holder of Company Common Stock
for the ECI Common Stock will include the holding period for his, her or its
Company Common Stock, provided that the Company Common Stock is held as a
capital asset at the time of the Distribution, and (iv) the Company will not
recognize any gain or loss as a result of the Distribution. The tax
consequences to Mr. Prosser upon his receipt of shares of ECI Common Stock
will be similar to those described above with respect to the holders of
Company Common Stock (except for clause (ii)).
Current Treasury regulations require that each holder of stock of the
Company which receives ECI Common Stock pursuant to the Distribution to attach
to his, her or its U.S. federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may be
appropriate to show the applicability of Section 355 of the Code to the
Distribution. The Company will provide each stockholder with the information
necessary to comply with this requirement.
If the Distribution did not qualify as a tax-free distribution under Section
355 of the Code, then each holder of Company Common Stock who received shares
of ECI Common Stock in the Distribution, other than Mr. Prosser, would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the ECI Common Stock received. Such
distribution would be treated as (i) a dividend to the extent of such
stockholder's pro rata share of the Company's earnings and profits for 1997
(the computation of which would include any gain recognized by the Company on
the Distribution, as discussed below), then (ii) a reduction in such
stockholder's tax basis in Company Common Stock to the extent the amount
received exceeded the amount referenced in clause (i), and then (iii) gain
from the sale or exchange of Company Common Stock to the extent the amount
received exceeded the sum of the amounts referenced in clauses (i) and (ii).
As a result of the complete termination of Mr. Prosser's interest in the
Company, the distribution of ECI Common Stock to Mr. Prosser would be treated
as capital gain to the extent that the fair market value of the ECI Common
Stock received by him exceeded his tax basis in the stock of the Company
exchanged therefor. Each stockholder's tax basis in his, her or its ECI Common
Stock would be equal to the fair market value of such stock at the time of the
Distribution.
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In addition, if the Distribution did not qualify as a tax-free distribution
under Section 355 of the Code, then, in general, a corporate level U.S.
federal income tax would be payable by the consolidated group of which the
Company is the common parent based upon the gain (computed as the difference
between the fair market value of the ECI Common Stock distributed and the
Company's adjusted tax basis in such stock) recognized by the Company on the
Distribution. Under the terms of the Tax Sharing Agreement, each of ECI and
the Company would be liable for 50% of any such additional taxes incurred by
the Company by reason of the Distribution being taxable. However, if the
Distribution failed to qualify for tax-free treatment under Section 355 of
Code as a result of the inaccuracy of certain factual statements or
representations made with respect to Mr. Prior or Mr. Prosser in connection
with the request for the Tax Ruling or as a result of Mr. Prior or Mr. Prosser
taking any action which was inconsistent with any factual statements or
representations or the tax treatment of the Distribution as contemplated in
the Tax Ruling, then Mr. Prior or Mr. Prosser, as the case may be, would be
required to indemnify each of ECI and the Company for any such additional
taxes incurred by the Company. If the Distribution failed to qualify for tax-
free treatment under Section 355 of Code as a result of the inaccuracy of
certain factual statements or representations made with respect to ECI or the
Company in connection with the request for the Tax Ruling or as a result of
ECI or the Company taking any action which was inconsistent with any factual
statements or representations or the tax treatment of the Distribution as
contemplated in the Tax Ruling, then ECI or the Company, as the case may be,
would be liable for 100% of any such additional taxes incurred by the Company.
See the discussion of the Tax Sharing Agreement under "The Transaction--
Documentation for the Transaction."
Disqualifying Acquisitions. Under an amendment to the Code generally
effective after April 16, 1997, if the distributing corporation or the
controlled corporation in a transaction otherwise qualifying as a tax-free
distribution under Section 355 of the Code is acquired pursuant to a plan or
arrangement in existence on the date of the distribution to acquire that
corporation (a "Disqualifying Acquisition"), then the distributing corporation
will recognize taxable gain immediately before the distribution in an amount
equal to the excess of the fair market value of the stock of the controlled
corporation over the distributing corporation's adjusted tax basis in that
stock. A Disqualifying Acquisition would be treated as occurring if a person
or persons acquired 50% or more of the stock of the distributing corporation
or the controlled corporation, as the case may be, pursuant to such a plan or
arrangement, and a plan or arrangement to acquire that corporation would be
presumed to exist on the date of the distribution if the acquisition occurred
during the four-year period commencing two years prior to the distribution
(unless it could be demonstrated that the acquisition was unrelated to the
distribution).
The Tax Sharing Agreement contains provisions which are intended to prevent
the occurrence of such a Disqualifying Acquisition during the two-year period
following the date of the Distribution. Under the terms of the Tax Sharing
Agreement, unless otherwise approved by the IRS or legal counsel or agreed to
by both the Company and ECI, the Company and ECI will not at any time after
the Effective Date take any action which may be inconsistent with the tax
treatment of the Transaction as contemplated in the Company's Ruling request.
Without limiting the generality of the foregoing, the Company and ECI will
not, within two years after the Effective Date: (a) liquidate or merge with or
into any other corporation; (b) issue any capital stock that in the aggregate
exceeds 45%, by vote or value, of its capital stock issued and outstanding
immediately after the Distribution; (c), with certain exceptions, redeem,
purchase or otherwise reacquire its capital stock issued and outstanding
immediately after the Distribution; (d) make a material disposition or
cessation of operations by means of a sale or exchange of assets or capital
stock, a distribution to stockholders, or otherwise, of the assets
constituting the trades or businesses relied upon in the Company's Ruling
request to satisfy Section 355(b) of the Code; or (e) discontinue the active
conduct of the trades or businesses relied upon in the Ruling request to
satisfy Section 355(b) of the Code. Accordingly, it can be expected that New
ATN, ECI, Mr. Prior and Mr. Prosser will not enter into any transaction which
might constitute a Disqualifying Acquisition, and, consequently, the ability
of New ATN and ECI to enter into business combinations with other companies or
to issue additional stock may be restricted.
Fractional Shares. No fractional shares of New ATN Common Stock will be
issued in the Transaction. A holder of Company Common Stock who receives cash
in lieu of fractional shares of New ATN Common Stock
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will be treated as having received such fractional shares of New ATN Common
Stock in the Transaction and then as having received such cash in a sale of
such fractional shares of New ATN Common Stock. Such holder generally will
recognize gain or loss pursuant to such deemed sale equal to the difference
(if any) between the amount of cash received and such holder's adjusted tax
basis in the fractional share of New ATN Common Stock deemed to be received
and then sold. Such gain or loss will be capital gain or loss (provided the
Company Common Stock is held as a capital asset at the Effective Date).
ACCOUNTING TREATMENT OF THE TRANSACTION
For accounting purposes the Transaction is a non-pro rata split-off of a
business and is accounted for at fair value. New ATN is considered to be the
split-off entity and accounted for at fair value since it is anticipated ECI
will have greater market capitalization (based on the Opinion), ECI will have
greater asset value, ECI will retain more of the top management of the
Company, and ECI had greater net income for the nine months ended September
30, 1997. Accordingly, the historical consolidated financial statements of the
Company included elsewhere in this Proxy Statement-Prospectus will become the
historical financial statements of ECI after the Transaction. After the
Transaction, ECI financial statements will reflect the split-off as of the
Effective Date and will not be restated to remove the effects of the prior
operating results of New ATN. The combined financial results of New ATN
included elsewhere in this Proxy Statement-Prospectus are the separate
financial statements relating to the Company's business and operations in
Guyana. The historical financial statements of New ATN for reporting purposes
after the Transaction will consist solely of the separate combined financial
statements of New ATN and will not correspond to the historical consolidated
financial statements of the Company. After the Transaction, the net assets of
New ATN will be adjusted to their fair value based on the average market price
of New ATN common stock during a short period after the Effective Date. This
adjustment is likely to reduce the carrying value of New ATN's fixed assets
significantly below their historical cost and replacement value; and
significantly reduce New ATN's charges for depreciation after the Effective
Date. Therefore, historical depreciation expense after the Transaction will
not be a reliable indicator of New ATN's cost of replenishing its assets.
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SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following selected historical financial data of the Company and its
subsidiaries as of and for the years ended December 31, 1996, 1995, 1994, 1993
and 1992 have been derived from the Company's audited consolidated financial
statements. The following selected historical financial data for the nine
months ended September 30, 1997 and 1996 have been derived from the Company's
unaudited consolidated condensed interim financial statements which, in the
opinion of management, reflects all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation. The
selected historical consolidated financial data should be read in conjunction
with the Company's audited consolidated financial statements and related notes
thereto, as of December 31, 1996 and for each of the three years in the period
ended December 31, 1996 and the Company's unaudited consolidated condensed
financial statements and notes thereto as of September 30, 1997 and for the
nine months ended September 30, 1997 and 1996 which are included elsewhere in
this Proxy Statement-Prospectus. The selected historical consolidated
financial data for the nine months ended September 30, 1997 are not
necessarily indicative of the operating results to be expected for the entire
fiscal year. All dollar amounts are in thousands, except per share data.
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SELECTED STATEMENT OF OPERATIONS DATA OF THE COMPANY
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Local exchange service. $22,846 $22,345 $23,836 $22,966 $25,585 $18,906 $21,749
Access charges......... 13,493 14,845 14,689 13,608 16,124 11,618 12,714
International long-
distance revenues (1). 37,495 44,299 76,820 128,939 145,080 112,259 92,977
Universal Service Fund. 11,168 13,201 12,081 12,151 11,360 8,406 10,494
Billing and other
revenues.............. 4,427 4,490 4,525 4,238 5,290 3,722 4,185
Directory advertising.. 3,420 3,020 2,916 2,730 2,563 1,938 1,332
Cellular services...... 2,657 2,808 3,616 5,910 5,480 4,457 2,894
Product sales and 4,479 4,489 4,879 5,128 5,435 3,931 3,380
rental................ ------- ------- ------- ------- ------- ------- -------
Total revenue.......... 99,985 109,497 143,362 195,670 216,917 165,237 149,725
Total expense........... 63,702 84,975 105,214 149,193 172,863 131,505 116,683
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations before
interest expense,
income taxes and
minority interest...... 36,283 24,522 38,148 46,477 44,054 33,732 33,042
Interest expense, net... 9,109 11,837 12,798 11,540 10,831 (8,285) (7,743)
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations before
income taxes and
minority interest...... 27,174 12,685 25,350 34,937 33,223 25,447 25,299
Income taxes (2)........ 9,562 5,458 10,465 15,250 13,039 10,484 (739)
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations before
minority interest...... 17,612 7,227 14,885 19,687 20,184 14,963 26,038
Minority interest....... (2,056) (1,030) (1,743) (2,477) (2,177) (1,860) (1,358)
------- ------- ------- ------- ------- ------- -------
Income from continuing $15,556 $ 6,197 $13,142 $17,210 $18,007 $13,103 $24,680
operations............. ======= ======= ======= ======= ======= ======= =======
Income per share from
continuing operations.. $ 1.27 $ 0.50 $ 1.07 $ 1.40 $ 1.47 $ 1.07 $ 2.01
Dividends per share..... $ 0.32 $ 0.20 -- -- -- -- --
Weighted average number
of shares.............. 12,273 12,273 12,273 12,273 12,273 12,273 12,273
</TABLE>
SELECTED BALANCE SHEET DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ----------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Fixed assets, net....... $225,886 $249,415 $242,548 $226,660 $251,996 $251,648
Total assets............ 315,019 336,564 340,113 371,939 389,324 391,819
Short-term debt
(including current
portion of long-term
debt).................. 10,540 19,362 19,249 24,841 30,095 29,217
Long-term debt, net..... 159,637 152,453 141,214 128,362 116,227 106,469
Stockholders' equity.... 99,959 101,300 114,861 130,956 149,791 174,471
</TABLE>
- --------
(1) 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 approximately $9.5 million of
lost revenues over a period of 18 months relating to an October 1995 PUC
order which temporarily reduced rates for outbound long-distance calls to
certain countries. These reduced rates were in effect for the period of
October 1995 through January 1997. In January 1997, on an appeal by GT&T,
the Guyana High Court voided the PUC's order in regards to the reduced
rates described above and rates were returned to the rates in existence in
October 1995. GT&T put such surcharge into effect on October 1, 1997
pending an ultimate trial on the merits. The Company has recognized the
approximately $9.5 million of lost revenues in the nine months ended
September 30, 1997.
(2) In May 1997, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1,
1998) from 90% of Virgin Islands income taxes and 100% of Virgin Islands
gross receipts, excise and property taxes. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, the
Company has adjusted its deferred tax assets and liabilities to reflect the
change in tax rates applicable to Vitelco during the benefit period. This
change resulted in the Company recording a non-recurring credit to income
tax expense of approximately $10.9 million ($.89 per share) in the nine
months ended September 30, 1997.
(3) Does not reflect the estimated pro-forma non-recurring loss of $55 million
on the split-off and fair valuation of the net assets of New ATN upon
consummation of the Transaction.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS OF THE COMPANY
INTRODUCTION
The Company's revenues and income from operations have been derived
principally from the operations of its telephone subsidiaries, Vitelco and
GT&T. Vitelco derives most of its revenues from local telephone and long-
distance access services. GT&T derives almost all of its revenues from
international telephone services. Other operations include VitelCellular,
which provides cellular telephone service in the U.S. Virgin Islands; and
Vitelcom, which supplies customer premises equipment in the U.S. Virgin
Islands.
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 consists of depreciation charges for telephone
plant and equipment and expenses related to telephone plant and network
administration, engineering, power, materials and supplies, provisioning and
plan 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 Vitelco's and 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.
Cellular services and product sales and rentals expense includes the operating
expense of VitelCellular and Vitelcom. General and administrative expenses
consist principally of parent company overheads and amortization.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Operating revenues for the nine months ended September 30, 1997 were $149.7
million as compared to $165.2 million for the corresponding period of the
prior year, a decrease of $15.5 million, or 9%.
The decrease was principally due to a $31.8 million, or 38%, decrease in
audiotext traffic revenues at GT&T for the nine months ended September 30,
1997. GT&T's volume of audiotext traffic fluctuated between 9 and 10 million
minutes per month in 1996. Through the first nine months of 1997, the volume
of audiotext traffic has averaged about 16% less than in the comparable period
of 1996. The reduction in traffic volume is estimated to account for
approximately $13.6 million, or 43% of the $31.8 million decrease in audiotext
revenues. Chargebacks from a carrier for the nine months ended September 30,
1997 approximated $4.3 million, representing 13% of the decline in revenues in
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 nine months ended September 30, 1997. The
remaining $13.9 million, or 44% of the decrease in audiotext revenue, resulted
from a combination of the following: the mislabeling of the origin of certain
traffic, changes in the traffic mix, certain accounting rate reductions, and
the strength of the U.S. dollar against 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 collection 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.
44
<PAGE>
GT&T's outbound international revenues for the nine months ended September
30, 1997 increased $13.2 million, principally as a result of the recognition
of approximately $9.5 million of revenues relating to outbound international
long distance revenues at GT&T for the period from October 1995 to January
1997. See "Regulatory Matters" for further discussion.
Vitelco's telephone operations revenues increased $5.5 million for the nine
months ended September 30, 1997. This increase is primarily the result of the
recovery from Hurricane Marilyn in September 1995 and an increase in Universal
Service Fund revenues of $2.1 million for the nine months ended September 30,
1997, as a result of increased investment in net fixed assets. At September
30, 1997 Vitelco had 61,326 lines in service compared to 58,431 at the
corresponding date in the prior year.
Operating expenses for the nine months ended September 30, 1997 were $116.7
million, a decrease of $14.8 million, or 11%, from operating expenses of
$131.5 million for the corresponding period of the prior year. The decrease
was due principally to a decrease in audiotext and outbound traffic expense at
GT&T of $15.2 million for the nine months ended September 30, 1997, due to
decreased traffic volumes. Somewhat offsetting the decrease was an increase in
plant non-specific expenses which increased as a result of increased plant in
service. General and administrative expenses decreased $1.3 million for the
nine months ended September 30, 1997. This decrease was principally due to a
non-recurring charge of $2.8 million in the first three months of 1996 for the
Company's obligation to reimburse its two Co-Chief Executive Officers for
certain litigation expenses in connection with a management dispute settled in
February 1996, offset by a $1.3 million charge related to the suspension of
the acquisition of the Congo national phone system in the second quarter of
1997. As a percentage of operating revenues, operating expenses decreased to
approximately 78% for the nine month period ended September 30, 1997 from
approximately 80% for the corresponding period of 1996.
Income from operations before interest expense, income taxes and minority
interest decreased $690,000 for the nine months ended September 30, 1997, as a
result of the factors affecting operating revenues and expenses discussed
above. GT&T's contribution to income from operations decreased $5.0 million,
or 18%, for the nine months ended September 30, 1997, 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. Vitelco's contribution to income from operations
increased by $4.7 million, or 38%, for the same period. Other operations
contribution to income from operations decreased by $1.8 million, or 77%, for
the same period, principally from decreased cellular operations.
With a $542,000 decrease in net interest expense due to reduced debt, income
before income taxes and minority interest decreased $148,000 for the nine
months ended September 30, 1997.
As discussed in Note C to the Consolidated Condensed Financial Statements,
Vitelco received approval from the Virgin Islands Industrial Development
Commission for a five year exemption (commencing October 1, 1998) from 90% of
Virgin Islands income taxes and 100% of Virgin Islands gross receipts, excise
and property taxes. In accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, the Company has adjusted its
deferred tax assets and liabilities to reflect the change in the tax rates
applicable to Vitelco during the benefit period. This change has resulted in
the Company recording a non-recurring credit to income tax expense of
approximately $10.9 million in the nine months ended September 30, 1997. The
effect of the tax exemption on future current taxes payable during the benefit
period will be reflected in the Company's financial statements during the
benefit period. On October 9, 1997 the Virgin Islands Public Service
Commission ("PSC") instituted a proceeding to determine whether Vitelco's
rates were just and reasonable in light of this tax rebate. There can be no
assurance as to the outcome of this proceeding.
Before giving effect to the change in deferred taxes discussed above, the
Company's effective tax rate for the nine months ended September 30, 1997 was
40.2% as compared to 41.2% for the corresponding period of the prior year.
45
<PAGE>
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Operating revenues for the year ended December 31, 1996 were $216.9 million
as compared to $195.7 million for the prior year, an increase of $21.2 million
(11%). The increase was due principally to a $14.9 million increase in
audiotext traffic revenues at GT&T and a $4.3 million increase in local
exchange and access charges at Vitelco for the year ended December 31, 1996.
Vitelco's telephone operations revenues increased $4.3 million for the year
ended December 31, 1996, principally as a result of restored lines in service
to pre-Hurricane Marilyn levels. Hurricane Marilyn struck the Virgin Islands
putting approximately 37,800 of Vitelco's approximately 60,000 access lines
out of service on September 15, 1995. At December 31, 1996 Vitelco had 59,470
lines in service.
Operating expenses increased $23.7 million (16%) for the year ended December
31, 1996. 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, although certain
expenses at Vitelco were reduced in the first quarter of 1996 as Vitelco's
work force was shifted from maintenance activities to repairing the damage
caused by Hurricane Marilyn.
Overall, income from telephone operations decreased $3.2 million (6%) for
the year ended December 31, 1996. 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. These revenue increases at GT&T were more than offset by
increased international long distance, plant, and other operating expenses.
This resulted in a decrease in GT&T's contribution to income from telephone
operations of $4.6 million (12%) for the year ended December 31, 1996. This
was offset by a $1.4 million increase in the contribution to income from
telephone operations at Vitelco caused by the restoration of lines in service
after Hurricane Marilyn's impact 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. In addition, margins are expected to decrease in 1997 as certain
foreign carriers insist that terminating carriers of audiotext traffic bear a
portion of the risk of non-collection associated with such traffic.
Net interest expense declined $709,000 due to decreased interest rates and
lower outstanding debt. This resulted in income before income taxes and
minority interest decreasing $1.7 million (5%) for the year ended December 31,
1996.
The Company's effective tax rate for the year ended December 31, 1996 was
39.2% as compared to 43.6% for the prior year. The $2.2 million decrease in
income tax expense is principally due to lower taxable income at GT&T which
has a higher effective tax rate than the balance of the Company.
46
<PAGE>
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Operating revenues for the year ended December 31, 1995 were $195.7 million
as compared to $143.4 million for the prior year, an increase of $52.3 million
(36%). The increase was due to a $52 million increase in audiotext traffic
revenues at GT&T for the year ended December 31, 1995. Vitelco's telephone
operations revenues decreased $3.2 million for the year ended December 31,
1995, principally as a result of Hurricane Marilyn which put approximately
37,800 of Vitelco's approximately 60,000 access lines out of service on
September 15, 1995. See "Business--Vitelco." At December 31, 1995 Vitelco had
40,761 lines in service. Principally as a result of the impact of Hurricane
Marilyn on Vitelco's lines in service in the fourth quarter of 1995, Vitelco's
local exchange revenues decreased by $1.7 million (8%) and Vitelco's
interstate access charge revenues decreased by $1.1 million for the year ended
December 31, 1995.
Operating expenses increased $44 million (42%) for the year ended December
31, 1995. This increase was due principally to increased audiotext and
outbound traffic expenses at GT&T of $38.4 million, due to increased traffic
volume. In addition, plant specific and plant non-specific expenses increased
as a result of increased plant in service, although certain expenses at
Vitelco were reduced in the fourth quarter of 1995 as Vitelco's work force was
shifted from maintenance activities to repairing the damage caused by
Hurricane Marilyn.
Overall, income from operations increased $8.5 million (19%) for the year
ended December 31, 1995. The increase occurred principally because of
increased audiotext traffic at GT&T. Audiotext traffic increased 62.5 million
minutes and other GT&T inbound paid and outcollect traffic increased 2.1
million minutes for the year ended December 31, 1995. These revenue increases
at GT&T were partially offset by increased international long distance, plant,
and other operating expenses. This resulted in an increase in GT&T's
contribution to income of $11.1 million (40%) for the year ended December 31,
1995. This was offset by an approximately $1.5 million decrease in the
contribution to income from telephone operations at Vitelco caused by the
impact of Hurricane Marilyn on Vitelco's revenues and expenses discussed
above.
Net interest expense decreased $1.3 million due to decreased rates and debt
resulting in income before income taxes and minority interest increasing $9.6
million (38%) for the year ended December 31, 1995.
The Company's effective tax rate for the year ended December 31, 1995 was
43.6% as compared to 41.3% for the prior year. The $4.8 million increase in
income tax expense is principally due to higher taxable income.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
REGULATORY CONSIDERATIONS
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.
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. 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 Transaction as a result of a termination of the License,
the IRS might revoke the Tax Ruling retroactively, with the result that the
distribution of ECI Common Stock might not be tax free for U.S. federal income
tax purposes to the Company and the holders of Common Stock and Class A Common
Stock. See "The Transaction--Certain U.S. Federal Income Tax Consequences."
47
<PAGE>
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $9.5 million for the period when the order was
effective. GT&T initially instituted 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 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 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
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 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. The deductibility of these
advisory fees 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
48
<PAGE>
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 an assessment 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 this assessment stems 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
assessment 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 assessment 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.
The principal issues raised by the November 1997 assessment are as follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S.$4.1 million of
taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.$2.1
million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High Court's
decision in August 1995 referred to above (approximately U.S.$2.9 million
of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable assets
(approximately U.S.$1.6 million of taxes)
Approximately U.S.$1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
As a result of the decline in GT&T's revenues and profits from audiotext
traffic in 1997 as previously discussed, GT&T is preparing to file an
application with the PUC for a significant increase in local and outbound
international rates. There can be no assurance as to whether or when GT&T will
receive any such rate increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company depends upon funds received from subsidiaries to meet its
capital needs, including servicing existing debt and its ongoing program of
seeking to acquire telecommunications licenses and businesses. The major
sources of funds for the Company has been advisory fees received from GT&T and
interest payments by GT&T and ATN-VI on intercompany debt.
The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997, November 19, 1997 and December 5, 1997, which
includes a Proxy Statement-Prospectus to consider and vote upon a proposed
transaction to divide the Company into two separate publicly-owned companies (
the "Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. The Company will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the
49
<PAGE>
Transaction by the holders of a majority of the outstanding shares of the
Company Common Stock, completion of $17.4 million of long-term financing by ECI
or ATN-VI, the listing of ECI Common Stock on the AMEX and the continued
listing of the Company Common Stock on the AMEX and the absence of any material
adverse change in the business of the Companies. In October 1997 a tax ruling
was received by the Company from the Internal Revenue Service to the effect
that the transfer of assets and liabilities to ECI and the distribution of ECI
Common Stock to shareholders of the Company will be tax free for federal income
tax purposes to the Company and its shareholders.
As a result of the Transaction, the Company's liquidity and capital resources
may change significantly, and the Company will have fewer resources and
significantly reduced operations. On the Effective Date of the Transaction,
Atlantic Tele-Network, Inc. will record a loss on the split-off and fair
valuation of the net assets of New ATN which on a pro forma basis is estimated
to be $55 million. Accordingly, equity of Atlantic Tele-Network, Inc. will
decrease by the loss recorded on the split-off and fair valuation of the net
assets of New ATN on the Effective Date. 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
Matters", 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 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.
Until the effective date of the Transaction, other potential sources of funds
to the Company are from repayment of loans or dividends from ATN-VI. However,
the RTFC Loan limits the payment of dividends by ATN-VI unless ATN-VI meets
certain financial ratios (which were not met at September 30, 1997).
Consequently ATN-VI was restricted from paying dividends at that date. At
September 30, 1997, the Company also holds a note of ATN-VI in the amount of
approximately $24 million which may be repaid by ATN-VI in whole or in part
without regard to the limit on the payment of dividends by ATN-VI.
However, ATN-VI's ability to service its debt is dependent on funds from its
parent or its subsidiaries . The RUS loan and applicable RUS regulations
restrict Vitelco's ability to pay dividends based upon certain net worth tests
except for limited dividend payments authorized when specific security
instrument criteria are unable to be met. Settlement agreements made in 1989
and 1991 with the PSC also contain certain restrictions on dividends by Vitelco
which, in general, are more restrictive than those imposed by the RUS.
Dividends by Vitelco are generally limited to 60% of its net income, although
additional amounts are permitted to be paid for the sole purpose of servicing
ATN-VI's debt to the RTFC. Under the above restrictions, at September 30, 1997,
Vitelco's dividend paying capacity was approximately $8.8 million in excess of
the amounts permitted for servicing ATN-VI debt.
The RTFC Loan and RUS Loan agreements also require, among other things,
maintenance of minimum debt service and times interest earned coverage and
restrictions on issuance of additional long-term debt. As of
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September 30, 1997, the Company was in compliance with all covenants contained
in its long-term debt agreements.
At September 30, 1997, Vitelco had outstanding $5 million of borrowings
under a $5 million line of credit with the RTFC expiring in March 2000, and an
additional $5 million under a $15 million line of credit with the RTFC
expiring in October 1998. These borrowings were incurred to finance part of
the costs of repairing damage to Vitelco's telephone plant caused by Hurricane
Marilyn in September 1995. Vitelco has also received approval from the RUS for
$35.7 million of long-term financing, which may be used to repay Vitelco's
outstanding line of credit borrowings from the RTFC. Borrowings under
Vitelco's $5 million line of credit are required to be repaid within 12 months
of the date of the borrowing, but may be repaid from the proceeds of
borrowings under the $15 million line of credit. Borrowings under Vitelco's
$15 million line of credit will mature on October 31, 1998, at which date, if
long-term loan funds from RUS have not yet been made available to Vitelco,
Vitelco will have the option of rolling the outstanding amount borrowed under
that line of credit into a 15-year term loan from RTFC having terms
substantially similar to those contained in Vitelco's existing long-term loan
from the RTFC.
The Company's short term bank credit facility, under which the Company has
$5.5 million of loans outstanding, expired on October 1, 1994. The bank has
orally agreed to renew this facility until October 1, 1998 and to waive the
prohibition on borrowing under the facility during the first thirty days of
the renewal period.
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 the current rate of approximately 142 to the
U.S. dollar, and it has remained relatively stable at approximately that rate
since 1994.
The effect of inflation on the Company's financial results of telephone
operations in the U.S. Virgin Islands has not been significant in recent
years. The effect of inflation on the cost of providing telephone service in
the U.S. Virgin Islands has generally been offset (without any increase in
local subscribers' rates) by increased revenues resulting from growth in the
number of subscribers and from regulatory cost recovery practices in
determining access revenues.
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SELECTED HISTORICAL FINANCIAL DATA OF NEW ATN
The following selected historical financial data have been derived from the
audited combined financial statements of New ATN, which include the Company's
business and operations in Guyana, as of December 31, 1996 and for each of the
three years ended December 31, 1996 and from the New ATN unaudited combined
financial statements for the years ended December 31, 1993 and 1992. The
following selected historical financial data for the nine months ended
September 30, 1997 and 1996 have been derived from the unaudited combined
condensed interim financial statements of New ATN which, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation. The selected
historical combined financial data should be read in conjunction with the
audited combined financial statements and related notes thereto of New ATN, as
of December 31, 1996 and for each of the three years in the period ended
December 31, 1996 and New ATN's unaudited combined condensed interim financial
statements and notes thereto as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 which are included elsewhere in this Proxy
Statement-Prospectus. The combined financial data for the nine months ended
September 30, 1997 are not necessarily indicative of the operating results to
be expected for the entire fiscal year. All dollar amounts are in thousands.
52
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SELECTED STATEMENT OF OPERATIONS DATA OF NEW ATN
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ---------- ---------
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Local exchange service. $ 375 $ 566 $ 754 $ 1,631 $ 2,463 $ 1,823 $ 2,123
International long-
distance revenues (2). 37,495 44,299 76,820 128,939 145,080 112,259 92,977
Other revenues......... 430 280 582 600 710 536 598
------- ------- ------- -------- -------- ---------- ---------
Total revenue.......... 38,300 45,145 78,156 131,170 148,253 114,618 95,698
Total expense........... 21,866 30,951 57,782 99,745 121,222 93,422 77,560
------- ------- ------- -------- -------- ---------- ---------
Income from continuing
operations before
interest expense,
income taxes and
minority interest...... 16,434 14,194 20,374 31,425 27,031 21,196 18,138
Interest (income)
expense, net........... (1,117) 1,669 3,278 2,678 1,749 1,357 1,125
------- ------- ------- -------- -------- ---------- ---------
Income from continuing
operations before
income taxes and
minority interest...... 17,551 12,525 17,096 28,747 25,282 19,839 17,013
Income taxes............ 5,989 5,211 7,411 13,619 10,824 8,643 7,558
------- ------- ------- -------- -------- ---------- ---------
Income from continuing
operations before
minority interest...... 11,562 7,314 9,685 15,128 14,458 11,196 9,455
Minority interest....... (2,043) (1,008) (1,696) (2,390) (2,096) (1,779) (1,371)
------- ------- ------- -------- -------- ---------- ---------
Income from continuing
operations............. $ 9,519 $ 6,306 $ 7,989 $ 12,738 $ 12,362 $ 9,417 $ 8,084
======= ======= ======= ======== ======== ========== =========
</TABLE>
SELECTED BALANCE SHEET DATA OF NEW ATN
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AT SEPTEMBER 30,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1997
BALANCE SHEET DATA: -------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed assets, net....... $ 75,167 $ 88,672 $ 91,025 $ 92,102 $ 97,780 $ 99,360
Total assets............ 133,789 159,297 162,688 185,481 194,493 198,434
Short-term debt
(including current
portion of
long-term debt)........ 3,183 10,903 11,515 15,626 11,047 11,047
Long-term debt, net..... 37,199 37,830 34,720 25,969 20,398 16,427
Stockholders' equity.... 77,711 77,537 85,526 98,264 110,626 118,710
</TABLE>
- --------
(1) Historical income and dividend per share amounts have not been presented
as this information is not considered meaningful.
(2) 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 approximately $9.5 million of
lost revenues over a period of 18 months relating to an October 1995 PUC
order which temporarily reduced rates for outbound long-distance calls to
certain countries. These reduced rates were in effect for the period of
October 1995 through January 1997. In January 1997, on an appeal by GT&T,
the Guyana High Court voided the PUC's order in regards to the reduced
rates described above and rates were returned to the rates in existence in
October 1995. GT&T put such surcharge into effect on October 1, 1997
pending an ultimate trial on the merits. The Company has recognized the
approximately $9.5 million of lost revenues in the nine months ended
September 30, 1997.
(3) Does not reflect the estimated pro-forma non-recurring loss of $55 million
on the split-off and fair valuation of the net assets of New ATN upon the
consummation of the Transaction.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF NEW ATN
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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Operating revenues for the nine months ended September 30, 1997 were $95.7
million as compared to $114.6 million for the corresponding period of the
prior year, a decrease of $18.9 million, or 17%.
The decrease was principally due to a $31.8 million, or 38%, decrease in
audiotext traffic revenues at GT&T for the nine months ended September 30,
1997. GT&T's volume of audiotext traffic fluctuated between 9 and 10 million
minutes per month in 1996. Through the first nine months of 1997, the volume
of audiotext traffic has averaged about 16% less than in the comparable period
of 1996. The reduction in traffic volume is estimated to account for
approximately $13.6 million, or 43% of the $31.8 million decrease in audiotext
revenues. Chargebacks from a carrier for the nine months ended September 30,
1997 approximated $4.3 million, representing 13% of the decline in revenues in
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 nine months ended September 30, 1997. The
remaining $13.9 million, or 44% 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 collection 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.
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GT&T's outbound international revenues for the nine months ended September
30, 1997 increased $13.2 million principally as 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. See
"Regulatory Matters" for further discussion.
Operating expenses for the nine months ended September 30, 1997 were $77.6
million, a decrease of $15.9 million or 17%, from operating expenses of $93.4
million for the corresponding period of the prior year. The decrease was due
principally to a decrease in audiotext and outbound traffic expense at GT&T of
$15.2 million for the nine months ended September 30, 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. General and administrative expenses decreased $1.9
million for the nine months ended September 30, 1997. This decrease was
principally due to a non-recurring charge of $2.8 million in the first three
months of 1996 for the companies obligation to reimburse its two Co-Chief
Executive Officers for certain litigation expenses in connection with a
management dispute settled in February 1996, offset by a $1.3 million charge
related to the suspension of the acquisition of the Congo national phone
system in the second quarter of 1997. As a percentage of operating revenues,
operating expenses decreased to approximately 81% for the nine month period
ended September 30, 1997 from approximately 82% for the corresponding period
of 1996.
Income from operations before interest expense, income taxes and minority
interest for the nine months ended September 30, 1997 was $18.1 million, a
decrease of $3.1 million or 14%, from income from telephone operations of
$21.2 million for the corresponding period of the prior year, as a result of
factors affecting revenues and operating expenses discussed above, even though
GT&T recognized approximately $9.5 million of revenues relating to outbound
international long distance revenues for the period October 1995 to January
1997 discussed above.
Net interest expense decreased $232,000 due to reduced debt resulting in
income before income taxes and minority interest for the nine months ended
September 30, 1997 of $17.0 million, a decrease of $2.8 million or 14%,
compared to $19.8 million for the corresponding period of the prior year.
The Company's effective tax rate for the nine months ended September 30,
1997 was 44.4% as compared to 43.6% for the corresponding period of the prior
year.
The minority interest in earnings consists of the Guyana government's 20%
interest in GT&T.
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 $121.2 million
as compared to $99.7 million for the prior year, an increase of $21.5 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, which resulted from
a substantial increase in traffic volume.
Overall, income from operations before interest expense, income taxes and
minority interest for the year ended December 31, 1996 was $27.0 million as
compared to $31.4 million for the prior year, a decrease of $4.4 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
55
<PAGE>
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. In addition, margins are expected to decrease in 1997 as certain
foreign carriers insist that terminating carriers of audiotext traffic bear a
portion of the risk of non-collection associated with such traffic.
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 $4.4 million
decrease in income from operations discussed above and the $929,000 decrease
in net interest expense due to decreased interest rates and lower outstanding
debt.
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.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Operating revenues for the year ended December 31, 1995 were $131.2 million
as compared to $78.2 million for the prior year, an increase of $53.0 million,
or 68%. The increase was principally due to a $52.0 million increase in
audiotext traffic revenues at GT&T for the year ended December 31, 1995.
Operating expenses for the year ended December 31, 1995 were $99.7 million
as compared to $57.8 million for the prior year, an increase of $42 million or
73%. This increase was due principally to increases in audiotext and outbound
traffic expenses at GT&T of $38.4 million due to increased traffic volume. In
addition, plant specific and plant non-specific expenses increased as a result
of increased plant in service. As a percentage of operating revenues combined
operating expenses increased to approximately 76% for the year ended December
31, 1995, from approximately 74% for the prior year.
Overall, income from operations before interest expense, income taxes and
minority interest for the year ended December 31, 1995 was $31.4 million as
compared to $20.3 million for the prior year, an increase of $11.1 million, or
54%. The increase occurred principally because of increased audiotext traffic
at GT&T. Audiotext traffic increased 62.5 million minutes and other GT&T
inbound paid and outcollect traffic increased 2.1 million minutes for the year
ended December 31, 1995. These revenue increases at GT&T were partially offset
by increased international long distance, plant, and other operating expenses.
Income before income taxes and minority interest for the year ended December
31, 1995 was $28.7 million as compared to $17.1 million for the prior year, an
increase of $11.7 million, or 68%.. The significant factors that contributed
to this for the year ended December 31, 1995 were the $11.1 million increase
in income from operations discussed above and the $600,000 decrease in
interest expense due to decreased rates and lower outstanding debt.
The Company's effective tax rate for the year ended December 31, 1995 was
47.4% as compared to 43.3% for the prior year. The $6.2 million increase in
income tax expense is principally due to higher taxable income in the current
year.
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The minority interest in earnings consists of the Guyana government's 20%
interest in GT&T.
REGULATORY CONSIDERATIONS
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.
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. 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 Transaction as a result of a termination of the License,
the IRS might revoke the Tax Ruling retroactively, with the result that the
distribution of ECI Common Stock might not be tax free for U.S. federal income
tax purposes to the Company and the holders of Common Stock and Class A Common
Stock. See "The Transaction--Certain U.S. Federal Income Tax Consequences."
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $9.5 million for the period when the order was
effective. GT&T initially instituted 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 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 the 1998 and to
provide to subscribers
57
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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 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 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. The deductibility of these
advisory fees 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 an assessment 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 this assessment stems 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
assessment 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 assessment 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.
The principal issues raised by the November 1997 assessment are as follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S.$4.1 million of
taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.$2.1
million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High Court's
decision in August 1995 referred to above (approximately U.S.$2.9 million
of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable assets
(approximately U.S.$1.6 million of taxes)
Approximately U.S.$1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
As a result of the decline in GT&T's revenues and profits from audiotext
traffic in 1997 as previously discussed, GT&T is preparing to file an
application with the PUC for a significant increase in local and outbound
international rates. There can be no assurance as to whether or when GT&T will
receive any such rate increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company has depended upon funds received from subsidiaries to meet its
capital needs, including servicing existing debt and its ongoing program of
seeking to acquire telecommunications licenses and businesses. The major
sources of funds for the Company have been advisory fees received from GT&T
and interest payments by GT&T and ATN-VI on intercompany debt.
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The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997, November 19, 1997 and December 5, 1997, which
includes a Proxy Statement-Prospectus to consider and vote upon a proposed
transaction to divide the Company into two separate publicly-owned companies (
the "Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. New ATN will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of the Company Common Stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, the
listing of ECI Common Stock on the AMEX and the continued listing of the
Company Common Stock on the AMEX and the absence of any material adverse
change in the business of the Companies. In October 1997 a tax ruling was
received by the Company from the Internal Revenue Service to the effect that
the transfer of assets and liabilities to ECI and the distribution of ECI
common stock to shareholders of the Company will be tax free for federal
income tax purposes to the Company and its shareholders.
As a result of the Transaction, the Company's liquidity and capital
resources may change significantly, and the Company will have fewer resources
and significantly reduced operations. On the Effective Date of the
Transaction, Atlantic Tele-Network, Inc. will record a loss on the split-off
and fair valuation of the net assets of New ATN which on a pro forma basis is
estimated to be $55 million. Accordingly, equity of Atlantic Tele-Network,
Inc. will decrease by the loss recorded on the split-off and fair valuation of
the net assets of New ATN on the Effective Date. 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 Matters", 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 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.
The Company's short term bank credit facility, under which the Company has
$5.5 million of loans outstanding, expired on October 1, 1994. The bank has
orally agreed to renew this facility until October 1, 1998 and to waive the
prohibition on borrowing under the facility during the first thirty days of
the renewal period. This indebtedness is to be assumed by ECI in the
Transaction.
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 the current rate of approximately
142 to the U.S. dollar, and it has remained relatively stable at approximately
that rate since 1994.
59
<PAGE>
NEW ATN
PRO FORMA FINANCIAL DATA
The following are unaudited pro forma combined condensed statements of
operations and combined condensed balance sheet for New ATN. The pro forma
combined condensed balance sheet as of September 30, 1997 gives effect to the
Transaction, as if it occurred on September 30, 1997. The unaudited pro forma
combined condensed statement of operations for the year ended December 31,
1996 and the nine months ended September 30, 1997 gives effect to the
Transaction, as if it occurred on January 1, 1996. The Transaction is
accounted for as a non-pro rata split-off of New ATN, and accordingly New ATN
is accounted for at fair value. New ATN is considered to be the split-off
entity since it is anticipated that ECI will have larger market capitalization
(based on the Opinion), ECI will have greater asset value, ECI will retain
more of the top management of the Company, and ECI had greater net income for
the nine months ended September 30, 1997. The pro forma adjustments are
described in the accompanying notes hereto. The pro forma combined condensed
balance sheet and statements of operations should be read in conjunction with
New ATN's combined financial statements and notes thereto, as of December 31,
1996 and for each of the three years in the period ended December 31, 1996 and
the New ATN's unaudited combined condensed interim financial statements and
notes thereto as of September 30, 1997 and for the nine months ended September
30, 1997 and 1996 which are included elsewhere in this Proxy Statement-
Prospectus. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the Transaction had occurred on January
1, 1996 or September 30, 1997, respectively, nor is it necessarily indicative
of future operating results or financial position. All dollar amounts are in
thousands, except per share data.
60
<PAGE>
NEW ATN
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NEW ATN PRO FORMA FAIR VALUE AS
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 9,229 $ 818 (1) $ 10,047 $ 10,047
Accounts receivable..... 44,162 (205)(1) 43,957 43,957
Other current assets.... 3,592 3,592 3,592
-------- -------- -------- -------- --------
Total current assets.... 56,983 613 57,596 57,596
Net fixed assets........ 99,360 (392)(1) 98,968 (69,922)(3) 29,046(6)
Due from ECI............ 28,340 (28,340)(2) 0 0
Other assets............ 13,751 13,751 13,751
-------- -------- -------- -------- --------
$198,434 $(28,119) $170,315 $(69,922) $100,393
======== ======== ======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities..... $ 28,718 $ (5,588)(1) $ 23,130 $ 23,130
Long-term debt.......... 16,427 (122)(1) 16,305 16,305
Other liabilities and
minority interest...... 34,579 34,579 (18,907)(3) 15,672(6)
Total stockholders'
equity................. 118,710 5,931 (1) 96,301 (51,015)(3) 45,286
(28,340)(2)
-------- -------- -------- -------- --------
$198,434 $(28,119) $170,315 $(69,922) $100,393
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
61
<PAGE>
NEW ATN
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
PRO FORMA
NEW ATN PRO FORMA FAIR VALUE PRO FORMA
HISTORICAL ADJUST- ADJUST- AS
RESULTS MENTS PRO FORMA MENTS ADJUSTED
---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues.... $148,253 $148,253 $148,253
Net expenses.... 121,222 121,222 (3,077)(5) 118,145
-------- -------- -------- ------- --------
Income from
continuing
operations
before interest
expense,
minority
interest and
income taxes.... 27,031 27,031 3,077 30,108
Interest ex-
pense, net...... 1,749 1,650 (4) 3,399 3,399
-------- -------- -------- ------- --------
Income from
continuing
operations
before income
taxes and
minority
interest........ 25,282 (1,650) 23,632 3,077 26,709
Income taxes.... 10,824 (561)(4) 10,263 1,384 (5) 11,647
-------- -------- -------- ------- --------
Income from
continuing
operations
before
minority
interest........ 14,458 (1,089) 13,369 1,693 15,062
Minority inter-
est............. (2,096) (2,096) (2,096)
-------- -------- -------- ------- --------
Income from con-
tinuing opera-
tions........... $ 12,362 $(1,089) $ 11,273 $ 1,693 $ 12,966
======== ======== ======== ======= ========
Income per share
from continuing
operations...... $ 2.64
========
Weighted average
shares outstand-
ing............. 4,909
========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------
PRO FORMA
PRO FORMA FAIR VALUE PRO FORMA
HISTORICAL ADJUST- ADJUST- AS
RESULTS MENTS PRO FORMA MENTS ADJUSTED
------------ ------------ --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues.... $95,698(7) $95,698 $95,698
Net expenses.... 77,560 77,560 (2,307)(5) 75,253
------------ ------------ --------- ------------- ---------
Income from
continuing
operations
before interest
expense,
minority
interest and
income taxes.... 18,138 18,138 2,307 20,445
Interest ex-
pense, net...... 1,125 1,275 (4) 2,400 2,400
------------ ------------ --------- ------------- ---------
Income from
continuing
operations
before income
taxes and
minority
interest........ 17,013 (1,275) 15,738 2,307 18,045
Income taxes.... 7,558 (434)(4) 7,124 1,038 (5) 8,162
------------ ------------ --------- ------------- ---------
Income from
continuing
operations
before
minority
interest........ 9,455 (841) 8,614 1,269 9,883
Minority inter-
est............. (1,371) (1,371) (1,371)
------------ ------------ --------- ------------- ---------
Income from con-
tinuing opera-
tions........... $ 8,084 $ (841) $ 7,243 $ 1,269 $ 8,512
============ ============ ========= ============= =========
Income per share
from continuing
operations...... $ 1.73
=========
Weighted average
shares outstand-
ing............. 4,909
=========
</TABLE>
The accompanying notes are an integral part of this statement.
62
<PAGE>
NEW ATN
NOTES TO PRO FORMA FINANCIAL DATA
The Transaction is accounted for as a non-pro rata split-off of New ATN, and
New ATN is accounted for at fair value. New ATN is considered to be the split-
off entity since management anticipates that ECI will have greater market
capitalization (based on the Opinion), ECI will have greater asset value, ECI
will retain more of the top management of the Company, and ECI had greater net
income for the nine months ended September 30, 1997.
There is a significant difference between pre-Transaction historical costs
and the pro-forma allocated fair values of net fixed assets of New ATN. As a
regulated entity, GT&T's costs, including all of its pre-Transaction
historical costs, are recoverable from cash flows created through rates. The
allocated fair value of net fixed assets in the pro-forma financial statements
of New ATN is based on an implied value derived by Prudential Securities in
connection with the Opinion (See Note 3 below) by applying significant
discounts to these cash flows to account for the declining volumes and profit
margins associated with audiotext and certain political and regulatory risks,
which causes the differences noted above. After the Transaction, the net
assets of New ATN will be adjusted to their fair value based on the average
market price of New ATN common stock during a short period after the Effective
Date. This adjustment is likely to reduce the carrying value of New ATN's
fixed assets significantly below their historical cost and replacement value
and significantly to reduce New ATN's charges for depreciation after the
Effective Date.
The non-recurring loss on the split-off and fair valuation of the net assets
of New ATN of $55 million (loss on split-off of New ATN of $51 million plus
assumed transaction costs of $4 million) is not reflected in the pro forma
combined condensed statement of operations as this is a non-recurring expense
directly associated with the Transaction.
(1) To reflect the payment of the final closing adjustment of $4,818,000
under the Subscription Agreement (based on the assumed transaction costs of
$4 million), the assumption of certain bank indebtedness by ECI of
$5,710,000, the net transfer of miscellaneous assets and the payment of
assumed transaction costs of $4 million.
(2) To reflect the extinguishment in the Transaction of the intercompany
indebtedness of ECI. The payment of intercompany debt of $17.4 million and
use of proceeds to acquire 765,564 shares of Company common stock are not
reflected in the pro forma combined condensed financial statements of New
ATN as these are transactions of the Company, which is the accounting
predecessor of ECI, and as such will be reflected by ECI.
(3) To record the split-off of New ATN at fair value. Previously recorded
deferred tax liabilities of $18.9 million, which represents all the
deferred taxes related to basis differences in property, plant and
equipment, have been reversed and recorded in "other liabilities and
minority interest." The assumed fair value of the net assets of New ATN is
$9.23 per share, which is the midpoint in the range of implied values for
New ATN common stock determined by Prudential Securities in connection with
the Opinion (See "The Transaction--Opinion of Investment Banker") and
represents management's current best estimate of fair value. The
Transaction will be accounted for on the basis of the average market price
of New ATN common stock during a short period after the Effective Date.
That average market price may vary significantly from $9.23 per share, and
the use of $9.23 per share should not be viewed as a prediction of the
future market price of New ATN common stock.
(4) To reflect the reversal of (a) interest income paid by the Transferred
Subsidiaries to the Company of $2,155,000 and $1,659,000, (b) interest
expense on certain bank indebtedness to be assumed by ECI of $505,000 and
$384,000 and (c) the related tax impact of such items of $561,000 and
$434,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively.
63
<PAGE>
(5) To record the amortization of fair value adjustments and the related tax
impact of such. Fair value adjustments were amortized over 23 years which
is the average useful life of property, plant and equipment at GT&T. The
amortization of the fair value adjustments after the Effective Date will
reduce future depreciation expense, which as a result of such reduction may
be significantly less in the aggregate than the replacement cost of New
ATN's depreciable assets.
(6) The pro forma fair value adjustments are estimates that affect the pro
forma financial statements, including net fixed assets, tax liabilities and
expenses. The fair value estimate of the net assets of New ATN is based
upon the implied value which Prudential Securities determined in connection
with the Opinion (See "The Transaction--Opinion of Investment Banker") and
represents management's current best estimate of fair value. The amounts
the Company will ultimately record upon consummation of the Transaction as
fair value could differ significantly from the estimates in the pro forma
financial statements and thus could significantly affect pro forma net
fixed assets, tax liabilities and expenses.
(7) 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 approximately $9.5 million of lost
revenues over a period of 18 months relating to an October 1995 PUC order
which temporarily reduced rates for outbound long-distance calls to certain
countries. These reduced rates were in effect for the period of October
1995 through January 1997. In January 1997, on an appeal by GT&T, the
Guyana High Court voided the PUC's order in regards to the reduced rates
described above and rates were returned to the rates in existence in
October 1995. GT&T put such surcharge into effect on October 1, 1997
pending an ultimate trial on the merits. The Company has recognized the
approximately $9.5 million of lost revenues in the nine months ended
September 30, 1997.
(8) ECI shares certain general and administrative costs with New ATN. These
shared costs have historically been allocated in approximately the same
proportion as operating revenues bear to the Company's total operating
revenues. Management believes the allocation methods used are 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.
64
<PAGE>
BUSINESS AND PROPERTIES OF NEW ATN
On and immediately after the Effective Date, New ATN's sole operating
subsidiary will be the Guyana Telephone & Telegraph Company Limited ("GT&T").
GT&T provides all local service and domestic long-distance telecommunications
service within the Co-operative Republic of Guyana and international telephone
service between Guyana and foreign points. During 1996, approximately $148
million, or 100% (on a pro forma basis), of New ATN's total revenues was
derived from the operations of GT&T.
The Company acquired 80% of the capital stock of GT&T from the government of
Guyana for $16.5 million on January 28, 1991 (the "GT&T Acquisition"). The
government of Guyana owns the remaining 20% of the capital stock of GT&T. In
1991, GT&T was a newly organized company that had acquired substantially all
of the assets and certain liabilities of Guyana Telecommunication Corporation
("GTC"), a corporation wholly owned by the government of Guyana. GTC had been
the exclusive provider of telecommunications services in Guyana for more than
20 years.
The Company also provides managerial, technical, sales and marketing
services to GT&T in exchange for advisory fees equal to 6% of Revenues. See
"Risk Factors--Risks Relating to New ATN--Regulatory Risks."
New ATN expects from time to time to evaluate 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. New ATN expects to focus its attention on wire line
and cellular telephone business and cable television.
INTERNATIONAL TRAFFIC
GT&T's revenues and earnings are highly dependent upon international long-
distance calls, particularly international audiotext traffic, other calls
originating outside of Guyana and collect calls from Guyana to foreign points.
The following table sets forth data with respect to the volume of GT&T's
international traffic for the periods indicated:
INTERNATIONAL TRAFFIC (IN THOUSANDS OF MINUTES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------------
1994 1995 1996 1996 1997
------------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inbound Paid and
Outbound Collect....... 35,784 (38%) 37,920 (24%) 40,350 (21%) 29,797 (21%) 32,750 (25%)
Audio Text.............. 39,291 (42%) 101,763 (63%) 122,476 (64%) 93,217 (64%) 78,147 (60%)
------ ------ ------- ------ ------- ------ -------- ------- -------- -------
Total Inbound........... 75,075 (80%) 139,683 (87%) 162,826 (85%) 123,014 (85%) 110,897 (85%)
Outbound................ 18,368 (20%) 20,725 (13%) 29,768 (15%) 21,593 (15%) 18,848 (15%)
------ ------ ------- ------ ------- ------ -------- ------- -------- -------
Total................. 93,443 (100%) 160,408 (100%) 192,594 (100%) 144,607 (100%) 129,745 (100%)
====== ====== ======= ====== ======= ====== ======== ======= ======== =======
</TABLE>
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
65
<PAGE>
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 tropospheric 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.
Currently, the amount which GT&T collects from its subscribers for outbound
international traffic is usually less than the amount which GT&T is required
to pay the foreign carrier (e.g., for the United States, GT&T collects
approximately $.74 per minute and pays the carrier $.85 per minute). 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.
Any decrease in the net margin of inbound over outbound traffic is likely to
have an adverse effect on GT&T's earnings. 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 "--Regulation."
In 1996, GT&T's outbound traffic increased 44% over the prior year while
inbound and outbound collect traffic (other than audiotext) increased only 6%.
GT&T believes that this was due to a substantial reduction in GT&T's rates for
outbound traffic which was ordered by the PUC in October 1995. This PUC order
was voided by the Guyana High Court in January 1997, which had the result of
reinstating for the time being GT&T's rates for outbound traffic which existed
prior to October 1995. Also, in October 1997 GT&T instituted a surcharge on
its rates for outbound traffic designed to recover approximately $9.5 million
of revenues lost by GT&T during the period from October 1995 to January 1997
when the PUC's invalid order was in effect.
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 and its audiotext traffic has increased
significantly since that date. GT&T's audiotext revenues amounted to
approximately $39 million, $91 million, and $106 million in 1994, 1995 and
1996, respectively. GT&T's volume of audiotext traffic peaked in August 1995
at slightly in excess of 10 million minutes per month and fluctuated between
approximately 9 million and 10 million minutes per month in 1996.
Audiotext traffic and audiotext revenues averaged about 16 percent less and
38 percent less, respectively, in the first nine months of 1997, compared to
the same period a year earlier. GT&T's profit margins from audiotext also
significantly declined. 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, from late
1996 through the current year, 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.
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
66
<PAGE>
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. In connection with the Opinion, with the intention of
being conservative in view of the volatile nature and many uncertainties which
affect audiotext revenues and profit margins (including substantial
competition which impacts on GT&T's volume of audiotext traffic and the
profitability of that traffic and regulatory proceedings which seek to reduce
the rates paid to GT&T and to eliminate audiotext traffic of a sexual nature
(see "Risk Factors--Risks Relating to New ATN--Regulatory Risks")), the
management of the Company furnished to Prudential Securities projections which
projected that GT&T's operating results from audiotext traffic would continue
to sharply decline in 1998 and the next two years. However, because of these
same uncertainties, the Company is unable to predict whether this decline will
in fact occur. As is discussed below under "Regulation," GT&T is entitled
under the GT&T Agreement and the PUC Law to a minimum return of 15% per annum
on its rate base. However, there can be no assurance as to whether or when
GT&T would receive any rate increase which might be warranted by a continuing
decline in operating results from audiotext traffic. The failure of GT&T to
receive such a rate increase, if accompanied by the projected decline in
operating results from audiotext traffic, could have a material adverse effect
on New ATN's financial condition and results of operations.
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.
Because a substantial portion of GT&T audiotext traffic involves material of
a sexual nature, GT&T has from time to time been subject to criticism and
pressure from governmental and other sources in Guyana to limit or cease
carrying this traffic. In 1994 the National Frequency Management Unit (the
"NFMU") an agency of the Guyana government, notified GT&T that the agency
considered GT&T's provision of telecommunication services to audiotext
providers to be a violation of the Telecommunications Act and GT&T's license.
After consulting with counsel, GT&T advised the NFMU that it believed that its
actions were lawful and that it was precluded by the Telecommunications Act
from modifying or interfering with any telecommunications messages sent over
its facilities. Since then, no further communications have been received from
the NFMU. Moreover, in an order in October 1995, the Guyana PUC prohibited
GT&T from discontinuing the carrying of audiotext traffic. In September 1996,
the Washington Post published an article which dealt generally with
international audiotext traffic and emphasized the "phone sex" nature of much
of the traffic. In this article, the Post stated that Guyana "now is tied with
the Netherlands Antilles as the world leader" in the international audiotext
traffic market. Following publications of this article, President Cheddi Jagan
of Guyana severely criticized GT&T for handling this traffic, threatened to
call in interested investors from the United States to buy out GT&T if the
firm continued its phone sex international traffic, and noted that GT&T's
agreements with the previous government of Guyana could be broken by
Parliament although, President Jagan said, his administration "does not want
to do that." The Trade Minister of Guyana, Michael Shree Chan (who has
responsibility for the telecommunications sector) also called on GT&T to cease
carrying audiotext traffic. In March and April 1997, the Trade Minister
announced the appointment of a task force to probe whether GT&T should have
paid withholding taxes on the fees paid by it to international audiotext
providers. An audit initiated by this task force has currently been stayed by
the
67
<PAGE>
Guyana High Court. See "Taxation--Guyana". Except for this tax audit, GT&T is
not the subject of any governmental investigation or inquiry at the present
time with regard to its provision of telecommunications services to
international audiotext providers.
DOMESTIC SERVICE
At December 31, 1996, GT&T had 50,190 subscriber access lines in service.
This number of access lines represents approximately 7 lines per 100
inhabitants. Of all lines in service, 52% 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.
GT&T's revenues from local telephone and other services, which are not
significant (accounting for approximately 2% of GT&T's total revenues in
1996), consist of 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. GT&T's current monthly charge per access
line is 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) is $1.99 and $2.61, respectively. See "Business and Properties of New
ATN--Regulation."
In December 1991, GT&T inaugurated a mobile cellular telephone system within
a thirty-mile radius of Georgetown. Prior to July 15, 1995, there was no
charge for local mobile cellular telephone service. Commencing July 15, 1995,
the PUC approved tariffs. See "Business and Properties of New ATN--
Regulation." Cellular subscribers are offered various calling plans and are
charged a monthly fee plus air time based on the selected plan. GT&T's current
average monthly charge per cellular subscriber is approximately $89 including
monthly rental and airtime charges. As of December 31, 1996, GT&T had
approximately 1,300 active mobile cellular subscribers.
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 much 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.
EXPANSION PROGRAM
Pursuant to the purchase agreement between the 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 50,190 lines at December
31, 1996. 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.
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.
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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 in talks with other international carriers to expand the
capacity of Americas I cable and 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, 1996, GT&T had expended nearly $86 million on
the Expansion Plan and the Company had advanced an aggregate of approximately
$23 million to GT&T principally for the Expansion Plan.
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 "--Regulation."
OTHER SERVICES
GT&T is also licensed to provide various telephone-related services that
extend beyond basic telephone service, including yellow pages and other
directory services, and it has an exclusive license to sell, lease or service
various kinds of telecommunications equipment. Under the License, GT&T's rates
for most of these services must be specified in a tariff approved by the PUC.
See "--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:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
AT&T....................................................... 42% 37% 36%
MCI........................................................ 17% 21% 21%
British Telecom............................................ 13% 19% 12%
Teleglobe (Canada)......................................... 26% 13% 12%
</TABLE>
A significant portion of GT&T'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. The following service bureaus accounted for more than 10% of GT&T's
total revenues in the years indicated below:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Beylen Telecommunications, Ltd............................. 40% 60% 57%
Islands Telephone Company Limited.......................... -- 10% 14%
</TABLE>
No other revenue source accounted for more than 10% of GT&T's total revenues
in 1994, 1995 or 1996.
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, in December 31, 1996, OPIC terminated the
Company's political risk insurance because of
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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 100% in the first year and 85% thereafter
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
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 and Properties of New ATN--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 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. 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
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Transaction as a result of a termination of the License, the IRS might revoke
the Tax Ruling retroactively, with the result that the distribution of ECI
Common Stock might not be tax free for U.S. federal income tax purposes to the
Company and the holders of Company Stock and Class A Common Stock. See "The
Transaction--Certain U.S. Federal Income Tax Consequences."
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. Subject to the 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 to GT&T of 15% per annum on its rate base.
Pursuant to an amendment to the PUC Law enacted in 1994, the PUC is required
to "act in a manner that is consistent with, and gives effect to, the
provisions of" the GT&T Agreement.
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.
Since GT&T commenced operations as a subsidiary of the Company in 1991, GT&T
has had difficulties in obtaining from the PUC the rate increases to which it
believed it was entitled. In February 1991 the official rate of exchange for
Guyanese currency was changed, allowing the currency to float. This resulted
in a devaluation of approximately 184 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 principal, 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 to 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
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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. At the
date of this Proxy Statement-Prospectus, the Consumer Advisory Bureau's
application are 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 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, including a number which had less than one year
maturities but were issued in consolidation or renewal of earlier notes which
had a more than one year maturity. 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. At the date of this Proxy Statement-Prospectus, 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
appealed the PUC's order to the Guyana High Court and obtained a stay of the
PUC's order pending determination of that appeal.
As a result of the decline in 1997 in GT&T's revenues and profits from
audiotext traffic, GT&T is preparing to file an application to the PUC for a
significant increase in local and outbound international rates. There can be
no assurance as to whether or when GT&T will receive any such rate increase.
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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 or what
actions the FCC or U.S. carriers may take in an effort to secure lower
settlement rates on the U.S.-Guyana route.
Since inbound traffic from the United States to Guyana significantly exceeds
outbound traffic from Guyana to the United States, any significant reduction
in the settlement rate for U.S.-Guyana traffic could have a significant
adverse impact on GT&T's earnings. Any significant reduction in the settlement
rate also might make it difficult for GT&T to continue to attract audiotext
traffic from the United States on a profitable basis. Any of these events
would provide GT&T with a basis to seek a rate increase so as to permit GT&T
to earn its contractually provided 15% rate of return. However, there can be
no assurance as to when or whether GT&T would receive such a rate increase.
FTC Matters. 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.
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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 will be
classified as 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, New
ATN 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 New ATN'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, and immediately upon the consummation of the Transaction
will continue to satisfy, 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 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 Guyanese department 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. The deductibility of these
advisory fees 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
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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 an assessment 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 this assessment stems 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
assessment 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 assessment 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.
The principal issues raised by the November 1997 assessment are as follows:
(a) The disallowance of interest on intercompany debt which was accrued but
not paid in relevant tax years (approximately U.S.$4.1 million of taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and accrual
process as improper bad debt write-offs (approximately U.S.$2.1 million
of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to the
Company for the year 1995 in apparent contradiction of the High Court's
decision in August 1995 referred to above (approximately U.S.$2.9
million of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement as
to the proper historical cost of certain of GT&T's depreciable assets
(approximately U.S.$1.6 million of taxes).
Approximately U.S.$1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
EMPLOYEES
As of December 31, 1996, GT&T employed approximately 745 persons of whom
approximately 565 are represented by the Guyana Postal and Telecommunications
Workers Union. GT&T's current contract with this union expired on March 31,
1997, and GT&T is currently in negotiations with the union on a new contract.
The Company considers its employee relations to be satisfactory. The Clerical
& Commercial Workers Union, in February 1996, sought recognition to represent
supervisors, junior managers and senior managers employed by GT&T. These
levels of employees are not now unionized, but the Clerical & Commercial
Workers Union has claimed that more than 50% of this level of staff are
members of the Union. GT&T has responded that its current policy does not
provide for collective bargaining of its management employees, and has
requested evidence of the more that 50% membership.
PROPERTIES
At December 31, 1996, GT&T utilized approximately 254,000 square feet of
building space on approximately 41 acres of land in various locations
throughout Guyana, all of which is owned by GT&T. In addition, GT&T leases
approximately 3,000 square feet of office space in Georgetown, Guyana. For
additional information, see "Business and Properties of New ATN--Expansion
Program." GT&T carries insurance against damage to equipment and buildings,
but not to outside plant.
75
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ATN-VI
The following selected historical financial data have been derived from the
audited consolidated financial statements of ATN-VI and its subsidiaries,
which includes the Company's operations in the U.S. Virgin Islands to which
ECI will succeed, as of and for the years ended December 31, 1996, 1995, 1994,
1993 and 1992. The following selected historical financial data for the nine
months ended September 30, 1997 and 1996 have been derived from the unaudited
consolidated condensed interim financial statements of ATN-VI which, in the
opinion of management, reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation. The
selected historical consolidated financial data should be read in conjunction
with the audited consolidated financial statements and related notes thereto
of ATN-VI, as of December 31, 1996 and for each of the three years in the
period ended December 31, 1996 and ATN-VI's unaudited consolidated condensed
interim financial statements and notes thereto as of September 30, 1997 and
for the nine months ended September 30, 1997 and 1996 which are included
elsewhere in this Proxy Statement-Prospectus. The consolidated financial data
for the nine months ended September 30, 1997 are not necessarily indicative of
the operating results to be expected for the entire fiscal year. All dollar
amounts are in thousands.
For accounting purposes the Transaction is a non-pro rata split-off of New
ATN. Accordingly the historical consolidated financial statements of the
Company included elsewhere in this Proxy Statement-Prospectus will become the
historical financial statements of ECI after the Transaction. After the
Transaction, ECI financial statements will reflect the split-off as of the
Effective Date and will not be restated to remove the effects of the prior
operating results of New ATN.
76
<PAGE>
SELECTED STATEMENT OF OPERATIONS DATA OF ATN-VI
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Local exchange serv-
ice................... $22,471 $21,779 $23,082 $21,335 $23,122 $ 17,083 $ 19,626
Access charges and rev-
enues................. 13,493 14,845 14,689 13,608 16,124 11,618 12,714
Universal Service Fund. 11,168 13,201 12,081 12,151 11,360 8,406 10,494
Billing and other reve-
nues.................. 3,997 4,210 3,943 3,638 4,580 3,186 3,587
Directory advertising.. 3,420 3,020 2,916 2,730 2,563 1,938 1,332
Cellular services...... 2,657 2,808 3,616 5,910 5,480 4,457 2,894
Product sales and rent-
al.................... 4,479 4,489 4,879 5,128 5,435 3,931 3,380
------- ------- ------- ------- ------- --------- ---------
Total revenue.......... 61,685 64,352 65,206 64,500 68,664 50,619 54,027
Total expense........... 41,704 53,550 47,522 49,538 51,731 38,150 39,189
------- ------- ------- ------- ------- --------- ---------
Income from continuing
operations before in-
terest expense, income
taxes and minority in-
terest................. 19,981 10,802 17,684 14,962 16,933 12,469 14,838
Interest expense, net... 10,053 10,054 9,520 8,862 9,082 6,928 6,618
------- ------- ------- ------- ------- --------- ---------
Income from continuing
operations before in-
come taxes and
minority interest...... 9,928 748 8,164 6,100 7,851 5,541 8,220
Income taxes (2)........ 3,659 352 3,054 1,631 2,215 1,841 (8,297)
------- ------- ------- ------- ------- --------- ---------
Income from continuing
operations before mi-
nority interest........ 6,269 396 5,110 4,469 5,636 3,700 16,517
Minority interest....... (14) (23) (47) (87) (81) (81) 13
------- ------- ------- ------- ------- --------- ---------
Income from continuing
operations............. $ 6,255 $ 373 $ 5,063 $ 4,382 $ 5,555 $ 3,619 $ 16,530
======= ======= ======= ======= ======= ========= =========
Dividends per share..... -- -- -- -- -- -- --
</TABLE>
SELECTED BALANCE SHEET DATA OF ATN-VI
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ----------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Fixed assets, net....... $145,010 $154,940 $146,706 $129,810 $149,574 $147,633
Total assets............ 203,789 200,906 199,206 211,918 216,817 216,799
Short-term debt
(including current
portion of long-term
debt).................. 6,807 7,909 7,184 8,665 18,498 17,620
Long-term debt, net..... 117,488 110,223 102,644 99,093 93,079 87,567
Stockholders equity..... 27,058 26,751 32,233 35,500 41,883 58,413
</TABLE>
- --------
- -------------------------------------------------------------------------------
(1) Historical income per share amounts have not been presented as this
information is not considered meaningful.
(2) In May 1997, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1,
1998) from 90% of Virgin Islands income taxes and 100% of Virgin Islands
gross receipts, excise and property taxes. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, the
Company has adjusted its deferred tax assets and liabilities to reflect
the change in tax rates applicable to Vitelco during the benefit period.
This change resulted in the Company recording a non-recurring credit to
income tax expense of approximately $10.9 million in the nine months ended
September 30, 1997.
77
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ATN-VI
INTRODUCTION
ATN-VI includes the Company's operations in the U.S. Virgin Islands to which
ECI will succeed. ATN-VI's revenues and income from continuing operations are
derived principally from the operations of its telephone subsidiary, Vitelco.
Vitelco derives most of its revenues from local telephone and long-distance
access services. Other operations in ATN-VI's Consolidated Statements of
Operations include: Vitelcom Cellular, Inc. d/b/a VitelCellular, which
provides cellular telephone service in the U.S. Virgin Islands; and Vitelcom,
which supplies customer premises equipment in the U.S. Virgin Islands.
The principal components of operating expenses for ATN-VI's telephone
operations are plant specific operations expenses, plant non-specific
operations expenses, customer operations expenses, corporate operations
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 Vitelco'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. Taxes other than income taxes
include gross receipts taxes, property taxes, and other miscellaneous taxes.
Cellular services and product sales and rentals expense includes the operating
expense of VitelCellular and Vitelcom. General and administrative expenses
consist primarily of parent company overheads and amortization.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Operating revenues for the nine months ended September 30, 1997 were $54.0
million as compared to $50.6 million for the corresponding period of the prior
year, an increase of $3.4 million, or 7%. The increase is primarily the result
of the recovery from Hurricane Marilyn in September 1995 and an increase in
Universal Service Fund revenues of $2.1 million for the nine months ended
September 30, 1997, as a result of increased investment in net fixed assets.
At September 30, 1997 Vitelco had 61,326 lines in service compared to 58,431
at the corresponding date in the prior year. Offsetting this was a decrease in
cellular revenue of $1.5 million.
Operating expenses for the nine months ended September 30, 1997 were $39.2
million, an increase of $1.0 million, or 3%, from telephone operating expenses
of $38.2 million for the corresponding period of the prior year. The increase
is principally the result of a $1.2 million increase in plant non-specific
operations, as depreciation increased due to increased telephone plant in
service. As a percentage of revenues, operating expenses decreased to
approximately 73% for the nine month period ended September 30, 1997, from
approximately 75% for the corresponding period of 1996.
Income from operations before interest expense, income taxes and minority
interest for the nine months ended September 30, 1997 was $14.8 million as
compared to $12.5 million for the corresponding period of the prior year, an
increase of $2.4 million, or 19%. The change occurred principally as a result
of factors affecting operating revenues and expenses discussed above.
Income before income taxes and minority interest for the nine months ended
September 30, 1997 was $8.2 million as compared to $5.5 million for the
corresponding period of the prior year, an increase of $2.7 million, or 48% as
net interest expense decreased $310,000 due to reduced debt.
78
<PAGE>
As discussed in Note C to the Consolidated Condensed Financial Statements,
Vitelco received approval from the Virgin Islands Industrial Development
Commission for a five year exemption (commencing October 1, 1998) from 90% of
Virgin Islands income taxes and 100% of Virgin Islands gross receipts, excise
and property taxes. In accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, the Company has adjusted its
deferred tax assets and liabilities to reflect the change in the tax rates
applicable to Vitelco during the benefit period. This change has resulted in
ATN-VI recording a non-recurring credit to income tax expense of approximately
$10.9 million in the nine months ended September 30, 1997. The effect of the
tax exemption on future current taxes payable during the benefit period will
be reflected in ATN-VI's financial statements during the benefit period. On
October 9, 1997, the Virgin Islands Public Service Commission instituted a
proceeding to determine whether Vitelco's rates are just and reasonable in
light of this tax rebate. There can be no assurance as to the outcome of this
proceeding.
Before giving effect to the change in deferred taxes discussed above, ATN-
VI's effective tax rate for the nine months ended September 30, 1997 was 32%
as compared to 33% for the corresponding period of the prior year.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Operating revenues for the year ended December 31, 1996 were $68.7 million,
an increase of $4.2 million, or 7%, from revenues of $64.5 million for the
year ended December 31, 1995. The increase was primarily the result of
increases of $1.8 million, or 8%, in local exchange revenues and $2.5 million,
or 18%, in access charge revenues at Vitelco for the year ended December 31,
1996. The increase in these revenues is a result of restored lines in service
to pre-Hurricane Marilyn levels. At December 31, 1996 Vitelco had 59,470 lines
in service.
Operating expenses for the year ended December 31, 1996 were $51.7 million,
an increase of $2.2 million, or 4%, from operating expenses of $49.5 million
for the year ended December 31, 1995. The increase was primarily the result of
increases in plant-specific expenses of $2.5 million, or 27%, as a result of
additional maintenance costs related to Hurricane Marilyn and subsequent
storms and an increase of $884,000, or 6%, in plant non-specific expenses due
to increased depreciation as a result of additional telephone plant in
service, partially offset by the capitalization of certain expenses at Vitelco
in the first quarter of 1996 as Vitelco's work force was shifted from
maintenance activities to repairing the damage caused by Hurricane Marilyn. As
a percentage of revenues, operating expenses were approximately 75% for the
year ended December 31, 1996 as compared to 76.8% for the year ended December
31, 1995.
Income from operations before interest expense, income taxes and minority
interest for the year ended December 31, 1996 was $16.9 million, an increase
of $1.9 million, or 4%, from income from operations of $15.0 million for the
year ended December 31, 1995. The increase resulted from the increase in
operating revenues discussed above, partially offset by the increase in
operating expenses as the restoration of lines in service after Hurricane
Marilyn's impact progressed to a pre-hurricane level.
Income before income taxes and minority interest for the year ended December
31, 1996 was $7.9 million, an increase of $1.8 million, or 29%, from $6.1
million for the year ended December 31, 1995 as net interest expense increased
$220,000 as a result of a decrease in interest income due to reduced cash on
hand resulting from hurricane repair expenditures.
ATN-VI's effective tax rate for the year ended December 31, 1996 was 28.2%
as compared to 26.7% for the year ended December 31, 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues for the year ended December 31, 1995 were $64.5 million, a decrease
of $706,000, or 1% from $65.2 million for the prior year. The decrease was
primarily the result of Hurricane Marilyn which put approximately 37,800 of
Vitelco's approximately 60,000 access lines out of service on September 15,
1995. At December 31, 1995, Vitelco had 40,761 lines in service. Principally
as a result of the impact of Hurricane Marilyn on Vitelco's lines in service
in the fourth quarter, Vitelco's local exchange revenues decreased by $1.7
million, or 8%, and Vitelco's access charge revenues decreased by $1.1
million, or 7%, for the year ended December 1995.
79
<PAGE>
Operating expenses for the year ended December 31, 1995 were $49.5 million,
an increase of $2.0 million, or 4%, from expenses of $47.5 million for the
year ended December 31, 1994. This increase was primarily the result of an
$859,000 increase in general and administrative expenses due to increased
corporate activity, and a $1.8 million increase in cellular services primarily
due to increased cellular revenues in the aftermath of Hurricane Marilyn.
Offsetting this was a decrease in telephone expenses which resulted from a
shifting in the fourth quarter of 1995 of Vitelco's work force from
maintenance activities to repairing the damage caused by Hurricane Marilyn. As
a percentage of revenues, operating expenses increased to approximately 77%
for the year ended December 31, 1995 from approximately 73% for the year ended
December 31, 1994.
Income from operations before interest expense, income taxes and minority
interest for the year ended December 31, 1995 was $15.0 million, a decrease of
$2.7 million, or 15%, from income from operations of $17.7 million for the
year ended December 31, 1994. The decrease resulted primarily from the
$706,000 decrease in operating revenues, combined with the $2.0 million
increase in operating expenses discussed above.
Income before income taxes and minority interest for the year ended December
31, 1995 was $6.1 million, a decrease of $2.1 million, or 25%, from $8.2
million for the year ended December 31, 1994, as net interest expense
decreased $658,000 due to increased cash on hand.
ATN-VI's effective tax rate for the year ended December 31, 1995 was 26.7%
as compared to 37.4% for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
ECI will depend upon funds received from its subsidiaries to meet its
capital needs, including servicing debt and financing of any future
acquisitions.
In the Transaction ECI will assume approximately $5.5 million of bank debt
of the Company which is currently outstanding under a short-term credit
facility which under an oral agreement with the bank expires October 1, 1998.
In connection with the Transaction, ATN-VI will borrow approximately $17.4
million, net, from the RTFC under the 15 year Credit Facility. This facility
will provide for quarterly amortization of principal and interest of
approximately $500,000 commencing on the first full billing cycle after
disbursement. For additional information on the Credit Facility, see "The
Transaction--The Credit Facility."
ATN-VI's loan agreements with the RTFC will limit the payment of dividends
by ATN-VI to ECI unless ATN-VI maintains an average times interest expense
coverage ("TIER") of at least 1.5 for two of the past three fiscal years and,
after giving effect to the dividend, shows a consolidated shareholders equity
for ATN-VI and its subsidiaries that is not less than 30% of its total assets
on a consolidated basis as shown on its most recent quarterly balance sheet,
provided, however, that ATN-VI may make an otherwise prohibited dividend
payment if, after giving effect to such dividend payment, the consolidated
stockholders equity of ATN-VI and its subsidiaries will not be less than 20%
of total assets on a consolidated basis and aggregate dividend payments for
the fiscal year do not exceed 50% of total net income for the prior fiscal
year. At September 30, 1997, ATN-VI would have been able to pay approximately
$2.8 million of dividends to ECI under this limitation.
A portion of the amount outstanding on the ATN-VI note payable to the RTFC
bears interest at RTFC's standard variable rate, which at September 30, 1997
was 6.65% for $1.3 million outstanding, with the balance of $16.9 bearing
interest at a fixed rate of 8%. Interest on the $11.1 million and $10.3
million outstanding on the Vitelco notes payable to RTFC is fixed at 9.75% and
8%, respectively.
ATN-VI's ability to service its debt will be dependent on funds from its
parent or its subsidiaries, primarily Vitelco. The RUS loan and applicable RUS
regulations restricts Vitelco's ability to pay dividends based upon certain
net worth tests except for limited dividend payments authorized when specific
security instrument criteria are unable to be met. Settlement agreements made
in 1989 and 1991 with the PSC also contain certain restrictions on dividends
by Vitelco which, in general, are more restrictive than those imposed by the
RUS. Dividends by
80
<PAGE>
Vitelco are generally limited to 60% of its net income, although additional
amounts are permitted to be paid for the sole purpose of servicing ATN-VI's
debt to the RTFC. Under the above restrictions, at September 30, 1997,
Vitelco's dividend paying capacity was approximately $8.8 million in excess of
the amounts permitted for servicing ATN-VI debt.
The RUS Loan Agreement calls for fixed monthly principal and interest
payments of $7.04 per $1,000 of loan balance with any remaining balance due
May 2012. At September 30, 1997, the amount outstanding was $55.0 million,
bearing interest at a fixed rate of 5%.
The RTFC Loan and RUS Loan agreements also require, among other things,
maintenance of minimum debt service ("DSC") and TIER and restrictions on
issuance of additional long-term debt. The RTFC Loan Agreement requires ATN-VI
to maintain a DSC of at least 1.35 and a TIER of at least 1.5 for each fiscal
year and Vitelco to maintain DSC of at least 1.25 and a TIER of at least 1.5
for two the last three fiscal years. Vitelco may incur additional debt with
RUS without prior approval from RTFC if Vitelco maintains a DSC of not less
than 1.25 and a TIER of not less than 1.5.
The RTFC Loan Agreement contains covenants, which, with certain exceptions,
restrict: (i) Vitelco from entering into any business venture with respect to
business in which it is not currently engaged and ATN-VI from entering into
any business venture other than as a holding company for its subsidiaries;
(ii) ATN-VI from selling and permitting any liens upon the capital stock of
Vitelco, (iii) ATN-VI from incurring additional indebtedness, (iv) ATN-VI from
declaring or paying any dividends, unless certain criteria are met, (v) ATN-VI
and Vitelco from engaging in mergers or consolidations, (vi) ATN-VI from
making or committing to make any investment in any person except as otherwise
permitted, (vii) ATN-VI from creating, assuming, incurring or suffering to
exist any lien upon any of its property or assets or the property or assets of
Vitelco, (viii) ATN-VI from forming or acquiring any subsidiaries, and (ix)
ATN-VI from permitting any subsidiary to sell or transfer any asset for
purposes of effecting a lease.
The RUS Loan Agreements contain covenants, which, with certain exceptions
restrict Vitelco from: (i) engaging in mergers and consolidations, (ii)
selling, leasing or transferring any capital assets, (iii) entering into any
contract for the management of its business or operations or maintenance of
its properties, (iv) declaring or paying dividends, unless certain criteria
are met, (v) guaranteeing or incurring additional indebtedness, and (vi)
making investments except as otherwise permitted. As of September 30, 1997,
ATN-VI and Vitelco were in compliance with all covenants contained in their
long-term debt agreements.
At September 30, 1997, Vitelco had outstanding $5 million of borrowings
under a $5 million line of credit with the RTFC expiring in March 2000, and an
additional $5 million under a $15 million line of credit with the RTFC
expiring in October 1998, each with interest rates of 7.25%. These borrowings
were incurred to finance part of the costs of repairing damage to Vitelco's
telephone plant caused by Hurricane Marilyn in September 1995. Vitelco has
also received approval from the RUS for $35.7 million of long-term financing,
which may be used to repay Vitelco's outstanding line of credit borrowings
from the RTFC. Borrowings under Vitelco's $5 million line of credit are
required to be repaid within 12 months of the date of the borrowing, but may
be repaid from the proceeds of borrowings under the $15 million line of
credit. Borrowings under Vitelco's $15 million line of credit will mature on
October 31, 1998, at which date, if long-term loan funds from RUS have not yet
been made available to Vitelco, Vitelco will have the option of rolling the
outstanding amount borrowed under that line of credit into a 15-year term loan
from RTFC having terms substantially similar to those contained in Vitelco's
existing long-term loan from RTFC.
IMPACT OF INFLATION
The effect of inflation on ATN-VI's financial results of telephone
operations in the U.S. Virgin Islands has not been significant in recent
years. The effect of inflation on the cost of providing telephone service in
U.S. Virgin Islands has generally been offset (without any increase in local
subscribers' rates) by increased revenues resulting from growth in the number
of subscribers and from regulatory cost recovery practices in determining
access revenues.
81
<PAGE>
ECI
PRO FORMA FINANCIAL DATA
The following are unaudited pro forma consolidated condensed statements of
operations data and consolidated condensed balance sheet data for ECI. The pro
forma consolidated condensed balance sheet data as of September 30, 1997 gives
effect to the Transaction, as if it occurred on September 30, 1997. The
unaudited pro forma consolidated condensed statement of operations data for
the year ended December 31, 1996 and the nine months ended September 30, 1997
gives effect to the Transaction, as if it occurred on January 1, 1996. The
Transaction is accounted for as a non-pro rata split-off of New ATN and New
ATN is accounted for at fair value. New ATN is considered to be the split-off
entity since it is anticipated that ECI will have greater market
recapitalization (based on the Opinion), ECI will have greater asset value,
ECI will retain more of the top management of the Company, and ECI had greater
net income for the nine months ended September 30, 1997. The pro forma
adjustments are described in the accompanying notes hereto. The pro forma
consolidated condensed balance sheet and statements of operations data should
be read in conjunction with the consolidated financial statements and notes
thereto of the Company and ATN-VI, which includes the Company's operations in
the U.S. Virgin Islands to which ECI will succeed, as of December 31, 1996 and
for each of the three years in the period ended December 31, 1996 and the
Company's and ATN-VI's unaudited consolidated condensed interim financial
statements and notes thereto as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 which are included elsewhere in this Proxy
Statement-Prospectus. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Transaction had occurred on
January 1, 1996 or September 30, 1997, respectively, nor is it necessarily
indicative of future operating results or financial position. All dollar
amounts are in thousands, except per share amounts.
82
<PAGE>
ECI
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FRO FORMA
SPLIT- OTHER
COMPANY OFF OF PRO FORMA
HISTORICAL NEW ATN ADJUSTMENTS PRO FORMA
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash......................... $ 15,150 $ (9,229)(1) $ 17,400 (2) $ 1,103
(17,400)(3)
(4,818)(4)
Accounts receivable.......... 57,948 (44,162)(1) 205 (4) 13,991
Other current assets......... 15,128 (3,592)(1) 11,536
-------- --------- -------- --------
Total current assets......... 88,226 (56,983) (4,613) 26,630
Net fixed assets............. 251,648 (99,360)(1) 392 (4) 152,680
Due to Atlantic Tele-Network,
Inc. ....................... (28,340)(1) 28,340 (4) 0
Regulatory Asset............. 21,923 21,923
Other assets................. 30,022 (13,751)(1) 916 (2) 17,187
-------- --------- -------- --------
$391,819 $(198,434) $ 25,035 $218,420
======== ========= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities.......... $ 66,180 $ (28,718)(1) $ 5,588 (4) $ 43,050
Long-term debt............... 106,469 (16,427)(1) 18,316 (2) 108,480
122 (4)
Other liabilities and minor-
ity interest................ 44,699 (34,579)(1) 10,120
Total stockholders' equity... 174,471 (118,710)(1) (17,400)(3) 56,770
18,409 (4)
-------- --------- -------- --------
$391,819 $(198,434) $ 25,035 $218,420
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
83
<PAGE>
ECI
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------ ---------------------------------------------------
PRO FORMA PRO FORMA
COMPANY SPLIT- OTHER PRO FORMA COMPANY SPLIT- OTHER PRO FORMA
HISTORICAL OFF OF PRO FORMA AS HISTORICAL OFF OF PRO FORMA AS
RESULTS NEW ATN ADJUSTMENTS ADJUSTED RESULTS NEW ATN ADJUSTMENTS ADJUSTED
---------- --------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $216,917 $(148,253)(1) $68,664 $149,725 $(95,698)(1) $54,027
Net expenses............ 172,863 (121,222)(1) 349 (7) 51,990 116,683 (77,560)(1) 262 (7) 39,385
-------- --------- ------ ------- -------- -------- ------ -------
Income from continuing
operations before
interest expense,
minority interest and
income taxes........... 44,054 (27,031) (349) 16,674 33,042 (18,138) (262) 14,642
Interest expense, net... 10,831 (1,749)(1) 1,282 (5) 8,714 7,743 (1,125)(1) 962 (5) 6,305
(1,650)(6) (1,275)(6)
-------- --------- ------ ------- -------- -------- ------ -------
Income from continuing
operations before
income taxes and
minority interest...... 33,223 (25,282) 19 7,960 25,299 (17,013) 51 8,337
Income taxes............ 13,039 (10,824)(1) (480)(5) 2,250 (739)(8) (7,558)(1) (360)(5) (8,256)
634 (6) 490 (6)
(119)(7) (89)(7)
-------- --------- ------ ------- -------- -------- ------ -------
Income from continuing
operations before
minority interest...... 20,184 (14,458) (16) 5,710 26,038 (9,455) 10 16,593
Minority interest....... (2,177) 2,096 (1) (81) (1,358) 1,371(1) 13
-------- --------- ------ ------- -------- -------- ------ -------
Income from continuing
operations............. $ 18,007 $ (12,362) $ (16) $ 5,629 $ 24,680 $ (8,084) $ 10 $16,606
======== ========= ====== ======= ======== ======== ====== =======
Income per share from
continuing operations.. $ 0.51 $ 1.52
======= =======
Weighted average shares
outstanding............ 10,959 10,959
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
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ECI
NOTES TO PRO FORMA FINANCIAL DATA
The Transaction is accounted for as a non-pro rata split-off of New ATN and
New ATN is accounted for at fair value. New ATN is considered to be the split-
off entity since it is anticipated that ECI will have greater market
recapitalization (based on the Opinion), ECI will have greater asset value,
ECI will retain more of the top management of the Company, and ECI had greater
net income for the nine months ended September 30, 1997.
The non-recurring loss on the split-off and fair valuation of the net assets
of New ATN of $55 million (loss on split-off of New ATN of $51 million plus
assumed transaction costs of $4 million) is not reflected in the pro forma
consolidated condensed statement of operations as this is a non-recurring
expense directly associated with the Transaction.
(1) To reflect the split-off of New ATN.
(2) To reflect the $18.3 million of long-term financing under the Credit
Facility, and the related acquisition of Subordinated Capital
Certificates.
(3) To reflect the purchase of 765,564 shares of Company stock.
(4) To reflect (a) the payment of the final closing adjustment under the
Subscription Agreement (based on assumed transaction costs of $4 million)
of $4,818,000, (b) the assumption of certain bank indebtedness by ECI of
$5,710,000 (c) the transfer of miscellaneous assets to ECI from New ATN
and (d) the extinguishment in the transaction of the indebtedness of ECI
of $28,340,000 to ATN.
(5) To record interest expense and related tax benefit on the new borrowing of
$18.3 million net under the Credit Facility.
(6) To reflect (a) the reversal of interest expense paid on intercompany debt
owed by ECI to the Company of $2,155,000 and $1,659,000, (b) interest
expense on certain bank indebtedness to be assumed by ECI of $505,000 and
$384,000 and (c) the related income tax impacts of $634,000 and $490,000
for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively.
(7) To record additional compensation expense in accordance with ECI's
employment agreement with Jeffrey J. Prosser and the related income tax
benefit.
(8) In May 1997, Vitelco received approval from the Virgin Islands Industrial
Development Commission for a five year exemption (commencing October 1,
1998) from 90% of Virgin Islands income taxes and 100% of Virgin Islands
gross receipts, excise and property taxes. In accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, the
Company has adjusted its deferred tax assets and liabilities to reflect
the change in tax rates applicable to Vitelco during the benefit period.
This change resulted in the Company recording a non-recurring credit to
income tax expense of approximately $10.9 million ($.99 per share on a pro
forma basis) in the nine months ended September 30, 1997.
(9) ECI shares certain general and administrative costs with New ATN. These
shared costs have historically been allocated in approximately the same
proportion as operating revenues bear to the Company's total operating
revenues. Management believes the allocation methods used are 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.
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BUSINESS AND PROPERTIES OF ECI
ECI is a newly formed Delaware corporation, incorporated in 1997, which,
following the Effective Date, will own and operate the Company's business and
operations in the Virgin Islands. On and immediately after the Effective Date,
ECI's principal subsidiary will be Vitelco. Vitelco is the exclusive provider
of local telephone service in the U.S. Virgin Islands. Vitelco provides
subscribers with local telephone service in the U.S. Virgin Islands, access to
long-distance companies for interstate and international telephone service,
and provides those companies with access to its local network. ECI will also
be engaged, through its wholly owned subsidiary ATN-VI in selling and leasing
telecommunications equipment in the US Virgin Islands (a business now
conducted by Vitelcom) and, through its 90 percent owned subsidiary,
VitelCellular, in providing cellular telephone service in the U.S. Virgin
Islands to land-based and marine subscribers.
It is the intention of Mr. Prosser, as the controlling stockholder of ECI,
after the Effective Date to endeavor to expand ECI's operations through the
acquisition of other businesses. ECI cannot predict whether it will be
successful in pursuing such acquisition opportunities or what the consequences
of any such acquisition would be. The evaluation and negotiation of such
business acquisitions may involve significant expenditures by ECI. There can
be no assurance that ECI will be able to acquire or successfully integrate any
such businesses, and acquisitions that are consummated may involve the
incurrence of significant amounts of debt by ECI and/or the dilution of
existing stockholders' interests in ECI through the issuance of additional
shares of ECI capital stock. No assurances can be given that any acquisitions
will be consummated or that, if completed, they will be successful.
Furthermore, there can be no assurance that ECI's management will be able to
manage effectively any resulting business or that any acquisition will benefit
ECI. Depending upon the nature, size and timing of acquisitions, ECI may be
required to raise financing. There can be no assurance that the Credit
Facility, or any other loan agreements to which ECI or its subsidiaries may
become a party will permit such additional financing or that such additional
financing will be available to ECI on terms acceptable to management or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of ECI--Liquidity and Capital Resources."
LOCAL SERVICE
In 1995, based upon access line data provided by the United States Telephone
Association (the "USTA"), Vitelco was the 28th largest local telephone company
of more than 1,000 local telephone companies in the United States.
Approximately 40% of Vitelco's total revenue in 1996 was derived from the
provision of local service.
ECI believes that Vitelco's telephone business is essentially non-cyclical,
and (except for its growth in access lines) is not materially reduced in times
of recession. In 1996, Vitelco's growth rate in access lines was 2%. ECI
believes that future growth in access lines will occur primarily as a result
of construction of new residential and commercial properties in the U.S.
Virgin Islands. However, growth should also occur from an increase in the
number of households that have telephones, and an increase in lines per
subscriber is anticipated as facsimile machines, computer data communication
and other technological innovations become more widespread. All of these
factors affecting the rate of growth of access lines are likely to be
sensitive to changes in general economic conditions.
As of December 31, 1996, approximately 67% of Vitelco's 59,470 access lines
were residential lines, and the remainder were business lines. Vitelco's
current monthly charge per access line, which includes unlimited calls between
points in St. Croix, St. John and St. Thomas and is regulated by the U.S.
Virgin Islands Public Services Commission (the "PSC"), is $18.55 for
residential customers and $49.85 for business customers. In June 1987, when
the Company acquired Vitelco, Vitelco's residential rate was $21.90, and its
business rate was $58.45.
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ACCESS FOR LONG-DISTANCE SERVICES
In addition to providing local service, Vitelco provides subscribers with
access to long-distance companies for interstate and international services
and provides those companies with access to its local network and, thereby, to
local subscribers. Vitelco is compensated for providing this access by long-
distance carriers and by its subscribers in accordance with tariffs, which are
subject to review by the FCC. See "Business and Properties of ECI--
Regulation." The principal long-distance carrier in the U.S. Virgin Islands is
AT&T of the Virgin Islands, Inc., a local subsidiary of AT&T ("AT&T-VI").
Approximately 28% of Vitelco's total revenues in 1996 was derived from access
charges.
OTHER SERVICES
During 1996 Vitelco received approximately 12% of its revenues from
providing billing and collection services for long distance carriers and from
yellow-pages directory advertising. Vitelco's current billing and collection
contract with AT&T-VI expires in May 2000.
SIGNIFICANT REVENUE SOURCES
Revenues from AT&T, derived principally from interstate network access and
billing and collection services of Vitelco, comprised approximately 13%, 12%
and 13% of ATN-VI's consolidated total revenues in 1994, 1995 and 1996,
respectively. No other revenue source accounted for more than 10% of ATN-VI's
total revenues in 1994, 1995 or 1996.
PHYSICAL PLANT
Vitelco operates a modern, fully digital telecommunications network in the
U.S. Virgin Islands. Vitelco initiated a modernization program with the
installation of its first fiber-optic cable in 1981 and its first digital
switch in 1982. Upon the completion of the modernization program in 1987,
Vitelco's network became the first multi-switch, all digital telephone system
in the Caribbean. Modern digital systems, which are more cost effective and
permit higher quality transmissions than analog systems, permit speech, text
and computer data to be transmitted simultaneously and on the same network.
Vitelco's policy is to upgrade plant and equipment, as necessary or
appropriate, pursuant to an ongoing construction and development program. The
program allows Vitelco to increase revenues and reduce costs, while enhancing
service, by taking advantage of technological developments in the
telecommunications industry, such as digital switching and fiber optics.
On September 17, 1989, a substantial portion of Vitelco's outside plant was
destroyed by Hurricane Hugo, which was the first hurricane to inflict
substantial damage in the U.S. Virgin Islands since 1928. While Hurricane Hugo
did relatively little damage to Vitelco's switching equipment, it resulted in
a decrease in the number of access lines in service from 46,968 to fewer than
12,000. Within seven months following the hurricane, Vitelco substantially
completed the restoration of the damaged and destroyed plant. On St. Croix,
which suffered the most damage, Vitelco replaced a substantial portion of its
aerial cable, including all cables connecting its remote switches on St.
Croix, with approximately 125 miles of underground cables, which have greater
capacity than the lines in place prior to the hurricane. On St. Thomas, where
the hurricane damage was less substantial, Vitelco replaced all damaged
outside plant, and, in addition, upgraded its network by installing an
underground fiber-optic cable to connect its microwave facility with its main
switch. In addition to greater capacity, underground cable provides greater
reliability and reduces the destructive impact of the elements, including the
impact of hurricanes. The total cost to Vitelco for replacement of plant due
to Hurricane Hugo was approximately $60 million. The Company received
approximately $23.6 million in respect of insurance coverage for damages
resulting from Hurricane Hugo.
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On September 15, 1995, Hurricane Marilyn struck the U.S. Virgin Islands
again causing extensive damage to Vitelco's outside telephone plant. Hurricane
Marilyn put out of service approximately 37,800 lines. The damage was most
extensive in St. Thomas and St. John, where respectively 90% and 50% of the
access lines were damaged as compared with the loss of only 30% in St. Croix.
The total cost to Vitelco for replacement of plant due to Hurricane Marilyn
was approximately $41 million.
The Company had been unable to obtain insurance coverage for any of its
outside plant or for any damage caused by windstorm at commercially reasonable
rates. However, the Company recently obtained insurance coverage for windstorm
damage in the amount of $30 million per storm and $55 million in the
aggregate.
CELLULAR AND OTHER OPERATIONS
The Company is engaged in other telecommunications operations, including
providing cellular telephone service in the U.S. Virgin Islands and selling
and leasing telecommunications equipment in the U.S. Virgin Islands.
VitelCellular provides cellular telephone service to land-based and marine
customers in the U.S. Virgin Islands. In September 1989, following Hurricane
Hugo, VitelCellular was granted special temporary authority by the FCC to
construct and operate cellular systems in the two U.S. Virgin Islands Rural
Service Areas (as defined by the FCC) and, as such, was the second cellular
system to become operational in a Rural Service Area in the United States.
Since late 1990, VitelCellular has been providing service in such Rural
Service Areas pursuant to regular authority from the FCC.
Comsat Mobile Investments, Inc. ("CMI"), a subsidiary of Communications
Satellite Corporation ("Comsat"), owns 10% of the common stock of
VitelCellular which it purchased in October 1990 for $1.4 million. Pursuant to
the agreement by which CMI acquired its stock interest in VitelCellular, CMI
was entitled to representation on the board of directors of VitelCellular and
CMI's approval was required for annual budgets and certain other corporate
actions. The Company has advised CMI that, in the Company's opinion, CMI
materially breached that agreement by failing to maintain a representative on
VitelCellular's board of directors, failing to consider request for approvals
in good faith in the best interest of VitelCellular and its shareholders and
refusing to give formal consent to an equipment purchase and related financing
which had previously been approved by CMI's former board representative in an
effort to force the Company to buy out CMI's investment in VitelCellular at an
exorbitant price, and that the Company has terminated that agreement by reason
of CMI's breach. CMI has disputed the Company's assertion of material breach,
but neither CMI nor the Company have initiated any proceedings to resolve the
issue.
Vitelcom earns revenues from the sale, lease and servicing of customer
premises equipment, facsimile machines, radio paging devices and private
branch exchanges in the U.S. Virgin Islands. Vitelcom recently participated in
the FCC auction process for Personal Communication Services ("PCS") spectrum
in the U.S. Virgin Islands Basic Trading Area ("BTA") and was awarded and
purchased the 10 MHz "E" block of spectrum for the U.S. Virgin Islands. The
Company is currently evaluating the build-out of this service and has until
April 2002 to build out the system.
In November 1996, the Company won a privatization bid to acquire 67%
ownership of the telephone system of the Republic of Congo, subject to
reaching agreement on a number of material points. However, direct
negotiations between the Company and the Congolese government did not result
in a final agreement. As of the second quarter of 1997, the Company ceased all
negotiations and wrote-off all the capital expenditures surrounding this
transaction which amounted to approximately $1.3 million.
COMPETITION
The 1996 Telecommunications Act ("1996 Act") worked a fundamental
restructuring of the telecommunications industry in the United States. Its
primary effect will be to enable a number of companies to enter new
telecommunications market segments where they were formerly precluded from
competing.
Prior to the 1996 Act, local telephone companies had state-protected
monopolies for the provision of local and intrastate toll telephone service.
This precluded other companies from offering the same services over wire.
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Since 1980, however, cellular telephone companies could provide local
telecommunications service that, to a limited extent, replaced local wired
telephone service. In addition, telephone companies were precluded from
providing cable TV services in their telephone service territories unless they
operated in communities of less than 10,000 persons or received a waiver from
the FCC.
The 1996 Act broke down these industry segment barriers. States are now
precluded from preventing other companies from offering local and intrastate
toll telephone services. It also permits telephone companies to provide cable
TV service within their service territories. The 1996 Act also opens up other
telecommunications segments to competition by a greater number of industry
segments. For example, Bell operating companies can now qualify to enter the
long distance business in their own telephone service territories. The
collective impact of these procompetition laws will be to increase both the
opportunities and risks for all industry segments and players, including
Vitelco.
Vitelco's previous protection as the sole provider of wired local telephone
service in the U.S. Virgin Islands is no longer in effect. Therefore, Vitelco
may be subject to competition in the provision of its local telephone services
in the future. No company currently is providing competing wired local
telephone services in the U.S. Virgin Islands. Two cellular companies are
currently operating in the U.S. Virgin Islands, one of which is controlled by
Vitelco's parent company, ATN-VI. A third company, operating from the British
Virgin Islands, provides cellular service to boats in U.S. Virgin Islands
waters. Additional wireless providers, using personal communications service
frequencies, have been awarded FCC licenses and may become operational in the
future. One such company executed an interconnection agreement with Vitelco in
June 1997.
AT&T recently completed the installation of an underwater fiber optic cable
connecting St. Croix to St. Thomas, where the connection between the two
islands had heretofore been solely by Vitelco's microwave facilities. The
terms and conditions of the cable license do not prohibit AT&T or other
carriers from routing telephone calls over the cable. Thus, some traffic
between these islands may be provided on facilities other than Vitelco's, and
may reduce access charges that otherwise would be paid to Vitelco.
Vitelco is also required under the 1996 Act to provide potential competitors
with interconnection to Vitelco's telephone network to enable others to offer
telecommunications services, including local telephone service.
Pursuant to Section 251(b) of the 1996 Act, local exchange carriers
("LECs"), including both existing telephone companies and new competitive
carriers, are required to (1) allow others to resell their services at retail
rates, (2) ensure that customers can keep their telephone numbers when
changing carriers, (3) ensure that competitors' customers can use the same
number of digits when dialing and to provide nondiscriminatory access to
telephone numbers, operator service, directory assistance and directory
listing, (4) ensure access to telephone poles, ducts, conduits and rights of
way, and (5) compensate competitors for the competitors' costs of completing
calls to competitors' customers. Competitors are required to compensate the
local telephone company for the cost of providing these interconnection
services.
Pursuant to Section 251(f)(2) Vitelco, as a small carrier, is eligible to
request exemption, suspension or modification of any or all of these Section
251(b) requirements from the Virgin Islands Public Service Commission
("VIPSC"). Vitelco expects to request such exemption, suspension or
modification from some or all of these requirements in the future. The VIPSC
may grant such a petition to the extent that it determines that such
suspension or modification is necessary to avoid a significant averse economic
impact on telecommunications users, to avoid imposing a requirement that is
unduly economically burdensome or to avoid imposing a requirement that is
technically infeasible and that such suspension or modification is consistent
with the public interest. It is not known at this time how the VIPSC will
respond to such a request. If the VIPSC denies some or all of that request and
if the VIPSC does not allow Vitelco adequate compensation for the costs of
providing the interconnection, Vitelco's costs could increase. In addition,
with such a denial competitors could enjoy benefits that would make their
services more attractive than if they did not receive such interconnection
rights.
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Pursuant to Section 251(c) of the 1996 Act, incumbent LECs ("ILECs"), which
only include local telephone companies like Vitelco, are required to (1)
interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point, (2) unbundle and
provide nondiscriminatory access to network elements (e.g., local loops,
switches and transport facilities) at nondiscriminatory rates and on
nondiscriminatory terms and conditions, (3) offer their retail services for
resale at wholesale rates, (4) provide reasonable notice of changes in the
information necessary for transmission and routing of services over the ILEC's
facilities or to information necessary for interoperability, and (5) to
provide, at rates, terms and conditions that are just, reasonable and
nondiscriminatory, for the physical co-location of equipment necessary for
interconnection or access to unbundled network elements at the premises of the
ILEC. Competitors are required to compensate the local telephone company for
the cost of providing these interconnection services.
Pursuant to Section 251(f)(l) Vitelco, as a rural carrier, is automatically
exempt from Section 251(c)'s interconnection requirements. This exemption can
be lifted or modified by the VIPSC if a competing carrier files a bona fide
request for such interconnection. No such request is pending before the VIPSC.
If such a request is filed, Vitelco would ask the VIPSC to retain the
exemption. The VIPSC may grant such a petition to the extent that it
determines such interconnection request is not unduly economically burdensome,
is technically feasible and is consistent with universal service obligations.
It is not known how the VIPSC would rule on these requests. If the VIPSC lifts
such exemption in whole or in part and if the VIPSC does not allow Vitelco
adequate compensation for the costs of providing the interconnection,
Vitelco's costs could significantly increase and it could suffer a significant
loss of customers to competition. Finally, the FCC issued an order in May 1997
that directed that incumbent local exchange carriers could not impose access
charges on long distance and other carriers that purchased unbundled network
elements from the incumbent. This decision could serve to reduce access
revenues for Vitelco and other incumbents. Several parties have appealed this
and other aspects of the FCC's May 1997 order, but Vitelco is unable to
determine the outcome of such appeals at this time.
The risk to Vitelco from competitive entry for local telephone services must
be weighed against any new opportunities Vitelco could take advantage of in
terms of new service offerings, such as interstate, Internet access, personal
communications or other wireless service, cable TV, or international services.
These new service offerings could produce revenues that could offset lost
revenues due to local service competition.
REGULATION
The Company's long-distance access services and its radio-based services in
the U.S. Virgin Islands are regulated by the FCC; Vitelco's local telephone
service in the U.S. Virgin Islands is regulated by the PSC. The 1996 Act may
significantly change many aspects of the regulation of Vitelco's business.
Franchise. Vitelco provides basic local telephone service in the U.S. Virgin
Islands pursuant to a franchise granted by the government of the Virgin
Islands on October 9, 1959. The franchise is for an indefinite term unless and
until terminated by the government of the U.S. Virgin Islands upon two years'
prior written notice. In the event of such a termination, the franchise
provides that the U.S. Virgin Islands government shall expropriate the entire
business, plant and facilities of Vitelco. Vitelco has no reason to believe
that the government of the U.S. Virgin Islands intends to exercise its right
of termination in the foreseeable future. Vitelco derives local telephone
service revenues from fixed monthly local service charges to subscribers at
rates regulated by the PSC.
The FCC. The FCC has jurisdiction over the rates for access services
provided by local exchange carriers to long-distance carriers, as well as
other matters relating to these services and has established a system of
access charges to compensate local exchange carriers for the costs of
originating and terminating long-distance services, including a fair return on
investment. The FCC established the National Exchange Carrier Association,
Inc. ("NECA") to prepare and file access charge tariffs for both traffic
sensitive and non-traffic sensitive rate elements on behalf of all telephone
companies that do not file separate tariffs or concur in a joint access tariff
of another telephone company for all access elements and to administer the
Universal Service Fund ("USF"), a pool funded by long-distance carriers, which
is intended to assist local exchange carriers with higher than average
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<PAGE>
non-traffic sensitive costs. Vitelco files its own access tariff with the FCC,
which specifies Vitelco's charges to long-distance carriers for traffic
sensitive access elements and references the NECA tariff for non-traffic
sensitive access elements. Vitelco participates in and receives reimbursement
from the non-traffic sensitive access charge revenue pool administered by
NECA.
The non-traffic sensitive portion of Vitelco's costs allocated to long-
distance service is recovered through (i) flat-rate per line monthly access
charges to subscribers and (ii) allocations to Vitelco from NECA's non-traffic
sensitive pool of receipts from long-distance carriers. The revenues derived
from the USF are considered to be local revenues for ratemaking purposes,
rather than long-distance revenues, thereby reducing the rates payable by
local subscribers.
In May 1997, the FCC issued a decision modifying its rules and policies
governing interstate exchange access services of incumbent local exchange
carriers. That decision applied, with limited exceptions, solely to incumbent
local exchange carriers who are governed by the FCC's price cap system of
regulation. As regards incumbent local exchange carriers (such as Vitelco) who
are subject to federal rate-of-return regulation, the FCC stated that it plans
to initiate a separate access reform proceeding later this year. Vitelco is
not in a position to speculate on what reforms the FCC will propose in that
proceeding or what impact such reforms might have on the Company's business.
Vitelco also is not in a position to speculate on the outcome of the pending
petitions for reconsideration or the court appeals filed by various parties
regarding the FCC's May 1997 decision.
In May 1997, the FCC also issued a decision modifying its federal universal
service rules and policies pursuant to Section 254 and other provisions of the
new law. In that decision, the FCC adopted rules defining universal service,
establishing the eligibility criteria for carriers other than incumbent local
exchange carriers to receive universal service support, establishing the
criteria to determine which carriers must contribute to universal service
support and the manner in which such contributions will be determined and
administered, moving long term support from interstate exchange access charges
to universal service support, and establishing new universal service
mechanisms for schools, libraries and health care providers. At the present
time, no carrier other than Vitelco qualifies to receive federal universal
service support in the U.S. Virgin Islands.
With respect to federal high cost support, the FCC held that rural carriers
in high cost areas, such as Vitelco, should continue to receive universal
service support through existing mechanisms, with some modifications, based
upon such carriers' embedded costs. As stated in the FCC's May 1997 and
subsequent decisions, those modifications include, among other things, an
indexed cap on the growth of the high cost fund and limitations on the
corporate operations expenses that qualify for universal service support. Such
modifications may limit the federal universal service support available to
Vitelco now and in the future and could adversely impact Vitelco's operations
in the future. Additionally, until the FCC has ruled on pending
reconsiderations of these decisions, the final outcome remains uncertain.
The FCC endorsed the policy that universal service support for all high cost
carriers should be determined based upon forward-looking economic costs rather
than embedded costs. However, the FCC deferred adopting such a requirement for
rural carriers such as Vitelco pending further FCC and other proceedings. The
FCC stated that it would commence a proceeding by October 1998 to establish
forward-looking economic cost mechanisms for rural carriers. The FCC stated
that any such requirement that it might adopt in the future would not apply to
rural carriers such as Vitelco until at least January 1, 2001. Vitelco
believes that, while the use of forward-looking economic cost mechanisms to
determine universal service support could have an adverse impact upon Vitelco,
it would be premature for Vitelco to predict the potential impact of the FCC's
new and prospective universal service rules and policies.
With respect to carriers serving insular areas, the FCC deferred deciding
whether such carriers should be required to shift to universal service support
mechanisms based upon forward-looking economic costs at the same time as other
rural carriers. Various parties have filed petitions for reconsideration and
appeals of the FCC's decision adopting universal service rules and policies.
Vitelco is unable to predict the impact that these future decisions might have
upon its business interests.
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Cellular licenses and other public land mobile licenses are issued by the
FCC for a term of ten years. Near the conclusion of the term, licensees must
file applications for renewal to obtain authority to operate for an additional
ten-year term. These applications may be denied for cause and other parties
may file competing applications for the authorization. On March 11, 1993, the
FCC adopted an order regarding the standards to be applied in cellular license
renewal proceedings, which may involve a hearing if qualified competitors for
the authorization file applications.
The PSC. Vitelco's local telephone operations, including the services
offered and the rates for those services, are subject to the jurisdiction of
the PSC, which has jurisdiction over public utilities and transportation in
the U.S. Virgin Islands pursuant to Title 30 of the U.S. Virgin Islands Code.
Under Title 30 of the U.S. Virgin Islands Code and the rules and regulations
promulgated thereunder, Vitelco is allowed to charge local service rates that
will permit it to earn a reasonable return on investment and to recover its
operating expenses. The rate of return is the amount of money earned by a
utility in excess of operating costs, stated as a percentage of the utility's
rate base, which is the value of the utility's property devoted to the
provision of telephone service minus accumulated depreciation. The rate of
return must be adequate to permit the utility to maintain its credit and to
attract new capital. Vitelco may file new rates thirty days prior to the time
the rates are intended to be effective. The new rates will become effective
unless the PSC suspends them and initiates an investigation into their
reasonableness. If the PSC determines that the proposed rates are
unreasonable, the PSC may order that rates for the future be reduced. The PSC
also may initiate an investigation of existing rates if it believes that these
rates are unreasonable. In May 1997, Vitelco received a five year rebate of
90% of its Virgin Islands income taxes and 100% of its Virgin Islands gross
receipts, excise and property taxes from the Virgin Islands Industrial
Development Commission. On October 9, 1997 the PSC instituted a proceeding to
determine whether Vitelco's rates were just and reasonable in light of this
tax rebate. There can be no assurance as to the outcome of this proceeding.
Between 1987, when the Company acquired Vitelco, and 1992 the Company and
certain of its subsidiaries were involved in numerous legal and administrative
proceedings with the PSC and entered into several settlement agreements with
the PSC. These agreements resulted in rate reductions in 1989 (retroactive to
1988) and September 1, 1992. The latest agreement between Vitelco and the PSC
with respect to rates provided that Vitelco's local rates would remain
unchanged until January 1, 1995 at the earliest and that, if Vitelco earned
more than an 11.5% return on its local rate base during the years 1993 to
1994, it would reduce its local rate base (and telephone plant on which
depreciation is computed) in the following years by an amount equal to 50% of
such excess earnings. These agreements also (i) require the prior approval of
the PSC for any direct or indirect transfer of 51% or more of Vitelco's common
stock, (ii) contain certain restrictions on intercompany transactions between
Vitelco and its affiliated companies and on advisory fees, (iii) prohibit
loans to or payments on behalf of affiliated companies by Vitelco, (iv) where
allocation of expense between Vitelco and an affiliate is necessary, require
the affiliate to repay Vitelco within 60 days with interest at 1% above the
prime rate, (v) require Vitelco to maintain an equity ratio of 25%, (vi)
except for payments to service ATN-VI's debt obligations to the RTFC, prevent
Vitelco from paying dividends in excess of 60% of net income so long as its
equity ratio is below 40%, (vii) except for payments to service ATN-VI's debt
obligations to RTFC, prohibit from paying any dividends if its equity ratio
falls below 25% and (viii) require that the chief executive officer of Vitelco
not be an employee, executive or member of the board of directors of any
affiliate of Vitelco or have any ownership interest in excess of 5% in any
affiliate of Vitelco and that such chief executive officer be allowed the
normal range of discretion for a chief executive officer of a public utility.
Although the latest agreement between Vitelco and the PSC essentially expired
on January 1, 1995, Vitelco has been operating since that date at the rates
established in that Agreement.
The PSC does not currently regulate cellular telephone service or rates;
however, in April 1993, the PSC reopened a proceeding, originally initiated in
1990, to consider whether and to what extent to regulate cellular rates and
services and whether to direct Vitelco to tariff interconnection rates. On
August 10, 1993, Congress
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enacted an amendment to the Communications Act of 1934 that preempts state
regulation of cellular rates and entry. Although states may petition the FCC
to continue or initiate rate regulation, the FCC has stated that a petitioning
state will have to clear substantial hurdles to be allowed to regulate rates
for cellular service.
TAXATION--UNITED STATES
As a U.S. corporation, ECI will be subject to U.S. federal income tax on its
worldwide net income, currently at rates up to 35%. ECI's Virgin Islands
subsidiaries will be classified as controlled foreign corporations ("CFCs")
for purposes of the Subpart F provisions of the Internal Revenue Code of 1986,
as amended (the "Code"). Under those provisions, ECI 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 ECI. 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,
ECI 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 ECI's U.S. federal income tax. The
10% Virgin Islands withholding tax applicable to dividends from the Virgin
Islands is likely to constitute an additional cost of distributing any such
dividends, because, after credit for allocable Virgin Islands corporate tax,
ECI may not benefit from the potential credit for the withholding 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., net income as reflected on the corporation's 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%. Immediately after
consummation of the Transactions, ECI will satisfy the above ownership
criterion but ECI believes that it will not satisfy the income criterion for
classification as a PHC.
TAXATION--U.S. VIRGIN ISLANDS
Although the U.S. Virgin Islands is a taxing jurisdiction separate from the
United States, the U.S. Internal Revenue Code of 1986, as amended, is the
controlling taxing statute in the U.S. Virgin Islands, with the words "Virgin
Islands" substituted for the words "United States" where appropriate. A
corporation organized under the laws of the U.S. Virgin Islands is generally
taxed at a 35% marginal rate on its worldwide income, subject to reduction by
foreign tax credits, if available, plus a surcharge equal to 10% of the basic
tax (i.e., an additional 3.5%). A corporation which is not organized under the
laws of the U.S. Virgin Islands is generally subject to corporate income tax
at a 35% rate, plus an additional 3.5% surcharge, on income effectively
connected with a trade or business in the U.S. Virgin Islands, and to an 11%
branch profits tax on effectively connected earnings and profits which are not
reinvested in its U.S. Virgin Islands trade or business. Corporations not
organized in the U.S. Virgin Islands are generally subject to a 10% U.S.
Virgin Islands withholding tax on interest or dividends received from sources
within the U.S. Virgin Islands (other than any dividends received from a
corporation not organized under the laws of the U.S. Virgin Islands). Further,
Section 1274(b) of the Tax Reform Act of 1986 authorized the U.S. Virgin
Islands to enact non-discriminatory local income taxes. Corporations and other
taxpayers are also generally subject to property, gross receipts, excise and
stamp taxes in the U.S. Virgin Islands. Under the U.S. Virgin Islands
Industrial Development Commission (the "IDC"), the U.S. Virgin Islands may
offer tax benefits to qualifying businesses for the purpose of promoting the
growth, development and diversification of the U.S. Virgin Islands economy.
ATN-VI, Vitelco, Vitelcom and VitelCellular (the "ATN-VI Group") file a
consolidated income tax return in the U.S. Virgin Islands. Pursuant to the IDC
and subject to the satisfaction of certain conditions by Vitelco,
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Vitelco was granted the following tax benefits through September 30, 1996: (i)
a rebate of 11.25% of Vitelco's U.S. Virgin Islands income tax, income tax
surcharge and customs duties and other taxes on raw materials which are
attributable to the operations of Vitelco; and (ii) an exemption from 12.5% of
Vitelco's U.S. Virgin Islands real property, gross receipts and excise taxes.
The amount of these benefits in 1996 was $329,000. In May 1997 Vitelco was
granted a rebate of 90% of Virgin Islands income taxes and 100% of Virgin
Islands gross receipts, excise and property taxes for the five year period
beginning October 1, 1998. On June 19, 1997 the Virgin Islands' Senate
unanimously passed a resolution calling on the PSC to reduce Vitelco's rates
by 20%. On October 9, 1997 the PSC instituted a proceeding to determine
whether Vitelco's rates were just and reasonable in light of this tax rebate.
There can be no assurance as to the outcome of this proceeding.
Dividends from ATN-VI to ECI and interest payments from any member of the
ATN-VI Group of companies to ECI or any affiliates not organized in the U.S.
Virgin Islands may be subject to a 10% U.S. Virgin Islands withholding tax.
EMPLOYEES
At December 31, 1996, Vitelco employed approximately 409 individuals.
Approximately 274 of Vitelco's employees are represented by the United Steel
Workers of America (the "Steel Workers"). Vitelco's contract with the Steel
Workers expires on September 30, 1999.
PROPERTIES
At December 31, 1996, Vitelco, VitelCellular and Vitelcom utilized
approximately 132,000 square feet of building space on approximately 16 acres
of land in various locations throughout the U.S. Virgin Islands. Of this
space, approximately 116,000 square feet of building space on approximately 12
acres was owned (subject to a first priority security interest securing
certain indebtedness to the RTFC and the Rural Utilities Service, an agency of
the U.S. government) and 16,000 square feet on approximately 4 acres was
leased. Vitelco carries insurance in an aggregate amount of $50 million
against damage to any of its property and business interruption insurance for
damage to any of its properties other than telephone poles, cables and lines
("outside plant"). In addition, ATN-VI has insurance with respect to its
outside plant in the amount of $30 million per storm and $55 million in the
aggregate.
Vitelco's network system principally utilizes the ITT System 1210 Digital
Switch (the "1210 Switch") interconnected by fiber optic cable (on an intra-
island basis) and digital microwave radio (on an inter-island basis). In
addition, in January 1989, Vitelco purchased a DMS-100 switch (the "DMS-100
Switch") from Northern Telecom (CALA) Corporation and installed the switch in
July 1989 in its main office in St. Thomas. The DMS-100 Switch has increased
Vitelco's capacity to serve access lines.
VitelCellular's system in the U.S. Virgin Islands consists of four full
power cell sites and one high power enhancer on St. Thomas, a full power cell
site and a high power enhancer on St. John, and two full power cell sites and
one high power enhancer on St. Croix, which cover most of the land area of the
islands and the surrounding waters. Despite the small land area of the
islands, the mountainous terrain requires multiple radio sites for adequate
coverage. The mobile telephone switching office that controls all of the radio
sites is located on St. Thomas. All of VitelCellular's switching equipment is
manufactured by Northern Telecom, Inc.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OF THE COMPANY COMMON STOCK
PRINCIPAL STOCKHOLDERS
As of August 11, 1997, the Company knows of no person who may be deemed to
own beneficially more than 5% of the Company Common Stock except as set forth
below:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
------------------------- -----------------------
AMOUNT AND
NATURE OF AMOUNT OF
NAME AND ADDRESS BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK OWNERSHIP COMMON STOCK
- ------------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Cornelius B. Prior, Jr....... 3,693,400(2) 30.1% 2,807,040 57.2%
P.O. Box 6100
48A Kronprindsens Gade
Charlotte Amalie
St. Thomas
U.S. Virgin Islands 00801
Jeffrey J. Prosser........... 3,325,000(3) 27.1% -- --
Chase Financial Center
P.O. Box 1730
St. Croix
U.S. Virgin Islands 00821
Fidelity Management & Re-
sources Corp................ 1,056,700(4) 8.6% 422,680 8.6%
82 Devonshire Street
Boston, MA 02109
Chancellor L.G.T. Asset Man-
agement, Inc................ 633,000(4) 5.1% 253,200 5.1%
50 California, 27th Floor
San Francisco, CA 94111
</TABLE>
- --------
(1) After giving effect to the Transaction.
(2) Includes 300 shares owned by Mr. Prior's children, as to which Mr. Prior
disclaims beneficial ownership. Also includes 500 shares owned by Gertrude
Prior, Mr. Prior's wife, as to which Mr. Prior disclaims beneficial
ownership. Also includes 348,564 shares held by the 1994 Prior Charitable
Remainder Trust as to which Mr. Prior is the sole Trustee.
(3) Includes 56,750 shares owned by Mr. Prosser's children, as to which Mr.
Prosser disclaims beneficial ownership, and 257,000 shares as to which Mr.
Prosser holds an option to purchase.
(4) Based on available public filings and conversations with Fidelity
Management & Resources Corp. and Chancellor L.G.T. Asset Management, Inc.
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<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
Set forth below is the ownership, as of August 11, 1997, of the number of
shares and percentage of the Company Common Stock beneficially owned by (i)
each director of the Company, (ii) the President and Co-Chief Executive
Officer and each of the six other most highly compensated executive officers
of the Company, and (iii) all executive officers and directors of the Company.
<TABLE>
<CAPTION>
SHARES OF
THE PERCENT OF
COMPANY THE COMPANY
COMMON COMMON
STOCK STOCK
DIRECTORS OWNED OUTSTANDING
--------- --------- -----------
<S> <C> <C>
Andrew F. Lane.................................. -- --
Robert A.R. Maclennan........................... -- --
Cornelius B. Prior, Jr.......................... 3,693,400(1) 30%
Jeffrey J. Prosser.............................. 3,325,000(2) 27%
Sir Shridath S. Ramphal......................... -- --
John P. Raynor.................................. -- --
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
James J. Heying................................. 11,057(3) *
Craig A. Knock.................................. 1,000 *
Sharon Smalls................................... 453(3) *
David L. Sharp.................................. 2,454(3) *
Thomas Minnich.................................. -- --
All executive officers and directors as a group
(11)........................................... 7,033,814 57%
</TABLE>
- --------
* Less than 1%
(1) Includes 300 shares owned by Mr. Prior's children, as to which Mr. Prior
disclaims beneficial ownership. Also includes 500 shares owned by Gertrude
Prior, Mr. Prior's wife, as to which Mr. Prior disclaims beneficial
ownership. Also includes 348,564 shares held by the 1994 Prior Charitable
Remainder Trust as to which Mr. Prior is the sole Trustee.
(2) Includes 56,750 shares owned by Mr. Prosser's children, as to which Mr.
Prosser disclaims beneficial ownership, and 257,000 shares as to which Mr.
Prosser holds an option to purchase.
(3) All of the shares owned by Ms. Smalls, 937 of the shares owned by Mr.
Heying and 554 of the shares owned by Mr. Sharp are allocated to them as
participants in the Company's Employees' Stock Ownership Plan.
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<PAGE>
DIRECTORS AND MANAGEMENT OF NEW ATN
DIRECTORS OF NEW ATN
Following the Transaction, the Board of Directors of New ATN (the "New ATN
Board") is expected to consist of five individuals. Of the current members of
the Company Board, it is intended that Andrew F. Lane, Robert A.R. Maclennan
and Cornelius B. Prior, Jr., will serve as directors of New ATN, and Jeffrey
J. Prosser, John P. Raynor and Sir Shridath S. Rampal will resign from the
Company Board. The remaining members of the New ATN Board will be James B.
Ellis and Henry Wheatley.
CORNELIUS B. PRIOR, JR., 63, has been Co-Chief Executive Officer and
President of the Company since June 1987, when the Company, through ATN-VI,
acquired Vitelco. He was Chairman of the Board of Vitelco 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.
ANDREW F. LANE, 62, has been a director of the Company since February 1,
1992. Mr. Lane has practiced law in Boston, Massachusetts for more than the
past five years and was a partner in the law firm of Warner and Stackpole from
1991 to May 1996.
ROBERT A.R. MACLENNAN, 60, has been a director of the Company since February
1, 1992. He has been a member of the British Parliament since 1966. Mr.
Maclennan is the president of the Liberal Democrat party and the party's
spokesman in the House of Commons on the National Heritage, Art, Broadcasting
and the Constitution. From 1981 through 1989, he was European counsel to the
New York law firm, Proskauer, Rose, Goetz & Mendelsohn.
JAMES B. ELLIS, 57, has been President and Treasurer of MLB Resources Inc.,
an investment, real estate and construction firm, since 1987. Prior to 1992,
Mr. Ellis was an executive of SBC Communications Inc. (formerly known as
Southwestern Bell), a telecommunications firm based in the United States. From
1960 until 1992, Mr. Ellis worked in the telecommunications business,
primarily at Southwestern Bell, where he was President of SBC Communications-
Oklahoma Division from 1990 to 1992.
HENRY WHEATLEY, 65, has been a director of Vitelco since 1994. Since 1973 he
has been the President of Wheatley Realty Corporation, where he manages the
development of shopping centers. Mr. Wheatley is also Chairman of the Board of
Coral World (Virgin Islands), Inc., and has been vice president and trustee of
Islands Resources Foundation since 1972.
EXECUTIVE OFFICERS OF NEW ATN
Following the Transaction, Cornelius B. Prior, Jr., Co-Chief Executive
Officer and President of the Company is expected to be Chairman of the Board
and Chief Executive Officer of New ATN, Craig Knock is expected to be
Treasurer and the Chief Financial Officer, and H. William Humphrey is expected
to be Vice President, Guyana Operations.
For information concerning Mr. Prior, see "Directors of New ATN"
CRAIG KNOCK has been Chief Financial Officer and Vice-President of the
Company since April 1993. From July 1992 until April 1993, he was an 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. Mr. Knock
obtained a B.B.A. degree in accounting from the University of Iowa in 1986.
H. WILLIAM HUMPHREY will join ATN on December 1, 1997 as Vice President,
Guyana Operations. His responsibilities will include providing advice and
direction to the General Manager and senior management of GT&T. 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.
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<PAGE>
EXECUTIVE OFFICERS OF GT&T
The following employees of GT&T are expected to make significant
contributions to New ATN's business.
RAYMOND ROOPNAUTH, General Manager of GT&T--Mr. Roopnauth was appointed
General Manager of GT&T in October 1997. He had been Director of Technical
Operations at GT&T since 1991. His responsibilities include overseeing
switching, national and international transmission, power systems, external
plant and operator services. Mr. Roopnauth has formerly held the position of
Senior Engineer for network development and international systems at Guyana
Telephone Co. He has more than 24 years experience in the field of
telecommunications engineering.
TERRENCE HOLDER, Deputy General Manager, Human Resources and Public
Relations--Mr. Holder has been Deputy General Manager of GT&T since 1991. His
responsibilities entail public relations communications, advertising, public
notifications, press releases and all other communications on behalf of GT&T.
Mr. Holder has formerly held positions as President--Caribbean Broadcasting
Union, Chairman of the Board of the Guyana Broadcasting Corporation, Ministry
of Information--Guyana. He has more than 15 years of experience in
broadcasting and public relations with the Guyana Broadcasting Corporation,
where he achieved the position of General Manager.
SONITA JAGAN, Deputy General Manager, Finance--Ms. Jagan joined GT&T in
March 1993 as Assistant Controller and was promoted to Controller in May 1994.
Her responsibilities include reporting financial position and results of
operations, internal management reporting, and providing internal accounting
control mechanisms over purchasing, warehousing, receipts and disbursements,
among other duties. Prior to her employment with GT&T, Ms. Jagan resided in
Canada, where she was employed at GN Navtel (Canada) Inc., as Controller. Ms.
Jagan has a Bachelors of Business Administration majoring in Finance and
Economics from University of Western Ontario.
GODFREY S. STATIA, Deputy General Manager, Legal and Regulatory Affairs--Mr.
Statia has been with GT&T from June 1993, joining as Manager--Revenue and
Taxation. He was promoted to the position of Treasurer in May 1994. As
Treasurer, Mr. Statia is responsible for cash flow forecasting, revenue
accounting, regulatory matters, tax compliance and planning, and financing and
debt service. Mr. Statia works closely with the Controller in carrying out
their various responsibilities. Before joining GT&T, he was the Senior Deputy
commissioner of Inland Revenue for the Inland Revenue Department for Guyana,
where he had acquired nearly 22 years of working experience. Mr. Statia holds
an MBA in Accounting and Finance from Rutgers University, a CPA Certificate,
and is a member of the American Institute of Certified Public Accountants and
the Illinois Society of Certified Public Accountants.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF ECI COMMON STOCK
Following the Transaction, the number of shares and percentage of ECI Common
Stock beneficially owned by (i) each director of ECI, (ii) each executive
officer of ECI and (iii) persons who may be deemed to own beneficially more
than 5% of ECI Common Stock will be as follows:
<TABLE>
<CAPTION>
NAMES AND ADDRESS OF 5% SHARES
STOCKHOLDERS, DIRECTORS BENEFICIALLY PERCENT OF
AND EXECUTIVE OFFICERS OWNED COMMON STOCK
----------------------- ------------ ------------
<S> <C> <C>
DIRECTORS:
Jeffrey J. Prosser........................... 5,704,231(1) 52%
Richard N. Goodwin........................... -- --
Salvatore Muoio.............................. 4,600 *
John P. Raynor............................... -- --
Sir Shridath S. Ramphal...................... -- --
John G. Vondras.............................. -- --
EXECUTIVE OFFICERS:
Jeffrey J. Prosser .......................... 5,704,231(1) 52%
Chairman, Chief Executive Officer, Secretary
and acting Chief Financial Officer
Thomas R. Minnich............................ -- --
Chief Operating Officer
Edwin Crouch................................. 8,014(2) *
Vice President
James J. Heying.............................. 11,057(3) *
Executive Vice President for Acquisitions
All Directors and Executive
Officers as a Group (8 persons)............. 5,715,738 52%
5% BENEFICIAL OWNERS:
Fidelity Management & Resources Corp.
82 Devonshire Street
Boston, MA 02109............................ 1,056,700(4) 9.6%
Chancellor L.G.T. Asset
Management, Inc.
50 California, 27th Floor
San Francisco, CA 94111..................... 633,000(4) 5.8%
</TABLE>
- --------
* Less than 1% ownership.
(1) Includes 97,358 shares owned by Mr. Prosser's children, as to which Mr.
Prosser disclaims ownership, and assumes that Mr. Prosser exercises the
option he currently holds to purchase 257,000 shares of ATN Common Stock.
(2) Includes 288 shares owned by Mr. Crouch that are allocated to him as a
participant in the Company's Employee Stock Ownership Plan, 1,726 shares
owned by Mr. Crouch pursuant to his IRA, and 6,000 shares owned by the
Edwin C. Crouch Revocable Trust.
(3) Includes 937 shares owned by Mr. Heying that are allocated to him as a
participant in the Company's Employee Stock Ownership Plan.
(4) Based on available public filings and conversations with Fidelity
Management & Resources Corp. and Chancellor L.G.T. Asset Management, Inc.
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<PAGE>
DIRECTORS AND MANAGEMENT OF ECI
EXECUTIVE OFFICERS AND DIRECTORS OF ECI
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Jeffrey J. Prosser.......... 40 Chairman of the Board, Chief Executive Officer,
Secretary and Acting Chief Financial Officer
Thomas R. Minnich........... 60 Chief Operating Officer
Edwin Crouch................ 49 Vice President
James J. Heying............. 43 Executive Vice President for Acquisitions
Richard N. Goodwin.......... 63 Director
Salvatore Muoio............. 38 Director
Sir Shridath Ramphal........ 69 Director
John P. Raynor.............. 46 Director
John G. Vondras............. 50 Director
</TABLE>
DIRECTORS OF ECI
Following the Transaction, the Board of Directors of ECI (the "ECI Board")
is expected to consist of six individuals. Of the current members of the
Company Board, it is intended that Jeffrey J. Prosser, John P. Raynor and Sir
Shridath S. Rampal will resign from the Company Board upon consummation of the
Transaction and will be directors of ECI. The remaining directors of ECI are
intended to be Salvatore Muoio, John G. Vondras and Richard N. Goodwin.
JEFFREY J. PROSSER, 40, has been Chairman of the Board, Co-Chief Executive
Officer and Secretary of the Company since June 1987. He was the Chairman of
the Board of GT&T from January 1991 to April 1997 and was President of Vitelco
from June 1987 through February 1992. He became Chairman of the Board of
Vitelco in April 1997. From 1980 until 1987, Mr. Prosser was a managing
shareholder of Prosser & Prosser, P.C. ("Prosser & Prosser"), an accounting
firm.
RICHARD N. GOODWIN, 63, is an author, columnist and a member of the
Massachusetts Bar, who has also spent much of his life in public service. Mr.
Goodwin serves as a consultant to the Government of the U.S. Virgin Islands
and to several private corporations and has done so since 1985. Mr. Goodwin is
an occasional columnist for the Los Angeles Times, and is the author of
"Triumph or Tragedy: Reflections on Vietnam," "The Sowers Seed--a Tribute to
Adlai Stevenson," "Promises to Keep--A Call for a New American Revolution,"
and "Remembering America," and the to-be-published "The Hinge of the World."
In the 1960s, he served as Special Consultant to House Subcommittee on
Legislative Oversight, where he conducted investigation of rigged television
quiz show, Assistant Special Counsel to President John F. Kennedy, Deputy
Assistant Secretary of State for Inter-American Affairs, and Special Assistant
to President Lyndon Johnson. Mr. Goodwin also served as a law clerk to Mr.
Justice Felix Frankfurter, U.S. Supreme Court in 1959.
SALVATORE MUOIO, 38, is a principal and general partner of S. Muoio and Co.
LLC. He was a securities analyst for Lazard Freres & Co. LLC from 1995 to 1996
in the telecommunications and media sectors, and for Gabelli & Co., Inc. from
1985 to 1995, serving as a generalist and in the communications sector. From
1993 to 1995, Mr. Muoio was portfolio manager for Gabelli Global
Telecommunications Fund, Inc. and from 1990 to 1995 also served as Director of
Research for GAMCO Investors. He has been a director of Lynch Corporation
since November 1995.
JOHN P. RAYNOR, 46, has been a director of the Company since June 1987. From
March 1, 1982 to March 31, 1987, Mr. Raynor was a partner of Schumacher &
Gilroy, a law firm located in Omaha, Nebraska. Since April 1, 1987, Mr. Raynor
has been a partner of Raynor, Rensch & Pfeiffer (or its predecessors), a law
firm located in Omaha, Nebraska.
100
<PAGE>
SIR SHRIDATH S. RAMPHAL, 69, has been a director of the Company since
February 1, 1992. An international consultant, he has been chancellor of the
University of Warwick (United Kingdom) and chancellor of the University of the
West Indies since 1989. He is also currently co-chairman of the international
commission on Global Governance and chairman of the Leadership for
Environmental and Developmental (LEAD) Programs. He was president of the
International Union for the Conservation of Nature from December 1990 to
January 1994, chairman of the West Indian Commission from July 1990 to
February 1993, and chancellor of the University of Guyana from 1988 to 1992.
He was secretary-general of the British Commonwealth from 1975 to 1990. A
native of Guyana, Sir Shridath served as Guyana's attorney general and
minister of Foreign Affairs from 1965 to 1975.
JOHN G. VONDRAS, 50, is President Director of PT ARIAWEST International, the
joint venture company operating the West Java KSO partnership with PT TELKOM.
Prior to October, 1995, Mr. Vondras was Executive Director--Finance (Auditing)
and Executive Director--International Network Strategies (May 1992 to November
1993) for U.S. West Inc. He has over 25 years experience in the
telecommunications industry in both line and staff functions.
ECI BOARD COMMITTEES
On or before the Effective Date, the ECI Board will establish an Audit
Committee and a Compensation Committee. The members and functions of these
committees are as follows:
The Audit Committee, a majority of which will be independent directors, has
the authority, among other things, to appoint the auditors of ECI and to
approve their audit fee, to review all financial statements and report to the
ECI Board and to review and assess ECI's internal audit program and the
adequacy of ECI's accounting, financial and operating policies and controls.
The members of the Audit Committee will be John P. Raynor and John G. Vondras.
The Compensation Committee, a majority of which will be independent
directors, has the authority, among other things, to review recommendations
from the Chief Executive Officer regarding (i) general compensation and
contractual policies to be applied to the Directors and Executive Officers and
(ii) options and incentive schemes, and to submit recommendations to the Board
of Directors on those areas as well as to determine the compensation and
employment conditions for the Chief Executive Officer and Chairman and to
approve the service contracts of Directors. The members of the Compensation
Committee will be Salvatore Muoio, Sir Shridath S. Ramphal and John P. Raynor.
OFFICERS OF ECI
For information regarding Mr. Prosser, see "--Directors of ECI".
Thomas R. Minnich has been employed by the Company since August 1995 and was
named General Manager--GT&T in March 1996. From September 1994 until August
1995, he was Senior Vice President-- Telecommunications & Government Affairs
for ICS Communications. From 1985 to 1994, Mr. Minnich was President and CEO
of Mantanuska Telephone Association, one of Alaska's primary telephone
companies. Previously, Mr. Minnich worked in various capacities for GTE for
over 30 years.
James J. Heying has been Chief Operating Officer and Vice President of the
Company since April 1993. Previously, from January 1990 until April 1993, Mr.
Heying was Chief Financial Officer and Treasurer of both the Company and
Vitelco. From 1981 until 1983, Mr. Heying was a staff accountant and a tax
consultant at Touche Ross & Co. (a predecessor of Deloitte & Touche LLP, an
international accounting firm), and, from 1983, until 1989, was employed by
Prosser & Prosser, P.C. as a manager and Certified Public Accountant. Mr.
Heying also served as a financial advisor to the Company and Vitelco from 1987
until 1989. Mr. Heying obtained a B.B.A. degree in accounting and an M.A.
degree in accounting from the University of Iowa in 1979 and 1981,
respectively.
Edwin Crouch has been Vice President, Investor Relations of the Company
since 1990.
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COMPENSATION OF EXECUTIVE OFFICERS OF ECI
The following Summary Compensation Table sets forth the individual
compensation information for the Chairman of the Board and Chief Executive
Officer the other two executive officers of ECI who were paid compensation by
the Company in excess of $100,000 for all services rendered in all capacities
to the Company and its subsidiaries for each of the prior three years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(a) BONUS COMPENSATION(b)
- --------------------------- ---- --------- ----- ---------------
<S> <C> <C> <C> <C>
Jeffrey J. Prosser...................... 1996 250,667 --
Chairman of the Board, Chief Executive
Officer, Secretary and Acting Chief Fi- 1995 250,667 --
nancial Officer 1994 250,665 --
Thomas R. Minnich....................... 1996 195,825 --
Chief Operating Officer 1995 46,321(c) --
1994 --
James J. Heying......................... 1996 188,673 4,750
Executive Vice President for Acquisi- 1995 237,142 4,620
tions 1994 155,672 4,607
David L. Sharp.......................... 1996 173,067 4,750
President of Vitelco 1995 173,066 4,620
1994 181,521 4,607
Edwin Crouch............................ 1996 166,305 4,750
Vice President--Investor Relations 1995 93,640 2,465
1994 75,670 2,250
</TABLE>
- --------
(a) Includes salary deferrals under the Company's 401(k) profit sharing plan
(the "401(k) Plan").
(b) Consists of Company matching contributions under the 401(k) Plan.
(c) Reflects salary of Mr. Minnich from July 1995, when Mr. Minnich joined the
Company, through December 31, 1995.
EMPLOYMENT AGREEMENT
ECI's employment agreement (the "Employment Agreement") with Mr. Prosser
will be for an initial five year term and will be renewable for successive
five year terms thereafter. The Employment Agreement will provide for a base
salary of $600,000 for the first year, subject to annual review and adjustment
in the subsequent years. In addition to the base salary, an annual bonus may
be awarded at the discretion of the ECI Board or any duly authorized committee
thereof. The Employment Agreement also provides for a grant of options to
purchase 2.5% of the total outstanding shares of ECI Common Stock pursuant to
ECI's 1997 Long Term Incentive and Share Award Plan. In the event Mr.
Prosser's employment is terminated for other than cause or disability by ECI
or for good reason by Mr. Prosser, Mr. Prosser will be entitled to receive a
lump sum severance payment equal to 500% of the sum of his base salary for the
year including the date of termination and his highest annual bonus earned
during the five years immediately preceding the date of termination.
The Employment Agreement also provides that, so long as Mr. Prosser
beneficially owns at least 3% of the outstanding shares of Common Stock of
ECI, ECI will, at its own expense and subject only to Mr. Prosser's bearing
his own pro rata share of all underwriting commissions and discounts incurred
in connection with any
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offering of registrable stock (as defined in the Employment Agreement), (1)
prepare and file with the SEC registration statements and other documents as
may be necessary to permit a public offering and sale of Mr. Prosser's
registrable stock and (2) include in any registration statement of ECI (other
than a registration statement on Form S-4 or S-8 or filed in connection with
an exchange offer or an offering of securities solely to the existing
shareholders or employees of ECI) such number of Mr. Prosser's registrable
stock as he may elect to include. In the event that Mr. Prosser's registrable
stock is included in a registration statement, ECI will indemnify Mr. Prosser
against certain claims or liabilities under the Securities Act.
STOCK OPTION PLANS
Prior to the Transaction, ECI will adopt the ECI 1997 Long Term Incentive
And Share Award Plan (the "Plan"). The purpose of the plan is to provide a
means to attract, retain and motivate employees and directors of ECI upon
whose judgment, initiative and efforts the continued success, growth and
development of ECI depends.
The plan will be administered by the Compensation Committee of the ECI Board
or such other committee designated by the ECI Board; consisting of two or more
non-employee directors (the "Committee"). Any employee of ECI or its affiliate
who is responsible for or contributes to the management, growth or
profitability of ECI or its affiliate will be eligible to participate in the
Plan. Subject to the terms of the Plan, the Compensation Committee will select
the participants and determine the terms and conditions of the awards,
including the type of award granted, the number of shares granted and the type
of consideration to be paid to ECI upon exercise of the awards. The total
number of shares reserved for awards under the Plan is 1,095,913. In the event
of a stock split, reverse stock split, reorganization, merger or similar
capital adjustment, the Committee may adjust the total number of shares
covered under the Plan, the number of shares covered by each award and the
exercise price, grant price or purchase price to prevent dilution or
enlargement of the rights under the Plan. In the event of a change of control
of ECI, all outstanding awards shall become fully exercisable subject to
conditions in the Plan. For a period of 60 days following a change of control,
participants in the Plan may also elect to surrender any outstanding awards
and receive cash payments based on either the change of control price of any
shares or the fair market value of any property other than shares relating to
such award.
The Committee is authorized to grant awards which may consist of incentive
stock options ("ISOs"), nonqualified stock options ("NQSOs") and stock
appreciation rights ("SARs") as well as other types of awards. At the
discretion of the Committee, awards granted under the Plan may be granted
alone or in addition to, in tandem with, or in exchange or substitution for,
any other award granted under the Plan or under any other plan or agreement of
ECI The Committee shall have the authority to determine the exercise price,
the time or times at which an option may be exercised in whole or in part, the
methods by which such exercise price may be paid and the form of such payment.
The Committee may impose on any award or exercise thereof, additional terms
and conditions not inconsistent with the provisions of the Plan.
The Board generally has the power to amend, alter, suspend, discontinue or
terminate the Plan or the Committee's authority to grant awards under the Plan
without the approval of the ECI's shareholders; provided that the Board shall
not amend the Plan to materially and adversely affect rights therefore granted
to a participant without the consent of such participant.
CERTAIN TRANSACTIONS
The law firm of Raynor, Rensch & Pfeiffer has from time to time performed
legal services for the Company, for which it has received its customary fees.
Following the Transaction, such legal services likely will be performed for
ECI. John P. Raynor, who will be a director of ECI following the Transaction,
is a partner in this firm. In 1996, Raynor, Rensch & Pfeiffer was paid
$533,000 for such legal services.
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PRICE RANGE AND DIVIDEND HISTORY
OF THE COMPANY COMMON STOCK
The Company Common Stock is traded on the AMEX (symbol "ANK").
The high and low prices of the Company Common Stock for each quarter during
1995, 1996, the first three quarters of 1997, and through December 5, for the
fourth quarter of 1997 were as follows (in U.S. dollars):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
1995
Market prices
High..................................... 9 3/4 8 5/8 12 5/8 12 1/4
Low...................................... 6 1/4 6 8 1/4 10
1996
Market prices
High..................................... 23 1/4 27 1/2 25 3/4 22
Low...................................... 10 5/8 20 1/2 18 14 5/8
1997
Market prices
High..................................... 17 1/2 13 13/16 14 1/4 13 3/8
Low...................................... 11 10 1/4 11 11 3/4
</TABLE>
The Company has not paid cash dividends in the past and does not intend to
pay cash dividends in the foreseeable future.
DESCRIPTION OF NEW ATN CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
New ATN's authorized capital stock will consist of 20,000,000 shares of
Common Stock, par value $.01 per share, of which 4,909,000 shares will be
outstanding immediately after the consummation of the Transaction, and
10,000,000 shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"), none of which will be outstanding immediately after the consummation
of the Transaction.
NEW ATN COMMON STOCK
All of the outstanding shares of the New ATN's Common Stock after the
consummation of the Transaction will be fully paid and nonassessable. Each
outstanding share is entitled to one vote on all matters submitted to a vote
of stockholders. There are no cumulative voting rights, meaning that the
holders of a majority of the shares voting for the election of directors can
elect all the directors if they choose to do so. Subject to the preferential
rights of any outstanding series of Preferred Stock, the holders of Common
Stock will be entitled to such dividends as may be declared from time to time
by the Board of Directors from funds legally available therefor, and will be
entitled to receive pro rata all assets of the New ATN upon the liquidation,
dissolution or winding up of the New ATN. Holders of Common Stock will have no
redemption, conversion or preemptive rights to purchase or subscribe for
securities of the New ATN.
NEW ATN PREFERRED STOCK
The New ATN Board of Directors will be authorized to divide the Preferred
Stock into series and, with respect to each series, to determine the dividend
rights, dividend rate, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series
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and the designation of such series. The New ATN Board of Directors could,
without stockholder approval, issue Preferred Stock with voting rights and
other rights that could adversely affect the voting power of holders of Common
Stock and could be used to prevent a hostile takeover of New ATN. New ATN has
no present plans to issue any shares of Preferred Stock.
DESCRIPTION OF ECI CAPITAL STOCK
The following discussion reflects an amendment and restatement of ECI's
Certificate of Incorporation and By-laws which will be adopted prior to the
Effective Date.
AUTHORIZED CAPITAL STOCK
Under ECI's Restated Certificate of Incorporation (the "Certificate"), ECI's
authorized capital stock will consist of 40,000,000 shares of ECI Common Stock
and 10,000,000 shares of Preferred Stock, par value $.01 per share ("ECI
Preferred Stock").
ECI COMMON STOCK
The holders of ECI Common Stock will be entitled to one vote for each share
on all matters on which stockholders generally are entitled to vote, and
except as otherwise required by law or provided in any resolution adopted by
the ECI Board with respect to any series of ECI Preferred Stock, the holders
of ECI Common Stock will possess 100% of the voting power. The Certificate
does not provide for cumulative voting.
Subject to the preferential rights of any outstanding ECI Preferred Stock
that may be created by the ECI Board under the Certificate, the holders of ECI
Common Stock will be entitled to such dividends as may be declared from time
to time by the ECI Board and paid from funds legally available therefor, and
the holders of ECI Common Stock will be entitled to receive pro rata all
assets of the Company available for distribution upon liquidation. All shares
of ECI Common Stock issued in connection with the Transaction will be fully
paid and nonassessable, and the holders thereof will not have any preemptive
rights.
There is no established public trading market for ECI Common Stock, although
a "when issued" market is expected to develop prior to the Effective Date. On
October 16, 1997, the American Stock Exchange approved the listing of such
shares upon notice of issuance.
The declaration of dividends on ECI Common Stock will be at the discretion
of the ECI Board. The ECI Board has not adopted a dividend policy as such.
Subject to legal and contractual restrictions, its decisions regarding
dividends will be based on all considerations that in its business judgment
are relevant at the time, including past and projected earnings, cash flows,
economic, business and securities market conditions and anticipated
developments concerning ECI's business and operations.
ECI's cash flow and the consequent ability of ECI to pay any dividends on
ECI Common Stock will be substantially dependent upon ECI's earnings and cash
flow available after its debt service and the availability of such earnings to
ECI by way of dividends, distributions, loans and other advances. ECI does not
intend to pay any dividends on the ECI Common Stock in the foreseeable future.
ECI PREFERRED STOCK
Under the Certificate, the ECI Board is authorized to issue ECI Preferred
Stock, in one or more series, and to fix the number of shares constituting
such series and the designation of such series, the voting powers (if any) of
the shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications, limitations
or restrictions thereof, of the shares of such series. See "--Antitakeover
Effects of Certain Provisions of the Certificate and By-laws."
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ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
The Certificate and ECI's By-laws contain certain provisions, that could
make the acquisition of ECI by means of a tender offer, a proxy contest or
otherwise more difficult. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the Certificate
and the By-laws, which are attached as exhibits to ECI's Registration
Statement on Form S-4 relating to the ECI Common Stock.
Classified Board of Directors. The Certificate provides that the ECI Board
will be divided into three classes of directors, with the classes to be as
nearly equal in number as possible. The ECI Board consists of the persons
referred to in "Directors of ECI" above. The Certificate provides that, of the
initial directors of ECI, approximately one-third will continue to serve until
the first succeeding annual meeting of ECI's stockholders, approximately one-
third will continue to serve until the second succeeding annual meeting of
ECI's stockholders following the effectiveness of the Certificate and
approximately one-third will continue to serve until the second succeeding
annual meeting of ECI's stockholders following the effectiveness of the
Certificate. Of the initial directors, Salvatore Muoio and Richard Goodwin
will serve until such first succeeding annual meeting of ECI's stockholders,
John G. Vondras and Sir Shridath S. Ramphal will serve until such second
succeeding annual meeting of ECI's stockholders and Jeffrey J. Prosser and
John P. Raynor will serve until such third succeeding annual meeting of ECI's
stockholders. At each annual meeting of ECI's stockholders, successors to the
class of directors whose term expires at the annual meeting will be elected
for a term expiring at the third succeeding annual meeting of stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the ECI Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the members of the ECI Board.
Such a delay may help ensure that ECI's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer or
an extraordinary corporate transaction, would have sufficient time to review
the proposal as well as any available alternatives to the proposal and to act
in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the ECI Board would be
beneficial to ECI and its stockholders and whether or not a majority of ECI's
stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of ECI, even though such an attempt
might be beneficial to ECI and its stockholders. The classification of the ECI
Board could thus increase the likelihood that incumbent directors will retain
their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of ECI's Common Stock by purchasers
whose objective is to take control of ECI and remove a majority of the members
of the ECI Board, the classification of the ECI Board could tend to reduce the
likelihood of fluctuations in the market price of ECI Common Stock that might
result from accumulations of large blocks for such a purpose. Accordingly,
stockholders could be deprived of certain opportunities to sell their shares
of ECI Common Stock at a higher market price than might otherwise be the case.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of ECI Preferred Stock have the right,
voting separately as a class or series, to elect directors, such directors
will not be classified, unless expressly provided by the terms of such series
of ECI Preferred Stock.
Number of Directors; Removal; Filling Vacancies. The Certificate provides
that the business and affairs of ECI will be managed by or under the direction
of a board of directors, consisting of not less than three nor more than
fifteen directors, the exact number thereof to be determined from time to time
by affirmative vote of a majority of the entire ECI Board. In addition, the
Certificate provides that any vacancy on the ECI Board that results from an
increase in the number of directors, and any other vacancy occurring in the
ECI Board only may be filled by a majority of the directors then in office,
even if less than a quorum, or by a sole remaining director.
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Under the Delaware General Corporation Law (the "DGCL"), unless otherwise
provided in the Certificate, directors serving on a classified board may only
be removed by the stockholders for cause. The Certificate does not provide
that directors may be removed without cause.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of ECI Preferred Stock have the right,
voting separately as a class or series, to elect directors, the election,
removal, term of office, filling of vacancies and other features of such
directorships will be governed by the terms of the Certificate applicable
thereto.
Special Meetings. The By-laws provide that special meetings of stockholders
will be called by the ECI Board. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the purposes
specified in the notice of meeting given by ECI.
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The By-laws establish an advance notice procedure for stockholders
to make nominations of candidates for election of directors, or to bring other
business before an annual meeting of stockholders of ECI (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the ECI Board, or by a stockholder who
has given timely written notice to the Secretary of ECI prior to the meeting
at which directors are to be elected, will be eligible for election as
directors of ECI. The Stockholder Notice Procedure provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the ECI Board or by a stockholder who has
given timely written notice to the Secretary of ECI of such stockholder's
intention to bring such business before such meeting. Under the Stockholder
Notice Procedure, for stockholder notice in respect of the annual meeting of
ECI's stockholders to be timely, such notice must be delivered to the
Secretary of ECI not less than 70 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
20 days, or delayed by more than 70 days, from such anniversary date, notice
by stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 70th day prior to such annual meeting or the 10th day following
the day on which public announcement of the date of such meeting is first
made.
Under the Stockholder Notice Procedure, a stockholder's notice to ECI
proposing to nominate a person for election as a director must contain certain
information, including, without limitation, the identity and address of the
nominating stockholder, the class and number of shares of stock of ECI that
are beneficially owned by such stockholder and, as to each person whom the
stockholder proposes to nominate for election or reelection as a director, (i)
the name, age, business address and residence of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number
of shares of capital stock of ECI that are beneficially owned by the person
and (iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Rule 14A under the Exchange Act. Under the Stockholder Notice Procedure, a
stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business
and about the proposing stockholder, including, without limitation, a brief
description of the business the stockholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting, the name
and address of such stockholder, the class and number of shares of stock of
ECI beneficially owned by such stockholder, and any material interest of such
stockholder in the business so proposed. If the chairman of the meeting
determines that a person was not nominated, or other business was not brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
person will not be eligible for election as a director, or such business will
not be conducted at any such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the ECI Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the ECI Board, to inform stockholders about such qualifications.
By requiring advance
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notice of other proposed business, the Stockholder Notice Procedure will also
provide a more orderly procedure for conducting annual meetings of
stockholders and, to the extent deemed necessary or desirable by the ECI
Board, will provide the ECI Board with an opportunity to inform stockholders,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with any recommendations of the ECI Board regarding action
to be taken with respect to such business, so that stockholders can better
decide whether to attend such a meeting or to grant a proxy regarding the
disposition of any such business.
Although the By-laws do not give the ECI Board any power to approve or
disapprove stockholder nominations for the election of directors or proper
stockholder proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to
whether consideration of such nominees or proposals might be harmful or
beneficial to ECI and its stockholders.
Stockholder Meetings. The By-laws provide that the ECI Board and the
chairman of a meeting may adopt rules for the conduct of stockholder meetings
and specify the types of rules that may be adopted (including the
establishment of an agenda, rules relating to presence at the meeting of
persons other than stockholders, restrictions on entry at the meeting after
commencement thereof and the imposition of time limitations for questions by
participants at the meeting).
ECI Preferred Stock. The Certificate authorizes the ECI Board to provide for
series of ECI Preferred Stock and, with respect to each such series, to fix
the number of shares constituting such series and the designation of such
series, the voting power (if any) of the shares of such series, and the
preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the
shares of such series.
ECI believes that the ability of the ECI Board to issue one or more series
of ECI Preferred Stock will provide ECI with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs which might arise. The authorized shares of ECI Preferred Stock, as well
as shares of ECI Common Stock, will be available for issuance without further
action by ECI's stockholders, unless such action is required by applicable law
or the rules of any stock exchange or automated quotation system on which
ECI's securities may be listed or traded. The American Stock Exchange
currently requires stockholder approval as a prerequisite to listing shares in
several instances, including where the present or potential issuance of shares
could result in a 20% increase in the number of shares of common stock
outstanding or in the amount of voting securities outstanding. If the approval
of ECI's stockholders is not required for the issuance of shares of ECI
Preferred Stock or ECI Common Stock, the ECI Board may determine not to seek
stockholder approval.
Although the ECI Board has no intention at the present time of doing so, it
could issue a series of ECI Preferred Stock that could, depending on the terms
of such series, impede the completion of a merger, tender offer or other
takeover attempt. The ECI Board will make any determination to issue such
shares based on its judgment as to the best interests of ECI and its
stockholders. The ECI Board, in so acting, could issue ECI Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the ECI Board, including a
tender offer or other transaction that some, or a majority, of ECI's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
Amendment of Certain Provisions of the Certificates and By-laws. Under the
DGCL, the stockholders of a corporation have the right to adopt, amend or
repeal the by-laws and, with the approval of the board of directors, the
certificate of incorporation of a corporation. In addition, if the certificate
of incorporation so provides, the by-laws may be adopted, amended or repealed
by the board of directors. The Certificate provides that the By-laws may be
amended by the ECI Board or by the stockholders.
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Elimination of Liability of Directors. The Certificate provides that a
director of ECI will not be personally liable to ECI or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to ECI or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any transactions from which the director derived an
improper personal benefit.
LEGAL MATTERS
Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York, counsel to the Company, ECI, and Mr. Prosser
has delivered its opinion to the effect that the ECI Common Stock to be
distributed to holders of Company Common Stock in the Transaction, when
distributed in accordance with the terms of the Merger Agreement, will be
validly issued, fully paid and nonassessable.
EXPERTS
The financial statements of Atlantic Tele-Network, Inc., New ATN and
Atlantic Tele-Network Co. as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 included in this Proxy
Statement-Prospectus and the related financial statement schedules included
elsewhere in the Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
109
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES OF ATLANTIC TELE-NETWORK,
INC. AND SUBSIDIARIES--AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF ATLANTIC TELE-NETWORK,
INC. AND SUBSIDIARIES--AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997
Consolidated Condensed Balance Sheets.................................. F-21
Consolidated Condensed Statements of Operations........................ F-22
Consolidated Condensed Statements of Cash Flows........................ F-23
Notes to Consolidated Condensed Financial Statements................... F-24
COMBINED FINANCIAL STATEMENTS OF NEW ATN--AS OF DECEMBER 31, 1995 AND
1996 AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Independent Auditors' Report........................................... F-28
Combined Balance Sheets................................................ F-29
Combined Statements of Operations...................................... F-30
Combined Statements of Stockholders' Equity............................ F-31
Combined Statements of Cash Flows...................................... F-32
Notes to Combined Financial Statements................................. F-33
COMBINED CONDENSED FINANCIAL STATEMENTS OF NEW ATN--AS OF SEPTEMBER 30,
1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Combined Condensed Balance Sheets...................................... F-41
Combined Condensed Statements of Operations............................ F-42
Combined Condensed Statements of Cash Flows............................ F-43
Notes to Combined Condensed Financial Statements....................... F-44
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES OF ATLANTIC TELE-NETWORK
CO. AND SUBSIDIARIES--AS OF DECEMBER 31, 1995 AND 1996 AND FOR THE YEARS
ENDED DECEMBER 31, 1994, 1995 AND 1996
Independent Auditors' Report........................................... F-48
Consolidated Balance Sheets............................................ F-49
Consolidated Statements of Income...................................... F-50
Consolidated Statements of Stockholder's Equity........................ F-51
Consolidated Statements of Cash Flows.................................. F-52
Notes to Consolidated Financial Statements............................. F-53
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF ATLANTIC TELE-NETWORK CO.
AND SUBSIDIARIES--AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997
Consolidated Condensed Balance Sheets.................................. F-62
Consolidated Condensed Statements of Operations........................ F-63
Consolidated Condensed Statements of Cash Flows........................ F-64
Notes to Consolidated Condensed Financial Statements................... F-65
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Atlantic Tele-Network, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Atlantic
Tele-Network, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of Atlantic Tele-Network, Inc.'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 consolidated financial statements present fairly, in
all material respects, the financial position of Atlantic Tele-Network, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Omaha, Nebraska
March 25, 1997
F-2
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 18,822 $ 11,540
Accounts receivable, net................................. 63,353 63,660
Materials and supplies................................... 8,656 9,658
Prepayments and other current assets..................... 5,781 4,110
--------- --------
Total current assets.................................. 96,612 88,968
Fixed assets:
Property, plant and equipment............................ 286,856 328,895
Less accumulated depreciation............................ (101,729) (117,031)
Franchise rights and cost in excess of underlying book
value, less accumulated amortization of $9,769,000 and
$11,170,000............................................. 41,533 40,132
--------- --------
Net fixed assets...................................... 226,660 251,996
Property costs recoverable from future revenues, less
accumulated amortization of $1,406,000 in 1996......... 20,000 22,905
Uncollected surcharges.................................... 4,339 3,119
Other assets.............................................. 24,328 22,336
--------- --------
$ 371,939 $389,324
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................ $ 6,969 $ 17,153
Accounts payable......................................... 19,568 25,021
Accrued taxes............................................ 6,177 2,457
Advance payments and deposits............................ 2,719 2,701
Other current liabilities................................ 8,815 8,231
Current portion of long-term debt........................ 17,872 12,942
--------- --------
Total current liabilities............................. 62,120 68,505
Deferred income taxes and tax credits..................... 28,188 33,066
Long-term debt, excluding current portion................. 128,362 116,227
Pension and other long-term liabilities................... 9,457 6,702
Minority interest......................................... 12,856 15,033
Contingencies and commitments (Notes J and K)
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 shares issued and outstanding..... 123 123
Paid-in capital........................................... 81,852 81,852
Retained earnings......................................... 48,981 67,816
--------- --------
Total stockholders' equity............................ 130,956 149,791
--------- --------
$ 371,939 $389,324
========= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Local exchange service......................... $ 23,836 $ 22,966 $ 25,585
Access charges................................. 14,689 13,608 16,124
International long-distance revenues........... 76,820 128,939 145,080
Universal Service Fund......................... 12,081 12,151 11,360
Billing and other revenues..................... 4,525 4,238 5,290
Directory advertising.......................... 2,916 2,730 2,563
Cellular services.............................. 3,616 5,910 5,480
Product sales and rentals...................... 4,879 5,128 5,435
-------- -------- --------
Total revenues............................... 143,362 195,670 216,917
Expenses:
Plant specific operations...................... 11,655 12,879 16,447
Plant nonspecific operations................... 19,336 21,530 22,487
Customer operations............................ 5,355 5,657 6,399
Corporate operations........................... 13,993 13,085 12,081
International long-distance expenses........... 35,969 74,335 94,457
Taxes other than income........................ 3,012 3,089 3,303
Cellular services and product sales and rental
expenses...................................... 6,553 8,399 8,231
General and administrative expenses............ 9,341 10,219 9,458
-------- -------- --------
Total expenses............................... 105,214 149,193 172,863
-------- -------- --------
Income from operations....................... 38,148 46,477 44,054
Interest Expense and Interest Income:
Interest expense............................... (13,044) (12,511) (11,289)
Interest income................................ 246 971 458
-------- -------- --------
Interest expense, net.......................... (12,798) (11,540) (10,831)
-------- -------- --------
Income before income taxes and minority inter-
est............................................. 25,350 34,937 33,223
Income taxes..................................... (10,465) (15,250) (13,039)
Minority interest................................ (1,743) (2,477) (2,177)
-------- -------- --------
Net income....................................... $ 13,142 $ 17,210 $ 18,007
======== ======== ========
Net income per share............................. $ 1.07 $ 1.40 $ 1.47
======== ======== ========
Weighted average shares outstanding.............. 12,273 12,273 12,273
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994....................... $123 $81,852 $19,325 $101,300
Minimum pension liability adjustment, net of
income taxes of $250,000.................... -- -- 419 419
Net income................................. -- -- 13,142 13,142
---- ------- ------- --------
Balance, December 31, 1994..................... 123 81,852 32,886 114,861
Minimum pension liability adjustment, net of
income tax benefit of $666,000.............. -- -- (1,115) (1,115)
Net income................................. -- -- 17,210 17,210
---- ------- ------- --------
Balance, December 31, 1995..................... 123 81,852 48,981 130,956
Minimum pension liability adjustment, net of
income taxes of $494,000.................... -- -- 828 828
Net income................................. -- -- 18,007 18,007
---- ------- ------- --------
Balance, December 31, 1996..................... $123 $81,852 $67,816 $149,791
==== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 13,142 $ 17,210 $18,007
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization................. 17,319 18,584 19,272
Deferred income taxes......................... 6,118 4,651 5,528
Minority interest............................. 1,743 2,477 2,177
Changes in operating assets and liabilities:
Accounts receivable......................... (12,235) (29,733) (307)
Materials, supplies and other current
assets..................................... 1,856 743 (512)
Uncollected surcharges...................... (508) 2,946 1,220
Accounts payable............................ (2,640) 7,248 5,453
Accrued taxes............................... 357 4,659 (3,720)
Other....................................... 4,314 2,321 (317)
-------- -------- -------
Net cash flows from operating activities.. 29,466 31,106 46,801
Cash flows from investing activities:
Capital expenditures............................ (18,368) (22,539) (47,202)
Insurance proceeds.............................. 10,074 -- --
-------- -------- -------
Net cash flows from investing activities.. (8,294) (22,539) (47,202)
Cash flows from financing activities:
Repayment of long-term debt..................... (11,402) (12,436) (18,401)
Issuance of long-term debt...................... 18 5,291 1,336
Net borrowings (repayments) on notes............ 32 (115) 10,184
-------- -------- -------
Net cash flows from financing activities.. (11,352) (7,260) (6,881)
-------- -------- -------
Net change in cash................................ 9,820 1,307 (7,282)
Cash, Beginning of Year........................... 7,695 17,515 18,822
-------- -------- -------
Cash, End of Year................................. $ 17,515 $ 18,822 $11,540
======== ======== =======
Supplemental cash flow information:
Interest paid................................... $ 12,299 $ 12,090 $10,920
======== ======== =======
Income taxes paid............................... $ 3,409 $ 4,113 $11,186
======== ======== =======
Non-cash activities:
Change in minimum pension liability............. $ (918) $ 1,842 $(1,071)
======== ======== =======
Change in pension intangibles................... $ (249) $ 61 $ 251
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
A. SIGNIFICANT ACCOUNTING POLICIES
GENERAL--Atlantic Tele-Network, Inc. (the Company or ATN) is engaged
principally in providing telecommunications services, including local
telephone service, access to long-distance service, and cellular service, in
the U.S. Virgin Islands and the Cooperative Republic of Guyana.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of the Company, and all of its wholly-owned subsidiaries, including
Atlantic Tele-Network Co. (ATN-VI) and its subsidiary, the Virgin Island
Telephone Corporation (Vitelco), and majority-owned subsidiaries, including
Guyana Telephone and Telegraph Company Limited (GT&T). All material
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 presentation.
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.
REGULATORY ACCOUNTING--The Company's telephone subsidiaries account for
costs in accordance with the accounting principles for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71, Accounting
for the Affects 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 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 original cost of fixed assets in service and under
construction includes an allocation of indirect costs applicable to
construction. Fixed assets also include the acquisition cost of Vitelco in
excess of underlying book value and the acquisition of GT&T franchises, all of
which are being amortized over forty years on the straight-line method.
DEBT ISSUANCE COSTS--Costs relating to the issuance of debt are being
amortized over the term of the debt.
DEPRECIATION--The Company provides for depreciation using the straight-line
and equal life group methods. This has resulted in a composite annualized rate
of 6.4%, 6.9% and 6.3% for Vitelco and 4.7%, 4.7% and 4.1% for GT&T for the
years ended December 31, 1994, 1995 and 1996, respectively. With respect to
regulated subsidiaries, the original 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.
F-7
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
REVENUE--Local exchange service, exchange access charges 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.
INCOME TAXES--The Company uses an asset and liability approach for reporting
of income taxes and measures deferred tax assets and liabilities based on
temporary differences existing at each balance sheet date using enacted tax
rates. The Company and its U.S. subsidiary file a consolidated U.S. tax
return. ATN-VI files a consolidated U.S. Virgin Islands income tax return with
its Virgin Islands subsidiaries and GT&T files in Guyana. Investment tax
credits related to regulated telephone operations have been deferred and are
being amortized into income over the service lives of the related property.
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
Guyana currency are adjusted to reflect the current exchange rate. Currency
transaction losses approximated $673,000 for the period ended December 31,
1994 and have not been material for any of the other periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS--In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
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.
INCOME PER SHARE--Income per share is computed on the basis of the weighted
average number of shares outstanding.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 amounts to conform to the 1996 presentation.
F-8
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
B. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Subscribers and installment sales, net of allowance for
doubtful
accounts of $3,004,000 and $2,145,000................... $13,464 $12,577
Connecting companies..................................... 48,173 49,636
Uncollected surcharges--current portion.................. 632 632
Other.................................................... 1,084 815
------- -------
$63,353 $63,660
======= =======
</TABLE>
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Used in Telephone Operations:
Outside plant......................................... $124,530 $158,860
Central office equipment.............................. 72,520 80,936
Land and building..................................... 19,953 21,124
Station equipment..................................... 9,151 9,739
Furniture and office equipment........................ 5,168 5,493
Construction in process............................... 17,504 15,603
Other................................................. 13,823 11,593
-------- --------
Total used in telephone operations.................. 262,649 303,348
-------- --------
Used in Other Operations.............................. 24,207 25,547
-------- --------
$286,856 $328,895
======== ========
</TABLE>
All property, plant and equipment used in telephone operations are recorded
at the original cost of the acquired company except for the property, plant
and equipment of GT&T at the date of GT&T's acquisition which were recorded at
their fair market value of $16,052,000.
D. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands causing
extensive damage to the outside telephone plant of Vitelco. None of the damage
was covered by insurance. Vitelco's estimate of the historical cost of the
facilities damaged or destroyed by Hurricane Marilyn is approximately $26.3
million with associated accumulated depreciation of approximately $9.1
million. These costs have been removed from the property accounts and along
with certain excess maintenance costs and costs of removal of $7.1 million
have been classified as property costs recoverable from future revenues
because the Company anticipates that future revenue in an amount at least
equal to the capitalized cost will result from inclusion of these costs in
allowable costs for rate making purposes. Vitelco has received approval from
the Federal Communications Commission to include the interstate portion of
these costs in its rate base and amortize them over a five year period. The
F-9
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
Company believes that it is probable that future revenue in an amount at least
equal to the intrastate portion of these costs will result from inclusion of
these costs in allowable costs for rate making purposes.
E. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Rural Telephone Finance Corporation subordinated capital
certificates............................................. $ 8,065 $ 6,490
Rural Telephone Finance Corporation patronage capital
certificates and patronage dividends receivable.......... 5,057 5,781
Debt service reserve fund and escrow account.............. 3,900 3,900
Pension and retirement plan intangibles................... 2,741 1,877
Debt issuance costs....................................... 1,937 1,626
Deferred costs and intangibles, net....................... 685 872
Other..................................................... 1,943 1,790
------- -------
$24,328 $22,336
======= =======
</TABLE>
F. NOTES PAYABLE
The Company has in place a $5.5 million line of credit, bearing interest at
0.75% over prime rate, which has expired and has been verbally extended to
October 1997. The interest rate was 9.25% and 9% at December 31, 1995 and
1996, respectively. As of December 31, 1995 and 1996, $5.5 million was
outstanding under this arrangement.
At December 31, 1995 and 1996, Vitelco had short-term notes payable to an
insurance company of $457,000 and $431,000, respectively, with interest rates
of 5.5% and 5.7%, respectively.
Vitelco has a $5 million revolving line of credit with a variable rate of
interest with the Rural Telephone Finance Corporation (RTFC) which expires in
March 2000 and a $15 million revolving line of credit with a variable rate of
interest also with the RTFC expiring April 1997. As of December 31, 1995, no
amounts were borrowed under these lines of credit. At December 31, 1996,
Vitelco has borrowings of $5 million for the line of credit expiring in March
2000 and $6 million for the line of credit expiring April 1997, both with
interest rates of 6.9%.
At December 31, 1995 and 1996, the Company had demand notes payable to a
stockholder of $1,012,000 and $222,000, respectively, with an interest rate of
9.58%.
F-10
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
G. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
COMPANY:
Note payable to ITT, paid January 1996..................... $ 4,000 $ --
SUBSIDIARIES:
Notes payable to RTFC, with principal and interest payments
due quarterly through December 30, 2002:
ATN-VI................................................... 21,203 19,098
Vitelco.................................................. 27,934 24,142
-------- --------
49,137 43,240
Notes payable to Rural Utilities Service ("RUS") with
principal and interest payments due monthly through 2012.... 57,594 56,901
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") and $34 million equipment financing agreement
(the "GT&T Equipment Loan")................................. 30,465 25,447
Note payable to be repaid with semi-annual payments and a
balloon payment of $1,925,000 on December 31, 1999.......... 3,850 3,300
Other........................................................ 1,188 281
-------- --------
146,234 129,169
Less current portion......................................... 17,872 12,942
-------- --------
$128,362 $116,227
======== ========
</TABLE>
Interest on the Vitelco note payable to RTFC is fixed at 9.75%. On the ATN-
VI note payable, $1.4 million and $1.3 million with a variable interest rate
of 6.35% and 6.3% was outstanding at December 31, 1995 and 1996, respectively,
with the balance bearing a fixed rate of 8%.
The RUS note arrangement calls for fixed monthly principal and interest
payments of $7.04 per $1,000 of loan balance with any remaining balance due
May 2012. The interest rate on these notes is fixed at 5%.
The RUS and RTFC debt agreements contain provisions which may require
prepayments of RTFC debt in the event of future advances from the RUS. Vitelco
has received approval from the RUS for an additional $35.7 million of long-
term financing under terms similar to its existing RUS debt.
The RTFC and RUS agreements require, among other things, maintenance of
minimum debt service and times interest earned coverages and restrictions on
issuance of additional long-term debt. The RTFC agreement also limits the
payment of dividends by ATN-VI to 40% of ATN-VI's consolidated net income,
contingent upon ATN-VI's ability to meet certain financial ratios (which were
not met at December 31, 1996). Therefore, ATN-VI was prohibited from paying
dividends. At December 31, 1996, the ability of ATN-VI to service its debt was
dependent on funds from its parent or its subsidiaries. The RUS loan and
applicable RUS regulations restrict
F-11
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
Vitelco's ability to pay dividends based upon certain net worth tests with an
exception for limited dividend payments authorized when specific security
instrument criteria are unable to be met. Settlement agreements made in 1989
and 1991 with the U.S. Virgin Islands Public Service Commission (PSC) also
contain restrictions on dividends by Vitelco which, in general, are more
restrictive than those imposed by the RUS. Dividends by Vitelco are generally
limited to 60% of its net income, although additional amounts are permitted to
be paid for the sole purpose of servicing ATN-VI's debt to the RTFC. Under the
above restrictions, at December 31, 1996, Vitelco had approximately $200,000
of retained earnings available for dividends.
As a condition of being granted the RTFC loan, the Company was required to
invest in subordinated capital certificates with the RTFC (included in other
assets). No capital certificates were amortized during 1995. In 1996, the
Company received a cash repayment of $1,575,000. These certificates are non-
interest bearing. As a member of the RTFC, the Company shares proportionately
in the net earnings of the RTFC. The Company's share of RTFC earnings,
included as an offset to interest expense, was $532,000, $528,000 and $551,000
for the years ended December 31, 1994, 1995 and 1996, respectively. RTFC
distributions of net earnings are made primarily through issuances of
patronage capital certificates (included in other assets) which are redeemed
at the option of the RTFC.
The GT&T Supply Loan, which had a balance of $6,034,000 and $4,314,000 at
December 31, 1995 and 1996, respectively, requires monthly principal and
interest payments with final maturity on January 15, 1999. The GT&T Supply
Loan was fixed at 11.75%. The GT&T Equipment Loan, which had a balance of
$24,431,000 and $21,133,000 at December 31, 1995 and 1996, respectively,
require monthly principal payments totaling $275,000 plus interest with all
outstanding balances maturing in 2004 through 2005. 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 the Company and secured by a pledge
of all the GT&T stock owned by the Company and a security interest in all net
toll revenues due to GT&T from U.S., British and Canadian 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, 1995 and 1996. The GT&T Supply Loan is secured by a
security interest in certain of GT&T's international net toll revenues.
The $3.3 million note payable is collateralized by property with a book
value of $6.9 million as of December 31, 1996. The variable interest rate was
7.2% at December 31, 1996.
The annual requirements for principal payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING TOTAL
------------ --------
<S> <C>
1997........................................................... $ 12,940
1998........................................................... 13,683
1999........................................................... 12,235
2000........................................................... 12,520
2001........................................................... 13,065
Thereafter..................................................... 64,726
--------
$129,169
========
</TABLE>
F-12
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
H. INCOME TAXES
The following is a reconciliation from the tax computed at statutory income
tax rates to the Company's income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Tax computed at statutory U.S. federal income
tax rates..................................... $ 8,872 $12,228 $11,628
Guyana income taxes in excess of statutory U.S.
rate.......................................... 1,613 2,906 2,038
Other, net..................................... (20) 116 (627)
------- ------- -------
Income tax expense............................. $10,465 $15,250 $13,039
======= ======= =======
</TABLE>
The components of income tax expense are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
United States and U.S. Virgin Islands........ $ 2,011 $ 1,210 $ 3,096
Foreign...................................... 2,696 10,370 4,948
Deferred....................................... 6,118 4,651 5,528
Amortization of regulatory liability and in-
vestment
tax credits................................... (360) (981) (533)
------- ------- -------
$10,465 $15,250 $13,039
======= ======= =======
</TABLE>
The significant components of deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property........... $20,823 $24,887
Revenues not recognized for tax purposes..................... 2,229 1,680
Property costs recoverable from future revenues.............. 7,480 8,566
Other........................................................ -- 73
------- -------
Deferred tax assets:
Non-deductible expense....................................... 1,602 1,067
Operating loss carryforwards................................. 3,309 --
Pension costs not currently deductible....................... 929 507
Regulatory liability......................................... 1,510 1,297
Other........................................................ 344 --
------- -------
7,694 2,871
------- -------
Total deferred tax liability............................... 22,838 32,335
Valuation allowance.......................................... 834 --
------- -------
Net deferred tax liabilities............................... $23,672 $32,335
======= =======
</TABLE>
F-13
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
Upon the adoption of SFAS 109, the Company recorded regulatory assets and
liabilities for the cumulative effect of the adoption on the Company's
regulated subsidiaries since it was anticipated that these amounts would be
recovered from or returned to customers through future rates. At December 31,
1995 and 1996 the Company has a regulatory liability of approximately $4.0
million and $3.5 million which is included in other long term liabilities in
the consolidated balance sheet.
At December 31, 1996, unremitted earnings of foreign subsidiaries were
approximately $81,178,000. 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. Additionally, distributions from ATN-VI and its
subsidiaries could be subject to 10% withholding taxes imposed by the U.S.
Virgin Islands. ATN-VI has not paid any dividends to the Company in the past
and does not intend to remit any dividends in the foreseeable future. The
cumulative undistributed earnings of ATN-VI amounted to $38,883,000 as of
December 31, 1996. Pursuant to the term of the purchase agreement with the
government of Guyana, there are no withholding taxes applicable to
distributions from GT&T.
I. RETIREMENT PLANS
The Company has noncontributory defined benefit pension plans for eligible
hourly union employees and salaried employees who are not members of a
collective bargaining unit, and who meet certain age and employment criteria.
The funding policy is to contribute to the Plan such amounts that are
necessary to fund the Plan in accordance with funding requirements of ERISA.
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 for the "salaried plan"
and credited service years for the "hourly plan."
Net periodic pension cost was:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost................................. $ 711 $ 600 $ 811
Interest on projected benefit obligation..... 774 890 1,061
Actual return on assets...................... (130) (1,292) (1,331)
Net amortization and deferral................ 276 1,052 1,085
-------- -------- --------
Net periodic pension cost.................... $ 1,631 $ 1,250 $ 1,626
======== ======== ========
</TABLE>
F-14
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
The following table sets forth the funded status, the amounts recognized in
the balance sheet of the Company at December 31, 1995 and 1996, and the
principal assumptions of the Company's plans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits..................................... $ 11,894 $ 13,681
Nonvested benefits.................................. 509 39
-------- --------
Accumulated plan benefits............................. $ 12,403 $ 13,720
======== ========
Projected benefit obligation.......................... $(13,977) $(16,027)
Fair value of plan assets............................. 9,973 12,389
-------- --------
Plan projected benefit obligation in excess of assets. (4,004) (3,638)
Unrecognized net loss................................. 3,481 2,699
Unrecognized prior service costs...................... 793 1,257
Unrecognized net obligation at January 1, 1987........ 1,096 939
-------- --------
Pension prepaid included in the balance sheet......... $ 1,366 $ 1,257
======== ========
</TABLE>
For Vitelco, ATN-VI and ATN, Inc. the discount rate was 7.0% and 7.4% at
December 31, 1995 and 1996 and the expected rate return on invested assets was
8.0% for both years. The Guyana discount rate was 15.0% and 13.0% and the
expected Guyana rate of return on invested assets was 12% and 10.0% for the
GT&T plan at December 31, 1995 and 1996.
In accordance with Statement of Financial Accounting Standards No. 87, at
December 31, 1995 and 1996, the Company has recorded an additional minimum
pension liability equal to the unfunded pension benefit obligation of
$4,303,000 and $3,234,000, and an intangible asset (to the extent of the
additional liability) equal to the aggregate of the prior service cost and
transition obligation of $1,622,000 and $1,877,000. The change in
the excess of the minimum pension liability over the intangible of $669,000,
$(1,781,000) and $1,322,000 at December 31, 1994, 1995 and 1996, respectively,
has been recorded as a credit to (reduction in) equity, net of taxes
(benefits) of $250,000, $(666,000) and $494,000.
In addition, the Company and its subsidiaries have an investment and savings
plan for all salaried employees which covers all employees of the Company and
its subsidiaries (except GT&T) who are not members of a collective bargaining
unit and who meet certain age and employment criteria. With respect to such
plan, the Company expensed $158,000, $178,000 and $181,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. The Company also has a 401(k)
plan for hourly union employees who meet certain age and employment
requirements. Employee contributions are elective and no contributions are
required by the Company.
In 1991, the Company established an Employees' Stock Ownership Plan ("ESOP")
to provide a means for employees to participate in the ownership of the
Company. All non-craft salaried and hourly employees of the Company and its
participating affiliates who are not members of a collective bargaining unit
and who have attained age 21 and completed one year of service are eligible to
participate in the ESOP.
The Company may make discretionary contributions to the ESOP in the form of
Company stock (or cash which is used to acquire stock of ATN, Inc., either on
the open market or directly from the Company). The ESOP
F-15
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
is permitted to borrow money to purchase Company stock. No Company
contributions were made in 1994, 1995 or 1996.
In addition to providing pension benefits, the Company provides unfunded
noncontributory defined medical, dental, vision and life benefits for both
retired, hourly and salaried employees (except GT&T) who meet certain age and
employment criteria. The cost of these postretirement benefits is accrued
during the employee's active service period.
Net postretirement benefit cost was:
<TABLE>
<CAPTION>
YEARS
ENDED
DECEMBER
31,
---------
1995 1996
---- ----
<S> <C> <C>
Service cost................................................... $ 68 $ 73
Interest cost.................................................. 108 116
Transition obligation.......................................... 38 38
Net other amortization and deferral............................ 51 68
---- ----
Net postretirement benefit cost.............................. $265 $295
==== ====
</TABLE>
The following table sets forth the funded status and the amounts recognized
in the balance sheet of the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $ 251 $ 281
Eligible actives........................................ 338 412
Non-eligible actives.................................... 1,127 1,053
------ ------
1,716 1,746
Fair value of plan assets................................. -- --
Accumulated benefit obligation in excess of assets........ (1,716) (1,746)
Unrecognized net loss (gain).............................. (143) (263)
Unrecognized prior service costs.......................... 615 543
Unrecognized net obligation............................... 643 605
------ ------
Pension liability included in the balance sheet........... $ (601) $ (861)
====== ======
</TABLE>
In determining the accumulated postretirement benefit obligations, the
discount rate was assumed to be 7.0% in 1995 and 7.4% in 1996. For 1996, the
assumed health care cost trend rate was 9.9% and 8.9% for pre-age 65 and post-
age 65 participants, respectively, declining gradually to 5.5% and 5.75% over
the next 15 years. A 1% increase in assumed health care cost trend rate would
increase the service and interest cost expense by $19,000 for 1996 and
increase the accumulated postretirement benefits obligations by $163,000.
F-16
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
J. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $10 million for the period when the order was
effective. In March 1997, GT&T notified the PUC that it would be putting into
effect a surcharge on long distance rates designed to recover these lost
revenues over a period of 18 months. The PUC has taken the position that GT&T
may not put the surcharge into effect without the permission of the PUC, and
this matter has not yet been resolved.
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 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 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 all of the promissory notes
then outstanding for failure to comply with certain provisions of the PUC law.
The PUC ordered that no payments be made on any of the outstanding notes, and
that GT&T recover from ATN all amounts theretofore paid. The order also
provided that the Commission 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 ATN. GT&T is planning to appeal the PUC's order to the Guyana
High Court.
K. CONTINGENCIES AND COMMITMENTS
The Company presently has no coverage for its outside plant or for damages
caused by wind storms. The Company continues to explore various alternatives
to enable it to insure these risks in whole or in part, but believes that such
insurance is currently not available at commercially reasonable terms.
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
PUC the failure of GT&T to complete the Plan by February 1995. However, all
proceedings by the PUC with respect to GT&T's obligations under its Expansion
Plan were stayed by the Guyana High Court during GT&T's appeal to the Court
from the PUC's October, 1995 order with regard to telephone rates discussed in
Note J. As a result of the High Court's decision in January 1997 on this
appeal, the stay is no longer in effect. The PUC scheduled a hearing on this
matter for March 1997 and at GT&T's request, the hearing has been postponed
and has not yet been rescheduled. 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.
The Company has various litigation cases and claims in the normal course of
business the resolution of which, in the opinion of management, is not
expected to have a material effect on the financial statements.
F-17
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
L. 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, 1995 and 1996, the carrying value of long-term debt
was $146,234,000 and $129,169,000 and the estimated fair value was
$140,205,000 and $127,783,000, respectively.
M. GEOGRAPHIC AND CREDIT CONCENTRATIONS
Geographic data:
<TABLE>
<CAPTION>
UNITED
STATES GUYANA CONSOLIDATED
-------- -------- ------------
<S> <C> <C> <C>
1996 Telephone operations:
Total revenues............................ $ 57,749 $148,253 $206,002
Income from telephone operations.......... 16,837 33,991 50,828
Identifiable assets....................... 230,714 158,610 389,324
1995 Telephone operations
Total revenues............................ $ 53,462 $131,170 $184,632
Income from telephone operations.......... 15,461 38,596 54,057
Identifiable assets....................... 223,428 148,511 371,939
</TABLE>
Revenues from AT&T comprised approximately 25%, 27% and 29% of consolidated
total revenues in 1994, 1995 and 1996, respectively. Revenues from MCI
comprised approximately 13% and 15% in 1995 and 1996, respectively. British
Telecom comprised approximately 11% of consolidated total revenues in 1995.
These revenues consist principally of international and long distance service,
interstate network access, and billing and collection service revenues. No
other revenue source accounted for more than 10% of total revenues for the
years presented.
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 $28 million, $78 million
and $83 million of these revenues for the years ended December 31, 1994, 1995
and 1996, respectively.
F-18
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
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 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Revenues.......................... $52,320 $55,882 $57,035 $51,680
Expenses.......................... 42,892 43,468 45,145 41,358
------- ------- ------- -------
Income from operations............ 9,428 12,414 11,890 10,322
Interest expense, net............. 2,726 2,777 2,782 2,546
------- ------- ------- -------
Income before income taxes and
minority interest................ 6,702 9,637 9,108 7,776
Income taxes...................... 2,924 3,952 3,608 2,555
------- ------- ------- -------
Income before minority interest... 3,778 5,685 5,500 5,221
Minority interest................. 592 680 588 317
------- ------- ------- -------
Net income........................ $ 3,186 $ 5,005 $ 4,912 $ 4,904
======= ======= ======= =======
Net income per share.............. $ 0.26 $ 0.41 $ 0.40 $ 0.40
======= ======= ======= =======
Weighted average shares outstand-
ing.............................. 12,273 12,273 12,273 12,273
======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Revenues.......................... $40,179 $48,102 $52,117 $55,272
Expenses.......................... 30,144 37,006 41,063 40,980
------- ------- ------- -------
Income from operations............ 10,035 11,096 11,054 14,292
Interest expense, net............. 3,007 2,898 2,850 2,785
------- ------- ------- -------
Income before income taxes and
minority interest................ 7,028 8,198 8,204 11,507
Income taxes...................... 2,885 3,485 3,467 5,413
------- ------- ------- -------
Income before minority interest... 4,143 4,713 4,737 6,094
Minority interest................. 457 637 594 789
------- ------- ------- -------
Net income........................ $ 3,686 $ 4,076 $ 4,143 $ 5,305
======= ======= ======= =======
Net income per share.............. $ 0.30 $ 0.33 $ 0.34 $ 0.43
======= ======= ======= =======
Weighted average shares
outstanding...................... 12,273 12,273 12,273 12,273
======= ======= ======= =======
</TABLE>
F-19
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
O. SUBSEQUENT EVENT
On January 29, 1997 the Company announced that its Board of Directors and
its two principal stockholders had approved the terms of the split-up of the
Company into two separate public companies. One, a new company, will contain
all of the Company's Virgin Islands operations. The other will continue the
Company's Guyana operations. As a condition to the transaction, the new
company is required to raise in excess of $17.4 million which will be paid to
the Company in repayment of certain intercompany indebtedness and will be used
by the Company to redeem a portion of the stock held by one of the principal
stockholders. The split-up is subject to the execution of definitive
documentation, the receipt of certain regulatory approvals, including a ruling
from the Internal Revenue Service that the distribution of shares of the new
company will be tax free for federal income tax purposes to the Company and
its stockholders under Section 355 of the Internal Revenue Code of 1986, as
amended, and an opinion from an investment banking firm as to the fairness of
the split-up from a financial point of view to the public stockholders of the
Company.
F-20
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 11,540 $ 15,150
Accounts receivable, net......................... 63,660 57,948
Materials and supplies........................... 9,658 9,570
Prepayments and other current assets............. 4,110 5,558
-------- --------
Total current assets........................... 88,968 88,226
Fixed assets:
Property, plant and equipment.................... 328,895 341,306
Less accumulated depreciation.................... (117,031) (128,739)
Franchise rights and cost in excess of underlying
book value, less accumulated amortization of
$11,170,000 and $12,221,000..................... 40,132 39,081
-------- --------
Net fixed assets............................... 251,996 251,648
Property costs recoverable from future revenues.... 22,905 21,923
Uncollected surcharges............................. 3,119 6,328
Other assets....................................... 22,336 23,694
-------- --------
$389,324 $391,819
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................... $ 17,153 $ 16,281
Accounts payable................................. 25,021 21,558
Accrued taxes.................................... 2,457 7,341
Advance payments and deposits.................... 2,701 3,163
Other current liabilities........................ 8,231 4,901
Current portion of long-term debt................ 12,942 12,936
-------- --------
Total current liabilities...................... 68,505 66,180
Deferred income taxes and tax credits.............. 33,066 21,980
Long-term debt, excluding current portion.......... 116,227 106,469
Pension and other long-term liabilities............ 6,702 6,329
Minority interest.................................. 15,033 16,390
Contingencies and commitments (Note E)
Stockholders' equity:
Preferred stock, par value $.01 per share;
10,000,000 shares authorized; none issued and out-
standing.......................................... -- --
Common stock, par value $.01 per share; 20,000,000
shares authorized; 12,272,500 shares issued and
outstanding....................................... 123 123
Paid-in capital.................................... 81,852 81,852
Retained earnings.................................. 67,816 92,496
-------- --------
Total stockholders' equity..................... 149,791 174,471
-------- --------
$389,324 $391,819
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-21
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1996 1997
<S> <C> <C>
Revenues:
Local exchange service...................................... $18,906 $21,749
Access charges.............................................. 11,618 12,714
International long-distance revenues........................ 112,259 92,977
Universal Service Fund...................................... 8,406 10,494
Billing and other revenues.................................. 3,722 4,185
Directory advertising....................................... 1,938 1,332
Cellular services........................................... 4,457 2,894
Product sales and rentals................................... 3,931 3,380
------- -------
Total revenues............................................ 165,237 149,725
Expenses:
Plant specific operations................................... 12,483 12,435
Plant nonspecific operations................................ 16,148 18,122
Customer operations......................................... 4,836 4,968
Corporate operations........................................ 8,950 8,727
International long-distance expenses........................ 71,797 56,550
Taxes other than income..................................... 2,406 2,646
Cellular services and product sales and rental expenses..... 6,084 5,737
General and administrative expenses......................... 8,801 7,498
------- -------
Total expenses............................................ 131,505 116,683
Income from operations.................................... 33,732 33,042
Interest Expense and Interest Income:
Interest expense............................................ (8,537) (7,979)
Interest income............................................. 252 236
------- -------
Interest expenses, net.................................... (8,285) (7,743)
------- -------
Income before income taxes and minority interest.............. 25,447 25,299
Income taxes.................................................. 10,484 (739)
------- -------
Income before minority interest............................... 14,963 26,038
Minority interest............................................. (1,860) (1,358)
------- -------
Net income.................................................... $13,103 $24,680
======= =======
Net income per share.......................................... $ 1.07 $ 2.01
======= =======
Weighted average shares outstanding........................... 12,273 12,273
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
F-22
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1997
-------- --------
<S> <C> <C>
Net cash flows provided by operating activities............. $ 26,631 $ 29,151
Cash flows from investing activities:
Capital expenditures...................................... (33,515) (14,905)
-------- --------
Net cash used in investing activities................... (33,515) (14,905)
Cash flows from financing activities:
Repayment of long-term debt............................... (14,804) (9,764)
Issuance of long-term debt................................ 1,335 --
Net borrowings (repayments) on notes...................... 10,533 (872)
-------- --------
Net cash flows used by financing activities............. (2,936) (10,636)
-------- --------
Net increase (decrease) in cash............................. (9,820) 3,610
Cash, Beginning of Period................................... 18,822 11,540
-------- --------
Cash, End of Period......................................... $ 9,002 $ 15,150
======== ========
Supplemental cash flow information:
Interest paid............................................. $ 8,542 $ 7,730
======== ========
Income taxes paid......................................... $ 9,621 $ 4,308
======== ========
Depreciation and Amortization Expense..................... $ 14,518 $ 16,502
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-23
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
A. GENERAL
Significant Accounting Policies
The consolidated condensed balance sheet of Atlantic Tele-Network, Inc. and
subsidiaries (the Company) at December 31, 1996 has been taken from audited
financial statements at that date. All other consolidated condensed financial
statements contained herein have been prepared by the Company and are
unaudited. The consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein.
The unaudited interim consolidated condensed financial statements furnished
herein reflect all adjustments, which are, in the opinion of management,
necessary to fairly present the financial results for the interim periods
presented. The results for the nine months ended September 30, 1996 and 1997
are not necessarily indicative of the operating results for the full year not
yet completed.
Reclassifications--Certain reclassifications have been made to the 1996
amounts to conform to the 1997 presentation.
B. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands causing
extensive damage to the outside telephone plant of Vitelco. None of the damage
was covered by insurance. The historical cost of the facilities damaged or
destroyed by Hurricane Marilyn was approximately $26.3 million with associated
accumulated depreciation of approximately $9.1 million. These costs have been
removed from the property accounts and along with certain excess maintenance
costs and costs of removal of $7.1 million have been classified as property
costs recoverable from future revenues because the Company anticipates that
future revenue in an amount at least equal to the capitalized cost will result
from inclusion of these costs in allowable costs for rate making purposes.
Vitelco has received approval from the Federal Communications Commission to
include the interstate portion of these costs in its rate base and amortize
them over a five year period. The Company believes that it is probable that
future revenue in an amount at least equal to the intrastate portion of these
costs will result from inclusion of these costs in allowable costs for rate
making purposes.
C. ACCOUNTING FOR INCOME TAXES
As discussed in Note B above, Vitelco received approval from the Virgin
Islands Industrial Development Commission in May 1997 for a five year
exemption (commencing October 1, 1998) from 90% of Virgin Islands income taxes
and 100% of Virgin Islands gross receipts, excise and property taxes. In
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company has adjusted its deferred tax assets
and liabilities to reflect the change in the tax rates applicable to Vitelco
during the benefit period. This change has resulted in the Company recording a
non-recurring credit to income tax expense of approximately $10.9 million in
the nine months ended September 30, 1997. On October 9, 1997 the Virgin
Islands Public Service Commission instituted a proceeding to determine whether
Vitelco's rates were just and reasonable in light of this tax rebate. There
can be no assurance as to the outcome of this proceeding.
D. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance
calls to certain countries. In most cases, the existing rates were already
less than GT&T's payment obligations to
F-24
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
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 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 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
appealed the PUC's order to the Guyana High Court and obtained a stay of the
PUC's order pending determination of that appeal.
E. CONTINGENCIES AND COMMITMENTS
The Company previously had no insurance coverage for its outside plant for
damages caused by wind storms. Effective June 1997, the Company has obtained
such insurance coverage in the amount of $30 million per storm and $55 million
in the aggregate.
F-25
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
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
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.
In May 1997, GT&T received a letter from the Guyanese department 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. The deductibility of these
advisory fees 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 an assessment 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 this assessment stems 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
assessment 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 assessment 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.
The principal issues raised by the November 1997 assessment are as follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S.$4.1 million of
taxes);
F-26
<PAGE>
ATLANTIC TELE-NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.$2.1
million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High Court's
decision in August 1995 referred to above (approximately U.S.$2.9 million
of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable assets
(approximately U.S.$1.6 million of taxes)
Approximately U.S.$1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
F. SPLIT-UP TRANSACTION
The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997, November 19, 1997 and December 5, 1997, which
includes a Proxy Statement-Prospectus to consider and vote upon a proposed
transaction to divide the Company into two separate publicly-owned companies (
the "Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. The Company will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of the Company Common Stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and the
absence of any material adverse change in the business of the Companies. In
October 1997 a tax ruling was received by the Company from the Internal
Revenue Service to the effect that the transfer of assets and liabilities to
ECI and the distribution of ECI common stock to shareholders of the Company
will be tax free for federal income tax purposes to the Company and its
shareholders. On the Effective Date of the Transaction, Atlantic Tele-Network,
Inc. will record a loss on the split-off and fair valuation of the net assets
of New ATN which on a pro forma basis is estimated to be $55 million.
Accordingly, equity of Atlantic Tele-Network, Inc. will decrease by the loss
recorded on the split-off and fair valuation of the net assets of New ATN on
the Effective Date.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Atlantic Tele-Network, Inc.
We have audited the accompanying combined balance sheets of New ATN as of
December 31, 1995 and 1996, and the related combined statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
New ATN'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 financial statements present fairly, in all
material respects, the financial position of New ATN as of December 31, 1995
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Omaha, Nebraska
March 25, 1997
F-28
<PAGE>
NEW ATN
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 4,658 $ 8,182
Accounts receivable, net................................. 49,011 49,264
Materials and supplies................................... 2,146 2,642
Prepayments and other current assets..................... 1,300 589
-------- --------
Total current assets................................... 57,115 60,677
Fixed assets:
Property, plant and equipment............................ 93,607 104,141
Less accumulated depreciation............................ (13,590) (17,987)
Franchise rights and cost in excess of underlying book
value, less accumulated amortization of $1,842,000 and
$2,301,000.............................................. 12,085 11,626
-------- --------
Net fixed assets....................................... 92,102 97,780
Due from affiliates........................................ 26,622 26,883
Uncollected surcharges..................................... 4,339 3,119
Other assets............................................... 5,303 6,034
-------- --------
$185,481 $194,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................ $ 6,512 $ 5,722
Accounts payable......................................... 9,195 14,545
Accrued taxes............................................ 6,639 1,776
Advance payments and deposits............................ 617 627
Other current liabilities................................ 1,103 1,940
Current portion of long-term debt........................ 9,114 5,325
-------- --------
Total current liabilities.............................. 33,180 29,935
Deferred income taxes...................................... 15,465 18,835
Long-term debt, excluding current portion.................. 25,969 20,398
Minority interest.......................................... 12,603 14,699
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 shares issued and outstanding...... 123 123
Paid-in capital............................................ 81,852 81,852
Retained earnings.......................................... 16,289 28,651
-------- --------
Total stockholders' equity............................. 98,264 110,626
-------- --------
$185,481 $194,493
======== ========
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
NEW ATN
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Revenues:
Local exchange service........................... $ 754 $ 1,631 $ 2,463
International long-distance revenues............. 76,820 128,939 145,080
Other revenues................................... 582 600 710
------- -------- --------
Total revenues................................. 78,156 131,170 148,253
Expenses:
Plant specific operations........................ 2,700 3,820 4,902
Plant nonspecific operations..................... 5,074 5,944 6,017
Customer operations.............................. 1,203 1,822 2,474
Corporate operations............................. 5,341 6,178 5,838
International long-distance expenses............. 35,969 74,335 94,457
Taxes other than income.......................... 343 475 574
General and administrative expenses.............. 7,152 7,171 6,960
------- -------- --------
Total expenses................................. 57,782 99,745 121,222
------- -------- --------
Income from operations......................... 20,374 31,425 27,031
Interest Expense and Interest Income:
Interest expense................................. (5,092) (4,950) (3,991)
Interest income.................................. 1,814 2,272 2,242
------- -------- --------
Interest expense, net.......................... (3,278) (2,678) (1,749)
------- -------- --------
Income before income taxes and minority interest... 17,096 28,747 25,282
Income taxes....................................... 7,411 13,619 10,824
------- -------- --------
Income before minority interest.................... 9,685 15,128 14,458
Minority interest.................................. (1,696) (2,390) (2,096)
------- -------- --------
Net income......................................... $ 7,989 $ 12,738 $ 12,362
======= ======== ========
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
NEW ATN
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994................. $123 $81,852 $(4,438) $ 77,537
Net income............................. -- -- 7,989 7,989
---- ------- ------- --------
BALANCE, December 31, 1994............... 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
==== ======= ======= ========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
NEW ATN
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 7,989 $12,738 $12,362
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization................... 6,138 4,418 4,890
Deferred income taxes........................... 2,596 1,886 3,370
Minority interest............................... 1,696 2,390 2,096
Changes in operating assets and liabilities:
Accounts receivable........................... (12,361) (26,893) (253)
Materials, supplies and other current assets.. 1,103 2,167 215
Uncollected surcharges........................ 540 2,946 1,220
Accounts payable.............................. (465) 3,411 5,350
Accrued taxes................................. (44) 6,387 (4,863)
Other......................................... (1,529) 3,555 82
------- ------- -------
Net cash flows from operating activities.... 5,663 13,005 24,469
Cash flows from investing activities:
Capital expenditures.............................. (7,456) (5,455) (10,534)
------- ------- -------
Cash flows from financing activities:
Repayment of long-term debt....................... (2,498) (4,640) (9,360)
Net borrowings (repayments) in due from
affiliates....................................... 5,027 133 (261)
Net borrowings (repayments) on notes.............. -- -- (790)
------- ------- -------
Net cash flows from financing activities.... 2,529 (4,507) (10,411)
------- ------- -------
Net change in cash.................................. 736 3,043 3,524
Cash, Beginning of Year............................. 879 1,615 4,658
------- ------- -------
Cash, End of Year................................... $ 1,615 $ 4,658 $ 8,182
======= ======= =======
Supplemental cash flow information:
Interest paid..................................... $ 4,506 $ 4,665 $ 3,611
======= ======= =======
Income taxes paid................................. $ 1,259 $ 2,213 $11,186
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The combined financial statements of New ATN are the
separate financial statements relating to Atlantic Tele-Network, Inc.'s (ATN)
business and operations in Guyana, including its majority-owned subsidiary,
Guyana Telephone and Telegraph Company Limited (GT&T), and ATN's activities as
the parent company of its subsidiaries. ATN's investment in subsidiaries other
than GT&T and the operations of these other subsidiaries have been carved out
of New ATN's financial statements. The combined financial statements present
the financial position, results of operations and cash flows of New ATN as if
it were a separate entity for all periods presented. ATN's historical basis in
the assets and liabilities of New ATN have been carried over. All material
intercompany transactions and balances have been eliminated in combination.
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--New ATN is engaged principally in providing telecommunications
services, including local telephone service and access to long-distance
service in the Cooperative Republic of Guyana. ATN provides management,
technical, sales and marketing services to GT&T for an advisory fee equal to
6% of GT&T's revenues. All of GT&T's operations are located in Guyana.
REGULATORY ACCOUNTING--New ATN'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 Affects 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 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, New ATN 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 original cost of fixed assets in service and under
construction includes an allocation of indirect costs applicable to
construction. Fixed assets also include the acquisition cost of the GT&T
franchise, which is being amortized over forty years on the straight-line
method.
DEBT ISSUANCE COSTS--Costs relating to the issuance of debt are being
amortized over the term of the debt.
DEPRECIATION--New ATN provides for depreciation using the straight-line and
equal life group methods. This has resulted in a composite annualized rate of
4.7%, 4.7% and 4.1% for GT&T for the years ended December 31, 1994, 1995 and
1996, respectively. With respect to the regulated subsidiary, the original
cost of
F-33
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
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, exchange access charges and international
long-distance revenues are recognized when earned, regardless of the period in
which they are billed. In determining revenue, New ATN estimates usage by
foreign exchanges of New ATN's local exchange network to determine the
appropriate rate to apply to long distance minutes carried by New ATN.
Additionally, New ATN establishes reserves for possible unreported or
uncollectible minutes from foreign exchange carriers and doubtful accounts
from customers. The amounts New ATN 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
Guyana currency are adjusted to reflect the current exchange rate. Currency
transaction losses approximated $673,000 for the period ended December 31,
1994 and have not been material for any of the other periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS--In 1996, New ATN 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, New ATN 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. New ATN 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 New ATN's financial statements.
B. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Subscribers, net of allowance for doubtful accounts of
$1,378,000 and $557,000................................ $ 1,434 $ 1,670
Connecting companies.................................... 46,424 46,519
Uncollected surcharges--current portion................. 632 632
Other................................................... 521 443
------- -------
$49,011 $49,264
======= =======
</TABLE>
F-34
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Used in telephone operations:
Outside plant........................................ $ 40,385 $ 44,759
Central office equipment............................. 32,067 37,634
Land and building.................................... 6,706 7,562
Station equipment.................................... 3,257 3,766
Furniture and office equipment....................... 1,705 1,977
Construction in process.............................. 4,354 3,259
Other................................................ 1,891 2,035
-------- --------
Total used in telephone operations................. 90,365 100,992
-------- --------
Used in other operations............................... 3,242 3,149
-------- --------
$ 93,607 $104,141
======== ========
</TABLE>
All property, plant and equipment used in telephone operations are recorded
at the original cost of the acquired property except for property, plant and
equipment of GT&T at the date of GT&T's acquisition which were recorded at
their fair market value of $16,052,000.
D. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------- ------
<S> <C> <C>
Debt service reserve fund and escrow account.............. $ 3,900 $3,900
Deferred costs and intangibles, net....................... 626 824
Debt issuance costs....................................... 201 162
Other..................................................... 576 1,148
------- ------
$ 5,303 $6,034
======= ======
</TABLE>
E. NOTES PAYABLE
New ATN has in place a $5.5 million line of credit, bearing interest at
0.75% over prime rate, which has expired and been verbally extended to October
1997. The interest rate was 9.25% and 9% at December 31, 1995 and 1996,
respectively. As of December 31, 1995 and 1996, $5.5 million was outstanding
under this arrangement.
At December 31, 1995 and 1996, New ATN had demand notes payable to a
stockholder of $1,012,000 and $222,000, respectively, with an interest rate of
9.58%.
F-35
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
F. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
------------ -------
<S> <C> <C>
ATN:
Note payable to ITT..................................... $ 4,000 $ --
SUBSIDIARY:
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") and $34 million equipment
financing agreement (the "GT&T Equipment Loan")........ 30,465 25,447
Other................................................... 618 276
------- -------
35,083 25,723
Less current portion.................................... 9,114 5,325
------- -------
$25,969 $20,398
======= =======
</TABLE>
The GT&T Supply Loan, which had a balance of $6,034,000 and $4,314,000 at
December 31, 1995 and 1996, respectively, requires monthly principal and
interest payments with final maturity on January 15, 1999. The GT&T Supply
Loan was fixed at 11.75%. The GT&T Equipment Loan, which had a balance of
$24,431,000 and $21,133,000 at December 31, 1995 and 1996, respectively,
require monthly principal payments totaling $275,000 plus interest with all
outstanding balances maturing in 2004 through 2005. 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 U.S., British and Canadian 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, 1995 and
1996. The GT&T Supply Loan is secured by a security interest in certain of
GT&T's international net toll revenues.
The annual requirements for principal payments are as follows:
<TABLE>
<CAPTION>
TOTAL
Years Ending December 31: -------
<S> <C>
1997................................. $ 5,325
1998................................. 5,573
1999................................. 3,589
2000................................. 3,299
2001................................. 3,226
Thereafter........................... 4,711
-------
$25,723
=======
</TABLE>
F-36
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
G. INCOME TAXES
The following is a reconciliation from the tax computed at statutory income
tax rates to New ATN's income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Tax computed at statutory U.S. federal income
tax rates...................................... $5,983 $10,061 $ 8,849
Guyana income taxes in excess of statutory U.S.
rate........................................... 1,513 2,452 1,965
Write off of tax regulatory asset............... -- 600 --
Other, net...................................... (85) 506 10
------ ------- -------
Income tax expense.............................. $7,411 $13,619 $10,824
====== ======= =======
</TABLE>
The components of income tax expense are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
---------------- --------
<S> <C> <C> <C>
Current:
United States................................. $ -- $ -- $ 1,302
Foreign....................................... 2,533 9,770 4,948
Deferred........................................ 4,878 3,849 4,574
------- -------- --------
$ 7,411 $ 13,619 $ 10,824
======= ======== ========
</TABLE>
The significant components of deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property...... $13,141 $17,509
Revenues not recognized for tax purposes................ 2,229 1,680
------- -------
15,370 19,189
Deferred tax assets:
Non-deductible expense.................................. 1,047 341
Operating loss carryforwards............................ 351 --
Other................................................... 62 13
------- -------
1,460 354
------- -------
Total deferred tax liability.............................. 13,910 18,835
Valuation allowance....................................... 351 --
------- -------
Net deferred tax liabilities.............................. $14,261 $18,835
======= =======
</TABLE>
At December 31, 1996, unremitted earnings of foreign subsidiaries were
approximately $42,295,000. Since it is New ATN's intention to indefinitely
reinvest these earnings, no U.S. taxes have been provided. The
F-37
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
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
New ATN 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 first three years of employment
and credited service years.
Net periodic pension cost was:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost............................................ $ 87 $103 $135
Interest on projected benefit obligation................ 44 65 101
Actual return on assets................................. (19) (75) (79)
Net amortization and deferral........................... 36 45 30
---- ---- ----
Net periodic pension cost............................... $148 $138 $187
==== ==== ====
</TABLE>
The following table sets forth the funded status, the amounts recognized in
the balance sheet of New ATN at December 31, 1995 and 1996, and the principal
assumptions of New ATN's plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
----- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits......................................... $ 148 $ 317
Nonvested benefits...................................... 25 79
----- -------
Accumulated plan benefits............................... $ 173 $ 396
===== =======
Projected benefit obligation............................ $(670) $(1,045)
Fair value of plan assets............................... 543 622
----- -------
Plan projected benefit obligation in excess of assets... (127) (423)
Unrecognized net loss................................... 27 152
Unrecognized prior service costs........................ 263 247
----- -------
Pension prepaid included in the balance sheet........... $ 163 $ (24)
===== =======
</TABLE>
The discount rate was 15.0% and 13.0% and the expected rate of return on
invested assets was 12.0% and 10.0% for the plan at December 31, 1995 and
1996.
F-38
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
I. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $10 million for the period when the order was
effective. In March 1997, GT&T notified the PUC that it would be putting into
effect a surcharge on long-distance rates designed to recover these lost
revenues over a period of 18 months. The PUC has taken the position that GT&T
may not put the surcharge into effect without the permission of the PUC, and
this matter has not yet been resolved.
In January 1997, the PUC ordered GT&T to cease paying advisory fees to ATN
and to recover from ATN approximately $25 million of fees paid by GT&T to ATN
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 ATN approximately $23 million for advances
made from time to time for working capital and capital expenditure needs of
GT&T. GT&T's indebtedness to ATN was evidenced by a series of promissory
notes. In March 1997, the PUC voided all of the promissory notes then
outstanding for failure to comply with certain provisions of the PUC law. The
PUC ordered that no payments be made on any of the outstanding notes, and that
GT&T recover from ATN all amounts theretofore paid. The order also provided
that the Commission 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 ATN. GT&T is planning to appeal the PUC's order to the Guyana High Court.
J. CONTINGENCIES AND COMMITMENTS
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
PUC the failure of GT&T to complete the Plan by February 1995. However, all
proceedings by the PUC with respect to GT&T's obligations under its Expansion
Plan were stayed by the Guyana High Court during GT&T's appeal to the Court
from the PUC's October 1995 order with regard to telephone rates discussed in
Note I. As a result of the High Court's decision in January 1997 on this
appeal, the stay is no longer in effect. The PUC scheduled a hearing on this
matter for March 1997 and at GT&T's request, the hearing has been postponed
and has not yet been rescheduled. 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 New ATN's business and prospects.
New ATN has various litigation cases and claims in the normal course of
business the resolution of which, in the opinion of management, is not
expected to have a material effect on the financial statements.
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
F-39
<PAGE>
NEW ATN
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
cash flow analysis. At December 31, 1995 and 1996, the carrying value of long-
term debt was $35,083,000 and $25,723,000 and the estimated fair value was
$36,291,000 and $25,443,000, respectively.
L. CREDIT CONCENTRATIONS
Revenues from AT&T, MCI, British Telecom and Teleglobe, consisting of
international long-distance service, comprised approximately 42%, 17%, 13% and
26%, respectively, of total revenues for 1994, 37%, 21%, 19% and 13%,
respectively, of total revenues for 1995 and 36%, 21%, 12% and 12%,
respectively, of total revenues for 1996. No other customers accounted for
more than 10% of total revenues.
A significant portion of New ATN'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 $28 million, $78 million
and $83 million of these revenues for the years ended December 31, 1994, 1995
and 1996, respectively, and another audiotext provider accounted for $13
million and $20 million of these revenues for the years ended December 31,
1995 and 1996, respectively.
M. TRANSACTIONS WITH AFFILIATES
New ATN shares certain general and administrative costs with its affiliate,
Atlantic Tele-Network Co. These shared costs have been allocated in
approximately the same proportion as operating revenues of the affiliate bear
to total operating revenues. Management believes the allocation methods used
are 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.
New ATN had interest bearing notes receivable from its affiliates of
$23,411,000 and $23,219,000 at December 31, 1995 and 1996, respectively. The
notes bear interest at prime plus 1.5% which was 9.8% and 9.75% at December
31, 1995 and 1996. Interest income for the years ended December 31, 1995 and
1996, was $2,250,000 and $2,155,000, respectively. Interest is not charged on
the remaining notes receivable from affiliates.
N. SUBSEQUENT EVENT
On January 29, 1997 ATN announced that its Board of Directors and its two
principal stockholders had approved the terms of the split-up of ATN into two
separate public companies. One, a new company, will contain all of ATN's
Virgin Islands operations. The other will continue ATN's Guyana operations. As
a condition to the transaction, the new company is required to raise in excess
of $17.4 million which will be paid to ATN in repayment of certain
intercompany indebtedness and will be used by ATN to redeem a portion of the
stock held by one of the principal stockholders. The split-up is subject to
the execution of definitive documentation, the receipt of certain regulatory
approvals, including a ruling from the Internal Revenue Service that the
distribution of shares of the new company will be tax free for federal income
tax purposes to ATN and its stockholders under Section 355 of the Internal
Revenue Code of 1986, as amended, and an opinion from an investment banking
firm as to the fairness of the split-up from a financial point of view to the
public stockholders of ATN.
F-40
<PAGE>
NEW ATN
COMBINED CONDENSED BALANCE SHEETS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 8,182 $ 9,229
Accounts receivable, net.......................... 49,264 44,162
Materials and supplies............................ 2,642 2,813
Prepayments and other current assets.............. 589 779
-------- --------
Total current assets............................ 60,677 56,983
Fixed assets:
Property, plant and equipment..................... 104,141 109,986
Less accumulated depreciation..................... (17,987) (21,908)
Franchise rights and cost in excess of underlying
book value, less accumulated amortization of
$2,301,000 and $2,645,000........................ 11,626 11,282
-------- --------
Net fixed assets................................ 97,780 99,360
Due from affiliates................................. 26,883 28,340
Uncollected surcharges.............................. 3,119 6,328
Other assets........................................ 6,034 7,423
-------- --------
$194,493 $198,434
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................... $ 5,722 $ 5,722
Accounts payable.................................. 14,545 10,350
Accrued taxes..................................... 1,776 6,326
Advance payments and deposits..................... 627 667
Other current liabilities......................... 1,940 328
Current portion of long-term debt................. 5,325 5,325
-------- --------
Total current liabilities....................... 29,935 28,718
Deferred income taxes and tax credits............... 18,835 18,510
Long-term debt, excluding current portion........... 20,398 16,427
Minority interest................................... 14,699 16,069
Contingencies and commitments (Note C)
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 shares issued and outstanding........... 123 123
Paid-in capital..................................... 81,852 81,852
Retained earnings................................... 28,651 36,735
-------- --------
Total stockholders' equity...................... 110,626 118,710
-------- --------
$194,493 $198,434
======== ========
</TABLE>
See notes to combined condensed financial statements.
F-41
<PAGE>
NEW ATN
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1996 1997
-------- -------
<S> <C> <C>
Revenues:
Local exchange service..................................... $ 1,823 $ 2,123
International long-distance revenues....................... 112,259 92,977
Other revenues............................................. 536 598
-------- -------
Total revenues........................................... 114,618 95,698
Expenses:
Plant specific operations.................................. 3,664 4,202
Plant nonspecific operations............................... 4,683 5,464
Customer operations........................................ 1,902 1,862
Corporate operations....................................... 4,385 4,419
International long-distance expenses....................... 71,797 56,550
Taxes other than income.................................... 415 401
General and administrative expenses........................ 6,576 4,662
-------- -------
Total expenses........................................... 93,422 77,560
Income from operations................................... 21,196 18,138
Interest Expense and Interest Income:
Interest expense........................................... (3,034) (2,916)
Interest income............................................ 1,677 1,791
-------- -------
Interest expense, net.................................... (1,357) (1,125)
-------- -------
Income before income taxes and minority interest............. 19,839 17,013
Income taxes................................................. 8,643 7,558
-------- -------
Income before minority interest.............................. 11,196 9,455
Minority interest............................................ (1,779) (1,371)
-------- -------
Net income................................................... $ 9,417 $ 8,084
======== =======
</TABLE>
See notes to combined condensed financial statements.
F-42
<PAGE>
NEW ATN
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
----------------
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1996 1997
------- -------
<S> <C> <C>
Net cash flows provided by operating activities............... $12,030 $10,863
Cash flows from investing activities:
Capital expenditures........................................ (5,800) (5,845)
------- -------
Net cash used in investing activities..................... (5,800) (5,845)
Cash flows from financing activities:
Repayment of long-term debt................................. (7,990) (3,971)
Net borrowings (repayments) on notes........................ (790) --
------- -------
Net cash flows used by financing activities............... (8,780) (3,971)
------- -------
Net increase (decrease) in cash............................... (2,550) 1,047
Cash, Beginning of Period..................................... 4,658 8,182
------- -------
Cash, End of Period........................................... $ 2,108 $ 9,229
======= =======
Supplemental cash flow information:
Interest paid............................................... $ 2,965 $ 2,456
======= =======
Income taxes paid........................................... $ 9,621 $ 3,683
======= =======
Depreciation and Amortization Expense....................... $ 4,001 $ 4,349
======= =======
</TABLE>
See notes to combined condensed financial statements.
F-43
<PAGE>
NEW ATN
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
A. GENERAL
Significant Accounting Policies
Basis of Presentation--The combined financial statements of New ATN (the
Company) are the separate financial statements relating to Atlantic Tele-
Network, Inc.'s (ATN) and its business and operations in its majority owned
subsidiary, Guyana Telephone and Telegraph Company Limited (GT&T), and ATN's
activities as the parent company of its subsidiaries. ATN investment in
subsidiaries other than GT&T and operations of these other subsidiaries have
been carved out of New ATN's financial statements. The combined financial
statements present the financial position, results of operations and cash
flows of New ATN as if it were a separate entity for all periods presented.
ATN's historical basis in the assets and liabilities of the Company have been
carried over. All material intercompany transactions and balances have been
eliminated in combination.
The combined condensed balance sheet of New ATN at December 31, 1996 has
been taken from audited financial statements at that date. All other combined
condensed financial statements contained herein have been prepared by the
Company and are unaudited. The combined condensed financial statements should
be read in conjunction with the combined financial statements and the notes
thereto included in the Company's Audited Financial Statements for the year
ended December 31, 1996.
The unaudited interim combined condensed financial statements furnished
herein reflect all adjustments, which are, in the opinion of management,
necessary to fairly present the financial results for the interim periods
presented. The results for the nine months ended September 30, 1996 and 1997
are not necessarily indicative of the operating results for the full year not
yet completed.
B. REGULATORY MATTERS
In October 1995, the Guyana Public Utilities Commission ("PUC") issued an
order that rejected the request of GT&T for substantial increases in all
telephone rates and temporarily reduced rates for outbound long-distance calls
to certain countries. In most cases, the existing rates were already less than
GT&T's payment obligations to foreign carriers. In January 1997, on an appeal
by GT&T, the Guyana High Court voided the PUC's order in regard to rates and
the rates were returned to the rates in existence in October 1995. The lost
revenue was approximately $9.5 million for the period when the order was
effective. GT&T initially instituted 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 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
F-44
<PAGE>
NEW ATN
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
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 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
appealed the PUC's order to the Guyana High Court and obtained a stay of the
PUC's order pending determination of that appeal.
C. CONTINGENCIES AND COMMITMENTS
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
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.
In May 1997, GT&T received a letter from the Guyanese department 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. The deductibility of these
advisory fees 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
F-45
<PAGE>
NEW ATN
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
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 an assessment 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 this assessment stems 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
assessment 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 assessment 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.
The principal issues raised by the November 1997 assessment are as follows:
(a) The disallowance of interest on intercompany debt which was accrued
but not paid in relevant tax years (approximately U.S.$4.1 million of
taxes);
(b) Treatment of adjustments made in GT&T's revenue estimation and
accrual process as improper bad debt write-offs (approximately U.S.$2.1
million of taxes);
(c) Disallowance of five-sixths of the advisory fees payable by GT&T to
the Company for the year 1995 in apparent contradiction of the High Court's
decision in August 1995 referred to above (approximately U.S.$2.9 million
of taxes);
(d) Disallowance of depreciation deductions arising from a disagreement
as to the proper historical cost of certain of GT&T's depreciable assets
(approximately U.S.$1.6 million of taxes)
Approximately U.S.$1.7 million of the assessment appears to arise from a
failure to credit GT&T with the full amount of taxes paid by GT&T in one of
the years under audit. GT&T believes that it should prevail on substantially
all of the issues raised in the November tax assessment if given the
opportunity to present the facts to the Commissioner of Inland Revenue.
However, there can be no assurance as to the ultimate outcome of any of the
above described pending tax issues.
D. SPLIT-UP TRANSACTION
The Company has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997, November 19, 1997 and December 5, 1997, which
includes a Proxy Statement-Prospectus to consider and vote upon a proposed
transaction to divide the Company into two separate publicly-owned companies (
the "Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of Atlantic Tele-Network Co. (ATN-VI), which owns and
conducts the Company's business and operations in the U.S. Virgin Islands, and
certain other assets and liabilities. New ATN will retain its business and
operations in Guyana and certain other assets and liabilities. The Transaction
is conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of the Company Common Stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, the
listing of ECI Common Stock on the American Stock Exchange and the continued
listing of the Company Common Stock on the American Stock Exchange and
F-46
<PAGE>
NEW ATN
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
the absence of any material adverse change in the business of the Companies. In
October 1997 a tax ruling was received by the Company from the Internal Revenue
Service to the effect that the transfer of assets and liabilities to ECI and
the distribution of ECI common stock to shareholders of the Company will be tax
free for federal income tax purposes to the Company and its shareholders. On
the Effective Date of the Transaction, Atlantic Tele-Network, Inc. will record
a loss on the split-off and fair valuation of the net assets of New ATN which
on a pro forma basis is estimated to be $55 million. Accordingly, equity of
Atlantic Tele-Network, Inc. will decrease by the loss recorded on the split-off
and fair valuation of the net assets of New ATN on the Effective Date.
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Atlantic Tele-Network Co. and subsidiaries
We have audited the accompanying consolidated balance sheets of Atlantic
Tele-Network Co. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of Atlantic Tele-Network Co.'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 consolidated financial statements present fairly, in
all material respects, the financial position of Atlantic Tele-Network Co. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Omaha, Nebraska
March 25, 1997
F-48
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 14,143 $ 3,352
Accounts receivable, net................................. 14,275 14,236
Materials and supplies................................... 6,510 7,016
Prepayments and other current assets..................... 8,163 3,436
-------- --------
Total current assets................................... 43,091 28,040
Fixed assets:
Property, plant and equipment............................ 185,084 216,589
Less accumulated depreciation............................ (87,530) (98,239)
Cost in excess of underlying book value, less accumulated 32,256 31,224
amortization of $8,874,000 and $9,906,000............... -------- --------
Net fixed assets....................................... 129,810 149,574
Property costs recoverable from future revenues, net of ac-
cumulated amortization of $1,406,000 in 1996.............. 20,000 22,905
Other assets............................................... 19,017 16,298
-------- --------
$211,918 $216,817
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable............................................ $ 457 $ 11,431
Accounts payable......................................... 10,317 10,373
Accrued taxes............................................ 3,301 645
Advance payments and deposits............................ 2,102 2,074
Other current liabilities................................ 7,455 6,119
Current portion of long-term debt........................ 8,208 7,067
-------- --------
Total current liabilities.............................. 31,840 37,709
Deferred income taxes and tax credits...................... 12,364 13,891
Long-term debt, excluding current portion.................. 99,093 93,079
Other long-term liabilities................................ 9,457 6,702
Due to affiliates.......................................... 23,411 23,219
Minority interest.......................................... 253 334
Contingencies and commitments (Note L)
Stockholder's equity:
Common Stock, par value $10 per share; 50,000 shares autho-
rized, 2,000 shares issued and outstanding................ 20 20
Paid-in capital............................................ 2,980 2,980
Retained earnings.......................................... 32,500 38,883
-------- --------
Total stockholder's equity............................. 35,500 41,883
-------- --------
$211,918 $216,817
======== ========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Local exchange service............................ $23,082 $21,335 $23,122
Access charges and revenues....................... 14,689 13,608 16,124
Universal Service Fund............................ 12,081 12,151 11,360
Billing and other revenues........................ 3,943 3,638 4,580
Directory advertising............................. 2,916 2,730 2,563
Cellular services................................. 3,616 5,910 5,480
Product sales and rentals......................... 4,879 5,128 5,435
------- ------- -------
Total revenues.................................. 65,206 64,500 68,664
Expenses:
Plant specific operations......................... 8,955 9,059 11,546
Plant nonspecific operations...................... 14,262 15,586 16,470
Customer operations............................... 4,152 3,835 3,925
Corporate operations.............................. 8,652 6,907 6,242
Taxes other than income........................... 2,669 2,614 2,729
Cellular services and product sales and rental
expenses......................................... 6,553 8,399 8,231
General and administration expenses............... 2,279 3,138 2,588
------- ------- -------
Total expenses.................................. 47,522 49,538 51,731
------- ------- -------
Income from operations.......................... 17,684 14,962 16,933
Interest Expense and Interest Income:
Interest expense.................................. (9,764) (9,811) (9,353)
Interest income................................... 244 949 271
------- ------- -------
Interest expense, net........................... (9,520) (8,862) (9,082)
------- ------- -------
Income before income taxes and minority interest.... 8,164 6,100 7,851
Income taxes........................................ (3,054) (1,631) (2,215)
Minority interest................................... (47) (87) (81)
------- ------- -------
Net income.......................................... $ 5,063 $ 4,382 $ 5,555
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994................. $20 $2,980 $23,751 $26,751
Minimum pension liability adjustment,
net of income taxes of $250,000....... -- -- 419 419
Net income............................. -- -- 5,063 5,063
--- ------ ------- -------
BALANCE, December 31, 1994............... 20 2,980 29,233 32,233
Minimum pension liability adjustment,
net of income tax benefit of $666,000. -- -- (1,115) (1,115)
Net income............................. -- -- 4,382 4,382
--- ------ ------- -------
BALANCE, December 31, 1995............... 20 2,980 32,500 35,500
Minimum pension liability adjustment,
net of income taxes of $494,000....... -- -- 828 828
Net income............................. -- -- 5,555 5,555
--- ------ ------- -------
BALANCE, December 31, 1996............... $20 $2,980 $38,883 $41,883
=== ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 5,063 $ 4,382 $ 5,555
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization................ 12,567 13,485 14,276
Deferred income taxes........................ 1,403 2,677 903
Minority interest............................ 47 87 81
Changes in operating assets and liabilities:
Accounts receivable........................ (795) (2,838) 39
Materials and supplies..................... 898 (1,631) (506)
Accounts payable........................... (343) 3,668 56
Accrued taxes.............................. (257) (2,328) (2,656)
Other...................................... 947 (362) 4,502
-------- -------- --------
Net cash flows from operating activities... 19,530 17,140 22,250
Cash flows from investing activities:
Capital expenditures........................... (11,712) (16,314) (36,668)
Insurance proceeds............................. 10,074 -- --
-------- -------- --------
Net cash flows from investing activities... (1,638) (16,314) (36,668)
Cash flows from financing activities:
Issuance of long-term debt, net of issuance
costs......................................... 18 4,936 1,336
Repayment of long-term debt.................... (8,354) (6,891) (8,491)
Net borrowings (repayments) on notes........... 32 (115) 10,974
Change in affiliate borrowings................. (461) (506) (192)
-------- -------- --------
Net cash flows from financing activities... (8,765) (2,576) 3,627
-------- -------- --------
Net change in cash............................... 9,127 (1,750) (10,791)
Cash, beginning of year.......................... 6,766 15,893 14,143
-------- -------- --------
Cash, end of year................................ $ 15,893 $ 14,143 $ 3,352
======== ======== ========
Supplemental cash flow information:
Interest paid.................................. $ 7,500 $ 7,075 $ 9,171
======== ======== ========
Income taxes paid.............................. $ 2,150 $ 1,900 $ --
======== ======== ========
Non-Cash Activities:
Change in minimum pension liability............ $ (918) $ 1,842 $ (1,071)
======== ======== ========
Change in pension intangibles.................. $ (249) $ 61 $ 251
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(COLUMNAR AMOUNTS IN THOUSANDS)
A. SIGNIFICANT ACCOUNTING POLICIES
GENERAL--Atlantic Tele-Network, Co. (ATN-VI), a wholly-owned subsidiary of
Atlantic Tele-Network, Inc. (ATN, Inc.), is engaged principally in providing
telecommunication services, including local telephone service, access to long-
distance service, and cellular service, in the U.S. Virgin Islands.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of ATN-VI, and its wholly-owned subsidiaries, including the Virgin
Island Telephone Corporation (Vitelco), Vitelcom, Inc., and its 90% owned
subsidiary, Vitelcom Cellular, Inc. The accounting policies of ATN-VI and its
subsidiaries conform to generally accepted accounting principles and as to
Vitelco, reflect practices appropriate to the telephone industry as prescribed
by Part 32 Uniform System of Accounts prescribed by the Federal Communications
Commission (the FCC). All material intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
the 1994 and 1995 financial statements to conform with the 1996 presentation.
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.
REGULATORY ACCOUNTING--ATN-VI's telephone subsidiary accounts for costs in
accordance with the accounting principles for regulated entereprises
prescribed by Statement of Financial Accounting Standards No. 71, Accounting
for the Affects 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 amounts in future years.
CASH--ATN-VI 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--Property, plant and equipment are recorded at original cost.
The original cost of telephone plant in service and under construction
includes an allocation of indirect costs applicable to construction. Fixed
assets also include the acquisition cost of Vitelco in excess of the
underlying book value, which is being amortized over forty years on the
straight-line method, and is not considered in the determination of rates.
DEPRECIATION--ATN-VI calculates depreciation on outside plant used to
provide interstate access (acquired after December 31, 1989) and on local
regulated plant (acquired after December 31, 1991) using the equal life group
method. The remaining telephone plant in service is depreciated on the
straight-line method. This has resulted in a composite annualized rate of
6.4%, 6.9% and 6.3% for the years ended December 31, 1994, 1995 and 1996,
respectively. The original 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.
F-53
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEBT ISSUANCE COSTS--Costs related to the issuance of debt are being
amortized over the term of the debt.
INCOME TAXES--ATN-VI uses an asset and liability approach for reporting
taxes and measures deferred tax assets and liabilities based on temporary
differences existing at each balance sheet date using enacted tax rates. ATN-
VI files a consolidated U.S. Virgin Islands income tax return with its
subsidiaries. Investment tax credits related to regulated telephone operations
have been deferred and are being amortized to income over the service lives of
the related property.
REVENUE--Local exchange service revenues, exchange access charges and
revenues are recognized when earned, regardless of the period in which they
are billed. Exchange access charges are billed by ATN-VI to the long distance
carriers (primarily AT&T) for interconnection with local facilities and to
end-user business and residential customers for access to long distance
facilities.
IMPAIRMENT OF LONG-LIVED ASSETS--In 1996, ATN-VI adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
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, ATN-VI 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. ATN-VI 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 ATN-VI's financial statements.
INCOME PER SHARE--Income per share has not been presented as this
information is not considered meaningful due to the reorganization of ATN Inc.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 amounts to conform to the 1996 presentation.
B. REORGANIZATION OF ATLANTIC TELE-NETWORK, INC.
On January 29, 1997, ATN Inc. announced that its Board of Directors and its
two principal stockholders had approved the terms of the split-up of ATN Inc.
into two separate public companies (the Transaction). Emerging Communications,
Inc. (ECI), will contain all the outstanding stock of ATN-VI and certain other
assets and liabilities. ATN Inc. will retain its business and operations in
Guyana and certain other assets and liabilities. The Transaction is
conditioned upon, among other things, approval of the Transaction by the
holders of a majority of the outstanding shares of ATN Inc. common stock,
completion of $17.4 million of long-term financing by ECI or ATN-VI, receipt
from the Internal Revenue Service of a tax ruling to the effect that the
transfer of assets and liabilities to ECI and the distribution of ECI common
stock to the shareholders of ATN Inc. will be tax free for federal income tax
purposes to ATN Inc. and its shareholders, the listing of ECI common stock on
the American Stock Exchange and the continued listing of ATN Inc. common stock
on such exchange and the absence of any material adverse change in the
businesses of the companies.
C. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Subscribers and installment sales, net of allowance for
doubtful accounts of $1,626,000 and $1,588,000........ $ 12,030 $ 10,907
Connecting companies................................... 1,748 3,117
Other.................................................. 497 212
-------- --------
$ 14,275 $ 14,236
======== ========
</TABLE>
F-54
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Outside plant........................................ $ 84,145 $ 114,101
Central office equipment............................. 40,453 43,302
Land and building.................................... 13,247 13,562
Station equipment.................................... 5,894 5,973
Furniture and office equipment....................... 3,463 3,516
Construction in process.............................. 15,613 12,344
Other................................................ 9,469 9,557
--------- ---------
Total used in telephone operations................. 172,284 202,355
Used in other operations............................. 12,800 14,234
--------- ---------
$ 185,084 $ 216,589
========= =========
E. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands causing
extensive damage to the outside telephone plant of Vitelco. None of the damage
was covered by insurance. Vitelco's estimate of the historical cost of the
facilities damaged or destroyed by Hurricane Marilyn is approximately $26.3
million with associated accumulated depreciation of approximately $9.1 million.
These costs have been removed from the property accounts and along with certain
excess maintenance costs and costs of removal of $7.1 million have been
classified as property costs recoverable from future revenues because ATN-VI
anticipates that future revenue in an amount at least equal to the capitalized
cost will result from inclusion of these costs in allowable costs for rate
making purposes. Vitelco has received approval from the FCC to include the
interstate portion of these costs in its rate base and amortize them over a
five year period. ATN-VI believes it is probable that future revenue in an
amount at least equal to the intrastate portion of these costs will result from
inclusion of these costs in allowable costs for rate making purposes.
F. OTHER ASSETS
Other assets include the following:
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Rural Telephone Finance Corporation subordinated
capital certificates................................ $ 8,065 $ 6,490
Rural Telephone Finance Corporation patronage capital
certificates and dividends receivable............... 5,057 5,781
Pension and retirement plan intangibles.............. 2,741 1,877
Debt issuance costs.................................. 1,736 1,460
Other................................................ 1,418 690
--------- ---------
$ 19,017 $ 16,298
========= =========
</TABLE>
G. NOTES PAYABLE
At December 31, 1995 and 1996, Vitelco had short-term notes payable to an
insurance company of $457,000 and $431,000, respectively, with interest rates
of 5.5% and 5.7%, respectively.
F-55
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Vitelco has a $5 million revolving line of credit with a variable rate of
interest with the Rural Telephone Finance Corporation (RTFC) which expires in
March 2000 and a $15 million revolving line of credit with a variable rate of
interest also with the RTFC expiring April 1997. As of December 31, 1995, no
amounts were borrowed under these lines of credit. At December 31, 1996,
Vitelco has borrowings of $5 million for the line of credit expiring in March
2000 and $6 million for the line of credit expiring April 1997, both with
interest rates of 6.9%.
H. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Notes payable to RTFC, with principal and interest
payments due quarterly through December 30, 2002:
ATN-VI................................................. $21,203 $19,098
Vitelco................................................ 27,934 24,142
------- -------
49,137 43,240
Notes payable to Rural Utilities Service (RUS) with
principal and interest payments due monthly through
2012.................................................... 57,594 56,901
Other.................................................... 570 5
------- -------
107,301 100,146
Less current portion..................................... 8,208 7,067
------- -------
$99,093 $93,079
======= =======
</TABLE>
Interest on the Vitelco note payable to RTFC is fixed at 9.75%. On the ATN-
VI note payable, $1.4 million and $1.3 million with a variable interest rate
of 6.35% and 6.3% was outstanding at December 31, 1995 and 1996, respectively,
with the balance bearing a fixed rate of 8%.
The RUS note arrangement calls for fixed monthly principal and interest
payments of $7.04 per $1,000 of loan balance with any remaining balance due
May 2012. The interest rate on these notes is fixed at 5%.
The RUS and RTFC debt agreements contain provisions which may require
prepayments of RTFC debt in the event of future advances from the RUS. Vitelco
has received approval from the RUS for an additional $35.7 million of long-
term financing under terms similar to its existing RUS debt.
The RTFC and RUS agreements require, among other things, maintenance of
minimum debt service and times interest earned coverages and restrictions on
issuance of additional long-term debt. The RTFC agreement also limits the
payment of dividends by ATN-VI to 40% of ATN-VI's consolidated net income,
contingent upon ATN-VI's ability to meet certain financial ratios (which were
not met at December 31, 1996). Therefore, ATN-VI was prohibited from paying
dividends. At December 31, 1996, the ability of ATN-VI to service its debt was
dependent on funds from its parent or its subsidiaries. The RUS loan and
applicable RUS regulations restrict Vitelco's ability to pay dividends based
upon certain net worth tests with an exception for limited dividend payments
authorized when specific security instrument criteria are unable to be met.
Settlement agreements made in 1989 and 1991 with the U.S. Virgin Islands
Public Service Commission (PSC) also contain restrictions on dividends by
Vitelco which, in general, are more restrictive than those imposed by the RUS.
Dividends by Vitelco are generally limited to 60% of its net income, although
additional amounts are permitted to be paid for
F-56
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the sole purpose of servicing ATN-VI's debt to the RTFC. Under the above
restrictions, at December 31, 1996, Vitelco had approximately $200,000 of
retained earnings available for dividends.
As a condition of being granted the RTFC loan, ATN-VI was required to invest
in subordinated capital certificates with the RTFC (included in other assets).
No capital certificates were amortized during 1995. In 1996, ATN-VI received a
cash repayment of $1,575,000. These certificates are non-interest bearing. As
a member of the RTFC, ATN-VI shares proportionately in the net earnings of the
RTFC. ATN-VI's share of RTFC earnings, included as an offset to interest
expense, was $532,000, $528,000 and $551,000 for the years ended December 31,
1994, 1995 and 1996, respectively. RTFC distributions of net earnings are made
primarily through issuances of patronage capital certificates (included in
other assets) which are redeemed at the option of the RTFC.
The ATN-VI/RTFC loan is secured by a lien on substantially all of the assets
of ATN-VI, and the Vitelco/RTFC loan and the RUS loan are ratably secured by
liens on substantially all of the assets of Vitelco and Vitelcom.
The annual requirements for principal payments for the years 1997 through
2001 are as follows:
<TABLE>
<CAPTION>
RTFC DEBT
--------------
YEARS ENDED DECEMBER 31, VITELCO ATN-VI RUS DEBT OTHER DEBT
------------------------ ------- ------ -------- ----------
<S> <C> <C> <C> <C>
1997.................................. $3,368 $1,162 $2,532 $ 5
1998.................................. 3,642 1,256 2,662 --
1999.................................. 3,938 1,360 2,798 --
2000.................................. 4,258 1,472 2,941 --
2001.................................. 4,604 1,593 3,092 --
</TABLE>
I. INCOME TAXES
The following is a reconciliation from the tax computed at statutory income
tax rates to ATN-VI's income tax expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Tax computed at statutory U.S. federal in-
come tax rates............................. $ 2,857 $ 2,135 $ 2,669
U.S. Virgin Islands surtax.................. 286 213 267
Amortization of investment tax credits and
regulatory liability....................... (360) (981) (533)
Amortization of cost in excess of underlying
book value not
deductible for tax purposes................ 386 386 386
Other, net.................................. (115) (122) (574)
-------- -------- --------
Income tax expense.......................... $ 3,054 $ 1,631 $ 2,215
======== ======== ========
</TABLE>
The components of income tax expense allocated to operations are comprised
of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
U.S. Virgin Islands........................ $ 2,011 $ (65) $ 1,845
Deferred.................................... 1,403 2,677 903
Amortization of investment tax credits and
regulatory liability....................... (360) (981) (533)
-------- -------- --------
$ 3,054 $ 1,631 $ 2,215
======== ======== ========
</TABLE>
F-57
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property....... $ 7,340 $ 7,270
Property costs recoverable from future revenues.......... 7,480 8,566
------- -------
14,820 15,836
Deferred tax assets:
Non-deductible expenses.................................. 761 823
Operating loss carryforwards............................. 2,474 --
Pension costs not currently deductible................... 1,002 507
Regulatory liability..................................... 1,510 1,297
------- -------
5,747 2,627
Total deferred tax liability........................... $ 9,073 $13,209
======= =======
</TABLE>
Upon the adoption of SFAS 109, Accounting for Income Taxes, ATN-VI recorded
a regulatory liability for the cumulative effect of the adoption on ATN-VI's
regulated subsidiary since it was anticipated that these amounts would be
returned to customers through future rates. At December 31, 1995 and 1996,
ATN-VI had a regulatory liability of approximately $4.0 million and $3.5
million which is included in other long term liabilities.
J. PENSION AND RETIREMENT PLANS
ATN-VI's subsidiaries have noncontributory defined benefit plans (the
"Plan") for eligible hourly union employees and salaried employees who are not
members of a collective bargaining unit, who meet certain age and employment
criteria. ATN-VI's funding policy is to contribute to the Plan such amounts
that are necessary to fund the Plan in accordance with funding requirements of
Employee Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service date, but also for those
expected to be earned in the future. The benefits are based on the
participants' average salary preceding termination for the "salaried plan" and
credited service years for the "hourly plan".
Net periodic pension cost was:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Service cost..................................... $ 624 $ 497 $ 676
Interest on projected benefit obligation......... 730 825 960
Actual return on assets.......................... (111) (1,217) (1,252)
Net amortization and deferral.................... 239 1,007 1,055
------ ------ -------
Net periodic pension cost........................ $1,482 $1,112 $ 1,439
====== ====== =======
</TABLE>
F-58
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status, the amounts recognized in
the balance sheets of ATN-VI at December 31, 1995 and 1996, and the principle
assumptions of ATN-VI's plans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.................................... $ 11,746 $ 13,364
Nonvested benefits................................. 484 356
-------- --------
Accumulated plan benefits............................ $ 12,230 $ 13,720
======== ========
Projected benefit obligation......................... $(13,306) $(14,982)
Fair value of plan assets............................ 9,430 11,767
-------- --------
Plan projected benefit obligation in excess of as-
sets................................................ (3,876) (3,215)
Unrecognized net loss................................ 3,454 2,547
Unrecognized prior service costs..................... 530 1,010
Unrecognized net obligation at January 1, 1987....... 1,096 939
-------- --------
Pension prepaid included in the balance sheet........ $ 1,204 $ 1,281
======== ========
</TABLE>
In determining the post retirement benefit obligation, the discount rate was
7.0% and 7.4% at December 31, 1995 and 1996, respectively, and the expected
rate of return on invested assets was 8.0% for both years.
In accordance with Statement of Financial Accounting Standards No. 87,
Employers Accounting for Pensions, at December 31, 1995 and 1996, ATN-VI has
recorded an additional minimum pension liability equal to the unfunded pension
benefit obligation of $4,303,000 and $3,234,000, and an intangible asset (to
the extent of the additional liability) equal to the aggregate of the prior
service cost and transition obligation of $1,622,000 and $1,877,000. The
change in the excess of the minimum pension liability over the intangible of
$669,000, $(1,781,000) and $1,322,000 at December 31, 1994, 1995 and 1996,
respectively, has been recorded as a credit to (reduction in) equity, net of
taxes (benefits) of $250,000, $(666,000) and $494,000 at December 31, 1994,
1995 and 1996, respectively.
In addition, ATN-VI and its subsidiaries have an investment and savings plan
for all salaried employees which covers all employees of ATN-VI and its
subsidiaries who are not members of a collective bargaining unit and who meet
certain age and employment criteria. With respect to such plan, ATN-VI
expensed $146,000, $165,000 and $165,000 for the years ended December 31,
1994, 1995 and 1996. ATN-VI also has a 401(k) plan for hourly union employees
who meet certain age and employment requirements. Employee contributions are
elective and no contributions are required by ATN-VI.
In 1991, ATN-VI established an Employees' Stock Ownership Plan (ESOP) to
provide a means for employees to participate in the ownership of ATN-VI. All
non-craft salaried and hourly employees of ATN-VI and its participating
affiliates who are not members of a collective bargaining unit and who have
attained age 21 and completed one year of service are eligible to participate
in the ESOP.
ATN, Inc. may make discretionary contributions to the ESOP in the form of
ATN, Inc. stock (or cash which is used to acquire stock of ATN, Inc., either
on the open market or directly from ATN, Inc.). The ESOP is permitted to
borrow money to purchase ATN, Inc. stock, although such borrowing is not
currently contemplated. No contributions were made in 1994, 1995 or 1996.
F-59
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to providing pension benefits, ATN-VI provides unfunded
noncontributory defined medical, dental, vision and life benefits for both
retired, hourly and salaried employees who meet certain age and employment
criteria. The cost of these postretirement benefits is accrued during the
employee's active service period.
Net postretirement benefit cost was:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost................................... $ 57 $ 68 $ 73
Interest cost.................................. 90 108 116
Transition obligation.......................... 38 38 38
Net other amortization and deferral............ 51 51 68
-------- -------- --------
Net postretirement benefit cost.............. $ 236 $ 265 $ 295
======== ======== ========
</TABLE>
The following table sets forth the funded status and the amounts recognized
in the balance sheet of ATN-VI:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.............................................. $ 251 $ 281
Eligible actives...................................... 338 412
Non-eligible actives.................................. 1,127 1,053
------- -------
1,716 1,746
Fair value of plan assets............................... -- --
------- -------
Accumulated benefit obligation in excess of assets...... (1,716) (1,746)
Unrecognized net gain................................... (143) (263)
Unrecognized prior service costs........................ 615 543
Unrecognized net obligation............................. 643 605
------- -------
Pension liability included in the balance sheet......... $ (601) $ (861)
======= =======
</TABLE>
In determining the accumulated postretirement benefit obligations, the
discount rate was assumed to be 7.0% in 1995 and 7.4% in 1996. For 1996, the
assumed health care cost trend rate was 9.9% and 8.9% for pre-age 65 and post-
age 65 participants, respectively, declining gradually to 5.5% and 5.75% over
the next 15 years. A 1% increase in assumed health care cost trend rate would
increase the service and interest cost expense by $19,000 for 1996 and
increase the accumulated postretirement benefits obligations by $163,000.
K. TRANSACTIONS WITH AFFILIATES
ATN-VI had a note payable to ATN-Inc. of $23,411,000 and $23,219,000 at
December 31, 1995 and 1996, respectively. A variable interest rate is charged
on this note which was 7.5% and 9.75% at December 31, 1995 and 1996,
respectively. Interest expense for the years ended December 31, 1994, 1995 and
1996, was $1,812,000, $2,250,000 and $2,155,000, respectively. Interest is not
charged on intercompany balances to affiliates.
ATN-VI shares general and administrative costs, such as legal, accounting
and consulting, rent and telephone, with ATN, Inc. These shared costs have
historically been allocated to ATN-VI in approximately the same proportion as
operating revenues of ATN-VI bear to ATN Inc.'s total operating revenues. ATN-
VI's share
F-60
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of these general and administrative costs for the years ended December 31,
1994, 1995 and 1996 was $2,988,000, $2,049,000 and $1,398,000, respectively.
Management believes the allocation methods used are reasonable. However, such
costs are not necessarily indicative of the costs that would have been
incurred if ATN-VI had been operated as an unaffiliated entity. It is not
practical to estimate these costs on a stand-alone basis.
L. CONTINGENCIES AND COMMITMENTS
At the date of this report, ATN-VI had no coverage for its outside plant or
for damages caused by wind storms.
ATN-VI has various litigation cases and claims in the normal course of
business, the resolution of which, in the opinion of management, is not
expected to have a material effect on the financial statements.
M. FAIR VALUE DISCLOSURE
Management has determined the carrying amounts of cash, accounts receivable,
accounts payable, and notes payable are a reasonable estimate of their fair
value. The fair value of long-term debt is estimated using a discounted cash
flow analysis. At December 31, 1995 and 1996, the carrying value of long-term
debt was $107,301,000 and $100,146,000 and the estimated fair value was
$100,064,000 and $99,040,000, respectively.
N. CREDIT CONCENTRATIONS
Revenues from AT&T comprised approximately 13%, 12% and 13% of consolidated
total revenues in 1994, 1995 and 1996, respectively. These revenues consist
principally of interstate network access and billing and collection service
revenues. No other revenue source accounted for more than 10% of total
revenues for the years presented.
F-61
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1996 1997
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash.............................................. $ 3,352 $ 5,914
Accounts receivable, net.......................... 14,236 13,575
Materials and supplies............................ 7,016 6,757
Prepayments and other current assets.............. 3,436 4,697
-------- --------
Total current assets............................ 28,040 30,943
Fixed assets:
Property, plant and equipment 216,589 223,086
Less accumulated depreciation (98,239) (105,874)
Franchise rights and cost in excess of underlying
book value, less accumulated amortization of
$9,906,000 and $10,679,000....................... 31,224 30,451
-------- --------
Net fixed assets................................ 149,574 147,663
Property costs recoverable from future revenues..... 22,905 21,923
Other assets........................................ 16,298 16,270
-------- --------
$216,817 $216,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................... $ 11,431 $ 10,559
Accounts payable.................................. 10,373 11,080
Accrued taxes..................................... 645 1,015
Advance payments and deposits..................... 2,074 2,496
Other current liabilities......................... 6,119 4,330
Current portion of long-term debt................. 7,067 7,061
-------- --------
Total current liabilities....................... 37,709 36,541
Deferred income taxes and tax credits............... 13,891 3,130
Long-term debt, excluding current portion........... 93,079 87,567
Pension and other long-term liabilities............. 6,702 6,329
Due to affiliates................................... 23,219 24,498
Minority interest................................... 334 321
Contingencies and commitments (Note D)..............
Stockholder's equity:
Common stock, par value $10 per share; 50,000 shares
authorized;
2,000 shares issued and outstanding................ 20 20
Paid-in capital..................................... 2,980 2,980
Retained earnings................................... 38,883 55,413
-------- --------
Total stockholder's equity...................... 41,883 58,413
-------- --------
$216,817 $216,799
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-62
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1996 1997
------- -------
<S> <C> <C>
Revenues:
Local exchange service...................................... $17,083 19,626
Access charges.............................................. 11,618 12,714
Universal Service Fund...................................... 8,406 10,494
Billing and other revenues.................................. 3,186 3,587
Directory advertising....................................... 1,938 1,332
Cellular services........................................... 4,457 2,894
Product sales and rentals................................... 3,931 3,380
------- -------
Total revenues............................................ 50,619 54,027
Expenses:
Plant specific operations................................... 8,819 8,233
Plant nonspecific operations................................ 11,465 12,658
Customer operations......................................... 2,934 3,106
Corporate operations........................................ 4,565 4,308
Taxes other than income..................................... 1,991 2,245
Cellular services and product sales and rental expenses..... 6,084 5,737
General and administrative expenses......................... 2,292 2,902
------- -------
Total expenses............................................ 38,150 39,189
Income from operations.................................... 12,469 14,838
Interest Expense and Interest Income:
Interest expense............................................ (7,144) (6,722)
Interest income............................................. 216 104
------- -------
Interest expense, net..................................... (6,928) (6,618)
------- -------
Income before income taxes and minority interest.............. 5,541 8,220
Income taxes.................................................. 1,841 (8,297)
Minority interest............................................. (81) 13
------- -------
Net income.................................................... $ 3,619 16,530
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
F-63
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1996 1997
-------- -------
<S> <C> <C>
Net cash flows provided by operating activities.............. $ 14,339 $17,943
Cash flows from investing activities:
Capital expenditures....................................... (27,715) (8,991)
-------- -------
Net cash used in investing activities.................... (27,715) (8,991)
Cash flows from financing activities:
Repayment of long-term debt................................ (5,204) (5,518)
Net borrowings (repayments) on notes....................... 11,323 (872)
-------- -------
Net cash flows provided (used) by financing activities... 6,119 (6,390)
-------- -------
Net increase (decrease) in cash.............................. (7,257) 2,562
Cash, Beginning of Period.................................... 14,143 3,352
-------- -------
Cash, End of Period.......................................... $ 6,886 $ 5,914
======== =======
Supplemental cash flow information:
Interest paid.............................................. $ 5,577 $ 5,274
======== =======
Income taxes paid.......................................... -- $ 625
======== =======
Depreciation and Amortization Expense...................... $ 10,517 $12,153
======== =======
</TABLE>
See notes to consolidated condensed financial statements.
F-64
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
A. GENERAL
Significant Accounting Policies--The consolidated balance sheet of ATN-VI at
December 31, 1996 has been taken from audited financial statements at that
date. All other consolidated condensed financial statements contained herein
have been prepared by ATN-VI and are unaudited. ATN-VI is a wholly owned
subsidiary of Atlantic Tele-Network, Inc. (ATN Inc.). the consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in ATN-VI's
Audited Financial Statements for the year ended December 31, 1996.
The accompanying interim consolidated financial statements have not been
audited by independent auditors. However, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary to fairly present the financial statements have been included. The
consolidated financial statements should be read in conjunction with the
audited financial statements and note thereto. The results of operations for
the nine months ended September 30, 1996 and 1997 are not necessarily
indicative of the operating results which may be expected for the entire
fiscal year 1997.
B. PROPERTY COSTS RECOVERABLE FROM FUTURE REVENUES
On September 15, 1995, Hurricane Marilyn struck the Virgin Islands causing
extensive damage to the outside telephone plant of Vitelco. None of the damage
was covered by insurance. The historical cost of the facilities damaged or
destroyed by Hurricane Marilyn was approximately $26.3 million with associated
accumulated depreciation of approximately $9.1 million. These costs have been
removed from the property accounts and along with certain excess maintenance
costs and costs of removal of $7.1 million have been classified as property
costs recoverable from future revenues because ATN-VI anticipates that future
revenue in an amount at least equal to the capitalized cost will result from
inclusion of these costs in allowable costs for rate making purposes. Vitelco
has received approval from the Federal Communications Commission to include
the interstate portion of these costs in its rate base and amortize them over
a five year period. ATN-VI believes that it is probable that future revenue in
an amount at least equal to the intrastate portion of these costs will result
from inclusion of these costs in allowable costs for rate making purposes.
C. ACCOUNTING FOR INCOME TAXES
As discussed in Note B above, Vitelco received approval from the Virgin
Islands Industrial Development Commission in May 1997 for a five year
exemption (commencing October 1, 1998) from 90% of Virgin Islands income taxes
and 100% of Virgin Islands gross receipts, excise and property taxes. In
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company has adjusted its deferred tax assets
and liabilities to reflect the change in the tax rates applicable to Vitelco
during the benefit period. This change has resulted in the Company recording a
non-recurring credit to income tax expense of approximately $10.9 million in
the nine months ended September 30, 1997. On October 9, 1997 the Virgin
Islands Public Service Commission instituted a proceeding to determine whether
Vitelco's rates were just and reasonable in light of this tax rebate. There
can be no assurance as to the outcome of this proceeding.
D. CONTINGENCIES AND COMMITMENTS
ATN-VI has various litigation cases and claims in the normal course of
business the resolution of which, in the opinion of management, is not
expected to have a material effect on the financial statements.
F-65
<PAGE>
ATLANTIC TELE-NETWORK CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
E. SPLIT UP TRANSACTION
ATN, Inc. has filed a Registration Statement dated August 12, 1997 and
amended October 20, 1997, November 19, 1997 and December 5, 1997, which
includes a Proxy Statement-Prospectus to consider and vote upon a proposed
transaction to divide ATN, Inc. into two separate publicly-owned companies
(the "Transaction"). Emerging Communications, Inc. (ECI) will contain all the
outstanding stock of ATN-VI and certain other assets and liabilities. ATN,
Inc. will retain its business and operations in Guyana and certain other
assets and liabilities (New ATN). The Transaction is conditioned upon, among
other things, approval of the Transaction by the holders of a majority of the
outstanding shares of ATN, Inc. Common Stock, completion of $17.4 million of
long-term financing by ECI or ATN-VI, the listing of ECI Common Stock on the
American Stock Exchange and the continued listing of ATN, Inc. Common Stock on
the American Stock Exchange and the absence of any material adverse change in
the business of the Companies. In October 1997 a tax ruling was received by
ATN, Inc. from the Internal Revenue Service to the effect that the transfer of
assets and liabilities to ECI and the distribution of ECI Common Stock to
shareholders of the ATN, Inc. will be tax free for federal income tax purposes
to ATN, Inc. and its shareholders. On the Effective Date of the Transaction,
Atlantic Tele-Network, Inc. will record a loss on the split-off and fair
valuation of the net assets of New ATN which on a pro forma basis is estimated
to be $55 million. Accordingly, equity of Atlantic Tele-Network, Inc. will
decrease by the loss recorded on the split-off and fair valuation of the net
assets of New ATN on the Effective Date.
F-66
<PAGE>
ANNEX A
TO
PROXY STATEMENT-PROSPECTUS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------------------------------
SUBSCRIPTION AGREEMENT
----------------------------------------
BETWEEN
ATLANTIC TELE-NETWORK, INC.
AND
EMERGING COMMUNICATIONS, INC.
DATED AUGUST 11, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
Definitions
Section 1.01. Definitions................................................. 2
Section 1.02. Rules of Construction....................................... 6
ARTICLE II
Subscription For and Acquisition of the Shares
Section 2.01. Subscription for the Shares................................. 6
Section 2.02. Acquisition of the Shares................................... 6
Section 2.03. Excluded Assets............................................. 7
Section 2.04. Issuance of the Shares...................................... 7
Section 2.05. Assumption of Liabilities................................... 7
Section 2.06. Excluded Liabilities........................................ 8
Section 2.07. Restricted Assets........................................... 8
Section 2.08. Access to Information....................................... 8
ARTICLE III
Closing Adjustment
Section 3.01. Preliminary Closing Adjustment.............................. 8
Section 3.02. Final Closing Adjustment.................................... 8
ARTICLE IV
No Representations or Warranties
Section 4.01. No Representations or Warranties............................ 9
Section 4.02. Condition of Assets, Disclaimers............................ 9
ARTICLE V
Certain Agreements of The Company and ECI
Section 5.01. Use of Retained Names....................................... 10
Section 5.02. Severance................................................... 10
Section 5.03. Aircraft Corp. Costs........................................ 10
Section 5.04. Exchange of Indebtedness.................................... 10
ARTICLE VI
Conditions to Closing
Section 6.01. Third-Party Approvals....................................... 10
Section 6.02. Registration Statement and Stockholder Approval............. 10
Section 6.03. Internal Revenue Service Ruling............................. 11
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 6.04. Fairness Opinion........................................... 11
Section 6.05. [Intentionally Omitted].................................... 11
Section 6.06. Liquidation of Vitelcom.................................... 11
Section 6.07. Minimum Borrowing Capacity................................. 11
Section 6.08. No Material Adverse Change................................. 11
Section 6.09. No Litigation.............................................. 11
Section 6.10. Agreements in Full Force................................... 11
Section 6.11. Listing.................................................... 11
Section 6.12. Performance................................................ 11
Section 6.13. ECI Charter................................................ 11
Section 6.14. Boards of Directors and Officers........................... 11
Section 6.15. Non-Competition Agreement.................................. 12
Section 6.16. Indemnity Agreement........................................ 12
Section 6.17. Personal Debts............................................. 12
Section 6.18. Employee Benefits Agreement................................ 12
Section 6.19. Tax Sharing and Indemnification Agreement.................. 12
Section 6.20. Assumed Liabilities........................................ 12
Section 6.21. Technical Assistance Agreement............................. 12
Section 6.22. Recapitalization Agreement Closing......................... 12
Section 6.23. Merger Agreement Closing................................... 12
ARTICLE VII
Closing Date; Closing
Section 7.01. Closing Date; Closing...................................... 12
Section 7.02. Further Assurances......................................... 13
ARTICLE VIII
Miscellaneous Provisions
Section 8.01. Termination................................................ 13
Section 8.02. Entire Agreement........................................... 13
Section 8.03. Governing Law.............................................. 13
Section 8.04. Headings................................................... 13
Section 8.05. Counterparts............................................... 13
Section 8.06. Benefits................................................... 13
Section 8.07. Assignment................................................. 13
Section 8.08. Amendment and Waiver....................................... 13
Section 8.09. Notices.................................................... 14
</TABLE>
SCHEDULES
<TABLE>
<C> <S>
SCHEDULE 1.01A Prosser Designated Employees
SCHEDULE 1.01B Counsel
SCHEDULE 1.01C Undesignated Employees
SCHEDULE 2.02(i) Certain Assets
SCHEDULE 2.05(d) Certain Assumed Liabilities
SCHEDULE 5.02 Employees To Be Terminated
</TABLE>
ii
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
EXHIBIT A Recapitalization Agreement
EXHIBIT B Merger Agreement
EXHIBIT C Form of Technical Assistance Agreement
EXHIBIT D Form of ECI Charter
EXHIBIT E Form of Non-Competition Agreement
EXHIBIT F Form of Indemnity Agreement
EXHIBIT G Form of Employee Benefits Agreement
EXHIBIT H Form of Tax Sharing Agreement
</TABLE>
iii
<PAGE>
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Subscription Agreement") is entered into
as of the 11th day of August, 1997 by and between Atlantic Tele-Network, Inc.,
a Delaware corporation (the "Company"), and Emerging Communications, Inc., a
Delaware corporation ("ECI").
WHEREAS, to eliminate corporate disputes and to maximize the value of the
Company for the benefit of the Company and its stockholders, the Company has
entered into a Principal Terms Agreement dated January 29, 1997 among the
Company and its co-chief executive officers and principal stockholders,
Cornelius B. Prior, Jr. ("Prior") and Jeffrey J. Prosser ("Prosser"), which
contemplates the separation of the businesses and assets of the Company in the
manner set forth herein and in the Recapitalization Agreement (as defined
below) and the Merger Agreement (as defined below); and
WHEREAS, in order to accomplish such separation, subject to the terms and
conditions set forth herein, the Company desires to transfer to ECI all of the
capital stock of its wholly owned subsidiaries, Atlantic Tele-Network, Co., a
Virgin Islands corporation ("ATNCo."), and Atlantic Aircraft, Inc., a Delaware
corporation ("Aircraft Corp."), as well as certain other assets of the Company
as more fully described herein relating to businesses conducted by ATNCo., its
subsidiaries, Virgin Islands Telephone Corporation, a Virgin Islands
corporation ("VITELCO"), Vitelcom Cellular Inc., a Virgin Islands corporation
("VCI"), and Vitelcom, Inc., a Virgin Islands corporation ("Vitelcom" and,
together with ATNCo., Aircraft Corp., VITELCO and VCI, the "Transferred
Subsidiaries"), and Aircraft Corp. in exchange for 10,959,131 shares of common
stock, par value $0.01 per share (the "ECI Common Stock"), of ECI; and
WHEREAS, in order to accomplish such separation, subject to the terms and
conditions set forth herein, in consideration of the transfer to it of the
Assets (as defined herein), ECI desires to issue to the Company 10,959,131
shares of ECI Common Stock and assume the Assumed Liabilities (as defined
herein); and
WHEREAS, the Company, Prior, individually and as Trustee of the 1994 Prior
Charitable Remainder Trust (the "Trust"), and Prosser have entered into a
Recapitalization Agreement dated of even date herewith attached hereto as
Exhibit A (the "Recapitalization Agreement"), pursuant to which, subject to
the terms and conditions set forth therein, (a) the Company has agreed to
repurchase (the "Repurchase") an aggregate of 765,562 shares of common stock,
par value $.01 per share (the "Company Common Stock"), of the Company owned by
Prior and the Trust, and (b) Prosser has agreed to exchange 3,325,000 shares
of Company Common Stock owned by Prosser and certain members of his family for
3,325,000 shares of a new series of common stock of the Company to be
designated Class A Common Stock and Prior has agreed to exchange 2,927,038
shares of Company Common Stock owned by Prior and certain members of his
family for 2,927,038 shares of a new series of common stock of the Company to
be designated Class B Common Stock (the "Recapitalization"); and
WHEREAS, the Company and ATN MergerCo., a Delaware corporation ("Merger
Sub"), have entered into an Agreement and Plan of Merger of even date herewith
attached hereto as Exhibit B (the "Merger Agreement"), pursuant to which,
subject to the terms and conditions contained therein, Merger Sub will merge
with and into the Company, with each share of Company Common Stock being
converted into one share of ECI Common Stock and 0.4 shares of Company Common
Stock, the outstanding shares of Class A Common Stock will be converted into
an aggregate of 5,704,231 shares of ECI Common Stock and the outstanding
shares of Class B Common Stock will be converted into an aggregate of
2,807,040 shares of Company Common Stock (the "Merger"); and
WHEREAS, the consummation of the Closing (as defined herein) is a condition
to the consummation of the Repurchase and Recapitalization pursuant to the
Recapitalization Agreement and a condition to the consummation of the Merger
pursuant to the Merger Agreement;
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained and subject to the terms and conditions hereinafter
set forth, the parties hereto hereby agree as follows:
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ARTICLE I
DEFINITIONS
Section 1.01. Definitions. As used in this Subscription Agreement, the
following terms shall have the meanings ascribed to them in this Section 1.01
"Aircraft Corp." has the meaning set forth in the recitals hereto.
"Aircraft Receivables" means all indebtedness owing from Aircraft Corp. to
the Company.
"Assets" has the meaning set forth in Section 2.02 hereof.
"Assumed Liabilities" has the meaning set forth in Section 2.05 hereof.
"ATNCo." has the meaning set forth in the recitals hereto.
"Auditor" has the meaning set forth in Section 3.02 hereof.
"Banco Popular Indebtedness" means Indebtedness outstanding under the loan
agreement dated May 29, 1990, as amended February 25, 1993, and as amended
October 6, 1993, between the Company and Banco Popular de Puerto Rico.
"Business Day" shall mean any day, excluding Saturday, Sunday and any day
which shall be in the City of New York a legal holiday or a day on which
banking institutions are authorized or required by law or other governmental
actions to close.
"Cash Equivalents" shall mean (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (b) marketable direct
obligations issued by any State of the United States of America or any local
government or other political subdivision thereof, (c) U.S. dollar denominated
time deposits, certificates of deposit and bankers' acceptances, (d)
commercial paper and variable or fixed rate notes maturing within one year of
the Closing Date and (e) repurchase agreements maturing within one year of the
Closing Date.
"Closing" has the meaning set forth in Section 7.01 hereof.
"Closing Date" has the meaning set forth in Section 7.01 hereof.
"Commission" means the Securities and Exchange Commission.
"Company" has the meaning set forth in the first paragraph hereof.
"Company Common Stock" has the meaning set forth in the recitals hereto.
"Company Projects" has the meaning set forth in Section 2.03 hereof.
"Credits" means, collectively, (a) an amount equal to 50% of the cash and
Cash Equivalents of the Company as of April 30, 1997, (b) an amount equal to
50% of all accounts receivable and other receivables of the Company (other
than (w) the principal amount of any Indebtedness owing to the Company by any
of its Subsidiaries, (x) any receivables identified on Schedule 2.02(i)
hereof, (y) the Aircraft Receivables or (z) any receivables (other than
receivables owing from any Subsidiary of the Company) which remain unpaid on
the Closing Date), including, without limitation, all accrued and unpaid
advisory and management fees, intercompany interest and stockholders'
receivables, as of April 30, 1997, (c) an amount equal to 50% of the current
assets of the Company as of April 30, 1997 (other than those included in or
specifically excluded by
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clause (a) or (b) above), (d) an amount equal to 50% of all principal payments
made by Transferred Subsidiaries after December 31, 1996 and on or prior to
April 30, 1997 on Indebtedness owing to the Company, (e) an amount equal to
50% of all dividends paid by Transferred Subsidiaries to the Company after
December 31, 1996 and on or prior to April 30, 1997, (f) an amount equal to
50% of the principal amount of all loans by the Company to, and of all capital
contributions by the Company to, GTT after December 31, 1996 and on or prior
to April 30, 1997, (g) an amount equal to 50% of all costs and expenses
incurred by the Company after December 31, 1996 and on or prior to April 30,
1997 relating to the Company Projects or any potential acquisitions (including
any which may have been abandoned after December 31, 1996) to be consummated
by the Company or any of its Subsidiaries (other than the Transferred
Subsidiaries), (h) an amount equal to 100% of all principal payments made by
the Transferred Subsidiaries after April 30, 1997 and on or prior to the
Closing Date on Indebtedness (other than with respect to the Aircraft
Receivables) owing to the Company, (i) an amount equal to 100% of all
dividends paid by Transferred Subsidiaries to the Company after April 30, 1997
and on or prior to the Closing Date, (j) an amount equal to 100% of all
payments of interest accruing after April 30, 1997 and made by Transferred
Subsidiaries to the Company (other than with respect to the Aircraft
Receivables) after April 30, 1997 and on or prior to the Closing Date on
Indebtedness owing to the Company, (k) an amount equal to 50% of the book
value as of April 30, 1997 of the furniture, fixtures, equipment and leasehold
improvements at the St. Thomas Office, (l) an amount equal to 100% of all
payments received by the Company after April 30, 1997 on any receivables
identified on Schedule 2.02(i) hereof and (m) an amount equal to 100% of the
principal amount of and accrued interest on the Indebtedness listed in
Schedule 2.05(d) as of the Closing Date. Any amounts comprising the Credits
which are denominated in a currency other than U.S. dollars shall be converted
into a U.S. dollar amount using the applicable exchange rate in effect as of
the fifth Business Day prior to the Closing Date, in the case of the Estimated
Statement, and as of the Closing Date, in the case of the Final Statement, as
published in The Wall Street Journal on the next succeeding Business Day.
"Debits" means, collectively, (a) an amount equal to 50% of the Indebtedness
(including Banco Popular Indebtedness) of the Company owing to banks or listed
on Schedule 2.05(d) attached hereto or as of April 30, 1997, (b) an amount
equal to 50% of all other current liabilities of the Company as of April 30,
1997 (other than Excluded Liabilities), (c) an amount equal to 50% of the
total severance payments with respect to the persons set forth on Schedule
5.02 attached hereto, (d) an amount equal to 50% of all principal payments
made by GTT on Indebtedness owing to the Company after December 31, 1996 and
on or prior to April 30, 1997, (e) an amount equal to 50% of all dividends
paid by GTT to the Company after December 31, 1996 and on or prior to April
30, 1997, (f) an amount equal to 50% of the principal amount of all loans by
the Company to, and all capital contributions by the Company to, Transferred
Subsidiaries (other than Aircraft Receivables) after December 31, 1996 and on
or prior to April 30, 1997, (g) an amount equal to 50% of all costs and
expenses incurred by the Company after December 31, 1996 and on or prior to
April 30, 1997 relating to the project for the privatization of the telephone
company for the Republic of Congo or any potential acquisitions (including any
which may have been abandoned after December 31, 1996) to be consummated by
ECI or any of the Transferred Subsidiaries, (h) an amount equal to 100% of the
principal amount of all loans made by the Company to, and of all capital
contributions by the Company to, Transferred Subsidiaries (including Aircraft
Receivables, unless the proceeds relating thereto were used by Aircraft Corp.
to repay third-party Indebtedness) after April 30, 1997 and on or prior to the
Closing Date, (i) an amount equal to 100% of all interest accrued as of April
30, 1997 which has not been paid to the Company on or prior to the Closing
Date on Indebtedness owing by Transferred Subsidiaries (other than with
respect to the Aircraft Receivables) to the Company, (j) an amount equal to
100% of all costs and expenses incurred by the Company after April 30, 1997
and on or prior to the Closing Date relating to the project for the
privatization of the telephone company for the Republic of Congo or any
potential acquisitions (including any which may have been abandoned after
December 31, 1996) to be consummated by ECI or any of the Transferred
Subsidiaries, (k) an amount equal to 100% of all costs and expenses incurred
by the Company after April 30, 1997 and on or prior to the Closing Date
relating to furniture, fixtures, equipment and leasehold improvements at, or
otherwise pertaining to, the St. Croix Office, (l) an amount equal to 50% of
the book value as of April 30, 1997 of the furniture, fixtures, equipment and
leasehold improvements at the St. Croix Office, (m) an amount equal to 100% of
the compensation and other expenses incurred by the Company after April 30,
1997 and on or prior to the Closing Date relating to the employees and
consultants identified on
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Schedule 1.01A attached hereto, (n) an amount equal to 50% of all fees and
expenses incurred by Prior, Prosser, the Company, ECI and their respective
Subsidiaries relating to the Transactions and all agreements, documents and
proceedings in connection therewith, including, without limitation, all fees
and expenses of each counsel set forth on Schedule 1.01B attached hereto,
accountants and investment bankers, filing fees with the Commission and state
securities agencies, stock exchange listing fees, transfer agent fees,
transfer taxes and filing fees with the State of Delaware, it being expressly
understood and agreed that the payment of all such fees and expenses (but, as
to counsel fees and expenses, limited to the counsel named in Schedule 1.01B)
shall be the obligation of the Company, (o) an amount equal to 50% of the
compensation and other expenses incurred by the Company after April 30, 1997
and on or prior to the Closing Date relating to the employees identified on
Schedule 1.01C attached hereto, (p) an amount equal to 50% of (i) the "blue
book" values of the two aircraft owned by Aircraft Corp. as of the latest
"blue book" available to the parties on the third Business Day prior to the
Closing Date less (ii) the amount of all Indebtedness and accrued interest
owing by Aircraft Corp. to third parties as of the Closing Date, (q) an amount
equal to 50% of the carrying value as of April 30, 1997 of the assets
identified on Schedule 2.02(i) hereof, (r) an amount equal to the provision
for Income Tax expense of the Company which would be accrued on a hypothetical
statement of operations of the Company for the period after April 30, 1997 to
and including the Closing Date which statement of operations includes as
revenues or gross income only dividends paid by the Transferred Subsidiaries
to the Company during such period and interest accrued during such period on
Indebtedness of the Transferred Subsidiaries to the Company and includes as
expense only the expenses charged to ECI under clauses (c), (j), (k), (m),
(n), (o) and (s) of this definition of "Debits" (and only to the extent such
charges represent expenses which are deductible for Income Tax purposes), and
(s) an amount equal to 50% of all expenses incurred by the Company after April
30, 1997 and on or prior to the Closing Date (including interest accrued on
Indebtedness listed on Schedule 2.05(d)) to the extent such expenses are of a
type which do not constitute a Credit hereunder or a Debit pursuant to any
other clause of this definition of "Debits." Any amount comprising the Debits
which are denominated in a currency other than U.S. dollars shall be converted
into a U.S. dollar amount using the applicable exchange rate in effect as of
the fifth Business Day prior to the Closing Date, in the case of the Estimated
Statement, and as of the Closing Date, in the case of the Final Statement, as
published in The Wall Street Journal on the next succeeding Business Day.
"ECI" has the meaning set forth in the first paragraph hereof.
"ECI Common Stock" has the meaning set forth in the recitals hereto.
"Estimated Statement" has the meaning set forth in Section 3.01 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" has the meaning set forth in Section 2.03.
"Excluded Liabilities" has the meaning set forth in Section 2.06.
"Final Statement" has the meaning set forth in Section 3.02.
"Goods" has the meaning set forth in the Uniform Commercial Code of the
State of New York.
"GTT" has the meaning set forth in Section 2.03.
"Income Tax" has the meaning set forth in the Tax Sharing Agreement.
"Indebtedness" of any person shall mean, without duplication, (a) all
indebtedness of such person for borrowed money, (b) the deferred purchase
price of assets or services which in accordance with generally accepted
accounting principles would be shown on the liability side of the balance
sheet of such person, (c) the face amount of all letters of credit issued for
the account of such person and, without duplication, all drafts drawn
thereunder and (d) all Indebtedness of a second person secured by any lien on
any property owned by such first person, whether or not such Indebtedness has
been assumed by such first person.
"Materials" has the meaning set forth in Section 5.01 hereof.
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"Merger" has the meaning set forth in the recitals hereto.
"Merger Agreement" has the meaning set forth in the recitals hereto.
"Prior" has the meaning set forth in the recitals hereto.
"Prosser" has the meaning set forth in the recitals hereto.
"Recapitalization" has the meaning set forth in the recitals hereto.
"Recapitalization Agreement" has the meaning set forth in the recitals
hereto.
"Repurchase" has the meaning set forth in the recitals hereto.
"Retained Indebtedness" has the meaning set forth in Section 2.02.
"Retained Names" has the meaning set forth in Section 5.01 hereof.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" has the meaning set forth in Section 2.01 hereof.
"Special Meeting" has the meaning set forth in the Merger Agreement.
"St. Croix Office" means the office of the Company located at Chase
Financial Center, Orange Grove, Christiansted, St. Croix, U.S. Virgin Islands
00821.
"St. Croix Office Lease" means the current lease between Chase Manhattan
Bank and VITELCO for the St. Croix Office, any and all renewals, extensions or
amendments thereof and any new lease for the St. Croix Office entered into on
or prior to the Closing Date.
"St. Thomas Office" means the office of the Company located at 19 Estate
Thomas, Havensite, St. Thomas, U.S. Virgin Islands 00802.
"St. Thomas Office Lease" means the lease agreement dated October 1, 1992,
as amended July 22, 1993, between the Company and St. Thomas Liquor Co., Ltd.
for the St. Thomas Office.
"Subscription Agreement" has the meaning set forth in the first paragraph
hereof.
"Subsidiary" shall mean, of any person at any time,
(a) any corporation of which a majority (by number of shares or number of
votes) of any class of outstanding capital stock normally entitled to vote
for the election of one or more directors (regardless of any contingency
which does or may suspend or dilute the voting rights of such class) is at
such time owned directly or indirectly, beneficially or of record, by such
person or one or more Subsidiaries of such person;
(b) any trust of which a majority of the beneficial interest is at such
time owned directly or indirectly, beneficially or of record, by such
person or one or more Subsidiaries of such person; and
(c) any partnership, joint venture or other entity of which ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at such time
owned directly or indirectly, beneficially or of record, by, or which is
otherwise controlled directly, indirectly or through one or more
intermediaries by, such person or one or more Subsidiaries of such person.
"Tax" or "Taxes" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp, excise,
severance, occupation, service, sales, use, license, lease, transfer, import,
export, value added,
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alternative minimum, estimated or other similar tax (including any fee,
assessment or other charge in the nature of or in lieu of any tax) imposed by
any governmental entity or political subdivision thereof, and any interest,
penalties, additions to tax or additional amounts in respect of the foregoing.
"Transactions" has the meaning set forth in Section 6.02 hereof.
"Transferred Subsidiaries" has the meaning set forth in the recitals hereto.
"Trust" has the meaning set forth in the recitals hereto.
"VCI" has the meaning set forth in the recitals hereto.
"VITELCO" has the meaning set forth in the recitals hereto.
"Vitelcom" has the meaning set forth in the recitals hereto.
Section 1.02. Rules of Construction. Unless the context otherwise requires:
(a) a capitalized term used herein has the meaning ascribed to such term;
(b) "or" is not exclusive;
(c) words in the singular include the plural, and words in the plural
include the singular; and
(d) "herein," "hereof" and other words of similar import refer to this
Subscription Agreement as a whole and not to any particular Article,
Section or other subdivision.
ARTICLE II
SUBSCRIPTION FOR AND ACQUISITION OF THE SHARES
Section 2.01. Subscription for the Shares. The Company hereby subscribes for
and, subject to the terms and conditions contained herein, agrees to acquire
at the Closing 10,959,131 shares of ECI Common Stock (the "Shares").
Section 2.02. Acquisition of the Shares. In consideration of the issuance of
the Shares by ECI and the performance of its other obligations hereunder,
subject to the terms and conditions contained herein, the Company agrees to
transfer, convey, assign and deliver, or cause to be transferred, conveyed,
assigned and delivered, at the Closing to ECI the following assets (which are
collectively referred to herein as the "Assets"):
(a) all of the issued and outstanding capital stock of ATNCo.;
(b) all of the issued and outstanding capital stock of Aircraft Corp.;
(c) all Indebtedness of each Transferred Subsidiary owing to the Company
except the Subordinated Demand Note of ATNCo. payable to the order of the
Company, which had an unpaid principal amount of $22,031,586 at April 30,
1997 (the "Retained Indebtedness");
(d) all rights of the Company under the St. Croix Office Lease;
(e) all equipment, furniture, fixtures and leasehold improvements of the
Company located at the St. Croix Office;
(f) all rights of the Company under any leases of equipment located at
the St. Croix Office;
(g) all rights of the Company and GTT (including any capitalized costs
relating thereto) relating to the project for the privatization of the
telephone company for the Republic of Congo;
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(h) all books, records and other data and papers held by the Company at
the Closing relating to the operation of the businesses of the Transferred
Subsidiaries;
(i) all of the right, title and interest of the Company in the assets set
forth on Schedule 2.02(i) attached hereto; and
(j) 50% of all receivables of the Company as of April 30, 1997 which
remain unpaid as of the Closing Date (other than Indebtedness owing to the
Company by any of its Subsidiaries and any receivables identified on
Schedule 2.02(i)).
Section 2.03. Excluded Assets. For the avoidance of doubt, each of the
parties hereto acknowledges and agrees that there shall not be included in
Assets to be transferred, conveyed, assigned and delivered to ECI at the
Closing any of the following assets (which are collectively referred to herein
as the "Excluded Assets"):
(a) any of the capital stock of Guyana Telephone & Telegraph Company
Ltd., a Guyana corporation ("GTT");
(b) any Indebtedness of GTT owing to the Company;
(c) any rights of the Company under the St. Thomas Office Lease;
(d) any equipment, furniture, fixtures and leasehold improvements of the
Company located at the St. Thomas Offices;
(e) any rights of the Company under any leases of equipment located at
the St. Thomas Office;
(f) any rights of the Company or GTT (including any capitalized costs
relating thereto) relating to the projects for the privatization of the
Suriname telephone company, the purchase of the St. Martin cellular
operation or the long distance telephone opportunity in Jamaica (the
"Company Projects"); and
(g) any rights of the Company under any advisory or management agreement
between GTT and the Company.
Section 2.04. Issuance of the Shares. At the Closing, subject to the terms
and conditions contained herein, ECI agrees to issue and deliver the Shares to
the Company.
Section 2.05. Assumption of Liabilities. In consideration of the transfer,
conveyance, assignment and delivery of the Assets and the performance by the
Company of its other obligations hereunder, subject to the terms and
conditions contained herein, ECI agrees to assume at the Closing in accordance
with their respective terms the following liabilities (which are collectively
referred to herein as the "Assumed Liabilities"):
(a) all obligations of the Company under the St. Croix Office Lease;
(b) all obligations of the Company under all of the leases of equipment
located at the St. Croix Office and all other leases of equipment located
at the St. Croix Office entered into by the Company after the date of this
Subscription Agreement and prior to the Closing;
(c) all obligations of the Company arising out of or relating to the
Transferred Subsidiaries and the project for the privatization of the
telephone company for the Republic of Congo;
(d) the obligations of the Company set forth on Schedule 2.05(d);
(e) certain Tax liabilities of the Company as more particularly described
in the Tax Sharing and Indemnification Agreement; and
(f) except as otherwise provided in the Indemnity Agreement, one-half of
all liabilities and obligations of the Company, whether known or unknown,
arising out of events or acts or omissions occurring at or prior to the
Closing, except for (i) any Tax liabilities, (ii) any liabilities or
obligations that are taken into account in clauses (b) and (c) of the
definition of "Debits" for purposes of calculating the Final Closing
Adjustment and (iii) any liabilities and obligations that are Assumed
Liabilities pursuant to clauses (a)-(d) of this Section 2.05 or Excluded
Liabilities pursuant to clauses (a)-(c) of Section 2.06.
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Section 2.06. Excluded Liabilities. For the avoidance of doubt, each of the
parties hereto acknowledges and agrees that ECI does not hereby assume or
agree to assume any of the following obligations or liabilities (which are
collectively referred to herein as the "Excluded Liabilities"):
(a) any obligations of the Company under the St. Thomas Office Lease;
(b) any obligations of the Company under the leases of equipment located
at the St. Thomas Office; and
(c) any liability or obligation of the Company, whether known or unknown,
or matured or contingent, arising out of or relating to GTT or the Company
Projects.
Section 2.07. Restricted Assets. In the event that any Asset is not
assignable or transferable to ECI at the Closing by its terms or under
applicable law (each, a "Restricted Asset"), the Company shall use all
reasonable efforts, and ECI shall cooperate reasonably with the Company, to
promptly obtain the consents and waivers necessary to cause to be assigned or
transferred to ECI such Restricted Asset. After the Closing and continuing for
the duration of the useful life of each Restricted Asset, the Company shall
use reasonable efforts to provide ECI with the benefits of such Restricted
Asset and enforce at the request of ECI, or allow ECI to enforce, any rights
of the Company under such Restricted Asset; provided that the reasonable costs
and expenses of the Company incurred at ECI's request with respect to any such
enforcement shall be reimbursed by ECI.
Section 2.08. Access to Information. Each of the parties shall give to the
other reasonable access to information necessary to consummate the
transactions contemplated by this Subscription Agreement and shall deliver at
its expense all records relating to businesses and operations of the other
party and its Subsidiaries which may inadvertently remain in its possession
after the Closing. Each of the parties shall retain records relating to the
businesses and operations of the other party and its Subsidiaries in its
possession for a period of five years after the Closing Date.
ARTICLE III
CLOSING ADJUSTMENT
Section 3.01. Preliminary Closing Adjustment.
(a) On the third Business Day prior to the Closing Date, the Company
shall deliver to ECI an estimated statement of the Debits and the Credits
(the "Estimated Statement"), which Estimated Statement shall be in form and
substance reasonably satisfactory to ECI. The difference between the Debits
and the Credits shown on the Estimated Statement is herein called the
"Closing Date Adjustment." If the Debits exceed the Credits the Closing
Date Adjustment shall be a positive amount representing the sum resulting
from the Closing Date Adjustment due by ECI to the Company. If the Credits
exceed the Debits the Closing Date Adjustment shall be a negative amount
representing the sum resulting from the Closing Date Adjustment due by the
Company to ECI.
(b) ECI shall cause ATNCo to pay on the Closing Date, by wire transfer of
immediately available funds, as a payment of the Retained Indebtedness,
$17.4 million increased by the sum of the Closing Date Adjustment should
such adjustment be a positive amount or decreased by the Closing Date
Adjustment should such amount be a negative amount. If the amount of the
payment to be made by ATNCo. under this Section 3.01 exceeds the principal
amount of the Retained Indebtedness, such excess amount shall be paid by
ECI to the Company.
Section 3.02. Final Closing Adjustment.
(a) As promptly as practicable after the Closing Date, the Company shall
deliver to ECI a statement of Debits and Credits as of the Closing Date
(the "Closing Date Statement"). The Company and ECI shall engage the Omaha,
Nebraska office of Deloitte & Touche LLP (the "Auditor") to perform an
audit of the Debits and Credits shown on the Closing Date Statement. The
Auditor shall, within 60 days after the
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Closing Date, deliver to the parties a report of the calculation of the
Debits and the Credits (the "Final Statement"). The Final Statement shall
be conclusive and binding upon the parties, absent fraud or manifest error.
Each of the parties shall give the Auditor full access to its books,
records, facilities and employees in connection with the Auditor's audit of
the Final Statement. The fees and disbursements of the Auditor shall be
paid equally by the Company and ECI. The amount by which the amount of the
Debits shown on the Final Statement exceeds the amount of the Credits shown
on the Final Statement is herein called the "Final Closing Adjustment." If
the amount of Credits exceeds the amount of Debits, the Final Closing
Adjustment shall be a negative amount.
(b) If the Final Closing Adjustment exceeds the amount of the Closing
Date Adjustment, then within three Business Days after receipt of the Final
Statement by ECI, ECI shall cause ATNCo. to pay to the Company on account
of the principal amount of the Retained Indebtedness by wire transfer of
immediately available funds to an account specified by the Company therefor
an amount in cash in U.S. dollars equal to the amount by which the Final
Closing Adjustment exceeds the Closing Date Adjustment. If the amount of
the payment to be made by ATNCo. under this clause (b) exceeds the
remaining principal amount of the Retained Indebtedness, such excess amount
shall be paid by ECI to the Company.
(c) If the Final Closing Adjustment is less than the Closing Date
Adjustment, then within three Business Days after receipt of the Final
Statement by the Company, the Company shall pay to ECI by wire transfer of
immediately available funds to an account specified by ECI therefor an
amount in cash in U.S. dollars equal to the amount by which the Final
Closing Adjustment is less than the amount of the Closing Date Adjustment.
(d) For the avoidance of doubt, it is hereby acknowledged and agreed that
a positive amount is always larger than any negative amount (e.g. $10 is
$110 larger than -$100), that a negative amount is always less than a
positive amount (e.g. -$100 is $110 less than $10), and that a larger
negative number is "less than" a smaller negative number (e.g. -$110 is $10
less than -$100).
(e) Immediately following the payment specified in clause (b) or (c) of
this Section 3.02, the Company shall note on the promissory note evidencing
the Retained Indebtedness the aggregate amount of the payments, if any,
received by it with respect to the Retained Indebtedness pursuant to
Section 3.01 and this Section 3.02 and assign and deliver the Retained
Indebtedness to ECI.
ARTICLE IV
NO REPRESENTATIONS OR WARRANTIES;
CONDITION OF ASSETS, DISCLAIMERS
Section 4.01. No Representations or Warranties. Each of the parties
understands and agrees that no party is making, in this Subscription Agreement
or in any other agreement or document entered into in connection with the
Transactions, representations or warranties to the other in any way as to the
business or operations of the Company prior to or after the Closing or as to
the business or operations of ECI after the Closing, or as to any consents or
approvals required in connection therewith.
Section 4.02. Condition of Assets, Disclaimers. All Goods to be conveyed
pursuant to this Subscription Agreement are expressly agreed to be conveyed
"AS IS" and "WITH ALL FAULTS." All of the Assets to be transferred and
assigned to ECI pursuant to the provisions of this Subscription Agreement
shall be transferred and assigned to ECI as is, where is, in the condition
thereof and subject to the state of title thereto, the rights of any parties
in possession, and the right of ownership of others therein, and are subject
to all applicable laws, rules, regulations, ordinances, licenses, permits,
franchises, judgments, orders and other governmental actions, whether now in
effect or hereafter taken, and without representations or warranties of any
kind by the Company or any person acting or purporting to act on its behalf.
The Company makes no warranty or representation, express or implied, as to the
title, design, condition, value, operation, workmanship, merchantibility or
suitability for a particular purpose of the Assets, or any portion thereof, or
any other warranty or representation, express or implied, of any kind
whatsoever with respect to the Assets or any portion thereof.
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ARTICLE V
CERTAIN AGREEMENTS OF THE COMPANY AND ECI
Section 5.01. Use of Retained Names. After the Closing, ECI shall not, and
shall cause its Subsidiaries not to, put into use any products, signs,
purchase orders, sales orders, labels, letterheads, or other materials
(collectively, "Materials") not in existence on the Closing Date that bear the
name "Atlantic Tele-Network, Inc." or "ATN" (the "Retained Names"). After the
Closing, ECI and its Subsidiaries shall be entitled to use any Materials in
existence as of the Closing that bear the Retained Names for a period not
exceeding 30 days.
Section 5.02. Severance. Prior to the Closing, the Company shall terminate
the employment of each of its employees identified on Schedule 5.02 attached
hereto.
Section 5.03. Aircraft Corp. Costs. Effective May 1, 1997, the Transferred
Subsidiaries, the project for the privatization of the telephone company for
the Republic of Congo, the Company Projects, and GTT shall be charged for use
of Aircraft Corp.'s jet aircraft only in an amount equal to the cost incident
to such use computed in the same manner and on the same basis as Prosser and
Prior have heretofore been charged for personal use of such aircraft, and all
remaining expenses of Aircraft Corp. with respect to the jet aircraft for the
period after April 30, 1997 and on or prior to the Closing Date shall be
charged to the Company as an expense to be allocated 50% to ECI pursuant to
clause(s) of the definition of "Debits" in this Subscription Agreement.
Section 5.04. Exchange of Indebtedness. Upon receipt of Indebtedness of
Transferred Subsidiaries pursuant to Section 2.02(c), ECI shall immediately
exchange any such Indebtedness for a promissory note with a term of at least
ten years at a variable rate of interest at least equal to the variable rate
of interest under the senior credit facility between Atlantic Tele-Network,
Co. and Rural Telephone Finance Cooperative and under which the obligor has
the right to prepay such note at any time without premium or penalty.
ARTICLE VI
CONDITIONS TO CLOSING
The obligations of the parties to consummate the purchase and sale of the
Shares, the assumption of the Assumed Liabilities and the other transactions
to be consummated by the parties hereto at the Closing shall be subject to the
satisfaction of the following conditions on or prior to the Closing Date:
Section 6.01. Third-Party Approvals. All consents, approvals,
authorizations, permits and orders with respect to the transactions
contemplated by this Subscription Agreement, the Recapitalization Agreement
and the Merger Agreement and the other agreements to be entered into pursuant
hereto and thereto required from any person, entity or court or governmental
agency, authority or instrumentality, federal, state or local, having or
asserting rights against or jurisdictions over the Company, ECI, or such
transactions (including, without limitation, from the Rural Telephone Finance
Corporation, the Rural Utilities Service, and Northern Telecom International
Finance B.V.) shall have been obtained and be valid and in full force and
effect.
Section 6.02. Registration Statement and Stockholder Approval. The
Registration Statement registering the Shares to be issued to stockholders of
the Company pursuant to the Merger Agreement under the Securities Act shall
have become effective in accordance with the provisions of the Securities Act;
no stop order suspending the effectiveness of such Registration Statement
shall have been issued by the Commission and remain in effect; all necessary
state securities or blue sky authorizations shall have been received. The
approval and adoption of this Subscription Agreement, the Recapitalization
Agreement, the Merger Agreement and the other agreements to be entered into
pursuant hereto and thereto and the transactions contemplated hereby and
thereby (the "Transactions"), by a majority of the outstanding shares of
Company Common Stock shall have been obtained.
10
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Section 6.03. Internal Revenue Service Ruling. The Company shall have
received rulings from the Internal Revenue Service reasonably acceptable to
the Company and ECI, which rulings shall be in full force and effect as of the
Closing Date, to the effect that:
(i) the transactions contemplated by the Subscription Agreement will be a
tax-free reorganization as described in Section 368(a)(1)(D) of the Code;
and
(ii) the distribution of ECI Common Stock to the holders of Company
Common Stock and the holders of the Class A Common Stock pursuant to the
Merger Agreement will be tax-free for federal income tax purposes to the
Company under Section 355(c) or 361(c) of the Code and to the holders of
Company Common Stock and the holders of the Class A Common Stock under
Section 355(a) of the Code.
Section 6.04. Fairness Opinion. The Board of Directors of the Company shall
have received an opinion from Prudential Securities Inc. dated July 7, 1997
and reaffirmed within five Business Days prior to the date a definitive proxy
statement is mailed to the holders of Company Common Stock under the Exchange
Act to the effect that the Transactions are fair from a financial point of
view to the public stockholders of the Company.
Section 6.05. [Intentionally Omitted]
Section 6.06. Liquidation of Vitelcom. Vitelcom shall be liquidated or
merged into ATN Co. and the business of Vitelcom shall be continued by ATN
Co., which may continue such business as a separate division of ATN Co. but
not as a separate corporate Subsidiary.
Section 6.07. Minimum Borrowing Capacity. Each of the Company and ECI shall
have minimum available borrowing capacity with reputable lenders or available
cash on hand necessary to make and, in ECI's case, to cause ATNCo. to make the
payments expected to be required under Article III hereof.
Section 6.08. No Material Adverse Change. Since the date of this Agreement,
there shall have been no material adverse change in the business to be
conducted by either (a) the Company and its Subsidiaries after the Closing or
(b) ECI and its Subsidiaries after the Closing.
Section 6.09. No Litigation. No action, suit, investigation or other
proceeding shall be pending or threatened before any arbitrator, court or
governmental agency which, in the opinion of at least one-half of the members
of the Board of Directors of either the Company or ECI, presents a substantial
risk of the restriction or prohibition of any material component of the
Transactions, or obtaining material damages or other relief in connection
therewith.
Section 6.10. Agreements in Full Force. Each of the Merger Agreement and the
Recapitalization Agreement shall be in full force and effect and no party
thereto shall be in material breach of any of its obligations thereunder.
Section 6.11. Listing. The Shares issuable in the Merger shall have been
authorized for listing on the American Stock Exchange subject to a final
notice of issuance. The outstanding Common Stock of the Company shall be
listed on the American Stock Exchange, and no proceedings shall be pending or
threatened to delist such stock from such Exchange.
Section 6.12. Performance. Each of the parties shall have performed and
complied in all material respects with all obligations and conditions required
by this Subscription Agreement to be performed or complied with by it at or
prior to the Closing and such party shall furnish to the other an officer's
certificate to evidence such performance and compliance.
Section 6.13. ECI Charter. ECI shall have adopted and filed with the
Secretary of State of Delaware a Restated Certificate of Incorporation
substantially in the form of Exhibit D attached hereto.
Section 6.14. Boards of Directors and Officers. The Board of Directors and
officers of ECI and each Transferred Subsidiary shall consist of those persons
designated in writing by Prosser to the Company on the
11
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Business Day preceding the Closing Date. The Board of Directors and officers
of the Company and GTT shall consist of those persons designated in writing by
Prior to the Company on the business day preceding the Closing Date.
Section 6.15. Non-Competition Agreement. ECI and Prosser shall have entered
into a Non-Competition Agreement substantially in the form of Exhibit E
attached hereto, and such agreement shall be in full force and effect and no
party thereto shall be in material default of any of its obligations
thereunder.
Section 6.16. Indemnity Agreement. The Company, ECI, Prior and Prosser shall
have entered into an Indemnity Agreement substantially in the form of Exhibit
F attached hereto, and such agreement shall be in full force and effect and no
party thereto shall be in material default of any of its obligations
thereunder.
Section 6.17. Personal Debts. Each of Prior and Prosser shall have repaid
all personal debts owing to the Company or any of its Subsidiaries (including
any Transferred Subsidiaries); and Prior shall have caused the repayment of
all amounts owing by Prior's private wireless cable television business to
Vitelcom as of the Closing Date.
Section 6.18. Employee Benefits Agreement. The Company and ECI shall have
entered into an Employee Benefits Agreement substantially in the form of
Exhibit G attached hereto, and such agreement shall be in full force and
effect and no party thereto shall be in material default of any of its
obligations thereunder.
Section 6.19. Tax Sharing and Indemnification Agreement. The Company and ECI
shall have entered into a Tax Sharing and Indemnification Agreement
substantially in the form of Exhibit H attached hereto (the "Tax Sharing
Agreement"), and such agreement shall be in full force and effect and no party
thereto shall be in material default of any of its obligations thereunder.
Section 6.20. Assumed Liabilities. ECI shall have assumed all obligations of
the Company with respect to the Assumed Liabilities outstanding as of the
Closing Date.
Section 6.21. Technical Assistance Agreement. The Company, ATNCo., VITELCO
and VCI shall have entered into a Technical Assistance Agreement substantially
in the form of Exhibit C attached hereto (the "Technical Services Agreement"),
and such agreement shall be in full force and effect and no party thereto
shall be in material default of any of its obligations thereunder.
Section 6.22. Recapitalization Agreement Closing. Each of the conditions to
the closing under the Recapitalization Agreement (the "Recapitalization
Agreement Closing") shall have been satisfied or, with the consent of each of
the parties hereto waived; and all parties thereto shall appear ready, willing
and able to consummate the transactions therein provided to be consummated at
the Recapitalization Agreement Closing.
Section 6.23. Merger Agreement Closing. Each of the conditions to the
closing under the Merger Agreement (the "Merger Agreement Closing") shall have
been satisfied or, with the consent of each of the parties hereto waived; and
all parties thereto shall appear ready, willing and able to consummate the
transactions therein provided to be consummated at the Merger Agreement
Closing.
ARTICLE VII
CLOSING DATE; CLOSING
Section 7.01. Closing Date; Closing. The closing of the acquisition and
issuance of the Shares hereunder (the "Closing") shall take place on the same
Business Day as the Recapitalization Agreement Closing and the Merger
Agreement Closing and shall be held as soon as reasonably practicable after
satisfaction or waiver by the parties hereto of the conditions set forth in
Article VI hereof. The date on which the Closing occurs is referred to herein
as the "Closing Date." The Closing shall take place at the offices of Cahill
Gordon &
12
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Reindel, 80 Pine Street, New York, New York 10005. At the Closing, (i) ECI
shall issue the Shares to the Company registered in such names and
denominations as the Company shall request, (ii) the transfer, conveyance,
assignment and delivery of the Assets shall be effected by the delivery by the
Company of such deeds, bills of sale, endorsements, assignments, certificates
or other instruments as ECI shall reasonably request, (iii) the assumption of
the Assumed Liabilities shall be effected by the delivery by ECI of such
instruments of assumption as the Company shall reasonably request and (iv) ECI
shall have consummated or caused ATNCo. to have consummated the wire transfer
contemplated by Section 3.01 hereof.
Section 7.02. Further Assurances. Each of the parties agrees that after the
Closing, upon reasonable request of the other party, it will do, execute,
deliver and acknowledge, and will cause to be done, executed, delivered and
acknowledged, all such further acts, deeds, certificates, assignments,
assumptions, transfers, conveyances, powers of attorney and other documents as
may be reasonably required to consummate the transactions contemplated hereby.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.01. Termination. This Subscription Agreement shall terminate upon
the termination of the Recapitalization Agreement or the Merger Agreement. In
addition, this Subscription Agreement may be terminated at any time prior to
the Closing by the Board of Directors of the Company and the Board of
Directors of ECI without the authorization or consent of the Company's or
ECI's stockholders. In the event of any such termination, neither party shall
have any liability of any kind to the other party.
Section 8.02. Entire Agreement. This Subscription Agreement, together with
all other written agreements which may be entered into between the parties in
connection herewith and the transactions contemplated hereby and all other
documents and instruments delivered in connection herewith and therewith and
the transactions contemplated hereby and thereby, set forth the full and
complete understanding of the parties hereto with respect to the transactions
contemplated hereby.
Section 8.03. Governing Law. This Subscription Agreement shall be governed
by and construed in accordance with the laws of the State of New York, without
reference to the conflict of laws rules thereof.
Section 8.04. Headings. The headings in this Subscription Agreement are
intended solely for convenience of reference and shall be given no effect in
the interpretation of this Subscription Agreement.
Section 8.05. Counterparts. This Subscription Agreement may be executed in
two counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
Section 8.06. Benefits. This Subscription Agreement will inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns, and no other person will have any right or obligation
hereunder.
Section 8.07. Assignment. Neither this Subscription Agreement nor any right
hereunder may be assigned by the parties hereto without the prior written
consent of the other party. Subject to the foregoing, this Subscription
Agreement shall be binding upon and inure to the benefit of the successors,
heirs, representatives and assigns of each party hereto.
Section 8.08. Amendment and Waiver. This Subscription Agreement may be
amended only by an instrument in writing signed on behalf of each of the
parties hereto. Any term, condition or provision of this Subscription
Agreement may be waived (if in writing) at any time by the party or each of
the parties entitled to the benefits thereof.
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<PAGE>
Section 8.09. Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered by hand, or when sent by telex or telecopier (with receipt
confirmed) or by registered mail, return receipt requested, addressed as
follows (or to such other address as a party may designate by notice to the
other):
(a) If to the Company:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
(b) If to ECI:
Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
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<PAGE>
IN WITNESS WHEREOF, each of the Company and ECI has caused this Subscription
Agreement to be executed on the date first written above.
Atlantic Tele-Network, Inc.
By: /s/ Cornelius B. Prior
__________________________________
Name: Cornelius B. Prior
Title:Co-Chief Executive Officer
By: /s/ Jeffrey J. Prosser
__________________________________
Name: Jeffrey J. Prosser
Title:Co-Chief Executive Officer
Emerging Communications, Inc.
By: /s/ Jeffrey J. Prosser
__________________________________
Name: Jeffrey J. Prosser
Title:Chief Executive Officer
15
<PAGE>
SCHEDULE 1.01A
PROSSER DESIGNATED EMPLOYEES AND CONSULTANTS
James J. Heying
Sharon Smalls
Edwin Crouch
Steve Ross
Deseree Rodriquez
Liz Goggins
Eling Joseph
Wilhelm Samuel
David Stuedell
Gary Fisher
Kevin Cullwood
Ronald Sanders
James Dishman
Sir Shridath S. Ramphal
Paul Singer
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SCHEDULE 1.01B
COUNSEL
Cahill Gordon & Reindel
Fried, Frank, Harris, Shriver & Jacobson
Raynor, Rensch & Pfeiffer
Richards, Layton & Finger
Brown & Wood LLP
Kelley Drye & Warren
Wiley, Rein & Fielding
17
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SCHEDULE 1.01C
UNDESIGNATED EMPLOYEES
Pacita Donovan
18
<PAGE>
SCHEDULE 2.02(I)
CERTAIN ASSETS
- --Any loans or advances to or other receivables from Jeffrey J. Prosser or any
of the persons listed on Schedule 1.01A hereof
- --AS400 Computer currently located at the premises of Vitelco
- --Key-man life insurance policies on the life of Jeffrey J. Prosser, including
pre-paid premiums relating thereto
- --Rent deposits relating to the St. Croix Office or leases relating to
equipment located at the St. Croix Office
- --Any other prepaid expenses, deposits or similar assets of the Company
relating to assets to be transferred to ECI under this Agreement, relating to
assets, liabilities, or operations of any of the Transferred Subsidiaries or
relating to Jeffrey J. Prosser of any of the person listed on Schedule 1.01A
hereof.
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SCHEDULE 2.05(D)
CERTAIN ASSUMED LIABILITIES
- --Banco Popular Indebtedness
- --Indebtedness relating to the AS400 Computer
- --Any other indebtedness of the Company that is secured by assets to be
transferred to ECI or assets of a Transferred Subsidiary
20
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SCHEDULE 5.02
EMPLOYEES TO BE TERMINATED
Pacita Donovan
21
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EXHIBIT A
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------------------------------------
REPURCHASE AND RECAPITALIZATION AGREEMENT
-----------------------------------------------
AMONG
ATLANTIC TELE-NETWORK, INC.,
CORNELIUS B. PRIOR, JR.,
1994 PRIOR CHARITABLE REMAINDER TRUST
AND
JEFFREY J. PROSSER
DATED AUGUST 11, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
REPURCHASE
<C> <S> <C>
Section 1.01. Purchase of Shares......................................... 1
Section 1.02. Sale of Shares............................................. 2
ARTICLE II
RECAPITALIZATION
Section 2.01. Issuance of Class A Common Stock........................... 2
Section 2.02. Issuance of Class B Common Stock........................... 2
ARTICLE III
CONDITIONS TO CLOSING
Section 3.01. Subscription Agreement Closing............................. 2
Section 3.02. Merger Agreement Closing................................... 2
Section 3.03. Performance................................................ 2
Section 3.04. Charter Amendment.......................................... 2
ARTICLE IV
CLOSING DATE; CLOSING
Section 4.01. Closing Date; Closing...................................... 3
Section 4.02. Further Assurances......................................... 3
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. Termination................................................ 3
Section 5.02. Entire Agreement........................................... 3
Section 5.03. Governing Law.............................................. 3
Section 5.04. Headings................................................... 4
Section 5.05. Counterparts............................................... 4
Section 5.06. Benefits................................................... 4
Section 5.07. Assignment................................................. 4
Section 5.08. Amendment and Waiver....................................... 4
Section 5.09. Notices.................................................... 4
Section 5.10. Best Efforts............................................... 5
Section 5.11. Tax Treatment.............................................. 5
EXHIBIT
Exhibit A-- Form of Charter Amendment
</TABLE>
i
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REPURCHASE AND RECAPITALIZATION AGREEMENT
THIS REPURCHASE AND RECAPITALIZATION AGREEMENT (this "Recapitalization
Agreement") is entered into as of the 11th day of August, 1997 by and among
Atlantic Tele-Network, Inc., a Delaware corporation (the "Company"), Cornelius
B. Prior, Jr. ("Prior"), individually and as Trustee of the 1994 PRIOR
CHARITABLE REMAINDER TRUST (the "Trust"), and Jeffrey J. Prosser ("Prosser").
WHEREAS, to eliminate corporate disputes and to maximize the value of the
Company for the benefit of the Company and its stockholders, the Company has
entered into a Principal Terms Agreement dated January 29, 1997 among the
Company, Prior and Prosser, which contemplates the separation of the
businesses and assets of the Company in the manner set forth herein and in the
Subscription Agreement (as defined below) and the Merger Agreement (as defined
below); and
WHEREAS, the Company and Emerging Communications, Inc., a Delaware
corporation ("ECI"), have entered into a Subscription Agreement of even date
herewith (the "Subscription Agreement"), pursuant to which in order to
accomplish such separation, subject to the terms and conditions set forth in
the Subscription Agreement, the Company has agreed to transfer to ECI all of
the capital stock of its wholly owned subsidiaries, Atlantic Tele-Network,
Co., a Virgin Islands corporation ("ATNCo."), and Atlantic Aircraft, Inc., a
Delaware corporation ("Aircraft Corp."), as well as certain other assets of
the Company as more fully described therein relating to businesses conducted
by ATNCo., its subsidiaries, Virgin Islands Telephone Corporation, a Virgin
Islands corporation, Vitelcom Cellular Inc., a Virgin Islands corporation, and
Vitelcom, Inc., a Virgin Islands corporation, and Aircraft Corp. in exchange
for 10,959,131 shares of common stock, par value $0.01 per share (the "ECI
Common Stock"), of ECI; and
WHEREAS, subject to the terms and conditions set forth herein, (a) the
Company desires to repurchase an aggregate of 765,562 shares of common stock,
par value $.01 per share (the "Company Common Stock"), of the Company owned by
Prior and the Trust, and (b) Prosser desires to exchange 3,325,000 shares of
Company Common Stock owned by Prosser and certain members of his family
(including shares which he holds under an option to purchase) for 3,325,000
shares of a new series of common stock of the Company to be designated Class A
Common Stock and Prior desires to exchange 2,927,038 shares of Company Common
Stock owned by Prior and certain members of his family for 2,927,038 shares of
a new series of common stock of the Company to be designated Class B Common
Stock; and
WHEREAS, the Company and ATN MergerCo., a Delaware corporation ("Merger
Sub"), have entered into an Agreement and Plan of Merger of even date herewith
(the "Merger Agreement"), pursuant to which, subject to the terms and
conditions contained therein, Merger Sub will merge with and into the Company,
with each share of Company Common Stock being converted into one share of ECI
Common Stock and 0.40 shares of Company Common Stock, the outstanding shares
of Class A Common Stock will be converted into an aggregate of 5,704,231
shares of ECI Common Stock and the outstanding shares of Class B Common Stock
will be converted into an aggregate of 2,807,040 shares of Company Common
Stock (the "Merger"); and
WHEREAS, the consummation of the Closing (as defined herein) is a condition
to the consummation of the Merger pursuant to the Merger Agreement;
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained and subject to the terms and conditions hereinafter
set forth, the parties hereto hereby agree as follows:
ARTICLE I
REPURCHASE
Section 1.01. Purchase of Shares. Subject to the terms and conditions
contained herein, the Company agrees to purchase at the Closing (as defined
herein) 416,998 shares of Company Common Stock owned by Prior (the "Prior
Repurchase Shares") at a purchase price of $22.7284 per share and 384,564
shares of Company Common Stock owned by the Trust (the "Trust Shares") at a
purchase price of $22.7284 per share.
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<PAGE>
Section 1.02. Sale of Shares. Subject to the terms and conditions contained
herein, (i) Prior agrees to sell and deliver to the Company at the Closing the
Prior Repurchase Shares for a purchase price of $22.7284 per share and (ii)
the Trust agrees to sell and deliver to the Company the Trust Shares for a
purchase price of $22.7284 per share.
ARTICLE II
RECAPITALIZATION
Section 2.01. Issuance of Class A Common Stock. (a) Subject to the terms and
conditions contained herein, the Company agrees to issue and deliver to
Prosser at the Closing 3,325,000 shares of the Company's Class A Common Stock,
par value $0.01 per share (the "Class A Common Stock"), to be authorized
pursuant to the Charter Amendment (as defined herein) in exchange for all of
the 3,325,000 shares of Company Common Stock owned by Prosser and certain
members of his family or as to which Prosser currently holds an option to
purchase (the "Prosser Shares").
(b) Subject to the terms and conditions contained herein, Prosser agrees to
deliver to the Company at the Closing the Prosser Shares in exchange for
3,325,000 shares of the Class A Common Stock.
Section 2.02. Issuance of Class B Common Stock. (a) Subject to the terms and
conditions contained herein, the Company agrees to issue and deliver to Prior
at the Closing 2,927,038 shares of the Company's Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock"), to be authorized pursuant
to the Charter Amendment in exchange for 2,927,038 shares of Company Common
Stock owned by Prior and certain members of his family (the "Prior Exchange
Shares").
(b) Subject to the terms and conditions contained herein, Prior agrees to
deliver to the Company at the Closing the Prior Exchange Shares in exchange
for 2,927,038 shares of the Class B Common Stock.
ARTICLE III
CONDITIONS TO CLOSING
The obligations of the parties to consummate the transactions to be
consummated by the parties at the Closing shall be subject to the satisfaction
of the following conditions on or prior to the Closing Date:
Section 3.01. Subscription Agreement Closing. Each of the conditions to the
closing under the Subscription Agreement (the "Subscription Agreement
Closing") shall have been satisfied or, with the consent of each of the
parties hereto, waived; and the Subscription Agreement Closing shall have been
consummated in accordance with the provisions of the Subscription Agreement.
Section 3.02. Merger Agreement Closing. Each of the conditions to the
Closing under the Merger Agreement (the "Merger Agreement Closing") shall have
been satisfied or with the consent of each of the parties hereto waived; and
all parties thereto shall appear ready, willing and able to consummate the
transactions therein provided to be consummated at the Merger Agreement
Closing.
Section 3.03. Performance. Each of the parties hereto shall have performed
and complied in all material respects with all obligations and conditions
required by this Recapitalization Agreement to be performed or complied with
by it at or prior to the Closing.
Section 3.04. Charter Amendment. The Company shall have adopted and filed
with the Secretary of State of Delaware a Restated Certificate of
Incorporation substantially in the form of Exhibit A attached hereto (the
"Charter Amendment").
2
<PAGE>
ARTICLE IV
CLOSING DATE; CLOSING
Section 4.01. Closing Date; Closing. The closing of the purchase and sale of
the Prior Repurchase Shares and Trust Shares and, immediately thereafter, the
closing of the exchange of the Prosser Shares for the Class A Common Stock and
the Prior Exchange Shares for the Class B Common Stock hereunder
(collectively, the "Closing") shall take place on the same day as the
Subscription Agreement Closing and the Merger Agreement Closing (and shall
occur after the Subscription Agreement Closing and prior to the Merger
Agreement Closing) and shall be held as soon as reasonably practicable after
satisfaction or waiver by the parties hereto of the conditions set forth in
Article VI hereof. The date on which the Closing occurs is referred to herein
as the "Closing Date". The Closing shall take place at the offices of Cahill
Gordon & Reindel, 80 Pine Street, New York, New York 10005. At the Closing,
(i) the Company shall pay by wire transfer of immediately available funds to
an account specified therefor by Prior the aggregate purchase price for the
Prior Repurchase Shares, (ii) the Company shall pay by wire transfer of
immediately available funds to an account specified therefor by the Trust the
aggregate purchase price for the Trust Shares, (iii) Prior shall deliver to
the Company the Prior Repurchase Shares duly endorsed in blank for transfer or
accompanied by a duly executed stock power assigning the Prior Repurchase
Shares in blank, (iv) the Trust shall deliver to the Company the Trust Shares
duly endorsed in blank for transfer or accompanied by a duly executed stock
power assigning the Trust Shares in blank, (v) the Company shall issue
3,325,000 shares of Class A Common Stock to Prosser registered in such names
and denominations as Prosser shall request, (vi) the Company shall issue
2,927,038 shares of Class B Common Stock to Prior registered in such names and
denominations as Prior shall request, (vii) Prosser shall deliver to the
Company the Prosser Shares duly endorsed in blank or accompanied by a duly
executed stock power assigning the Prosser Shares in blank and (viii) Prior
shall deliver to the Company the Prior Exchange Shares duly endorsed in blank
or accompanied by a duly executed stock power assigning the Prior Exchange
Shares in blank.
Section 4.02. Further Assurances. Each of the parties agrees that after the
Closing, upon reasonable request of the other party, it will do, execute,
deliver and acknowledge, and will cause to be done, executed, delivered and
acknowledged, all such further acts, deeds, certificates, assignments,
transfers, conveyances, powers of attorney and other documents as may be
reasonably required to consummate the transactions contemplated hereby. Each
of Prior, Prosser and the Trust agree to vote all shares of Company Common
Stock owned or controlled by them in favor of the Transactions at the Special
Meeting (as defined in the Merger Agreement).
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. Termination. This Recapitalization Agreement shall terminate
upon any termination of the Subscription Agreement or the Merger Agreement. In
addition, this Recapitalization Agreement may be terminated at any time prior
to the Closing by mutual written consent of each party hereto. In the event of
any such termination, no party shall have any liability of any kind to any
other party.
Section 5.02. Entire Agreement. This Recapitalization Agreement, together
with all other written agreements which may be entered into between the
parties in connection herewith and the transactions contemplated hereby and
all other documents and instruments delivered in connection herewith and
therewith and the transactions contemplated hereby and thereby, set forth the
full and complete understanding of the parties hereto with respect to the
transactions contemplated hereby.
Section 5.03. Governing Law. This Recapitalization Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without reference to the conflict of laws rules thereof.
3
<PAGE>
Section 5.04. Headings. The headings in this Recapitalization Agreement are
intended solely for convenience of reference and shall be given no effect in
the interpretation of this Recapitalization Agreement.
Section 5.05. Counterparts. This Recapitalization Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
Section 5.06. Benefits. This Recapitalization Agreement will inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns, and no other person will have any right or obligation
hereunder.
Section 5.07. Assignment. Neither this Recapitalization Agreement nor any
right hereunder may be assigned by the parties hereto without the prior
written consent of the other parties. Subject to the foregoing, this
Recapitalization Agreement shall be binding upon and inure to the benefit of
the successors, heirs, representatives and assigns of each party hereto.
Section 5.08. Amendment and Waiver. This Recapitalization Agreement may be
amended only by an instrument in writing signed on behalf of each of the
parties hereto. Any term, condition or provision of this Recapitalization
Agreement may be waived (if in writing) at any time by the party or each of
the parties entitled to the benefits thereof.
Section 5.09. Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered by hand, or when sent by telex or telecopier (with receipt
confirmed) or by registered mail, return receipt requested, addressed as
follows (or to such other address as a party may designate by notice to the
other):
(a)If to the Company or Prior:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
(b)If to Prosser:
c/o Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
4
<PAGE>
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
(c)If to the Trust:
c/o Cornelius B. Prior
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
Section 5.10. Best Efforts. Each of the parties hereto shall use his or its
best efforts to cause the Transactions to be consummated. Without limiting the
generality of the foregoing, (i) Prior, individually and as trustee of the
Trust, and Prosser agree to vote all of their shares of Company Common Stock
in favor of the approval of the Transactions and the adoption of the Merger
Agreement and the Charter Amendment, (ii) each of the parties hereto shall
execute all contracts, documents and instruments, the execution of which is
contemplated as a condition to closing under this Recapitalization Agreement,
the Subscription Agreement or the Merger Agreement, (iii) each of the parties
shall promptly, at the request of counsel to the Company or counsel to ECI,
supply such counsel with letters of representation reasonable under the
circumstances as to facts or statements of intention represented to the
Internal Revenue Service in connection with the Company's application for the
Tax Ruling (as defined in the Subscription Agreement) and (iv) each of the
parties shall take all steps within his or its control to cause the other
conditions to closing of the Transactions to be consummated and shall
generally use his or its best efforts to cause the Transactions to be
consummated.
Section 5.11. Tax Treatment. The Company and Prior, individually and as
trustee of the Trust, agree to report for tax purposes the purchase of the
Prior Repurchase Shares and the Trust Shares pursuant to Article I hereof as
distributions of property to which Section 301 of the Internal Revenue Code of
1986, as amended, applies.
5
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Recapitalization Agreement to be duly executed, all as of the date first
written above.
ATLANTIC TELE-NETWORK, INC.
By: /s/ Cornelius B. Prior
__________________________________
Name: Cornelius B. Prior
Title: Co-Chief Executive Officer
By: /s/ Jeffrey J. Prosser
__________________________________
Name: Jeffrey J. Prosser
Title: Co-Chief Executive Officer
1994 PRIOR CHARITABLE REMAINDER
TRUST
By: /s/ Cornelius B. Prior
__________________________________
Name: Cornelius B. Prior
Title: Trustee
/s/ Cornelius B. Prior
___________________________________
Cornelius B. Prior
/s/ Jeffrey J. Prosser
___________________________________
Jeffrey J. Prosser
6
<PAGE>
EXHIBIT A TO
REPURCHASE AND
RECAPITALIZATION
AGREEMENT
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ATLANTIC TELE-NETWORK, INC.
ATLANTIC TELE-NETWORK, INC., a corporation organized and existing under the
laws of the State of Delaware, does hereby certify as follows:
FIRST: The name of the Corporation is ATLANTIC TELE-NETWORK, INC. (the
"Corporation"). The original Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on August 4, 1989.
SECOND: This Amended and Restated Certificate of Incorporation has been
duly adopted pursuant to Section 245 of the General Corporation Law of the
State of Delaware (the "GCL"). The Corporation certifies that amendments
effected by this Amended and Restated Certificate of Incorporation have
been adopted in accordance with Section 242 of the GCL.
THIRD: The text of the Corporation's Certificate of Incorporation as
heretofore amended or supplemented is hereby further amended and restated
to read in its entirety as follows:
ARTICLE ONE
NAME
The name of the Corporation is Atlantic Tele-Network, Inc.
ARTICLE TWO
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE THREE
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE FOUR
CAPITAL STOCK
1. Authorized Capital Stock. The total number of shares of all classes of
capital stock which the Corporation shall have the authority to issue is
36,252,038 shares divided into two classes of which
(i)10,000,000 shares, par value $.01 per share, shall be designated
Preferred Stock,
(ii)20,000,000 shares, par value $.01 per share, shall be designated Common
Stock,
(iii)3,325,000 shares, par value $.01 per share, shall be designated Class
A Common Stock, and
(iv)2,927,038 shares, par value $.01 per share, shall be designated Class B
Common Stock.
<PAGE>
2. Terms of the Preferred Stock
2.1 Issuance. The Board of Directors is expressly authorized, subject to
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each such series, and to fix the designations, powers,
preferences, and rights of the shares of each such series, and any
qualifications, limitations, or restrictions thereof.
The authority of the Board with respect to each series shall include, but not
be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates,
and whether they shall be payable in preference to, or in another
relation to, the dividends payable to any other class or classes or
series of stock;
(c) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion or exchange privileges, and,
if so, the terms and conditions of such conversion or exchange,
including provision for adjustment of the conversion or exchange rate
in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the manner
of selecting shares for redemption if less than all shares are to be
redeemed, the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
(f) Whether that series shall be entitled to the benefit of a sinking fund
to be applied to the purchase or redemption of shares of that series,
and, if so, the terms and amounts of such sinking fund;
(g) The right of the shares of that series to the benefit of conditions and
restrictions upon the creation of indebtedness of the Corporation or
any subsidiary, upon the issue of any additional stock (including
additional shares of such series or of any other series) and upon the
payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by the Corporation or any
subsidiary of any outstanding stock of the Corporation;
(h) The right of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
and whether such rights shall be in preference to, or in another
relation to, the comparable rights of any other class or classes or
series of stock; and
(i) Any other power, preference or relative, participating, optional or
other special rights, qualifications, limitations or restrictions of
that series.
3. Terms of the Common Stock
3.1 Dividends. Subject to the preferential rights, if any, of the Preferred
Stock, the holders of shares of Common Stock, Class A Common Stock and Class B
Common Stock shall be entitled to receive, when and if declared by the Board
of Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in property, or in shares of the
Corporation's capital stock.
3.2 Voting Rights. Subject to the preferential rights, if any, of the
Preferred Stock and except as otherwise provided by applicable law, at every
annual or special meeting of stockholders of the Corporation, every holder of
Common Stock, Class A Common Stock and Class B Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock, Class A
Common Stock and Class B Common Stock standing in his name on the books of the
Corporation.
2
<PAGE>
3.3 Liquidation, Dissolution, or Winding Up. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the affairs of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and of the preferential amounts, if any, to
which the holders of Preferred Stock shall be entitled, the holders of all
outstanding shares of Common Stock, Class A Common Stock and Class B Common
Stock shall be entitled to share ratably in the remaining net assets of the
Corporation.
3.4 Rights of Class A Common Stock and Class B Common Stock. All rights of
the Class A Common Stock and Class B Common Stock shall be identical to the
rights of the Common Stock, except in a merger, consolidation or sale of
assets of the Corporation the Class A Common Stock and the Class B Common
Stock shall have the right to receive separate and distinct consideration from
the Common Stock as determined by the Board of Directors.
ARTICLE FIVE
DIRECTORS
1. Management. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors of the Corporation.
2. By-Laws. The board of directors is expressly authorized to adopt, amend,
or repeal the by-laws of the Corporation.
3. No Ballot. Elections of directors need not be by written ballot unless
the by-laws of the Corporation shall otherwise provide.
4. Limitation of Liability. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director; provided, however, that the
foregoing shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the General Corporation Law of the State of Delaware is hereafter amended to
permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware as so amended. Any repeal or
modification of this Article FIVE shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE SIX
EXISTENCE
The Corporation is to have perpetual existence.
ARTICLE SEVEN
COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions
of Section 291 of Title 8 of the Delaware Code or on the application of
trustees
3
<PAGE>
in dissolution or of any receiver or receivers appointed for this Corporation
under the provisions of Section 279 of Title 8 of the Delaware Code order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned
in such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which said application has been made, be binding on all the
creditors or class of creditors, and/or on all of the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE EIGHT
AMENDMENT
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, Atlantic Tele-Network, Inc. has caused this Amended and
restated Certificate of Incorporation to be signed and attested by its duly
authorized officers, this day of October, 1997.
Atlantic Tele-Network, Inc.
By: _________________________________
Name:
Title:
Attest:
By: ______________________________________
Name:
Title:
4
<PAGE>
EXHIBIT B
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------------------------------------
AGREEMENT AND PLAN OF MERGER
--------------------------------------
BETWEEN
ATLANTIC TELE-NETWORK, INC.
AND
ATN MERGERCO.
DATED AS OF AUGUST 11, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
THE MERGER
<C> <S> <C>
Section 1.01. The Merger................................................ 1
Section 1.02. Effective Time............................................ 2
Certificate of Incorporation and By-Laws of Surviving
Section 1.03. Corporation.............................................. 2
Section 1.04. Directors and Officers of Surviving Corporation........... 2
Section 1.05. Stockholders' Meeting..................................... 2
Section 1.06. Filing of Certificate of Merger........................... 2
Section 1.07. Further Assurances........................................ 2
ARTICLE II
CONVERSION OF SHARES
Section 2.01. Shares.................................................... 2
Section 2.02. Exchange of Shares........................................ 3
Section 2.03. Dividends, Transfer Taxes................................. 3
Section 2.04. No Fractional Shares...................................... 3
ARTICLE III
CONDITIONS TO CLOSING
Section 3.01. Stockholder Approval...................................... 4
Section 3.02. Closings.................................................. 4
Section 3.03. Performance............................................... 4
ARTICLE IV
CLOSING DATE; CLOSING
Section 4.01. Closing Date; Closing..................................... 4
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. Termination............................................... 5
Section 5.02. Entire Agreement.......................................... 5
Section 5.03. Governing Law............................................. 5
Section 5.04. Headings.................................................. 5
Section 5.05. Counterparts.............................................. 5
Section 5.06. Benefits.................................................. 5
Section 5.07. Assignment................................................ 5
Section 5.08. Amendment and Waiver...................................... 5
Section 5.09. Notices................................................... 5
</TABLE>
i
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") is entered into
as of the 11th day of August, 1997 by and between Atlantic Tele-Network, Inc.,
a Delaware corporation (the "Company"), and ATN MergerCo., a Delaware
corporation ("Newco").
WHEREAS, to eliminate corporate disputes and to maximize the value of the
Company for the benefit of the Company and its stockholders, the Company has
entered into a Principal Terms Agreement dated January 29, 1997 among the
Company and its co-chief executive officers and principal stockholders,
Cornelius B. Prior, Jr. ("Prior") and Jeffrey J. Prosser ("Prosser"), which
contemplates the separation of the businesses and assets of the Company in the
manner set forth herein and in the Recapitalization Agreement (as defined
below) and the Subscription Agreement (as defined below); and
WHEREAS, in order to accomplish such separation, the Company and Emerging
Communications, Inc., a Delaware corporation ("ECI"), have entered into a
Subscription Agreement of even date herewith (the "Subscription Agreement"),
pursuant to which, subject to the terms and conditions set forth therein, the
Company has agreed to transfer to ECI all of the capital stock of its wholly
owned subsidiaries, Atlantic Tele-Network, Co., a Virgin Islands corporation
("ATNCo."), and Atlantic Aircraft, Inc., a Delaware corporation, as well as
certain other assets of the Company as more fully described therein relating
to businesses conducted by ATNCo., its subsidiaries, Virgin Islands Telephone
Corporation, a Virgin Islands corporation ("VITELCO"), Vitelcom Cellular Inc.,
a Virgin Islands corporation, and Vitelcom, Inc., a Virgin Islands
corporation, and Aircraft Corp. in exchange for 10,959,131 shares of common
stock, par value $0.01 per share (the "ECI Common Stock"), of ECI; and
WHEREAS, the Company, Prior, Prosser and the 1994 Prior Charitable Remainder
Trust have entered into a Recapitalization Agreement dated of even date
herewith (the "Recapitalization Agreement"), pursuant to which, subject to the
terms and conditions set forth therein, (a) the Company has agreed to
repurchase an aggregate of 765,852 shares of common stock, par value $.01 per
share (the "Company Common Stock"), of the Company owned by Prior and the
Trust, and (b) Prosser has agreed to exchange 3,325,000 shares of Company
Common Stock owned by Prosser and certain members of his family for 3,325,000
shares of a new class of common stock, par value $0.01 per share, of the
Company denominated Class A Common Stock ("Class A Common Stock") and Prior
has agreed to exchange 2,927,038 shares of Company Common Stock owned by Prior
for 2,927,038 shares of a new class of common stock, par value $0.01 per
share, of the Company denominated Class B Common Stock (the "Class B Common
Stock" and, together with the Company Common Stock and the Class A Common
Stock, the "Common Stock"); and
WHEREAS, Newco desires to merge with the Company and the Company desires to
merge with Newco, all upon the terms and subject to the conditions of this
Merger Agreement.
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained and subject to the terms and conditions hereinafter
set forth, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.01. The Merger. (a) In accordance with the provisions of this
Merger Agreement and the General Corporation Law of the State of Delaware (the
"Delaware Act"), at the Effective Time (as hereinafter defined), Newco shall
be merged (the "Merger") with and into the Company, and the Company shall be
the surviving corporation (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. The name of the Surviving Corporation shall be the same as
that of the Company. At the Effective Time, the separate existence of Newco
shall cease.
1
<PAGE>
(b) The Merger shall have the effects on Newco and the Company as
constituent corporations of the Merger as provided under the Delaware Act.
Section 1.02. Effective Time. The Merger shall become effective at the time
of filing of, or at such later time specified in, a certificate of merger, in
the form required by and executed in accordance with the Delaware Act, with
the Secretary of State of the State of Delaware in accordance with the
provisions of (S) 251 of the Delaware Act (the "Certificate of Merger"). The
date and time when the Merger shall become effective is herein referred to as
the "Effective Time."
Section 1.03. Certificate of Incorporation and By-Laws of Surviving
Corporation. At the Effective Time, the Certificate of Incorporation shall be
amended and restated in its entirety in the form set forth in Exhibit 1.03
hereto and the Certificate of Incorporation as so amended and the By-Laws of
the Company, as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation and By-Laws of the Surviving Corporation
until thereafter amended as provided by law.
Section 1.04. Directors and Officers of Surviving Corporation. The directors
of Newco immediately prior to the Effective Time will be, from and after the
Effective Time, the directors of the Surviving Corporation, and the officers
of the Company immediately prior to the Effective Time will be, from and after
the Effective Time, the officers of the Surviving Corporation, in each case
until their successors are elected and qualified.
Section 1.05. Stockholders' Meeting. The Company will take all action
necessary in accordance with applicable law and its Restated Certificate of
Incorporation and By-Laws to convene a special meeting of its stockholders
(the "Special Meeting") as soon as practicable to consider and vote upon the
approval and adoption of this Merger Agreement and the other components of the
Transactions (as defined in the Subscription Agreement). The Company, through
its Board of Directors, shall recommend to its stockholders approval and
adoption of this Merger Agreement (which recommendation shall be contained in
the related proxy statement) and shall use all commercially reasonable efforts
to solicit from its stockholders proxies in favor of approval and adoption of
this Merger Agreement and the other components of the Transactions.
Section 1.06. Filing of Certificate of Merger. At the Closing (as
hereinafter defined), Newco and the Company shall cause a Certificate of
Merger to be executed and filed with the Secretary of State of the State of
Delaware as provided in (S) 251 of the Delaware Act, and shall take any and
all other lawful actions and do any and all other lawful things to cause the
Merger to become effective.
Section 1.07. Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the constituent corporations
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger or otherwise to carry out this Merger Agreement,
the officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the constituent
corporations or otherwise, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the
constituent corporations or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out this Merger Agreement.
ARTICLE II
CONVERSION OF SHARES
Section 2.01. Shares. (a) Each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive (i) 0.40 shares of Common Stock, par value $0.01 per
share, of the Surviving Corporation ("Surviving Corporation Common Stock") and
(ii) one share of ECI Common Stock.
2
<PAGE>
(b) The outstanding shares of Class A Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into the
right to receive 5,704,231 shares of ECI Common Stock in the aggregate.
(c) The outstanding shares of Class B Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive 2,807,040 shares of Surviving Corporation Common Stock in the
aggregate.
(d) Each share of Common Stock, par value $0.01 per share, of Newco shall,
by virtue of the Merger and without any action on the part of any holder
thereof, be cancelled and no consideration shall be issued in respect thereof.
(e) All shares of Class A Common Stock, Class B Common Stock, Company Common
Stock and all shares of common stock, par value $0.01 per share, of Newco, by
virtue of the Merger and without any action on the part of holders thereof,
shall no longer be outstanding and shall be canceled and retired and cease to
exist. Each holder of Company Common Stock, Class A Common Stock or Class B
Common Stock immediately prior to the Effective Time shall, after the Merger,
cease to have any rights with respect such Company Common Stock, Class A
Common Stock or Class B Common Stock except the right to receive the
applicable Merger consideration set forth in Section 2.01 upon surrender of
certificates therefor in accordance with Section 2.02.
Section 2.02. Exchange of Shares. Prior to the Effective Time, the Company
shall select The Bank of New York or such other person or persons reasonably
satisfactory to the Company to act as Exchange Agent for the Merger (the
"Exchange Agent"). As soon as practicable after the Effective Time, the
Company shall make available, and each holder of certificates formerly
representing Company Common Stock, Class A Common Stock and Class B Common
Stock (each, a "Company Holder") will be entitled to receive, upon surrender
to the Exchange Agent of one or more certificates representing such stock
("Certificates") for cancellation, certificates representing the number of
shares of Surviving Corporation Common Stock and ECI Common Stock into which
such shares are converted in the Merger and cash in consideration of
fractional shares as provided in Section 2.04. Such shares of Surviving
Corporation Common Stock and ECI Common Stock issued in the Merger shall each
be deemed, for all purposes including the right to receive notices of and to
vote at meetings of stockholders and the right to receive dividends, if any,
to have been issued at the Effective Time.
Section 2.03. Dividends, Transfer Taxes. Notwithstanding Section 2.02
hereof, no dividends or other distributions that are declared or made on
Surviving Corporation Common Stock or ECI Common Stock will be paid to persons
entitled to received certificates representing Surviving Corporation Common
Stock or ECI Common Stock pursuant to this Merger Agreement until such persons
surrender their Certificates formerly representing Company Common Stock. Upon
such surrender, there shall be paid to the person in whose name the
certificates representing such Surviving Corporation Common Stock or ECI
Common Stock shall be issued any dividends or other distributions which shall
have become payable with respect to such stock in respect of a record date
after the Effective Time. In no event shall the persons entitled to receive
such dividends be entitled to receive interest on such dividends. In the event
that any certificates for any shares of Surviving Corporation Common Stock are
to be issued in a name other than that in which the Certificates formerly
representing shares of Company Common Stock surrendered in exchange therefor
are registered, it shall be a condition of such exchange that the person
requesting such exchange shall pay to the Exchange Agent any transfer or other
taxes required by reason of the issuance of certificates for such shares of
Surviving corporation Common Stock or ECI Common Stock or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a Company Holder for any shares of Surviving
Corporation Common Stock, ECI Common Stock or dividends thereon delivered to a
public official pursuant to any applicable escheat or similar abandoned
property laws.
Section 2.04. No Fractional Shares. Notwithstanding anything herein to the
contrary, no certificates or scrip representing less than one full share of
Surviving Corporation Common Stock or ECI Common Stock shall
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be issued upon the surrender for exchange of Certificates representing Company
Common Stock, Class A Common Stock or Class B Common Stock pursuant to Section
2.02. In lieu of any such fractional share, each Company Holder who would
otherwise have been entitled to a fraction of a share of Surviving Corporation
Common Stock or ECI Common Stock pursuant to Section 2.01 shall be paid upon
surrender of Certificates for exchange pursuant to Section 2.02 cash (without
interest) in an amount equal to such holder's proportionate interest in the
net proceeds from the sale or sales in the open market by the Exchange Agent,
on behalf of all such holders, of the Excess Shares (as defined below). As
soon as practicable following the Effective Date, the Exchange Agent shall
determine the excess of (i) the number of full shares of Surviving Corporation
Common Stock and ECI Common Stock delivered to the Exchange Agent by the
Surviving Corporation over (ii) the aggregate number of full shares of
Surviving Corporation Common Stock and ECI Common Stock to be distributed to
holders of Company Common Stock, Class A Common Stock and Class B Common Stock
(such excess being herein called the "Excess Shares"), and the Exchange Agent,
as agent for each of the former Company Holders, shall sell the Excess Shares
at the prevailing prices on the American Stock Exchange. The sale of the
Excess Shares by the Exchange Agent shall be executed on the American Stock
Exchange through one or more member firms of the American Stock Exchange and
shall be executed in round lots to the extent practicable. The Surviving
Corporation shall pay all commissions, transfer taxes and other out-of-pocket
transaction costs, including the expenses and compensation of the Exchange
Agent, incurred in connection with such sale of Excess Shares. Until the net
proceeds of such sale have been distributed to the former Company Holders, the
Exchange Agent will hold such proceeds in trust for each of such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former Company Holders
in lieu of any fractional interests, the Exchange Agent shall make available
in accordance with this Merger Agreement such amount to such former
stockholders.
ARTICLE III
CONDITIONS TO CLOSING
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 3.01. Stockholder Approval. This Merger Agreement and the
Transactions (as defined in the Subscription Agreement) shall have been
approved and adopted by the holders of a majority of the outstanding shares of
Company Common Stock.
Section 3.02. Closings. Each of the conditions to the closing under the
Subscription Agreement (the "Subscription Agreement Closing") and the closing
under the Recapitalization Agreement (the "Recapitalization Agreement
Closing") shall have been satisfied or, with the consent of each party hereto,
waived; the Subscription Agreement Closing shall have been consummated in
accordance with the provisions of the Subscription Agreement; and the
Recapitalization Agreement Closing shall have been consummated in accordance
with the provisions of the Recapitalization Agreement.
Section 3.03. Performance. Each of the parties hereto shall have performed
and complied in all material respects with all obligations and conditions
required by this Merger Agreement to be performed or complied with by it at or
prior to the Closing.
ARTICLE IV
CLOSING DATE; CLOSING
Section 4.01. Closing Date; Closing. The closing of the Merger (the
"Closing") shall take place on the same day as the Subscription Agreement
Closing and the Recapitalization Agreement Closing and shall be held
immediately after consummation of such closings as soon as practicable after
satisfaction or waiver by the
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parties hereto of the conditions set forth in Article III hereof. The date on
which the Closing occurs is referred to herein as the "Closing Date." The
Closing shall take place at the offices of Cahill Gordon & Reindel, 80 Pine
Street, New York, New York 10005. At the Closing, the Company and Newco shall
cause to be executed and filed with the Secretary of State of Delaware the
Certificate of Merger in accordance with the applicable provisions of the
Delaware Act and shall take any and all other lawful actions and do any and
all other lawful things necessary to cause the Merger to become effective.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. Termination. This Merger Agreement shall terminate upon any
termination of the Subscription Agreement or the Recapitalization Agreement.
In addition, this Merger Agreement may be terminated, notwithstanding
stockholder approval hereof, at any time prior to the Effective Time by the
Board of Directors of the Company and the Board of Directors of Newco without
the authorization or consent of the Company's or Newco's stockholders. In the
event of any such termination, neither party shall have any liability of any
kind to the other party.
Section 5.02. Entire Agreement. This Merger Agreement, together with all
other written agreements which may be entered into between the parties in
connection herewith and the transactions contemplated hereby and all other
documents and instruments delivered in connection herewith and therewith and
the transactions contemplated hereby and thereby, set forth the full and
complete understanding of the parties hereto with respect to the transactions
contemplated hereby.
Section 5.03. Governing Law. Except where the laws of the State of Delaware
are by their terms applicable, this Merger Agreement shall be governed by and
construed in accordance with the laws of the State of New York without
reference to the conflict of laws rules thereof.
Section 5.04. Headings. The headings in this Merger Agreement are intended
solely for convenience of reference and shall be given no effect in the
interpretation of this Merger Agreement.
Section 5.05. Counterparts. This Merger Agreement may be executed in two
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
Section 5.06. Benefits. This Merger Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns, and no other person will have any right or obligation hereunder.
Section 5.07. Assignment. Neither this Merger Agreement nor any right
hereunder may be assigned by the parties hereto without the prior written
consent of the other party. Subject to the foregoing, this Merger Agreement
shall be binding upon and inure to the benefit of the successors, heirs,
representatives and assigns of each party hereto.
Section 5.08. Amendment and Waiver. This Merger Agreement may be amended
only by an instrument in writing signed on behalf of each of the parties
hereto. Subject to the Delaware Act any term, condition or provision of this
Merger Agreement may be waived (if in writing) at any time by the party or
each of the parties entitled to the benefits thereof.
Section 5.09. Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered by hand, or when sent by telex or telecopier (with
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<PAGE>
receipt confirmed) or by registered mail, return receipt requested, addressed
as follows (or to such other address as a party may designate by notice to the
other):
(a)If to the Company or Newco:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
and
Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 00801-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
and
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
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<PAGE>
IN WITNESS WHEREOF, each of the Company and Newco has caused this Merger
Agreement to be executed on the date first written above.
Atlantic Tele-Network, Inc.
By: /s/ Cornelius B. Prior
__________________________________
Name: Cornelius B. Prior
Title: Co-Chief Executive Officer
By: /s/ Jeffrey J. Prosser
__________________________________
Name: Jeffrey J. Prosser
Title: Co-Chief Executive Officer
ATN MergerCo.
By: /s/ Cornelius B. Prior
__________________________________
Name: Cornelius B. Prior
Title: President
7
<PAGE>
EXHIBIT 1.03 TO AGREEMENT
AND PLAN OF MERGER
RESTATED CERTIFICATE OF INCORPORATION
OF
ATLANTIC TELE-NETWORK, INC.
ARTICLE ONE
NAME
The name of the Corporation is Atlantic Tele-Network, Inc.
ARTICLE TWO
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE THREE
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
the State of Delaware.
ARTICLE FOUR
CAPITAL STOCK
1. Authorized Capital Stock. The total number of shares of all classes of
capital stock which the Corporation shall have the authority to issue is
30,000,000 shares divided into two classes of which 10,000,000 shares, par
value $.01 per share, shall be designated Preferred Stock and 20,000,000
shares, par value $.01 per share, shall be designated Common Stock.
2. Terms of the Preferred Stock
2.1 Issuance. The Board of Directors is expressly authorized, subject to
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each such series, and to fix the designations, powers,
preferences, and rights of the shares of each such series, and any
qualifications, limitations, or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate, if any, on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates,
and whether they shall be payable in preference to, or in another
relation to, the dividends payable to any other class or classes or
series of stock;
(c) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
<PAGE>
(d) Whether that series shall have conversion or exchange privileges, and,
if so, the terms and conditions of such conversion or exchange,
including provision for adjustment of the conversion or exchange rate
in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the manner
of selecting shares for redemption if less than all shares are to be
redeemed, the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates;
(f) Whether that series shall be entitled to the benefit of a sinking fund
to be applied to the purchase or redemption of shares of that series,
and, if so, the terms and amounts of such sinking fund;
(g) The right of the shares of that series to the benefit of conditions and
restrictions upon the creation of indebtedness of the Corporation or
any subsidiary, upon the issue of any additional stock (including
additional shares of such series or of any other series) and upon the
payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by the Corporation or any
subsidiary of any outstanding stock of the Corporation;
(h) The right of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
and whether such rights shall be in preference to, or in another
relation to, the comparable rights of any other class or classes or
series of stock; and
(i) Any other power, preference or relative, participating, optional or
other special rights, qualifications, limitations or restrictions of
that series.
3. Terms of the Common Stock
3.1 Dividends. Subject to the preferential rights, if any, of the Preferred
Stock, the holders of shares of Common Stock shall be entitled to receive,
when and if declared by the Board of Directors, out of the assets of the
Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of the Corporation's capital stock.
3.2 Voting Rights. Subject to the preferential rights, if any, of the
Preferred Stock and except as otherwise provided by applicable law, at every
annual or special meeting of stockholders of the Corporation, every holder of
Common Stock shall be entitled to one vote, in person or by proxy, for each
share of Common Stock standing in his name on the books of the Corporation.
3.3 Liquidation, Dissolution, or Winding Up. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the affairs of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and of the preferential amounts, if any, to
which the holders of Preferred Stock shall be entitled, the holders of all
outstanding shares of Common Stock shall be entitled to share ratably in the
remaining net assets of the Corporation.
ARTICLE FIVE
DIRECTORS
1. Management. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors of the Corporation.
2. By-Laws. The board of directors is expressly authorized to adopt, amend,
or repeal the by-laws of the Corporation.
3. No Ballot. Elections of directors need not be by written ballot unless
the by-laws of the Corporation shall otherwise provide.
2
<PAGE>
4. Limitation of Liability. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director; provided, however, that the
foregoing shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the General Corporation Law of the State of Delaware is hereafter amended to
permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware as so amended. Any repeal or
modification of this Article FIVE shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE SIX
EXISTENCE
The Corporation is to have perpetual existence.
ARTICLE SEVEN
COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions
of Section 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of this Corporation, as the case may
be, and also on this Corporation.
ARTICLE EIGHT
AMENDMENT
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
3
<PAGE>
EXHIBIT C
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
---------------------------------
TECHNICAL ASSISTANCE AGREEMENT
---------------------------------
AMONG
ATLANTIC TELE-NETWORK, INC.,
ATLANTIC TELE-NETWORK CO.,
VIRGIN ISLANDS TELEPHONE CORPORATION
AND
VITELCOM CELLULAR INC.
DATED [ ], 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
SERVICES
<C> <S> <C>
Section 1.01. Services to be Provided.................................... 1
Section 1.02. Payment for Services....................................... 1
Section 1.03. Requests for Services...................................... 2
ARTICLE II
CERTAIN AGREEMENTS
Section 2.01. Advisory Contract.......................................... 2
Section 2.02. Indemnity.................................................. 2
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.01. Termination................................................ 2
Section 3.02. Entire Agreement........................................... 3
Section 3.03. Governing Law.............................................. 3
Section 3.04. Headings................................................... 3
Section 3.05. Counterparts............................................... 3
Section 3.06. Benefits................................................... 3
Section 3.07. Assignment................................................. 3
Section 3.08. Amendment and Waiver....................................... 3
Section 3.09. Notices.................................................... 3
EXHIBIT A Advisory Contract
</TABLE>
i
<PAGE>
TECHNICAL ASSISTANCE AGREEMENT
THIS TECHNICAL ASSISTANCE AGREEMENT (this "Technical Assistance Agreement")
is entered into as of the [ ] day of [ ], 1997 by and among ATLANTIC
TELE-NETWORK, INC., a Delaware corporation (the "Company"), ATLANTIC TELE-
NETWORK CO., a U.S. Virgin Islands corporation ("ATNCo."), VIRGIN ISLANDS
TELEPHONE CORPORATION, a U.S. Virgin Islands corporation ("VITELCO"), and
VITELCOM CELLULAR INC., a U.S. Virgin Islands corporation ("VCI").
WHEREAS, pursuant to an agreement between the Company and Guyana Telephone
and Telegraph Company Limited ("GTT"), dated as of January 28, 1991 (the
"Advisory Contract"), a copy of which is attached as Exhibit A hereto, the
Company has the continuing obligation to provide technical and professional
service, advice and assistance to GTT in the operation by GTT of its telephone
business, which services and assistance will be conducive to the economical
and efficient development and operation of GTT's telephone system and will
enhance its ability to provide dependable, state-of-art telephone service to
its subscribers;
WHEREAS, ATNCo., VITELCO and VCI have personnel at their disposal who are
trained and experienced in the telecommunications field and who are familiar
with the economical and efficient organization, development and operation of
telecommunications systems and services and have extensive experience in
finance, law, accounting, regulatory matters and the development of
communications apparatus, equipment and services and the rapidly changing
technological and regulatory environment affecting the telecommunications
industry, and the Company has from time to time in the past called upon ATNCo,
VITELCO and/or VCI to assist the Company in providing services and advice to
GTT pursuant to the Advisory Contract; and
WHEREAS, this Technical Assistance Agreement is being entered into in
connection with and in consideration of the transfer by the Company to
Emerging Communications, Inc., pursuant to the Subscription Agreement dated
August 11, 1997 between them, of all of the outstanding capital stock of
ATNCo., which transfer will provide significant benefits to ATNCo., VITELCO
and VCI by resolving certain management problems which have heretofore
affected such corporations.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants herein contained and subject to the terms and conditions hereinafter
set forth, the parties hereto hereby agree as follows:
ARTICLE I
SERVICES
Section 1.01. Services to be Provided. Subject to the terms and conditions
of this Technical Services Agreement, each of ATNCo., VITELCO and VCI agrees
to make available its employees to the Company at its request from time to
time during the term of this Agreement to assist and support the Company in
carrying out its obligations under the Advisory Contract. Such support and
assistance shall include performing services at the premises of ATNCo.,
VITELCO, VCI, the Company or GTT or their respective affiliates. ATNCo,
VITELCO or VCI, as the case may be, shall determine (in consultation with the
Company) which of its employees will perform any services requested hereunder.
Notwithstanding anything contained in this Technical Services Agreement to the
contrary, (a) none of ATNCo., VITELCO or VCI shall be required to make
available to the Company pursuant to this Technical Assistance Agreement at
any one time more than the greater of 3% of its employees or three employees
in the aggregate for all of them, (b) no employee of ATNCo., VITELCO or VCI
shall be required to be made available to the Company pursuant to this
Technical Assistance Agreement for a period of greater than 20 hours during
any calendar month and (c) none of ATNCo., VITELCO or VCI shall be required to
make available to the Company any employee to the extent that doing so would
interfere in any material respect with the performance of such employee's
duties to ATNCo., VITELCO or VCI, as the case may be, or otherwise cause a
burden to ATNCo., VITELCO or VCI, as the case may be.
Section 1.02. Payment for Services. The Company agrees to reimburse ATNCo.,
VITELCO and VCI, on a monthly basis, (a) for the services of each employee of
ATNCo., VITELCO or VCI, as the case may be,
1
<PAGE>
who provides services to the Company hereunder during such month, an amount
equal to the product of (i) two times the cost to ATNCo., VITELCO or VCI, as
the case may be, of the salary, wages and benefits of such employee for such
month and (ii) a fraction, the numerator of which is the number of hours such
employee provided services to the Company hereunder and the denominator of
which is the product of (x) eight and (y) the number of days during such month
when ATNCo., VITELCO or VCI, as the case may be, was open for business and (b)
for 100% of all "out-of-pocket expenses," including travel and lodging of any
employee, incurred by ATNCo., VITELCO or VCI, as the case may be, in
performing its obligations hereunder. Payments by the Company pursuant to this
Section 1.02 shall be made within ten days of receipt of an invoice from
ATNCo., VITELCO or VCI, as the case may be, showing in reasonable detail the
amounts due hereunder with respect to any month.
Section 1.03. Requests for Services. ATNCo., VITELCO and VCI shall have no
obligation to perform any services hereunder except such as may be requested
of them by the Company on reasonable notice to them, and they shall not be
entitled to any payments under Section 1.02 from the Company except for
services requested of them by the Company.
ARTICLE II
CERTAIN AGREEMENTS
Section 2.01. Advisory Contract. The Company shall not, without the prior
written consent of each of ATNCo., VITELCO and VCI (which consents shall not
be unreasonably withheld or delayed), enter into any amendment, modification,
waiver, renewal or replacement of the Advisory Contract.
Section 2.02. Indemnity. The Company shall indemnify and hold harmless each
of ATNCo., VITELCO and VCI, each of their respective affiliates and each of
their respective officers, directors, employees, agents and controlling
persons (each an "Indemnified Person") from and against any and all losses,
claims, damages, liabilities and expenses, joint or several, to which any such
Indemnified Person may become subject arising out of or in connection with
this Technical Services Agreement and the services provided hereunder, or any
claim, litigation, investigation or proceedings relating to the foregoing
regardless of whether any of such Indemnified Persons is a party thereto, and
to reimburse such Indemnified Persons for any legal or other out-of-pocket
expenses as they are incurred in connection with investigating or defending
any of the foregoing. The indemnity obligations of the Company under this
Section 2.02 shall be in addition to any liability which the Company may
otherwise have to an Indemnified Party.
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.01. Termination. This Technical Services Agreement (other than the
provisions of Sections 1.02, 2.02 and 2.03 which shall survive any
termination) (a) may be terminated (i) by the Company at any time upon written
notice to each of the other parties hereto or (ii) by ATNCo., VITELCO or VCI
upon written notice to the Company if the Company shall have breached or
violated any of the terms or provisions of this Technical Services Agreement
and (b) shall automatically terminate upon (i) the termination of the Advisory
Contract or (ii) a Change of Control (as defined below) of the Company.
As used herein, "Change of Control" means the occurrence of one or more of
the following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all
of the assets of the Company or GTT to any person or group of related persons
for purposes of Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (a "Group"); (ii) the approval by the holders of
capital stock of the Company or GTT, as the case may be, of any plan or
proposal for the liquidation or dissolution of the Company or GTT, as the case
may be; or (iii) the acquisition in one or more
2
<PAGE>
transactions of "beneficial ownership" (within the meaning of Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time) by any person, entity or Group (other than a Permitted Holder
(as defined below) or a Group controlled by any Permitted Holder) of any
capital stock of the Company or GTT such that, as a result of such
acquisition, such person, entity or Group either (A) beneficially owns (within
the meaning of Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, more than 50% of then outstanding voting securities of the Company
or GTT entitled to vote on a regular basis in an election for a majority of
the board of directors of the Company or GTT or (B) otherwise has the ability
to elect, directly or indirectly, a majority of the members of the board of
directors of the Company or GTT.
As used herein, "Permitted Holders" means Cornelius B. Prior, Jr. and his
estate, heirs and legatees, and the legal representatives of any of the
foregoing, including, without limitation, the trustee of any trust of which
one or more of the foregoing are the sole beneficiaries.
Section 3.02. Entire Agreement. This Technical Assistance Agreement,
together with all other written agreements which may be entered into between
the parties in connection herewith and the transactions contemplated hereby
and all other documents and instruments delivered in connection herewith and
therewith and the transactions contemplated hereby and thereby, set forth the
full and complete understanding of the parties hereto with respect to the
transactions contemplated hereby.
Section 3.03. Governing Law. This Technical Assistance Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without reference to the conflicts of laws rules thereof.
Section 3.04. Headings. The headings in this Technical Assistance Agreement
are intended solely for convenience of reference and shall be given no effect
in the interpretation of this Technical Assistance Agreement.
Section 3.05. Counterparts. This Technical Assistance Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
Section 3.06. Benefits. This Technical Assistance Agreement will inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns, and no other person will have any right or obligation
hereunder.
Section 3.07. Assignment. Neither this Technical Assistance Agreement nor
any right hereunder may be assigned by the parties hereto without the prior
written consent of the other parties. Subject to the foregoing, this Technical
Assistance Agreement shall be binding upon and inure to the benefit of the
successors, heirs, representatives and assigns of each party hereto.
Section 3.08. Amendment and Waiver. This Technical Assistance Agreement may
be amended only by an instrument in writing signed on behalf of each of the
parties hereto. Any term, condition or provision of this Technical Assistance
Agreement may be waived (if in writing) at any time by the party or each of
the parties entitled to the benefits thereof.
Section 3.09 Notices. All notices, requests, demands, and, other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered by hand, or when sent by telex or telecopier (with
3
<PAGE>
receipt confirmed) or by registered mail, return receipt requested, addressed
as follows (or to such other address as a party may designate by notice to the
other):
(a) If to the Company:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 6100
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
(b) If to ATNCo., VITELCO or VCI:
c/o Emerging Communications, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this Technical
Assistance Agreement to be duly executed, all as of the date first written
above.
Atlantic Tele-Network, Inc.
By: _________________________________
Name: Cornelius B. Prior
Title:Co-Chief Executive Officer
By: _________________________________
Name: Jeffrey J. Prosser
Title:Co-Chief Executive Officer
Atlantic Tele-Network Co.
By: _________________________________
Name:
Title:
Virgin Islands Telephone Corporation
By: _________________________________
Name:
Title:
Vitelcom Cellular Inc.
By: _________________________________
Name:
Title:
5
<PAGE>
EXHIBIT D TO SUBSCRIPTION AGREEMENT
RESTATED CERTIFICATE OF INCORPORATION
OF
EMERGING COMMUNICATIONS, INC.
* * * * *
The present name of the corporation is Emerging Communications, Inc. (the
"Corporation"). The corporation was incorporated under that name by the filing
of its original Certificate of Incorporation with the Secretary of State of
the State of Delaware on March 17, 1997. This Restated Certificate of
Incorporation of the Corporation, which both restates and further amends the
provisions of the Corporation's Certificate of Incorporation, was duly adopted
in accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware. The Corporation's board of directors
(the "Board of Directors") adopted a resolution approving the following
amendments to and restatement of the Certificate of Incorporation of the
Corporation. The Certificate of Incorporation of the Corporation is hereby
amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is Emerging Communications, Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, 19801. The name of its registered agent at such address
is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware. The Corporation is to have perpetual existence.
FOURTH: A. The total number of shares of all classes of stock that the
Corporation shall be authorized to issue is 50,000,000 shares, divided into
40,000,000 shares of Common Stock, par value $.01 per share (herein called
"Common Stock"), and 10,000,000 shares of Preferred Stock, par value $.01 per
share (herein called "Preferred Stock").
B. The Board of Directors is hereby expressly authorized, by resolution or
resolutions thereof, to provide, out of the unissued shares of Preferred
Stock, for series of Preferred Stock and, with respect to each such series, to
fix the number of shares constituting such series and the designation of such
series, the voting powers (if any) of the shares of such series, and the
preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the
shares of such series. The powers, preferences and relative, participating,
optional and other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
C. Except as may otherwise be provided in this Restated Certificate of
Incorporation (including any certificate filed with the Secretary of State of
the State of Delaware establishing the terms of a series of Preferred Stock in
accordance with Section B of this Article FOURTH) or by applicable law, each
holder of Common Stock, as such, shall be entitled to one vote for each share
of Common Stock held of record by such holder on all matters on which
stockholders generally are entitled to vote, and no holder of any series of
Preferred Stock, as such, shall be entitled to any voting powers in respect
thereof. The number of authorized shares of Common Stock and Preferred Stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in voting
power of the stock of the Corporation entitled to vote thereon irrespective of
the provisions of Section 242(b)(2) of the General Corporation Law of the
State of Delaware (or any successor provision thereto), and no vote of the
holders of either the Common Stock or the Preferred Stock voting separately as
a class shall be required therefor.
1
<PAGE>
D. Subject to applicable law and the rights, if any, of the holders of any
outstanding series of Preferred Stock, dividends may be declared and paid on
the Common Stock at such times and in such amounts as the Board of Directors
in its discretion shall determine.
E. Upon the dissolution, liquidation or winding up of the Corporation,
subject to the rights, if any, of the holders of any outstanding series of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the assets of the Corporation available for distribution to its stockholders
ratably in proportion to the number of shares held by them.
F. The Corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
FIFTH: A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, consisting of not less than
three nor more than fifteen directors, with the exact number of directors
constituting the entire Board of Directors to be determined from time to time
by resolution adopted by the affirmative vote of a majority of the entire
Board of Directors. For purposes of this Restated Certificate of
Incorporation, "the entire Board of Directors" shall mean the number of
directors that would be in office if there were no vacancies nor any unfilled
newly created directorships.
The Board of Directors shall be divided into three classes--Class I, Class
II and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the number of directors constituting the entire Board of
Directors. Class I directors shall be initially elected for a term expiring at
the first succeeding annual meeting of stockholders following the
effectiveness of this Restated Certificate of Incorporation, Class II
directors shall be initially elected for a term expiring at the second
succeeding annual meeting of stockholders following the effectiveness of this
Restated Certificate of Incorporation, and Class III directors shall be
initially elected for a term expiring at the third succeeding annual meeting
of stockholders following the effectiveness of this Restated Certificate of
Incorporation. At each annual meeting of the stockholders following the
effectiveness of this Restated Certificate of Incorporation, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a term expiring at the third succeeding annual meeting of stockholders. If
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any
class elected to fill a newly created directorship resulting from an increase
in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however, to
prior death, resignation, retirement, disqualification or removal from office.
Any vacancy on the Board of Directors that results from an increase in the
number of directors may only be filled and any other vacancy occurring in the
Board of Directors may only be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Directors
chosen to fill any such vacancy shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to
which they have been elected expires and until such directors' successors
shall have been duly elected and qualified.
Notwithstanding the foregoing, whenever the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a class
or series, to elect directors, the election, removal, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation (including any certificate
filed with the Secretary of State of the State of Delaware establishing the
terms of a series of Preferred Stock in accordance with Section B of Article
FOURTH hereof) applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article FIFTH unless expressly provided
by such terms.
2
<PAGE>
B. The Board of Directors shall be authorized to adopt, make, amend, alter,
change, add to or repeal the By-Laws of the corporation, subject to the power
of the stockholders to amend, alter, change, add to or repeal the By-Laws made
by the Board of Directors.
C. Unless and except to the extent that the By-Laws of the Corporation shall
so require, the election of the members of the Board of Directors need not be
by written ballot.
SIXTH: The Corporation does hereby elect not to be governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware.
SEVENTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit.
EIGHTH: A. Each person who was or is a party or is threatened to be made a
party to, or is involved, in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or, while a
director or officer of the Corporation, is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of the State of
Delaware, as the same exists or may hereafter be amended, against all expense,
liability and loss (including attorneys' fees, judgments, amounts paid in
settlement, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) actually and reasonably incurred or suffered by such
person in connection therewith, and such indemnification shall continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrators.
Notwithstanding the preceding sentence, the Corporation shall be required to
indemnify an indemnitee in connection with a proceeding (or part thereof)
commenced by such indemnitee only if the commencement of such proceeding (or
part thereof) by the indemnitee was authorized by the Board of Directors of
the Corporation.
B. The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any expense, liability or
loss incurred by such person in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power to
indemnify him or her against such liability.
C. Neither the amendment nor repeal of this Article EIGHTH, nor the adoption
of any provision of this Restated Certificate of Incorporation or the By-Laws
of the Corporation, nor, to the fullest extent permitted by the laws of the
State of Delaware, any modification of law, shall eliminate or reduce the
effect of this Article EIGHTH in respect of any acts or omissions occurring
prior to such amendment, repeal, adoption or modification.
NINTH: A. Meetings of stockholders may be held within or without the State
of Delaware as the By-Laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the General Corporation Law of the
State of Delaware) outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the By-
Laws of the Corporation.
3
<PAGE>
B. Except as may otherwise be provided in this Restated Certificate of
Incorporation (including any certificate filed with the Secretary of the State
of Delaware establishing the terms of a series of Preferred Stock in
accordance with Section B of Article FOURTH), no action that is required or
permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders. Notwithstanding anything
contained in this Restated Certificate of Incorporation to the contrary, the
affirmative vote of at least 80 percent in voting power of the then
outstanding voting stock of the Corporation, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with Section B of this Article NINTH.
TENTH: Subject to the provisions of this Restated Certificate of
Incorporation and applicable law, the Corporation reserves the right at any
time and from time to time to amend, alter, change or repeal any provision
contained in this Restated Certificate of Incorporation, and any other
provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted, in the manner now or hereafter prescribed
herein or by applicable law, and all rights, preferences and privileges of
whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Restated Certificate of Incorporation in
its present form or as hereafter amended are granted subject to the right
reserved in this Article TENTH.
IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate
of Incorporation this day of , 1997.
Emerging Communications, Inc.
By__________________________________:
Name:
Office:
4
<PAGE>
EXHIBIT E
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
----------------------------------------------
NON-COMPETITION AGREEMENT
----------------------------------------------
AMONG
EMERGING COMMUNICATIONS, INC.,
ATLANTIC TELE-NETWORK, INC.
AND
JEFFREY J. PROSSER
DATED [ ], 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
DEFINITIONS
<C> <S> <C>
Section 1.01. Definitions................................................ 1
ARTICLE II
AGREEMENT NOT TO COMPETE; DISCLOSURE OF INFORMATION
Section 2.01. Agreement Not To Compete................................... 2
Section 2.02. Disclosure of Information.................................. 2
Section 2.03. Acknowledgment............................................. 2
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.01. Remedies................................................... 3
Section 3.02. Benefits................................................... 3
Section 3.03. Severability; Blue Penciling............................... 3
Section 3.04. Notices.................................................... 3
Section 3.05. Complete Agreement; Amendments; Prior Agreements........... 4
Section 3.06. Governing Law.............................................. 4
Section 3.07. Counterparts............................................... 4
Section 3.08. Jurisdiction............................................... 4
Section 3.09. Expenses of Enforcement.................................... 4
</TABLE>
i
<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (this "Non-Competition Agreement") is entered
into as of the [ ] day of [ ], 1997 by and among Emerging
Communications, Inc., a Delaware corporation ("ECI"), Atlantic Tele-Network,
Inc., a Delaware corporation (the "Company"), and Jeffrey J. Prosser,
("Prosser").
WHEREAS, to eliminate corporate disputes and to maximize the value of the
Company for the benefit of the Company and its stockholders, the Company and
its co-chief executive officers and principal stockholders, Cornelius B.
Prior, Jr. ("Prior") and Prosser, entered into a Principal Terms Agreement
dated January 29, 1997 which contemplated the separation of the businesses and
assets of the Company; and
WHEREAS, in order to accomplish such separation, the Company and ECI entered
into a Subscription Agreement (the "Subscription Agreement"), the Company,
Prior and Prosser entered into a Recapitalization Agreement (the
"Recapitalization Agreement") and the Company and ATN MergerCo. entered into
an Agreement and Plan of Merger (the "Merger Agreement"), all dated as of
August 11, 1997;
WHEREAS, Prior and the other stockholders of the Company are relying on the
covenants of ECI and Prosser in this Non-Competition Agreement in making
and/or retaining their investments in the Common Stock of the Company; and
WHEREAS, the execution and delivery of this Non-Competition Agreement by the
parties hereto is contemplated by the Subscription Agreement and is a
condition to the Closing (as defined in the Subscription Agreement); and
WHEREAS, each of the parties hereto desires to consummate, and will secure
substantial benefits from the consummation of, the Closing.
NOW, THEREFORE, for and in consideration of the covenants herein contained
and subject to the conditions hereinafter set forth, the parties hereto agrees
as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. Capitalized terms used in this Non-Competition
Agreement without definition shall have the respective meanings ascribed to
such terms in the Subscription Agreement. As used in this Agreement, the
following terms have the meanings assigned to them below:
"Competitive Business" means any business which competes anywhere in the
world in any material respect with the conduct of the Subject Business by
the Company or any of its Subsidiaries.
"Confidential Information" means all information of a proprietary nature
and documents or other tangible items that record information of a
proprietary nature relating to the Subject Business, including without
limitation, books, records, customer lists, vendor lists, supplier lists,
pricing information, cost information, plans, strategies, forecasts,
financial statistics, budgets and projections, other than any such
information which is generally within the public domain at the time of
receipt thereof by ECI or Prosser or at the time of use or disclosure of
such information by ECI or Prosser (other than as a result of the breach by
ECI or Prosser of its or his agreement hereunder).
"Subject Business" means the business of providing telecommunications
services (including carrying and/or terminating telecommunications
traffic), directly or indirectly through service bureaus or other
intermediaries, to persons who generate international audiotext
telecommunications traffic (whether voice or data); provided, however, that
the Subject Business shall not include the provision of any
telecommunications services as a common carrier which does not involve the
installation of special
1
<PAGE>
equipment to facilitate the generation of international audiotext
telecommunications traffic or, directly or indirectly, the payment of any
fee, commission or other compensation, through sharing of accounting or
settlement rates, rate discounts or otherwise to persons generating such
traffic.
ARTICLE II
AGREEMENT NOT TO COMPETE;
DISCLOSURE OF INFORMATION
Section 2.01. Agreement Not To Compete. (a) Each of ECI and Prosser
recognizes the highly competitive nature of the Subject Business and agrees
that the value and goodwill of the Company and its Subsidiaries would be
substantially impaired if it or he, as the case may be, failed to comply with
its or his obligations hereunder. Accordingly, each of ECI and Prosser hereby
agrees from the consummation of the Merger that during a period of ten years
thereafter, each of ECI and Prosser shall not, directly or indirectly, on its
or his own behalf, as the case may be, or on behalf of any other person or
entity:
(i) engage in any Competitive Business, whether such engagement shall be
as an employer, officer, director, owner, employee, partner, advisor,
consultant, stockholder, investor, agent or other participant in any
Competitive Business (or in any similar capacity in which it or he, as the
case may be, derives an economic benefit from a Competitive Business);
(ii) assist others in engaging in any Competitive Business in the manner
described in the foregoing clause (i);
(iii) solicit, entice or induce any director, employee, consultant or
other agent of the Company or any current or future Subsidiary of the
Company materially involved in the Subject Business to terminate his or her
employment or other relationship with the Company or such current or future
Subsidiary or to engage in any Competitive Business;
(iv) solicit, entice or induce any vendor or distributor of the Company
or any current or future Subsidiary materially involved in the Subject
Business to terminate or materially diminish its relationship with the
Company or such current or future Subsidiary; or
(v) solicit, entice or induce any subscriber or customer of the Company
or any current or future Subsidiary of the Company with respect to the
Subject Business to purchase the products or services of any Competitive
Business, or to cease purchasing the services of the Subject Business from
the Company or any current or future Subsidiary of the Company.
(b) Anything contained in this Non-Competition Agreement to the contrary
notwithstanding, no provision of this Agreement shall prohibit (i) ECI or
Prosser from owning, as a passive investment, in the aggregate less than 5% of
a class of publicly-traded securities issued by any person or entity engaged
in a Competitive Busi- ness or (ii) the provision of services by ATNCO,
VITELCo or VCI pursuant to terms of the Technical Assistance Agreement.
Section 2.02. Disclosure of Information. From and after the date hereof,
each of ECI and Prosser shall hold in strict confidence and shall not use or
disclose to any person, firm, corporation or other business entity, except as
required by law or judicial process, any Confidential Information for any
reason or purpose whatsoever, nor shall ECI or Prosser make use of any of the
Confidential Information for ECI's or Prosser's purposes or for the benefit of
any person or entity except the Company or any affiliate thereof.
Section 2.03. Acknowledgment. Prosser acknowledges that the provisions of
this Agreement are not designed to prevent Prosser from earning a living or
fostering his own career. The provisions of this Agreement are designed to
prevent any Competitive Business from gaining unfair advantage from Prosser's
and ECI's knowledge of confidential and proprietary information relating to
the Subject Business.
2
<PAGE>
ARTICLE III
MISCELLANEOUS PROVISIONS
Section 3.01. Remedies. Each of ECI and Prosser acknowledges that a remedy
at law for any breach or threatened breach of the provisions of this Non-
Competition Agreement would be inadequate and therefore agrees that the
Company shall be entitled to injunctive relief; provided, however, that
nothing contained herein shall be construed as prohibiting the Company from
pursuing any other remedies available for any such breach or threatened
breach.
Section 3.02. Benefits. This Non-Competition Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by reorganization, merger or
consolidation or otherwise and any assignee of all or substantially all of its
business and properties.
Section 3.03. Severability, Blue Penciling. It is the desire and intent of
the parties hereto that the provisions of this Non-Competition Agreement shall
be enforced to the fullest extent permissible under the laws and public
policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Non-Competition Agreement
shall be adjudicated to be invalid or unenforceable, such provision shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid
or unenforceable, such deletion to apply only with respect to the operation of
such provision in the particular jurisdiction in which such adjudication is
made. In addition, if any one or more of the provisions contained in this Non-
Competition Agreement shall for any reason be held to be excessively broad as
to duration, geographical scope, activity or subject, it shall be construed by
limiting and reducing it so as to be enforceable to the extent compatible with
the applicable law as it shall then appear.
Section 3.04. Notices. All notices or other communications required or
permitted hereunder shall be in writing and sufficient if (a) delivered
personally, (b) sent by nationally-recognized overnight courier or (c) sent by
certified mail, postage prepaid, return receipt requested, addressed as
follows:
if to the Company, to:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
if to ECI or Prosser, to:
Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
3
<PAGE>
or, in each case, to such other address as the party to whom notice is to be
given may have furnished to the other party in writing in accordance herewith.
Any such communication shall be deemed to have been given (i) when delivered,
if personally delivered, (ii) on the business day after dispatch, if sent by
nationally-recognized overnight courier and (iii) on the third business day
after dispatch, if sent by mail.
Section 3.05. Complete Agreement; Amendments; Prior Agreements. The
foregoing is the entire agreement of the parties with respect to the subject
matter hereof and may not be amended, supplemented, canceled or discharged
except by a written instrument executed by the parties hereto. This Non-
Competition Agreement supersedes any and all prior agreements among the
parties hereto with respect to the matters covered hereby.
Section 3.06. Governing Law. This Non-Competition Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and performed wholly therein.
Section 3.07. Counterparts. This Non-Competition Agreement may be executed
in any number of counterparts, and each such counterpart shall be deemed to be
an original instrument, but all such counterparts together shall constitute
but one agreement.
Section 3.08. Jurisdiction. Any action or proceeding brought by any party to
this Non-Competition Agreement against any other party hereto with respect to
the enforcement or breach of this Non-Competition Agreement may be brought in
the courts of the State of New York or of the United States for the Southern
District of New York. Each of the parties hereto irrevocably submits to the
jurisdiction of each such court in respect of any such action or proceeding,
irrevocably waives any objection that it may now or hereafter have to the
laying of venue of any such action or proceeding in any such court and any
claim that any such action or proceeding brought in any such court has been
brought in an inconvenient forum, and irrevocably consents that service of
process or other legal summons for purposes of any such action or proceeding
may be served on it by personal service within or without the State of New
York or by mailing a copy thereof by registered mail, or a form of mail
substantially equivalent to registered mail, addressed to such party at its
address as provided for notices hereunder.
Section 3.09. Expenses of Enforcement. In the event of any breach of this
Non-Competition Agreement by any party hereto, any other party hereto which is
aggrieved by such breach (an "Aggrieved Breach") shall be entitled to recover
from the party in breach, any and all costs and expenses, including without
limitation reasonable attorneys' fees, incurred by the Aggrieved Party as a
result of such breach or in connection with enforcing the provisions of this
Non-Competition Agreement with respect to such breach.
4
<PAGE>
IN WITNESS WHEREOF, this Non-Competition Agreement has been executed and
delivered by the parties hereto as of the date first above written.
Atlantic Tele-Network, Inc.
By: _________________________________
Name:
Title:
Emerging Communications, Inc.
By: _________________________________
Name:
Title:
-------------------------------------
Jeffrey J. Prosser
5
<PAGE>
EXHIBIT F
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-----------------------------------
INDEMNITY AGREEMENT
-----------------------------------
AMONG
ATLANTIC TELE-NETWORK, INC.,
EMERGING COMMUNICATIONS, INC.,
CORNELIUS B. PRIOR, JR.
AND
JEFFREY J. PROSSER
DATED [ ], 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
DEFINITIONS
<C> <S> <C>
Section 1.01. Definitions................................................ 1
ARTICLE II
INDEMNIFICATION
Section 2.01. Indemnification by Prosser................................. 1
Section 2.02. Indemnification by Prior................................... 1
Section 2.03. Indemnification by ECI..................................... 2
Section 2.04. Indemnification by the Company............................. 2
Section 2.05. No Third Party Rights...................................... 2
Section 2.06. Indemnification Procedures................................. 2
ARTICLE III
FORBEARANCE; STANDSTILL
Section 3.01. Forbearance................................................ 4
Section 3.02. Standstill................................................. 4
ARTICLE IV
MISCELLANEOUS PROVISIONS
Section 4.01. Effectiveness.............................................. 5
Section 4.02. Entire Agreement........................................... 5
Section 4.03. Governing Law.............................................. 5
Section 4.04. Headings................................................... 5
Section 4.05. Counterparts............................................... 5
Section 4.06. Benefits................................................... 5
Section 4.07. Assignment................................................. 5
Section 4.08. Amendment and Waiver....................................... 5
Section 4.09. Notices.................................................... 5
Section 4.10. Jurisdiction............................................... 6
Section 4.11. Expenses of Enforcement.................................... 6
</TABLE>
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INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this ("Indemnity Agreement") is entered into as of
the [ ] day of [ ], 1997 by and among Atlantic Tele-Network, Inc., a
Delaware corporation (the "Company"), Emerging Communications, Inc., a
Delaware corporation ("ECI"), Cornelius B. Prior, Jr. ("Prior") and Jeffrey J.
Prosser ("Prosser").
WHEREAS, the execution and delivery of this Indemnity Agreement by the
parties hereto is contemplated by the Subscription Agreement dated as of
August 11, 1997 (the "Subscription Agreement") between the Company and ECI and
is a condition to the Closing (as defined in the Subscription Agreement); and
WHEREAS, each of the parties hereto desires to consummate, and will receive
substantial benefits from the consummation of, the Closing.
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained and subject to the conditions hereinafter set
forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. Capitalized terms used in this Indemnity
Agreement without definition shall have the respective meanings ascribed to
such terms in the Subscription Agreement.
"Affiliate" of any person shall mean any other person which controls, is
controlled by, or is under common control with such person, and "person" for
purposes hereof means and includes any individual, partnership, limited
liability company, firm, corporation or other entity.
ARTICLE II
INDEMNIFICATION
Section 2.01. Indemnification by Prosser. Subject to the terms and
conditions contained herein, Prosser hereby agrees to indemnify and hold
harmless the Company, its Subsidiaries after the Closing, their respective
officers, directors and agents and Prior, individually and as Trustee of the
1994 Prior Charitable Remainder Trust, from and against any and all losses,
liabilities, damages, costs, and expenses (including, without limitation,
reasonable attorney's fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending any action, suit or
proceeding, commenced or threatened) of any kind and nature (collectively,
"Losses") (A) which relate to or arise out of any action, suit or proceeding
brought by or on behalf of any stockholder of the Company or ECI arising out
of or relating to (i) the repurchase by the Company of shares of Company
Common Stock owned by Prior and/or the Trust pursuant to the Recapitalization
Agreement or (ii) the number of shares of ECI Common Stock to be received by
Prosser pursuant to the Merger Agreement, or (B) which relate to or arise out
of any action, suit or proceeding arising out of relating to an untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the proxy statement/prospectus to be delivered to holders of
Company Common Stock (the "Proxy Statement") or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with respect
to the beneficial ownership of stock of the Company by Prosser and/or members
of his family and his or their Affiliates and biographical information with
respect to Mr. Prosser.
Section 2.02. Indemnification by Prior. Subject to the terms and conditions
contained herein, Prior hereby agrees to indemnify and hold harmless ECI, the
entities which will become its Subsidiaries after the Closing, their
respective officers, directors and agents and Prosser from and against any and
all Losses (A) which
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relate to or arise out of any action, suit or proceeding brought by or on
behalf of any stockholder of the Company or ECI arising out of or relating to
the number of shares of Surviving Corporation Common Stock (as defined in the
Merger Agreement) to be received by Prior pursuant to the Merger Agreement or
(B) an untrue statement of a material fact or alleged untrue statement of a
material fact contained in the Proxy Statement or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with respect
to the beneficial ownership of stock of the Company by Prior and/or members of
his family and his or their Affiliates and biographical information with
respect to Mr. Prior.
Section 2.03. Indemnification by ECI. Subject to the terms and conditions
contained herein, ECI hereby agrees to indemnify and hold harmless the
Company, its Subsidiaries after the Closing, their respective officers,
directors and agents and Prior from and against any and all Losses which
relate to or arise out of, (i) the business or operations conducted by ECI and
the Transferred Subsidiaries before or after the Closing, or any other
Subsidiaries of ECI after the Closing, (ii) the Assumed Liabilities or (iii)
any action, suit or proceeding arising out of or relating to an untrue
statement of a material fact or alleged untrue statement of a material fact
contained in the Proxy Statement or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with respect to (a) the business,
prospects or planned or proposed activities of ECI and its Subsidiaries after
the Closing Date, (b) activities of ECI or the Transferred Subsidiaries after
April 30, 1997 and (c) prospective acquisitions of businesses or other
transactions not in the ordinary course of business planned or contemplated by
ECI, the Transferred Subsidiaries or Prosser.
Section 2.04. Indemnication by the Company. Subject to the terms and
conditions contained herein, the Company hereby agrees to indemnify and hold
harmless ECI, the entities which will become its Subsidiaries after the
Closing, their respective officers, directors and agents and Prosser from and
against any and all Losses which relate to or arise out of (i) the business
and operations conducted by GTT before or after the Closing or the business
and operations after the Closing of the Company or any other entity which will
be a Subsidiary of the Company after the Closing, (ii) the Excluded
Liabilities or (iii) any action, suit or proceeding arising out of or relating
to an untrue statement of a material fact or alleged untrue statement of a
material fact contained in the Proxy Statement or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with respect
to (a) the business, prospects or planned or proposed activities of the
Company and its Subsidiaries after the Closing Date, (b) activities of GTT and
the Company with respect to GTT after April 30, 1997 and (c) prospective
acquisitions of businesses or other transactions not in the ordinary course of
business planned or contemplated by GTT or Prior.
Section 2.05. No Third Party Rights. Nothing in this Indemnity Agreement,
express or implied, is intended or shall be construed to give to any person,
firm or corporation, other than an Indemnified Party (as defined below), any
rights, remedy, claim or cause of action under or by reason of this Indemnity
Agreement, or any terms, covenants or conditions hereof.
Section 2.06. Indemnification Procedures. (a) If any party or person which
may seek indemnification hereunder (an "Indemnified Party") determines that it
is or may be entitled to indemnification by any party hereto (an "Indemnifying
Party") under this Agreement (other than in connection with any Third Party
Claim (as defined below) subject to clause (b) of this Section 2.06), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
have been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 30 days after receipt of
such notice, pay the Indemnified Party such amount in cash or other
immediately available funds (or reach agreement with the Indemnified Party as
to a mutually agreeable alternative payment schedule) unless the Indemnifying
Party objects to the claim for indemnification or the amount thereof. If the
Indemnifying Party does not give the Indemnified Party written notice
objecting to such claim and setting forth the grounds therefor within the same
30 day period, the Indemnifying Party shall be deemed to have acknowledged its
liability for such claim and the Indemnified Party may exercise any and all of
its rights under applicable law to collect such amount.
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(b) Promptly following the earlier of (i) receipt of notice of the
commencement by a third party of any action, suit or proceeding against or
otherwise involving any Indemnified Party or (ii) receipt of information from
a third party alleging the existence of a claim against an Indemnified Party,
in either case, with respect to which indemnification may be sought pursuant
to this Indemnity Agreement (a "Third-Party Claim"), the Indemnified Party
shall give the Indemnifying Party prompt written notice thereof. The failure
of the Indemnified Party to give notice as provided in this clause (b) shall
not relieve the Indemnifying Party of its obligations under this Indemnity
Agreement, except to the extent that the Indemnifying Party is materially
prejudiced by such failure to give notice. Within 30 days after receipt of
such notice, the Indemnifying Party may (i) by giving written notice thereof
to the Indemnified Party, acknowledge liability for and at its option elect to
assume the defense of such Third-Party Claim at its sole cost and expense or
(ii) object to the claim of indemnification set forth in the notice delivered
by the Indemnified Party pursuant to the first sentence of this clause (b);
provided that if the Indemnifying Party does not within the same 30 day period
give the Indemnified Party written notice objecting to such claim and setting
forth the grounds therefor or electing to assume the defense, the Indemnifying
Party shall be deemed to have acknowledged its liability for such Third-Party
Claim. Any contest of a Third-Party Claim as to which the Indemnifying Party
has elected to assume the defense shall be conducted by attorneys employed by
the Indemnifying Party and reasonably satisfactory to the Indemnified Party,
and the Indemnifying Party shall not be liable to the Indemnified Party for
any legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation, except as provided in the following sentence. The Indemnified
Party shall have the right to participate in the defense against the Third
Party Claim and to be represented by attorneys of its own choosing, but the
fees and expenses of such attorneys shall be at the expense of the Indemnified
Party unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of such attorneys by the Indemnified Party or
(ii) representation of both parties by the same counsel in respect of such
Third Party Claim would be inappropriate due to actual or potential differing
interests between them (in which case the Indemnifying Party shall not be
entitled to assume or direct the defense of such proceeding on behalf of the
Indemnified Party); provided that in no event shall the Indemnifying Party be
required to pay the fees and expenses of more than one separate counsel (in
addition to local counsel) in any one proceeding representing the Indemnified
Parties who are parties thereto. If the Indemnifying Party assumes the defense
of a Third-Party Claim, the Indemnifying Party may settle or compromise the
claim without the prior written consent of the Indemnified Party; provided
that without the prior written consent of the Indemnified Party, which consent
shall not be unreasonably withheld, the Indemnifying Party may not agree to
any such settlement or compromise unless such settlement or compromise
includes an unconditional release of the Indemnified Party from all liability
on claims that are or could be the subject matter of such proceeding. If the
Indemnifying Party does not assume the defense of a Third-Party Claim for
which it has acknowledged liability for indemnification as described herein,
the Indemnified Party may require the Indemnifying Party to reimburse it on a
current basis for its reasonable expenses of investigation, reasonable
attorney's fees and reasonable out-of-pocket expenses incurred in defending
against such Third-Party Claim and the Indemnifying Party shall be bound by
the result obtained with respect thereto by the Indemnified Party; provided
that the Indemnifying Party shall not be liable for any settlement effected
without its consent, which consent shall not be unreasonably withheld. The
Indemnifying Party shall pay to the Indemnified Party in cash the amount for
which the Indemnified Party is entitled to be indemnified (if any) within 15
days after the final resolution of such Third-Party Claim (whether by the
final nonappealable judgment of a court of competent jurisdiction or
otherwise) or, in the case of any Third-Party Claim as to which the
Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection has been resolved by settlement, compromise or
the final nonappealable judgment of a court of competent jurisdiction.
(c) This Section 2.06 shall have no applicability to any claim for
indemnification with respect to any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, severance, occupation, service, sales, use, license, lease, transfer,
import, export, value added, alternative minimum, estimated or other similar
tax (including any fee, assessment, or other charge in the nature of or in
lieu of any tax) imposed by any governmental entity or political subdivision
thereof, and any interest, penalties, additions to tax, or additional amounts
in respect of the foregoing (collectively "Taxes"), it being understood that
the procedures for
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indemnification with respect to Taxes are covered in that separate Tax Sharing
and Indemnification Agreement dated the date hereof among the parties hereto.
ARTICLE III
FORBEARANCE; STANDSTILL
Section 3.01. Forbearance. Except with respect to enforcing specific
provisions of an agreement entered into in connection with the Transactions,
including, without limitation, this Indemnity Agreement, (a) Prosser and ECI
hereby agree not to bring any action, suit or proceeding against Prior or the
Company with respect to any of the matters constituting the Transactions, or
arising out or relating to the business, operations or management of the
Company or any of its Subsidiaries prior to and including the Closing and (b)
Prior and the Company hereby agree not to bring any action, suit or proceeding
against Prosser or ECI with respect to any of the matters constituting the
Transactions or arising out of or relating to the business, operations or
management of the Company or any of its Subsidiaries prior to and including
the Closing.
Section 3.02. Standstill.
(a) Each of Prosser and ECI agrees that for a period of ten years after the
Closing Date, he or it, as the case may be, shall not, and shall not permit
his or its, as the case may be, Controlled Affiliates (as defined below) to,
without the prior written consent of the Company, duly authorized by its Board
of Directors:
(i) be the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of greater than 5% of the outstanding Voting Securities (as
defined below) of the Company; or offer or agree to purchase any Voting
Securities of the Company if, after giving effect to such purchase, he or
it, as the case may be, would be the beneficial owner of greater than 5% of
the outstanding Voting Securities of the Company; or
(ii) make, or in any way participate in, any "solicitation" of "proxies"
(as such terms are defined in Rule 14a-1 under the Exchange Act) with
respect to Voting Securities of the Company; become a participant in any
"election contest" (within the meaning of Rule 14a-11 of the Exchange Act)
with respect to the Company; seek to advise or influence any person with
respect to the voting of any Voting Securities of the Company; execute any
written consent in lieu of a meeting of holders of any class or series of
Voting Securities of the Company; or initiate, propose or otherwise solicit
holders of Voting Securities of the Company for the approval or rejection
of a proposal for a vote of holders of Voting Securities of the Company.
(b) Each of Prior and the Company agrees that for a period of ten years
after the Closing Date, he or it, as the case may be, shall not, and shall not
permit his or its, as the case may be, Controlled Affiliates (as defined
below) to, without the prior written consent of ECI, duly authorized by its
Board of Directors:
(i) be the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of greater than 5% of the outstanding Voting Securities (as
defined below) of ECI; or offer or agree to purchase any Voting Securities
of ECI if, after giving effect to such purchase, he or it, as the case may
be, would be the beneficial owner of greater than 5% of the outstanding
Voting Securities of ECI; or
(ii) make, or in any way participate in, any "solicitation" of "proxies"
(as such terms are defined in Rule 14a-1 under the Exchange Act) with
respect to Voting Securities of ECI; become a participant in any "election
contest" (within the meaning of Rule 14a-11 of the Exchange Act) with
respect to ECI; seek to advise or influence any person with respect to the
voting of any Voting Securities of ECI; execute any written consent in lieu
of a meeting of holders of any class or series of Voting Securities of ECI;
or initiate, propose or otherwise solicit holders of Voting Securities of
ECI for the approval or rejection of a proposal for a vote of holders of
Voting Securities of ECI.
(c) As used in this Section 3.02, the following terms have the meanings
assigned to them below:
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"Controlled Affiliate" of any person means any other person under the
control of such person. As used in this definition, "control" means the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a person, whether through ownership of
Voting Securities, by contract or otherwise.
"Voting Securities" of any person means securities, the holders of which
are, at the applicable time in question, entitled to vote for the election of
directors of such person.
ARTICLE IV
MISCELLANEOUS PROVISIONS
Section 4.01. Effectiveness. This Indemnity Agreement shall become operative
upon consummation of the Merger.
Section 4.02. Entire Agreement. This Indemnity Agreement, together with all
other written agreements which may be entered into between the parties in
connection herewith and the transactions contemplated hereby and all other
documents and instruments delivered in connection herewith and therewith and
the transactions contemplated hereby and thereby, set forth the full and
complete understanding of the parties hereto with respect to the transactions
contemplated hereby.
Section 4.03. Governing Law. This Indemnity Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
reference to the conflict of laws rules thereof.
Section 4.04. Headings. The headings in this Indemnity Agreement are
intended solely for convenience of reference and shall be given no effect in
the interpretation of this Indemnity Agreement.
Section 4.05. Counterparts. This Indemnity Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument.
Section 4.06. Benefits. This Indemnity Agreement will inure to the benefit
of and be binding upon the parties hereto and their respective successors and
assigns, and no other person (other than an Indemnified Party) will have any
right or obligation hereunder.
Section 4.07. Assignment. Neither this Indemnity Agreement nor any right
hereunder may be assigned by the parties hereto without the prior written
consent of the other parties. Subject to the foregoing, this Indemnity
Agreement shall be binding upon and inure to the benefit of the successors,
heirs, representatives and assigns of each party hereto.
Section 4.08. Amendment and Waiver. This Indemnity Agreement may be amended
only by an instrument in writing signed on behalf of each of the parties
hereto. Any term, condition or provision of this Indemnity Agreement may be
waived (if in writing) at any time by the party or each of the parties
entitled to the benefits thereof.
Section 4.09. Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered by hand, or when sent by telex or telecopier (with
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<PAGE>
receipt confirmed) or by registered mail, return receipt requested, addressed
as follows (or to such other address as a party may designate by notice to the
other):
(a) If to the Company or Prior:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
with copies to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
(b) If to ECI or Prosser:
Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-8000
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
Section 4.10. Jurisdiction. Any action or proceeding brought by any party to
this Indemnity Agreement against any other party hereto with respect to the
enforcement or breach of this Indemnity Agreement may be brought in the courts
of the State of New York or of the United States for the Southern District of
New York. Each of the parties hereto irrevocably submits to the jurisdiction
of each such court in respect of any such action or proceeding, irrevocably
waives any objection that it may now or hereafter have to the laying of venue
of any such action or proceeding in any such court and any claim that any such
action or proceeding brought in any such court has been brought in an
inconvenient forum, and irrevocably consents that service of process or other
legal summons for purposes of any such action or proceeding may be served on
it by personal service within or without the State of New York or by mailing a
copy thereof by registered mail, or a form of mail substantially equivalent to
registered mail, addressed to such party at its address as provided for
notices hereunder.
Section 4.11. Expenses of Enforcement. In the event of any breach of this
Indemnity Agreement by any party hereto, any other party hereto which is
aggrieved by such breach (an "Aggrieved Party") shall be entitled to recover
from the party in breach, any and all costs and expenses, including without
limitation reasonable attorneys fees, incurred by the Aggrieved Party as a
result of such breach or in connection with enforcing the provisions of this
Indemnity Agreement with respect to such breach.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Indemnity
Agreement to be duly executed, all as of the date first written above.
Atlantic Tele-Network, Inc.
By: _________________________________
Name: Cornelius B. Prior
Title: Co-Chief Executive Officer
By: _________________________________
Name: Jeffrey J. Prosser
Title: Co-Chief Executive Officer
Emerging Communications, Inc.
By: _________________________________
Name:
Title:
_____________________________________
Cornelius B. Prior, Jr.
_____________________________________
Jeffrey J. Prosser
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EXHIBIT G
TO
SUBSCRIPTION AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-------------------------------
EMPLOYEE BENEFITS AGREEMENT
-------------------------------
BETWEEN
EMERGING COMMUNICATIONS, INC.,
AND
ATLANTIC TELE-NETWORK, INC.
DATED [ ], 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EMPLOYEE BENEFITS AGREEMENT
THIS EMPLOYEE BENEFITS AGREEMENT (this "Employee Benefits Agreement") is
entered into as of the [ ] day of [ ] 1997 by and between Emerging
Communications, Inc., a Delaware Corporation (the "ECI"), and Atlantic Tele-
Network, Inc., a Delaware corporation (the "Company" or "ATNI").
WHEREAS, to eliminate corporation disputes and to maximize the value of the
Company for the benefit of the Company and its stockholders, the Company, and
its co-chief executive officers and principal stockholders, Cornelius B.
Prior, Jr. ("Prior") and Jeffrey J. Prosser ("Prosser"), entered into a
Principal Terms Agreement dated January 29, 1997 which contemplated the
separation of the businesses and assets of the Company; and
WHEREAS, in order to accomplish such separation, the Company and New ATN
entered into a Subscription Agreement (the "Subscription Agreement"), the
Company, Prior and Prosser entered into a Recapitalization Agreement (the
"Recapitalization Agreement") and the Company and ATN MergerCo. entered into
an Agreement and Plan of Merger (the "Merger Agreement"), all dated as of
August 11, 1997;
WHEREAS, the execution and delivery of this Employee Benefits Agreement by
the parties hereto is contemplated by the Subscription Agreement and is a
condition to the Closing (as defined in the Subscription Agreement); and
WHEREAS, each of the parties hereto desires to consummate, and will secure
substantial benefits from the consummation of, the Closing.
NOW, THEREFORE, for and in consideration of the covenants herein contained
and subject to the conditions hereinafter set forth, the parties hereto agree
as follows:
1. Effective as of the Closing, (i) ECI shall adopt as its own the Atlantic
Tele-Network, Inc. Defined Benefit Plan for Salaried Employees, the Atlantic
Tele-Network, Inc. Management Employees' Savings Plan, and the Atlantic Tele-
Network, Inc. Employees' Stock Ownership Plan (collectively, the "ATNI
Plans"), (ii) each of the trusts (and all assets thereof) forming a part of
the ATNI Plans shall be assumed by ECI, and (iii) ECI and the Company shall
take such action, including amendments to the ATNI Plans (or the trusts
forming a part thereof), as is necessary in order for ECI to be the sponsor
and "Employer" under such ATNI Plans. As of the Closing, employees of the
Company and its subsidiaries shall cease participation in the ATNI Plans
maintained by ECI or any of its subsidiaries.
2. All other employee benefit plans maintained by ATN Co., a U.S. Virgin
Islands corporation ("ATNC"), by Virgin Islands Telephone Corp., a U.S. Virgin
Islands corporation ("Vitelco") or by any of their subsidiaries (the
"ATNC/Vitelco Plans"), including but not limited to the Virgin Islands
Telephone Corporation Pension Plan for Hourly Employees, the United
Steelworkers of America 401(k) Plan for Bargaining Unit Employees of Vitelco,
the Welfare Plan for Salaried Employees and the Welfare Plan for Bargaining
Employees, shall continue to be sponsored by such entities after the Closing.
As of the Closing, employees of the Company and its subsidiaries shall cease
participation in the ATNC/Vitelco Plans maintained by ECI, ATNC, Vitelco or
any of their subsidiaries.
3. Effective as of the Closing, ECI and its subsidiaries shall assume all
employment-related liabilities and obligations of ATNI toward those employees
who prior to the Closing were employed by ATNI and who after the Closing will
be employed by ECI or its subsidiaries. Such employment-related liabilities
and obligations shall include, but are not limited to, liabilities and
obligations with respect to wages, withholding taxes, benefits, accrued
vacation, employee benefit plan contributions and administrative expenses,
whether incurred or accrued before, on or after the Closing and whether or not
reported as of the Closing.
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4. All notices or other communications required or permitted hereunder shall
be in writing and sufficient if (a) delivered personally, (b) sent by
nationally-recognized overnight courier or (c) sent by certified mail, postage
prepaid, return receipt requested, addressed as follows:
if to the Company, to:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 6100
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: [(809) 774-7790]
if to ECI, to:
Emerging Communications, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-7700
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
with copies to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
or, in each case, to such other address as the party to whom notice is to be
given may have furnished to the other party in writing in accordance herewith.
Any such communication shall be deemed to have been given (i) when delivered,
if personally delivered, (ii) on the business day after dispatch, if sent by
nationally-recognized overnight courier and (iii) on the third business day
after dispatch, if sent by mail.
5. The foregoing is the entire agreement of the parties with respect to the
subject matter hereof and may not be amended, supplemented, canceled or
discharged except by a written instrument executed by the parties hereto. This
Employee Benefits Agreement supersedes any and all prior agreements among the
parties hereto with respect to the matters covered hereby.
6. This Employee Benefits Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and performed wholly therein.
7. This Employee Benefits Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
8. Any action or proceeding brought by any party to this Employee Benefits
Agreement against any other party hereto with respect to the enforcement or
breach of this Employee Benefits may be brought in the courts of the State of
New York or of the United States for the Southern District of New York. Each
of the parties hereto irrevocably submits to the jurisdiction of each such
court in respect of any such action or proceeding, irrevocably waives any
objection that it may now or hereafter have to the laying of venue of any such
action or proceeding
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in any such court and any claim that any such action or proceeding brought in
any such court has been brought in an inconvenient forum, and irrevocably
consents that service of process or other legal summons for purposes of any
such action or proceeding may be served on it by personal service within or
without the State of New York or by mailing a copy thereof by registered mail,
or a form of mail substantially equivalent to registered mail, addressed to
such party at its address as provided for notices hereunder.
9. In the event of any breach of this Employee Benefits Agreement by any
party hereto, any other party hereto which is aggrieved by such breach (an
"Aggrieved Breach") shall be entitled to recover from the party in breach, any
and all costs and expenses, including without limitation reasonable attorneys'
fees, incurred by the Aggrieved Party as a result of such breach or in
connection with enforcing the provisions of this Non-Competition Agreement
with respect to such breach.
IN WITNESS WHEREOF, this Employee Benefits Agreement has been executed and
delivered by the parties hereto as of the date first above written.
Atlantic Tele-Network, Inc.
By:__________________________________
Name:
Title:
Emerging Communications, Inc.
By:__________________________________
Name:
Title:
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EXHIBIT H
TO
SUBSCRIPTION AGREEMENT
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---------------------------------
TAX SHARING AND INDEMNIFICATION AGREEMENT
---------------------------------
AMONG
ATLANTIC TELE-NETWORK, INC.,
EMERGING COMMUNICATIONS, INC.,
CORNELIUS B. PRIOR
AND
JEFFREY J. PROSSER
DATED [ ], 1997
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<PAGE>
TAX SHARING AND INDEMNIFICATION AGREEMENT
This Tax Sharing and Indemnification Agreement is entered into as of [ ],
1997 by and among Atlantic Tele-Network, Inc., a Delaware corporation ("ATN"),
Emerging Communications, Inc., a Delaware corporation ("ECI"), Cornelius B.
Prior, Jr. ("Prior") and Jeffrey J. Prosser ("Prosser"). Capitalized terms
used in this Agreement are defined in Section 1 below. Unless otherwise
indicated, all "Section" references in this Agreement are to sections of this
Agreement.
RECITALS
WHEREAS, as of the date hereof ATN is the common parent of an affiliated
group of corporations, including ECI and Atlantic Aircraft, Inc., a Delaware
corporation ("Aircraft Corp."), which has elected to file consolidated Federal
and combined Delaware income tax returns; and
WHEREAS, the execution and delivery of this Agreement by the parties hereto
is contemplated by the Subscription Agreement dated as of August 11, 1997 (the
"Subscription Agreement") between ATN and ECI and is a condition to the
Closing (as defined in the Subscription Agreement); and
WHEREAS, as a result of the Transactions, ECI and Aircraft Corp. will cease
to be members of the affiliated group of which ATN is the common parent as of
the end of the day which is the Closing Date; and
WHEREAS, ATN, ECI, Prior and Prosser desire to provide for and agree upon
the allocation among them of liabilities for Taxes arising prior to and as a
result of the Transactions, and to provide for and agree upon other matters
relating to Taxes;
NOW THEREFORE, in consideration of the mutual agreements contained herein,
ATN, ECI, Prior and Prosser hereby agree as follows:
Section 1. Definition of Terms. For purposes of this Agreement (including
the recitals hereof), the following terms have the following meanings:
"ACCOUNTING CUTOFF DATE" means, with respect to each of ATN and ECI, any
date as of the end of which there is a closing of the financial accounting
records for such entity.
"ACCOUNTING FIRM" shall have the meaning provided in Section 15.
"AFFILIATE" means any entity that directly or indirectly "controls" or is
"controlled" by the person or entity in question. "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person, whether through
ownership of voting securities, by contract or otherwise.
"AGREEMENT" means this Tax Sharing and Indemnification Agreement.
"ATN GROUP" means ATN and its Affiliates as determined immediately after the
Transactions.
"CLOSING" means the Closing as that term is defined in the Subscription
Agreement.
"CLOSING DATE" means the Closing Date as that term is defined in the
Subscription Agreement.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended, or any
successor law.
"COMPANIES" means ATN and ECI and "Company" means either ATN or ECI.
"DEBITS" shall have the meaning ascribed to it in the Subscription
Agreement.
"DISTRIBUTION" means the distribution to certain ATN shareholders on the
Closing Date of all of the outstanding stock of ECI owned by ATN.
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"ECI GROUP" means ECI and its Affiliates as determined immediately after the
Transactions.
"FEDERAL INCOME TAX" means any Tax imposed by Subtitle A of the Code, or to
the extent related to such Tax, any Tax imposed by Subtitle F of the Code.
"FINAL CLOSING ADJUSTMENT" shall have the meaning ascribed to it in the
Subscription Agreement.
"FINAL DETERMINATION" means the final resolution of any Tax liability for a
Tax Period, including any related interest or penalties, by (i) a decision of
the Tax Court or judgment, decree, or other order by a court of competent
jurisdiction, which has become final and unappealable; (ii) IRS Form 870-AD
(or any successor forms thereto), on the date of acceptance by or on behalf of
the Internal Revenue Service, or by a comparable agreement form under other
applicable Tax Laws; except that a Form 870-AD or comparable form that by its
terms reserves the right of the taxpayer to file a claim for refund and/or the
right of the Tax Authority to assert a further deficiency shall not constitute
a final determination; (iii) a closing agreement under Section 7121 of the
Code or under corresponding provisions of any subsequently enacted federal Tax
Laws, or comparable agreements under other applicable Tax Laws; and (iv) any
other final disposition by reason of the expiration of the applicable statute
of limitations.
"FOREIGN INCOME TAX" means any Tax imposed by any foreign country or any
territory or possession of the United States, or by any political subdivision
of any foreign country or United States territory or possession, which is an
income tax as defined in Treasury Regulation Section 1.901-2.
"GROUP" means the ATN Group or the ECI Group, as the context requires.
"GT&T" means Guyana Telephone & Telegraph Company Limited, a Guyana
corporation.
"INCOME TAX" means any Federal Income Tax, State Income Tax, or Foreign
Income Tax.
"INTERCOMPANY TAX ALLOCATION AGREEMENTS" means any written or oral agreement
or any other arrangements relating to allocation of Taxes existing between ATN
and Aircraft Corp. or any other member of the ECI Group in effect as of the
Closing Date (other than this Agreement).
"LETTER REQUEST" means the letter filed by ATN with the Internal Revenue
Service requesting a ruling from the Internal Revenue Service regarding
certain tax consequences of the Transactions, including the job descriptions
of certain officers and employees of ATN attached as Exhibit 9 to such letter
and the Revenue Procedure 96-30 Checklist attached as Exhibit 1 to such letter
and any amendment or supplement to such letter or such exhibits.
"LLC" means a limited liability company organized under the laws of Delaware
of which Prosser is the sole beneficial owner, member and manager and which is
disregarded as an entity separate from Prosser under Treasury Regulations
Section 301.7701-3.
"PAYMENT DATE" means (i) with respect to any Tax Return relating to Federal
Income Taxes, the due date for any required installment of estimated taxes
determined under Code Section 6655, the due date (determined without regard to
extensions) for filing the Tax Return determined under Code Section 6072, and
the date the Tax Return is filed, and (ii) with respect to any Tax Return
relating to other Taxes, the corresponding dates determined under the
applicable Tax Law.
"PERMITTED PLEDGE" means a bona fide pledge of stock or securities of ATN or
ECI by Prior or Prosser or the LLC to a bank (including, without limitation,
the RTFC) or brokerage firm as collateral for a full recourse loan to Prior or
Prosser or a loan to the LLC with full recourse to Prosser.
"POST-DISTRIBUTION PERIOD" means any Tax Period beginning after the Closing
Date, and, in the case of any Straddle Period, the portion of such Straddle
Period beginning the day after the Closing Date.
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"PRE-DISTRIBUTION PERIOD" means any Tax Period ending on or before the
Closing Date, and, in the case of any Straddle Period, the portion of such
Straddle Period ending on the Closing Date.
"PRIME RATE" means the base rate on corporate loans charged by Citibank,
N.A., New York, New York from time to time, compounded daily on the basis of a
year of 365 or 366 (as applicable) days and actual days elapsed.
"REPURCHASE AND RECAPITALIZATION AGREEMENT" means that certain repurchase
and recapitalization agreement dated as of August 11, 1997 by and among ATN,
Prior, individually and as Trustee of the 1994 Prior Charitable Remainder
Trust, and Prosser.
"RESPONSIBLE COMPANY" means, with respect to any Tax Return, the Company
having responsibility for preparing and filing such Tax Return under this
Agreement.
"RESTRUCTURING TAX" means any Taxes resulting from any income or gain
recognized as a result of the Transactions including, without limitation, any
Taxes resulting from any income or gain recognized as a result of the
Transactions failing to qualify for tax-free treatment under Code Sections 355
or 361 or other provisions of the Code (as contemplated by the Ruling Request)
and any Taxes resulting from any income or gain recognized under Treasury
Regulations Section 1.1502-13 or 1.1502-19 (or any corresponding provisions of
other applicable Tax Laws) as a result of the Transactions.
"RTFC" means the Rural Telephone Finance Cooperative.
"RULING REQUEST" means the letter filed by ATN with the Internal Revenue
Service requesting a ruling from the Internal Revenue Service regarding
certain tax consequences of the Transactions (including all attachments,
exhibits, and other materials submitted with such ruling request letter) and
any amendment or supplement to such ruling request letter.
"SPECIFIED ACTION" shall have the meaning provided in Section 10.
"STRADDLE PERIOD" means any Tax Period that begins on or before and ends
after the Closing Date.
"STATE INCOME TAX" means any Tax imposed by any State of the United States
or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.
"TAINTING ACT" shall have the meaning provided in Section 10.
"TAX" or "TAXES" means any Income Tax, any Tax on gross income, gross
receipts, profits, or capital stock, or any franchise, withholding, payroll,
social security, workers compensation, unemployment, disability, property, ad
valorem, stamp, excise, severance, occupation, service, sales, use, license,
lease, transfer, import, export, value added, alternative minimum, estimated
or other similar tax (including any fee, assessment, or other charge in the
nature of or in lieu of any tax) imposed by any governmental entity or
political subdivision thereof, and any interest, penalties, additions to tax,
or additional amounts in respect of the foregoing.
"TAX AUTHORITY" means, with respect to any Tax, the governmental entity or
political subdivision thereof that imposes such Tax, and the agency (if any)
charged with the collection of such Tax for such entity or subdivision.
"TAX CONTEST" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes or any claim for refund or credit of Taxes of any of ATN,
ECI or the Aircraft Corp. (including any administrative or judicial review
thereof) for any Tax Period ending on or before the Closing Date or any
Straddle Period.
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<PAGE>
"TAX ITEM" means, with respect to any Income Tax, any item of income, gain,
loss, deduction, or credit.
"TAX LAW" means the law of any governmental entity or political subdivision
thereof relating to any Tax.
"TAX PERIOD" means, with respect to any Tax, the period for which the Tax is
reported as provided under the Code or other applicable Tax Law.
"TAX RECORDS" means Tax Returns, Tax Return workpapers, documentation
relating to any Tax Contests, and any other books of account or records
required to be maintained under the Code or other applicable Tax Laws or under
any record retention agreement with any Tax Authority.
"TAX RETURN" means any report of Taxes due, any claim for refund or credit
of Taxes paid, any information return with respect to Taxes, or any other
similar report, statement, declaration, or document required or permitted to
be filed under the Code or other Tax Law, including any attachments, exhibits,
or other materials submitted with any of the foregoing, and including any
amendments or supplements to any of the foregoing.
"TRANSACTIONS" shall have the meaning ascribed to that term in the
Subscription Agreement.
"TRANSFER" shall have the meaning set forth in Section 11(a).
"TREASURY REGULATIONS" means the regulations promulgated from time to time
under the Code as in effect for the relevant Tax Period.
Section 2. Allocation of Tax Liabilities. The provisions of this Section 2
are intended to determine each of ATN's, ECI's, Prior's and Prosser's
liability for Taxes with respect to Pre-Distribution Periods. Once the
liability has been determined under this Section 2, Section 5 determines the
time when payment of the liability is to be made, and whether the payment is
to be made to the Tax Authority directly or to ATN or ECI, as the case may be.
2.01 Taxes of GT&T and the Virgin Islands Subsidiaries. This Agreement does
not allocate liability for Taxes imposed on GT&T, Atlantic Tele-Network Co., a
Virgin Islands corporation, or any of the subsidiaries of Atlantic Tele-
Network Co. (except for any withholding of Foreign Income Taxes imposed with
respect to payments made by any of such companies to ATN) and, as between the
parties to this Agreement, such Taxes and Tax Returns relating to such Taxes
shall be solely the responsibility of the legal entity on which such Taxes are
imposed.
2.02 ATN and ECI Liability.
(a) ATN Liability. Notwithstanding the provisions of Section 2.03, as
between ATN and ECI, ATN shall be liable for, and shall indemnify and hold
harmless the ECI Group from and against:
(i) any Restructuring Taxes which arise from any breach by ATN of its
representations or covenants under Section 10 or from any Tainting Act by
ATN or its Affiliates or the inaccuracy of any factual statements or
representations made in or in connection with the Ruling Request with
respect to the activities of ATN and its Affiliates after the Closing;
(ii) all Taxes to the extent taken into account in clauses (b) or (r) of
the definition of "Debits" for purposes of calculating the Final Closing
Adjustment;
(iii) an amount of Income Tax equal to the provision for income tax
expense of ATN which would be accrued on a hypothetical statement of
operations of ATN for the period after April 30, 1997 to and including the
Closing Date which statement of operations includes as revenues or gross
income only
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dividends paid by GT&T to ATN during such period, interest accrued during
such period on indebtedness of GT&T to ATN and advisory fees payable by
GT&T to ATN during such period (computed on an accrual basis) and includes
as expense all expenses of ATN during such period (to the extent such
expenses are deductible for Income Tax purposes) except for expenses
charged to ECI under clauses (c), (j), (k), (m), (n), (o), and (s) of the
definition of "Debits" in the Subscription Agreement;
(iv) any withholding of Foreign Income Taxes imposed with respect to
payments from GT&T to ATN; and
(v) 50% of all other Taxes (including Restructuring Taxes) of ATN or
Aircraft Corp. (in each case, whether computed on a separate company or
consolidated basis) with respect to all Pre-Distribution Periods, except
for Taxes described in clauses (i), (ii) or (iii) of Section 2.02(b).
(b) ECI Liability. Notwithstanding the provisions of Section 2.03, as
between ATN and ECI, ECI shall be liable for, and shall indemnify and hold
harmless the ATN Group from and against:
(i) Any Restructuring Taxes which arise from any breach by ECI of its
representations or covenants under Section 10 or from any Tainting Act by
ECI or its Affiliates or the inaccuracy of any factual statements or
representations made in or in connection with the Ruling Request with
respect to the activities of ECI and its Affiliates after the Closing;
(ii) 100% of all Taxes of ECI (computed on a separate company basis) for
all Pre-Distribution Periods;
(iii) any withholding of Foreign Income Taxes imposed with respect to
payments from Atlantic Tele-Network Co. or any of its subsidiaries to ATN
except to the extent taken into account in clauses (b) or (r) of the
definition of "Debits" for purposes of calculating the Final Closing
Adjustment; and
(iv) 50% of all other Taxes (including Restructuring Taxes) of ATN or
Aircraft Corp. (in each case, whether computed on a separate company or
consolidated basis) for all Pre-Distribution Periods, except for Taxes
described in clauses (i), (ii), (iii) or (iv) of Section 2.02(a).
Section 2.03 Liability of Prior and Prosser.
(a) Prior Liability. Prior shall be liable for, and shall indemnify and hold
harmless the ATN Group and the ECI Group from and against any liability for,
any Restructuring Taxes which arise from (x) any breach of Prior's
representations and covenants under Section 11(a) or (y) the inaccuracy of any
factual statements or representations relating to Prior or members of Prior's
family made in the Letter Request or in any certificate provided by Prior in
connection with the Ruling Request or in connection with an opinion of tax
counsel with respect to the Transactions.
(b) Prosser Liability. Prosser shall be liable for, and shall indemnify and
hold harmless the ATN Group and the ECI Group from and against any liability
for any Restructuring Taxes which arise from (x) any breach of Prosser's
representations and covenants under Section 11(b) or (y) the inaccuracy of any
factual statements or representations relating to Prosser or members of
Prosser's family made in the Letter Request or in any certificate provided by
Prosser in connection with the Ruling Request or in connection with an opinion
of tax counsel with respect to the Transactions.
Section 2.04. Expenses. Each of ATN, ECI, Prior and Prosser shall be liable
for all fees, costs and expenses, including without limitation reasonable
attorneys' fees, arising out of, or incident to, any proceeding before any Tax
Authority, or any judicial authority, with respect to any Taxes for which it
or he (as the case may be) is liable under Section 2.02(a) (in the case of
ATN), 2.02(b) (in the case of ECI), 2.03(a) (in the case of Prior) or 2.03(b)
(in the case of Prosser). In addition, an indemnified party under Section 2.02
or 2.03 shall be entitled to recover from the indemnifying party thereunder
all fees, costs and expenses, including without limitation reasonable
attorneys' fees, incurred by the indemnified party in connection with
enforcement of its rights to indemnification against the indemnifying party.
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Section 3. Proration of Taxes for Straddle Periods.
3.01 General Method of Proration. For purposes of Section 2, in the case of
any Straddle Period, Tax Items shall be apportioned between Pre-Distribution
Periods and Post-Distribution Periods in accordance with the principles of
Treasury Regulation Section 1.1502-76(b). No election shall be made under
Treasury Regulation Section 1.1502-76(b)(2)(ii) (relating to ratable
allocation of a year's items). If the Closing Date is not an Accounting Cutoff
Date, the provisions of Treasury Regulation Section 1.1502-76(b)(2)(iii) will
be applied to ratably allocate the items (other than extraordinary items) for
the month which includes the Closing Date.
3.02 Transaction Treated as Extraordinary Item. In determining the
apportionment of Tax Items between Pre-Distribution Periods and Post-
Distribution Periods, any Tax Item relating to the Transactions shall be
treated as an extraordinary item described in Treasury Regulation Section
1.1502-76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and
any Taxes related to any such Tax Item (including Restructuring Taxes) shall
be treated under Treasury Regulation Section 1.1502-76(b)(2)(iv) as relating
to such extraordinary item and shall be allocated to Pre-Distribution Periods.
3.03 Proration of Other Taxes. For purposes of Section 2, in the case of any
Straddle Period, Taxes that are not susceptible to apportionment in the manner
described in Section 3.01 (e.g., real and personal property taxes) shall be
apportioned between Pre-Distribution Periods and Post-Distribution Periods on
a pro rata basis based on the number of days in the relevant Tax Period.
Section 4. Preparation and Filing of Tax Returns.
4.01 General.
(a) All Tax Returns shall be prepared and filed when due (including
extensions) by the person obligated to file such Tax Returns under the Code or
applicable Tax Law. ATN and ECI shall provide, and shall cause their
respective Affiliates to provide, assistance and cooperate with one another in
accordance with Section 6 with respect to the preparation and filing of all
Tax Returns, including, without limitation, providing information required to
be provided in Section 6.
(b) ECI shall, for each Tax Period or portion thereof for which ECI or
Aircraft Corp. is included in a Tax Return required to be filed by ATN,
provide ATN with (i) a true and correct schedule in the form of a separate
Federal Income Tax Return for each of ECI and Aircraft Corp., and (ii) a
reconciliation of book income to federal taxable income for ECI and Aircraft
Corp. ECI hereby agrees to use its best efforts to provide ATN with such
schedules and computations no later than the first day of the sixth month
following the end of the period to which such schedules and computations
relate.
4.02 Manner of Filing.
(a) All Tax Returns filed or caused to be filed by ATN or ECI after the
Closing Date shall be prepared on a basis that is consistent with (i) any IRS
ruling obtained by ATN in connection with the Transactions, (ii) the treatment
of ATN's purchase pursuant to Article I of the Repurchase and Recapitalization
Agreement of 416,998 shares of common stock at ATN owned by Prior and 384,564
shares of common stock of ATN owned by the 1994 Prior Charitable Remainder
Trust as distributions of property to which Section 301 of the Code applies,
and (iii) the treatment of the transactions contemplated by Article II of the
Repurchase and Recapitalization Agreement as tax-free to ATN, Prior and
Prosser for Federal Income Tax purposes by reason of such transactions
qualifying as reorganizations within the meaning of Section 368(a) of the Code
or otherwise (in each case, in the absence of a controlling change in law or
circumstances), and shall be filed on a timely basis by the Responsible
Company.
(b) Except as otherwise agreed in writing by ATN and ECI, and in the absence
of a controlling change in law or circumstances, all Tax Returns filed or
caused to be filed by ATN or ECI after the Closing Date shall be prepared
consistent with past practices, elections, accounting methods, conventions,
and principles of taxation used for the most recent taxable periods for which
Tax Returns involving similar items have been filed prior to the Closing Date,
except that, with respect to any Tax Item not relating to the Transactions,
one party may take
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an inconsistent position without the agreement of the other party only to the
extent such position does not create a Tax detriment to the other party or any
member of such other party's Group.
Section 5. Tax Payments and Intercompany Billings.
5.01 Payment of Taxes With Respect to Pre-Distribution or Straddle Period
Returns Filed After the Distribution Date. In the case of any Tax Return
required to be filed by ATN under Section 4.01 with respect to a Pre-
Distribution Period or Straddle Period the due date for which Tax Return
(including extensions) is after the Closing Date, at least 10 business days
prior to any Payment Date, ATN (i) shall compute the amount of Tax required to
be paid to the relevant Tax Authority (taking into account the requirements of
Section 4.02(b) relating to consistent accounting practices) with respect to
such Tax Return on such Payment Date and (ii) shall send to ECI a written
notice and demand for payment by ECI of its share (if any) of such Tax payment
determined by ATN in accordance with Section 2.02(b) and accompanied by a
statement detailing the Taxes to be paid and describing in reasonable detail
the particulars relating thereto. ECI shall deliver to ATN on or before the
business day immediately preceding such Payment Date a cashier's check made to
the order of the applicable Tax Authority for the amount of ECI's share of
such Tax Payment, and ATN shall remit such check and make the remainder of
such Tax payment to the relevant Tax Authority on or before such Payment Date.
5.02 Payment of Tax Related to Adjustments. ATN shall pay to the relevant
Tax Authority when due any additional Taxes required to be paid as a result of
any adjustment to Taxes with respect to any Pre-Distribution Period. At least
10 business days before such additional Tax payment is due to be paid by ATN,
ATN shall send to ECI, Prior or Prosser, as the case may be, a written notice
and demand from ATN for payment by it or him, as the case may be, of its or
his share (if any) of any such additional Tax payment determined by ATN in
accordance with Section 2 accompanied by a statement detailing the Taxes to be
paid and describing in reasonable detail the particulars relating thereto;
provided, however, that ATN will not make a demand for an indemnification
payment attributable to any Restructuring Taxes under Section 2.02(b)(i) or
2.03 until the liability for such Restructuring Taxes either (i) is
established by a Final Determination or (ii) subject to Section 8.02, is
otherwise agreed to in writing by ATN with the applicable Tax Authority. ECI,
Prior or Prosser, as the case may be, shall pay to ATN, in immediately
available funds, ECI's or his share (if any) of any such additional Tax
Payment on or before the business day immediately preceding the date such
additional Tax is due to be paid by ATN; provided, however, that if any
portion of such additional Tax payment is indemnified by Prior or Prosser
under Section 2.03, (x) ECI may reduce the amount of its payment to ATN under
this Section 5.02 in respect of such additional Tax payment by 50% of the
amount of any indemnification payment in respect of such additional Tax
payment actually received by ATN from Prior or Prosser, as the case may be, on
or prior to the date that ECI is required to make such payment to ATN, and (y)
ATN shall immediately remit to ECI 50% of the amount of any indemnification
payment in respect of such additional Tax payment actually received by ATN
from Prior or Prosser, as the case may be, after ECI actually made a payment
to ATN under this Section 5.02 in respect of such additional Tax payment.
5.03 Indemnification Payments. Without overriding the procedures set forth
in Sections 5.01 and 5.02, if a Company (the "payor") pays to a Tax Authority
a Tax for which the other Company (the "responsible party") is liable under
this Agreement, the responsible party shall reimburse the payor within 10
business days of delivery by the payor to the responsible party of an invoice
for the amount due, accompanied by evidence of payment and a statement
detailing the Taxes paid and describing in reasonable detail the particulars
relating thereto. The reimbursement shall include interest on the Tax payment
computed at the Prime Rate based on the number of days from the date of the
payment to the Tax Authority to the date of reimbursement under this Section
5.03.
Section 6. Assistance and Cooperation.
6.01 General. After the Closing Date, each of ATN and ECI shall cooperate
(and cause their respective Affiliates to cooperate) with each other and with
each other's agents, including accounting firms and legal counsel, in
connection with Tax matters relating to ATN and ECI and their respective
Affiliates including,
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without limitation, (i) preparation and filing of Tax Returns, (ii)
determining the liability for and amount of any Taxes due (including estimated
Taxes) or the right to and amount of any refund of Taxes, (iii) examinations
of Tax Returns, and (iv) any administrative or judicial proceeding in respect
of Taxes assessed or proposed to be assessed. Such cooperation shall include
making all information and documents in their possession relating to the other
Company and its Affiliates reasonably available to such other Company as
provided in Section 7. Each of the Companies shall also make available to each
other, as reasonably requested and available, personnel (including officers,
directors, employees and agents of the Companies or their respective
Affiliates) responsible for preparing, maintaining, and interpreting
information and documents relevant to Taxes, and personnel reasonably required
as witnesses or for purposes of providing information or documents in
connection with any administrative or judicial proceedings relating to Taxes.
Any information or documents provided under this Section 6 shall be kept
confidential by the Company receiving the information or documents, except as
may otherwise be necessary in connection with the filing of Tax Returns or in
connection with any administrative or judicial proceedings relating to Taxes.
6.02 Income Tax Return Information. Each Company will provide to the other
Company information and documents relating to its Group required by the other
Company to prepare Tax Returns. The Responsible Company shall determine a
reasonable compliance schedule for such purpose in accordance with ATN's past
practices. Any additional information or documents the Responsible Company
requires to prepare such Tax Returns will be provided in accordance with past
practices, if any, or as the Responsible Company reasonably requests and in
sufficient time for the Responsible Company to file such Tax Returns timely.
Section 7. Tax Records.
7.01 Retention of Tax Records. Except as provided in Section 7.02, each of
ATN and ECI shall preserve and keep all Tax Records exclusively relating to
the assets and activities of its Group for Pre-Distribution Tax Periods and
all other Tax Records relating to Taxes of the Groups for Pre-Distribution Tax
Periods, for so long as the contents thereof may become material in the
administration of any matter under the Code or other applicable Tax Law, but
in any event until the later of (i) the expiration of any applicable statutes
of limitation, and (ii) seven years after the Closing Date. If, prior to the
expiration of the applicable statute of limitation and such seven-year period,
a Company reasonably determines that any Tax Records which it is required to
preserve and keep under this Section 7 are no longer material in the
administration of any matter under the Code or other applicable Tax Law, such
Company may dispose of such records upon 90 days prior notice to the other
Company. Such notice shall include a list of the records to be disposed of
describing in reasonable detail each file, book, or other record accumulation
to be disposed of. The notified Company shall have the opportunity, at its
cost and expense, to copy or remove, within such 90-day period, all or any
part of such Tax Records.
7.02 State and Foreign Income Tax Returns. Tax Returns with respect to State
Income Taxes and Foreign Income Taxes and workpapers prepared in connection
with preparing such Tax Returns shall be preserved and kept, in accordance
with the guidelines of Section 7.01, by the person responsible for preparing
and filing the applicable Tax Return.
7.03 Access to Tax Records. The Companies and their respective Affiliates
shall make available to each other for inspection and copying during normal
business hours upon reasonable notice all Tax Records in their possession to
the extent reasonably required by the other Company in connection with the
preparation of Tax Returns, audits, litigation, or the resolution of items
under this Agreement.
Section 8. Tax Contests.
8.01 Notice. Each of ATN and ECI shall provide prompt notice to the other
and to Prior and Prosser of any pending or threatened Tax audit, assessment or
proceeding or other Tax Contest of which it becomes aware related to Taxes for
Tax Periods for which it is indemnified by the other or Prior or Prosser, as
the case may be, hereunder. Such notice shall contain factual information (to
the extent known) describing any asserted Tax liability in reasonable detail
and shall be accompanied by copies of any notice and other documents received
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from any Tax Authority in respect of any such matters. If an indemnified party
has knowledge of an asserted Tax liability for which it is to be indemnified
hereunder and such party fails to give the indemnifying party prompt notice of
such asserted Tax liability, such failure to give notice will not relieve the
indemnifying party of its obligations hereunder, except to the extent that the
indemnifying party is materially prejudiced by such failure.
8.02 Control of Tax Contests. Each of ATN and ECI shall have full
responsibility and discretion in handling, settling or contesting any Tax
Contest involving a Tax Return for which it has filing responsibility pursuant
to Section 4 of this Agreement; provided, however, ECI, Prior or Prosser, at
it or his sole cost and expense, may participate in any Tax Contest with
respect to any Restructuring Taxes for which it or he has liability or an
indemnification obligation with respect to such Taxes under this Agreement;
provided, further, that ECI, at its sole cost and expense and employing Cahill
Gordon & Reindel or other counsel reasonably acceptable to ATN, shall be
permitted to jointly share with ATN, employing Fried, Frank, Harris, Shriver &
Jacobson or other counsel reasonably acceptable to ECI, the responsibility and
discretion in handling, settling or contesting any Tax Contest with respect to
any Taxes for which ECI has liability or an indemnification obligation to ATN
with respect to such Taxes, unless ECI fails to provide to ATN a written
acknowledgment of ECI's potential liability for such Taxes or indemnification
obligation to ATN with respect to such Taxes within 10 business days of ECI's
receipt of a written request by ATN therefor. Except as otherwise provided in
Section 2.04 hereof, any costs incurred in handling, settling or contesting
any Tax Contest shall be borne by the party having full responsibility and
discretion thereof.
Section 9. Effective Date; Termination of Prior Intercompany Tax Allocation
Agreements. This Agreement shall be effective on the Closing Date. Immediately
prior to the close of business on the Closing Date, all Intercompany Tax
Allocation Agreements shall be terminated.
Section 10. No Inconsistent Actions.
(a) Each of the Companies covenants and agrees that, except as disclosed in
the Letter Request, it will not take any action, and it will cause its
Affiliates to refrain from taking any action, which may be inconsistent with
the Tax treatment of the Transactions as contemplated in the Ruling Request
(any such action is referred to in this Section 10 as a "Tainting Act"),
unless (i) the Company or Affiliate thereof proposing such Tainting Act (the
"Requesting Party") either (A) obtains a ruling with respect to the Tainting
Act from the Internal Revenue Service or other applicable Tax Authority that
is reasonably satisfactory to the other Company (the "Requested Party")
(except that the Requesting Party shall not submit any such ruling request if
a Requested Party determines in good faith that filing such request might have
a materially adverse effect upon such Requested Party), or (B) obtains an
unqualified opinion, reasonably satisfactory in form and substance to
Requested Party, of Fried, Frank, Harris, Shriver & Jacobson or Cahill Gordon
& Reindel or other independent nationally recognized tax counsel acceptable to
the Requested Party, on a basis of assumed facts and representations
consistent with the facts at the time of such action, that such Tainting Act
will not affect the Tax treatment of the Transactions as contemplated in the
Ruling Request, or (ii) the Requested Party consents in writing to such
Tainting Act, which consent shall be granted or withheld in the sole and
absolute discretion of the Requested Party. Without limiting the foregoing:
(i) Specified Actions. During the two-year period beginning on (and
including) the Closing Date, unless clause (i) or (ii) of the preceding
paragraph is satisfied with respect to the applicable action, and except as
disclosed in the Letter Request, ATN and ECI will not (and neither will
cause or permit any of its Affiliates to) (A) liquidate or merge with or
into any other corporation; (B) issue any capital stock that in the
aggregate exceeds 45%, by vote or value, of its capital stock issued and
outstanding immediately after the Distribution; (C) redeem, purchase or
otherwise reacquire its capital stock issued and outstanding immediately
after the Distribution (other than through stock purchases meeting the
requirements of section 4.05(1)(b) of Rev. Proc. 96-30); (D) make a
material disposition (including transfers from one member of a Group to
another member of that Group) or cessation of operations by means of a sale
or exchange of assets or capital stock, a distribution to stockholders, or
otherwise, of the assets constituting the trades or
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businesses relied upon in the Ruling Request to satisfy Section 355(b) of
the Code; or (E) discontinue or cause to be discontinued the active conduct
of the trades or businesses relied upon in the Ruling Request to satisfy
Section 355(b) of the Code (each of the foregoing, a "Specified Action").
(ii) No Inconsistent Plan or Intent. Each of ATN and ECI represents and
warrants that it shall, and shall cause each of its Affiliates to, comply
with each factual statement and representation in the Ruling Request, and
that neither it nor any of its Affiliates has any plan or intent to take
any Specified Action or any action which is inconsistent with any factual
statements or representations in the Ruling Request. Regardless of any
change in circumstances, each of ATN and ECI covenants and agrees that it
will not take, and it will cause its Affiliates to refrain from taking, any
such Specified Action or inconsistent action on or before the last day of
the calendar year ending after the second anniversary of the Closing Date
other than as permitted in this Section 10.
(iii) Amended or Supplemental Rulings. Each of ATN and ECI covenants and
agrees that it will not file, and it will cause its Affiliates to refrain
from filing, any amendment or supplement to the Ruling Request subsequent
to the Closing Date without the consent of the other, which consent shall
not be unreasonably withheld.
(b) Notwithstanding anything to the contrary in this Agreement, each Company
shall be solely liable for, and shall indemnify and hold harmless the other
Company from any Restructuring Tax resulting from a Tainting Act by such first
Company or its Affiliates, regardless of whether clause (i) or (ii) of Section
10(a) was satisfied with respect to such Tainting Act.
Section 11. Certain Representations and Covenants of Prior and Prosser.
(a) Representations and Covenants of Prior.
(i) Transfer Restrictions. Prior represents and warrants that he has no
plan or intention to sell, exchange, transfer by gift, pledge or otherwise
dispose of or encumber, whether actually or constructively by means of a
short sale, equity swap, forward or futures contract, option or otherwise
(collectively, a "Transfer") any stock or securities of ATN, or any
beneficial or financial interest therein, after the Transactions except for
Permitted Pledges. Prior covenants and agrees that during the two-year
period beginning on (and including) the Closing Date, without the prior
written consent of ECI (which consent ECI may grant or withhold in its sole
discretion), he will not Transfer any stock or securities of ATN, or any
beneficial or financial interest therein, except for Permitted Pledges,
unless he first obtains either (A) a ruling with respect to the Transfer
from the Internal Revenue Service or other applicable Tax Authority that is
reasonably satisfactory to ECI (acting on advice of counsel, such counsel
to be reasonably satisfactory to ATN) or (B) an unqualified opinion,
reasonably satisfactory in form and substance to ECI (acting on advice of
counsel, such counsel to be reasonably satisfactory to ATN), of Fried,
Frank, Harris, Shriver & Jacobson or other independent nationally
recognized tax counsel acceptable to ECI, on a basis of assumed facts and
representations consistent with the facts at the time of such Transfer,
that such Transfer will not affect the Tax treatment of the Transactions as
contemplated in the Ruling Request. In order to ensure compliance with the
requirements of this Section 11(a)(i), during the two-year period beginning
on (and including) the Closing Date, Prior shall maintain at least a
majority of the outstanding common stock of ATN (or all stock or securities
in ATN owned by him if he shall then own less than a majority of the
outstanding common stock of ATN) in accounts with one or more banks or
brokerage firms (collectively, "Financial Institutions"), which accounts
may be margin accounts, provided that each such Financial Institution shall
deliver a written undertaking to ECI stating that such Financial
Institution will not permit any Transfer of Mr. Prior's stock or securities
in ATN from such account without the prior written approval of ECI except
for (i) sales of such stock or securities made by such Financial
Institution for the purpose of obtaining repayment of any loans or advances
made to Prior by such Financial Institution following a default by Prior in
respect of such loans or advances, and (ii) any Transfer of such stock or
securities from an account of Prior with such Financial Institution to an
account of Prior with another Financial Institution which shall have given
ECI a written undertaking described in this Section 11(a)(i).
Notwithstanding anything to the contrary in this Agreement, Prior shall be
liable for, and shall indemnify and hold harmless the ATN Group
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and the ECI Group from and against any liability for, any Restructuring
Taxes which arises out of any Transfer of any of his stock or securities in
ATN or any beneficial or financial interest therein (including, without
limitation, any sale of stock subject to a Permitted Pledge on foreclosure
of such pledge) regardless of whether the provisions of this Section
11(a)(i) were satisfied with respect to such Transfer.
(ii) No Inconsistent Plan or Intent. Prior represents and warrants that
he has no plan or intent to cause ATN or any of its Affiliates to take any
Tainting Act (including any Specified Action) or any action inconsistent
with any factual statement or representation in the Letter Request. Prior
covenants and agrees that, so long as he owns a majority of the voting
power of the outstanding capital stock of ATN, he will cause ATN and its
Affiliates to refrain from taking any Tainting Act (including any Specified
Action) or any action inconsistent with any factual statement or
representation in the Letter Request on or before the last day of the
calendar year ending after the second anniversary of the Closing Date other
than as permitted in Section 10.
(b) Representations and Covenants of Prosser.
(i) Transfer Restrictions. Prosser represents and warrants that other
than a Transfer of ECI stock to the LLC, neither he nor the LLC has any
plan or intention to sell, exchange, transfer by gift, pledge or otherwise
dispose of or encumber, whether actually or constructively by means of a
short sale, equity swap, forward or futures contract, option or otherwise
(collectively, a "Transfer") any ownership interest, stock or securities of
ECI or the LLC, or any beneficial or financial interest therein, after the
Transactions except for Permitted Pledges. Prosser covenants and agrees
that during the two-year period beginning on (and including) the Closing
Date, without the prior written consent of ATN (which consent ATN may grant
or withhold in its sole discretion), (x) neither he nor the LLC will
Transfer any ownership interest, stock or securities of ECI or the LLC, or
any beneficial or financial interest therein, except for Permitted Pledges,
(y) Prosser will remain the only beneficial owner, member and manager of
the LLC and (z) Prosser will not take and will not permit the LLC to take
any action which would result in the LLC not being disregarded as an entity
separate from Prosser under Treasury Regulations section 301.7701-3, unless
he first obtains either (A) a ruling with respect to the Transfer, Prosser
ceasing to be the only beneficial owner, member and manager of the LLC or
any such action referred to in the preceding clause (z), as the case may
be, from the Internal Revenue Service or other applicable Tax Authority
that is reasonably satisfactory to ATN (acting on advice of counsel, such
counsel to be reasonably satisfactory to ECI) or (B) an unqualified
opinion, reasonably satisfactory in form and substance to ATN (acting on
advice of counsel, such counsel to be reasonably satisfactory to ECI), of
Cahill Gordon & Reindel or other independent nationally recognized tax
counsel acceptable to ATN, on a basis of assumed facts and representations
consistent with the facts at the time of such Transfer, or at the time that
Prosser ceases to be the sole beneficial owner, member and manager of the
LLC or takes any action or permits the LLC to take any action referred to
in the preceding clause (z), as the case may be, that such Transfer,
Prosser ceasing to be the sole beneficial owner, member and manager of the
LLC or the taking of any action referred to in the preceding clause (z), as
the case may be, will not affect the Tax treatment of the Transactions as
contemplated in the Ruling Request. In order to ensure compliance with the
requirements of this Section 11(b)(i), during the two-year period beginning
on (and including) the Closing Date, Prosser, together with the LLC, shall
maintain at least a majority of the outstanding common stock of ECI (or all
stock or securities in ECI owned by him and the LLC if he, together with
the LLC, shall then own less than a majority of the outstanding common
stock of ECI) in accounts with one or more banks (including, without
limitation, the RTFC) or brokerage firms (collectively, "Financial
Institutions"), which accounts may be margin accounts, provided that each
such Financial Institution shall deliver a written undertaking to ATN
stating that such Financial Institution will not permit any Transfer of Mr.
Prosser's or the LLC's stock or securities in ECI from such account without
the prior written approval of ATN except for (i) sales of such stock or
securities made by such Financial Institution for the purpose of obtaining
repayment of any loans or advances made to Prosser or the LLC by such
Financial Institution following a default by Prosser or the LLC in respect
of such loans or advances, and (ii) any Transfer of such stock or
securities from an account of Prosser or the LLC with such Financial
Institution to an account of Prosser or the LLC with another Financial
Institution which shall have given ATN a written undertaking described in
this Section 11(b)(i). Notwithstanding anything to the contrary in
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this Agreement, Prosser shall be liable for, and shall indemnify and hold
harmless the ATN Group and the ECI Group from and against any liability
for, any Restructuring Taxes which arises out of (w) any Transfer of any of
his ownership interest, stock or securities in ECI or the LLC or any
beneficial or financial interest therein (including, without limitation,
any sale of stock subject to a Permitted Pledge on foreclosure of such
pledge) (x) any Transfer of any of the LLC's stock or securities in ECI or
any beneficial or financial interest therein including, without limitation,
any sale of Stock subject to a Permitted Pledge on foreclosure of such
pledge, (y) Prosser ceasing to be the sole beneficial owner, member and
manager of the LLC or (z) Prosser taking any action or permitting the LLC
to take any action which would result in the LLC ceasing to be disregarded
as an entity separate from Prosser under Treasury Regulations section
301.7701-3, as the case may be, regardless of whether the provisions of
this Section 11(b)(i) were satisfied with respect to such Transfer.
(ii) No Inconsistent Plan or Intent. Prosser represents and warrants that
he has no plan or intent to cause ECI or any of its Affiliates to take any
Tainting Act (including any Specified Action) or any action inconsistent
with any factual statement or representation in the Letter Request. Prosser
covenants and agrees that, so long as he owns a majority of the voting
power of the outstanding capital stock of ECI, he will cause ECI and its
Affiliates to refrain from taking any Tainting Act (including any Specified
Action) or any action inconsistent with any factual statement or
representation in the Letter Request on or before the last day of the
calendar year ending after the second anniversary of the Closing Date other
than as permitted in Section 10.
(c) Upon compliance by Prior or Prosser with the requirements for a Transfer
specified in Sections 11(a)(i) or 11(b)(i), ECI or ATN, as the case may be,
shall promptly give written permission for such Transfer to the Financial
Institution holding the stock or securities proposed to be Transferred).
Section 12. Survival of Obligations. The representations, warranties,
covenants and agreements set forth in this Agreement shall be unconditional
and absolute and shall remain in effect without limitation as to time.
Section 13. Treatment of Payments; Tax Gross Up.
13.01 Treatment of Tax Indemnity Payments. In the absence of any change in
tax treatment under the Code or other applicable Tax Law, any Tax indemnity
payments made by a Company under Section 5 shall be reported for Tax purposes
by the payor and the recipient as distributions or capital contributions, as
appropriate, occurring immediately before the Distribution on the Closing
Date, but only to the extent the payment does not relate to a Tax allocated to
the payor in accordance with Treasury Regulation Section 1.1502-33(d) (or
under corresponding principles of other applicable Tax Laws).
13.02 Tax Gross Up. If notwithstanding the manner in which Tax indemnity
payments were reported, there is an adjustment to the Tax liability of a
Company as a result of its receipt of a Tax indemnity payment in respect of
Restructuring Taxes resulting from a breach of a representation or covenant
made hereunder by the indemnifying party, such payment shall be appropriately
adjusted so that the amount of such payment, reduced by the amount of all
Income Taxes payable with respect to the receipt thereof, shall equal the
amount of the payment which the Company receiving such payment would otherwise
be entitled to receive pursuant to this Agreement.
Section 14. Disagreements. If after good faith negotiations the parties
cannot agree on the application of this Agreement to any matter, then the
matter will be referred to a nationally recognized accounting firm acceptable
to each of the parties (the "Accounting Firm"). The Accounting Firm shall
furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days
after its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this
Agreement. In accordance with Section 17, each party shall pay its own fees
and expenses (including the fees and expenses of its representatives) incurred
in connection with the referral of the matter to the Accounting Firm. All fees
and expenses of the Accounting Firm in connection with such referral shall be
shared equally by the parties affected by the matter.
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Section 15. Late Payments. Any amount owed by one party to another party
under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus two percent, compounded semiannually, from the due date of the
payment to the date paid. To the extent interest required to be paid under
this Section 15 duplicates interest required to be paid under any other
provision of this Agreement, interest shall be computed at the higher of the
interest rate provided under this Section 15 or the interest rate provided
under such other provision.
Section 16. Expenses. Except as provided in Section 14 and Section 2.04,
each party and its Affiliates shall bear their own expenses incurred in
connection with preparation of Tax Returns, Tax Contests, and other matters
related to Taxes under the provisions of this Agreement.
Section 17. General Provisions
17.01 Addresses and Notices. Any notice, demand, request or report required
or permitted to be given or made to any party under this Agreement shall be in
writing and shall be deemed given or made when delivered in party or when sent
by first class mail or by other commercially reasonable means of written
communication (including delivery by an internationally recognized courier
service or by facsimile transmission) to the party at the party's address as
follows:
If to ATN or Prior:
Atlantic Tele-Network, Inc.
Estate Havensight
P.O. Box 12030
St. Thomas, U.S. Virgin Islands 00801
(340) 774-2260 or 777-8000
Attention: Cornelius B. Prior
Telecopy: (809) 774-7790
With a copy to:
Lewis A. Stern, P.C.
Fried, Frank, Harris, Shriver
& Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8190
Telecopy: (212) 859-8587
If to ECI or Prosser:
Atlantic Tele-Network, Inc.
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 06821-1730
(340) 777-8000
Attention: Jeffrey J. Prosser
Telecopy: (809) 774-5487
With a copy to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
(212) 701-3851
Telecopy: (212) 269-5420
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A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.
17.02 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and assigns.
17.03 Waiver. No failure by any party to insist upon the strict performance
of any obligation under this Agreement or to exercise any right or remedy
under this Agreement shall constitute waiver of any such obligation, right, or
remedy or any other obligation, rights, or remedies under this Agreement.
17.04 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein
shall not be affected thereby.
17.05 Further Action. The parties shall execute and deliver all documents,
provide all information, and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement, including
the execution and delivery to the other parties and their Affiliates and
representatives of such powers of attorney or other authorizing documentation
as is reasonably necessary or appropriate in connection with Tax Contests (or
portions thereof) under the control of such other parties in accordance with
Section 8.
17.06 Integration. This Agreement constitutes the entire agreement among the
parties pertaining to the subject matter of this Agreement and supersedes all
prior agreements and understandings pertaining thereto. In the event of any
inconsistency between this Agreement and any other agreements relating to the
Transactions, the provisions of this Agreement shall control.
17.07 Construction. The language in all parts of this Agreement shall in all
cases be construed according to its fair meaning and shall not be strictly
construed for or against any party.
17.08 No Double Recovery; Subrogation. No provision of this Agreement shall
be construed to provide an indemnity or other recovery for any costs, damages,
or other amounts for which the damaged party has been fully compensated under
any other provision of this Agreement or under any other agreement or action
at law or equity. Unless expressly required in this Agreement, a party shall
not be required to exhaust all remedies available under other agreements or at
law or equity before recovering under the remedies provided in this Agreement.
Subject to any limitations provided in this Agreement, the indemnifying party
shall be subrogated to all rights of the indemnified party for recovery from
any third party.
17.09 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
17.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
the respective officers as of the date set forth above.
Atlantic Tele-Network, Inc.
By: _________________________________
Its: ________________________________
Emerging Communications, Inc.
By: _________________________________
Its: ________________________________
Cornelius B. Prior, Jr.
-------------------------------------
Jeffrey P. Prosser
-------------------------------------
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ANNEX B
PRIVATE AND CONFIDENTIAL
July 7, 1997
The Board of Directors
Atlantic Tele-Network, Inc.
Chase Financial Center
PO Box 1730
St. Croix, U.S. Virgin Islands, 00821
Members of the Board:
We understand that Atlantic Tele-Network, Inc., a Delaware corporation (the
"Company"), proposes to effect a reorganization and separation of the
businesses of the Company involving the adoption by the stockholders of the
Company of the following agreements:
(i) the Subscription Agreement between the Company and Emerging
Communications, Inc., a Delaware corporation and newly formed wholly owned
subsidiary of the Company ("ECI"), pursuant to which the Company will
transfer certain assets and liabilities to ECI so that all of the assets,
liabilities and operations of (a) the Company's business and operations of
the Virgin Islands and certain other assets and liabilities of the Company
will be owned by ECI and (b) the Company's business and operations in
Guyana will continue to be owned by the Company (the Company, after
consummation of the transaction, to be hereinafter referred to as "New
ATN") (the "Subscription Agreement");
(ii) the Recapitalization Agreement, among the Company, Mr. Cornelius
Prior, co-chief executive officer and a principal stockholder of the
Company ("Prior"), individually and as trustee of the 1994 Charitable
Remainder Trust (the "Trust"), and Mr. Jeffrey Prosser, co-chief executive
officer and a principal stockholder of the Company ("Prosser"), pursuant to
which the Company will repurchase in the aggregate 765,562 shares of
Company Common Stock (as defined in the Recapitalization Agreement) owned
by Prior and the Trust at $22.7284 per share. Prior will exchange all of
his remaining 2,927,038 shares of Company Common Stock for a like number of
shares of a new series of common stock of the Company to be designated
Class B Common Stock (as defined in the Recapitalization Agreement), and
Prosser will exchange all of his 3,325,000 shares of Company Common Stock
for a like number of shares of a new series of common stock of the Company
to be designated Class A Common Stock (as defined in the Recapitalization
Agreement) (the "Recapitalization Agreement"); and
(iii) the Agreement and Plan of Merger, between ATN Merger Co., a
Delaware corporation ("Mergerco"), and the Company, pursuant to which (i)
Mergerco will be merged with and into the Company (the "Merger"), (ii) each
share of Company Common Stock (but not the newly created Class A Common
Stock and Class B Common Stock to be issued prior to the Merger) will be
converted into the right to receive four-tenths (0.4) of a share of New ATN
common stock, par value $0.01 (the "New ATN Common Stock"), and one share
(1.0) of ECI common stock, par value $0.01 (the "ECI Common Stock"), (iii)
the outstanding shares of Class A Common Stock of the Company will be
converted into the right to receive in the aggregate 5,704,231 shares of
ECI Common Stock, and (iv) the outstanding shares of Class B Common Stock
of the Company will be converted into the right to receive in the aggregate
2,807,040 shares of New ATN Common Stock (the "Merger Agreement" and
together with the Subscription Agreement and the Recapitalization
Agreement, the "Agreements").
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You have requested our opinion as to the fairness from a financial point of
view of the basic economic terms of the transaction provided for by the
Agreements to the Public Stockholders (defined as all holders of the Company
Common Stock except for Prior, the Trust, and Prosser and his family) of the
Company.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and analyzed such financial and other factors as
we deemed relevant under the circumstances, including, but not limited to:
(i) drafts dated June 16, 1997 of the Agreements (excluding the schedules
to the Subscription Agreement) and certain ancillary agreements and
exhibits to the Subscription Agreement;
(ii) a draft dated June 27, 1997 of the Proxy Statement/Prospectus on
Form S-4;
(iii) a copy of the Rural Telephone Finance Cooperative loan commitment
letter, dated April 14, 1997;
(iv) certain publicly-available historical financial and operating data
of the Company, including, but not limited to, (a) the Annual Reports on
Form 10-K of the Company for the fiscal years ended December 31, 1994, 1995
and 1996, (b) the Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, and (c) the Proxy Statement for the Annual Meeting of
Stockholders held on April 30, 1997;
(v) certain information relating to New ATN and ECI, including projected
income statements, balance sheets and cash flow data for the fiscal years
ending December 31, 1997, 1998, 1999 and 2000 which were prepared by the
management of the Company;
(vi) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed comparable to
ECI, or otherwise relevant to our inquiry;
(vii) the historical stock prices and trading volumes, and current
trading multiples of the Company Common Stock; and
(viii) such other financial studies, analyses, reviews and investigations
that we deemed appropriate.
We have assumed, with your consent, that the drafts of the Agreements which
we reviewed (as referred to above) will conform in all material respects to
those documents when in final form.
We have met with the senior management of the Company to discuss (i) the
prospects for the respective businesses of New ATN and ECI, (ii) their
estimates of such businesses' future financial performance, (iii) the
financial impact of the transaction as provided for by the Agreements on the
respective companies and (iv) such other matters that we deemed relevant.
In connection with our review and analysis and in arriving at our opinion,
we have assumed and relied upon the accuracy and completeness of the financial
and other information provided to us by the Company and we have not assumed
any responsibility for the verification of such information or any independent
valuation or appraisal of any of the assets or liabilities of New ATN or those
to be transformed or assumed by ECI. With respect to certain projected
financial data, provided to us by the Company for New ATN and for ECI, we have
assumed that such information (and the assumptions and bases therefor) has
been reasonably prepared and represents management's best currently available
estimate as to the future financial performance of New ATN and of ECI. Our
opinion is predicated on (i) the Company's transfer of certain of its assets
and liabilities to ECI qualifying as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and (ii) the distribution of ECI Common Stock to the holders of the Company
Common Stock being treated as a tax-free exchange for federal income tax
purposes to the Company under Section 355 (c)(1) or 361(c)(1) of the Code and
to such holders under Section 355(a) of the Code. Further, our opinion is
necessarily based on economic, financial and market conditions as they exist
and can only be evaluated as of the date hereof.
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Our opinion does not address nor should it be construed to address the
relative merits of the transaction . In addition, this opinion does not in any
manner address the prices at which New ATN Common Stock or the ECI Common
Stock will trade following consummation of the transaction.
As you know, we have been retained by the Board of Directors of the Company
to render this opinion in connection with the transaction provided for by the
Agreements and will receive a fee for such services, which fee is not
contingent upon the consummation of the transaction. In 1996, we were engaged
as the Company's financial advisor in connection with the Company's
exploration of strategic alternatives. Pursuant to our prior engagement
letter, we did not receive a fee for such services. In the ordinary course of
business we may actively trade the shares of the Company Common Stock for our
own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such security.
This letter and the opinion expressed herein are for the use of the Board of
Directors of the Company. This opinion is not intended to be and does not
constitute a recommendation to the stockholders of the Company as to how such
stockholders should vote or as to any other action such stockholders should
take regarding the transaction. This opinion may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in
any manner, without our prior written consent; except that the Company may
include this opinion in its entirety in any proxy statement relating to the
transaction sent to the Company's stockholders which we have had prior
opportunity to review.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the basic economic terms of the transaction provided for by
the Agreements is fair to the Public Stockholders of the Company from a
financial point of view.
Very truly yours,
Prudential Securities Incorporated
3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF ECI
LIMITATION OF LIABILITY OF DIRECTORS
The Restated Certificate of Incorporation of ECI provides that a director
will not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the General Corporation Law of the State of Delaware,
which concerns unlawful payments of dividends, stock purchases or redemptions
or (iv) for any transaction from which the director derived an improper
personal benefit.
While these provisions provide directors with protection from award for
monetary damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions described
above apply to an officer of the corporation only if he or she is a director
of the corporation and is acting in his or her capacity as director, and do
not apply to officers of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation and By-Laws of ECI will provide
that each person who was or is a party or is threatened to be made a party to,
or is involved, in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation or, while a
director or officer of the corporation, is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer , employee or agent, will be indemnified and held harmless by the
corporation to the fullest extent permitted by the laws of the State of
Delaware, as the same exists or may hereafter be amended, against all expense,
liability and loss (including attorneys' fees, judgments, amounts paid in
settlement, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) actually and reasonably incurred or suffered by such
person in connection therewith, and such indemnification will continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrators.
Notwithstanding the preceding sentence, the corporation will be required to
indemnify an indemnitee in connection with a proceeding (or part thereof)
commenced by such indemnitee only if the commencement of such proceeding (or
part thereof) by the indemnitee was authorized by the Board of directors of
the corporation.
ECI will be authorized to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any expense, liability or
loss incurred by such person in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability.
ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES
(a) Exhibits
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<C> <S>
2.1 Subscription Agreement, dated as of August 11, 1997, between Atlantic
Tele-Network, Inc. and Emerging Communications, Inc. (included in Annex A
to Proxy Statement--Prospectus).
2.2 Repurchase and Recapitalization Agreement, dated as of August 11, 1997,
among Atlantic Tele-Network, Inc., Cornelius B. Prior, Jr., individually
and as trustee of the 1994 Prior Charitable Remainder Trust, and Jeffrey
J. Prosser (included in Annex A to Proxy Statement--Prospectus).
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
2.3 Agreement and Plan of Merger, dated as of August 11, 1997, between ATN
Merger Co, and Atlantic Tele-Network, Inc. (included in Annex A to
Proxy Statement--Prospectus).
2.4 Principal Terms Agreement, dated as of January 29, 1997, Relating to
the Division of Atlantic Tele-Network, Inc. by and among Atlantic Tele-
Network, Inc., Cornelius B. Prior, Jr. and Jeffrey J. Prosser.+
3.1 Form of Restated Certificate of Incorporation of Emerging
Communications, Inc. (included in Annex A to Proxy Statement--
Prospectus).+
3.2 Form of By-laws of Emerging Communications, Inc.+
4.1 Specimen Form of Emerging Communications, Inc.'s Stock Certificate+
4.2 Supplemental Stockholders' Agreement, dated as of December 29, 1987,
among Mr. Prosser, Mr. Prior, E.F. Hutton LBO, Inc., Atlantic Tele-
Network Co. and the Rural Telephone Finance Cooperative, as amended
April 30, 1991.+
5.1 Opinion of Cahill Gordon & Reindel with respect to the legality of the
securities registered hereby.+
10.1 Form of Employment Agreement, between Emerging Communications, Inc. and
Mr. Prosser.+
10.2 Loan Agreement, dated as of December 29, 1987, among Atlantic Tele-
Network, Co. and Virgin Islands Telephone Corporation, as Borrowers,
and the Rural Telephone Finance Cooperative, as Lender, as amended on
July 7, 1989, May 10, 1990, April 30, 1991, August 21, 1991, May 18,
1994 and June 9, 1994 (excluding exhibits).**
10.3 Guarantee and Pledge Agreement, dated as of December 29, 1987, between
Atlantic Tele-Network Co. and the Rural Telephone Finance Cooperative,
as amended on August 31, 1988.+
10.4 Telephone Loan Contract, dated as of May 15, 1990, between Virgin
Islands Telephone Corporation and the United States of America, acting
through the Administrator of the Rural Electrification
Administration.***
10.5 Supplemental Mortgage and Security Agreement, dated as of May 29, 1990,
among Virgin Islands Telephone Corporation, as Mortgagor, the United
States of America and Rural Telephone Finance Cooperative, as
Mortgagee, Vitelcom, Inc. (excluding exhibits).***
10.6 Supplemental Agreement, dated as of May 10, 1990, among Virgin Islands
Telephone Corporation, as Mortgagor, Vitelcom, Inc., and the Rural
Telephone Finance Cooperative, as Mortgagee.+
10.7 Virgin Islands Public Service Commission Order, dated April 19, 1989,
approving Settlement Order, dated April 19, 1989, among Virgin Islands
Telephone Corporation, Atlantic Tele-Network Co., the Rural Telephone
Finance Cooperative, Vitelcom, Inc. and the Virgin Islands Public
Service Commission.***
10.8 Virgin Islands Public Service Commission Order, dated November 4, 1991,
embodying the Settlement Agreement, effective as of July 26, 1991,
among Virgin Islands Telephone Corporation, Atlantic Tele-Network Co.
and the Virgin Islands Public Service Commission.***
10.9 Virgin Islands Public Service Commission Order, dated August 12, 1992,
embodying the Settlement Agreement, effective as of August 5, 1992,
between Virgin Islands Telephone Corporation and the Virgin Islands
Public Service Commission, annexed thereto.***
10.10 Settlement Agreement, dated June 22, 1993, between Virgin Islands
Telephone Corporation and the Virgin Islands Public Service
Commission.****
10.11 Memorandum of Understanding, dated as of June 23, 1993, between the
Government of the Virgin Islands, by and through its Police Department,
and Virgin Islands Telephone Corporation.****
</TABLE>
- --------
** Filed as an Exhibit to Atlantic Tele-Network, Inc.'s Registration
Statement (File No. 33-43012) and incorporated by reference herein,
except for amendments dated May 18, 1994 and June 9, 1994, which are
filed herewith.
*** Filed as an Exhibit to Atlantic Tele-Network, Inc.'s Registration
Statement (File No. 33-43012) and incorporated herein by reference
herein.
**** Filed as an Exhibit to Atlantic Tele-Network, Inc.'s Quarterly Report on
Form 10-Q for the Quarter ended June 30, 1993 and incorporated by
reference herein.
+ Previously filed.
II-2
<PAGE>
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<C> <S>
10.12 Loan Agreement, dated as of May 29, 1990 between Atlantic Tele-Network,
Inc. and Banco Popular de Puerto Rico, as amended February 25, 1993 and
October 6, 1993.+
10.13 Franchise to Virgin Islands Telephone Corporation for Telephone Service
to the Virgin Islands, dated October 30, 1959.+
10.14 Atlantic Tele-Network, Inc. Defined Benefit Plan for Salaried
Employees.+
10.15 Atlantic Tele-Network, Inc. Management Employees Savings Plan.+
10.16 Atlantic Tele-Network, Inc. Employees' Stock Ownership Plan.+
10.17 Line of Credit Application and Agreement, dated March 20, 1995, between
Virgin Islands Telephone Corporation, as Borrower, and Rural Telephone
Finance Cooperative, as Lender.+
10.18 Line of Credit Application and Agreement, dated March 10, 1996, between
Virgin Islands Telephone Corporation, as Borrower, and Rural Telephone
Finance Cooperative, as Lender.+
10.19 Form of Senior Credit Facility between Atlantic Tele-Network Co., as
Borrower, and Rural Telephone Finance Cooperative, as Lender.+
10.20 Form of 1997 Long Term Incentive and Share Award Plan of Emerging
Communications, Inc.+
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Cahill Gordon & Reindel (included in Exhibit 5.1 to this
Proxy Statement-Prospectus).
23.3 Consent of Prudential Securities Incorporated.
23.4 Consent of Messrs. Ellis and Wheatley.+
24.1 Power(s) of Attorney.+
99.1 Form of proxy to be mailed to shareholders of Atlantic Tele-Network,
Inc.+
(b) Financial Statement Schedules.
Atlantic Tele-Network, Inc. and Subsidiaries.
99.2 Independent Auditors' Report on Financial Statement Schedules.
99.3 Schedule I--Condensed Financial Statements of Atlantic Tele-Network,
Inc. (Parent Company Only).
99.4 Schedule II--Valuation and Qualifying Accounts.
Atlantic Tele-Network Co. and Subsidiaries.
99.5 Independent Auditors' Report on Financial Statement Schedules.
99.6 Schedule I--Condensed Financial Statements of Atlantic Tele-Network Co.
(Parent Company Only).
99.7 Schedule II--Valuation and Qualifying Accounts.
(c) Reports, Opinions or Appraisal.
99.8 Opinion of Prudential Securities Incorporated (also included in Annex B
to Proxy Statement-Prospectus).+
99.9 Form of Notice of Transmittal.+
</TABLE>
- --------
+ Previously filed.
ITEM 22. UNDERTAKINGS.
The Undersigned Registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an
II-3
<PAGE>
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a) (3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 20, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, EMERGING
COMMUNICATIONS, INC. HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF CHRISTIANSTED, THE ISLAND OF ST. CROIX, U.S.
VIRGIN ISLANDS, ON DECEMBER 8, 1997.
Emerging Communications, Inc.
/s/ Jeffrey J. Prosser
By __________________________________
JEFFREY J. PROSSER
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT ON FORM S-4 HAS BEEN SIGNED ON DECEMBER 8, 1997
BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURES TITLE
/s/ Jeffrey J. Prosser Chairman, Chief
- ------------------------------------- Executive Officer,
JEFFREY J. PROSSER Acting Chief
Financial Officer
and Director
(Principal
Executive Officer
and Principal
Financial and
Accounting Officer)
* Director
- -------------------------------------
SALVATORE MUOIO
/s/ John P. Raynor Director
- -------------------------------------
JOHN P. RAYNOR
* Director
- -------------------------------------
SIR SHRIDATH S. RAMPHAL
* Director
- -------------------------------------
JOHN G. VONDRAS
* Director
- -------------------------------------
RICHARD N. GOODWIN
/s/ John P. Raynor
*By_________________________________
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-33401 of Emerging Communications, Inc. on Form S-4 of our reports on
Atlantic Tele-Network, Inc., Atlantic Tele-Network Co. and New ATN all dated
March 25, 1997 appearing in the Prospectus, which is part of this Registration
Statement, and of our reports dated March 25, 1997 related to the financial
statement schedules of Atlantic Tele-Network, Inc. and the financial statement
schedules of Atlantic Tele-Network Co. appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Omaha, Nebraska
December 8, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF PRUDENTIAL SECURITIES INCORPORATED
We hereby consent to the references of our firm under the captions
"SUMMARY--Investment Banker's Opinion", "RISK FACTORS--Risks Relating to New
ATN" "THE TRANSACTION--Background and Reasons for the Transaction", "THE
TRANSACTION--Recommendation of the Company Board," "THE TRANSACTION--Opinion
of the Investment Banker" and "Notes to the New ATN Pro Forma Financial Data"
in the Registration Statement on Form S-4 of Emerging Communications, Inc.
(Regis. No. 333-33401) and to the inclusion of our opinion letter as Annex B
to the Proxy Statement/Prospectus contained in such Registration Statement. In
giving this consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we admit that we are experts with respect to any
part of such Registration Statement within the meaning of "experts" as used in
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Prudential Securities Incorporated
Dated December 5, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF NOMINEE FOR DIRECTOR
I hereby consent to be named as a nominee for director of Atlantic Tele-
Network, Inc. in its Proxy Statement--Prospectus, and to become a director on
the Effective Date of the Transaction.
/s/ James B. Ellis
-------------------------------------
October 2, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF NOMINEE FOR DIRECTOR
I hereby consent to be named as a nominee for director of Atlantic Tele-
Network, Inc. in its Proxy Statement--Prospectus, and to become a director on
the Effective Date of the Transaction.
/s/ Henry Wheatley
_____________________________________
October 4, 1997
