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SCHEDULE 14A INFORMATION
(AMENDMENT NO. 1)
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]CONFIDENTIAL, FOR USE OF THE
[X]Preliminary Proxy Statement COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[_]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
EMERGING COMMUNICATIONS, INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[_]$125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and O-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 per share
(2) Aggregate number of securities to which transaction applies:
5,352,258
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$10.25
(4) Proposed maximum aggregate value of transaction:
$54,860,644.50
(5) Total fee paid:
$10,973.00
[_]Fee paid previously by written preliminary materials.
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
O-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $10,973.00
-------------------------------------------------
(2) Form, Schedule or Registration Statement No.: Schedule 14 D-1
----------------------------------
(3) Filing Party: Jeffrey J. Prosser
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(4) Date Filed: August 24, 1998
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PRELIMINARY PROXY MATERIALS
EMERGING COMMUNICATIONS, INC.
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
(340) 777-7700
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 1998
TO THE STOCKHOLDERS OF EMERGING COMMUNICATIONS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (including any
adjournments, continuations or postponements thereof, the "Special Meeting")
of Emerging Communications, Inc., a Delaware corporation (the "Company"), will
be held on Monday, October 5, 1998 at 9:00 a.m., local time, at Cahill Gordon
& Reindel, 80 Pine Street, New York, New York 10005, in order to consider and
act upon the following proposal:
I. To approve and adopt the Agreement and Plan of Merger, dated as of
August 17, 1998 (as such may be amended, supplemented or modified from time
to time, the "Merger Agreement"), among the Company, Innovative
Communication Corporation, a U.S. Virgin Islands corporation, (the
"Purchaser"), ICC Merger Sub Corporation, a Delaware corporation ("Merger
Sub"), and the Company pursuant to which Merger Sub will be merged with and
into the Company, with the Company as the surviving corporation (the
"Merger"). In the Merger, all of the shares of Common Stock, par value of
$0.01 per share (the "Shares"), of the Company issued and outstanding at
the effective time of the Merger (other than Shares owned by Innovative
Communication Company, LLC, a Delaware limited liability company (the
"Parent"), the Purchaser, the Company or any direct or indirect subsidiary
of the Parent or the Company or Shares held by stockholders of the Company
who have properly exercised their appraisal rights in accordance with
Section 262 of the Delaware General Corporation Law) will be converted into
the right to receive $10.25 per share. Jeffrey J. Prosser, the Chairman,
Chief Executive Officer and Secretary of the Company, beneficially owns all
of the outstanding membership interests of the Parent, and the Parent owns
all of the outstanding capital stock of the Purchaser. The Parent and the
Purchaser own approximately 51% and [ ]%, respectively, of the outstanding
Shares; and
II. To transact such other business, including, without limitation,
adjournments of the Special Meeting, as may properly come before the
Special Meeting or any adjournments, continuations or postponements
thereof.
Only holders of record of shares of Shares at the close of business on
September 22, 1998 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting. A complete list of such stockholders will be made
available for inspection for any purpose germane to the Special Meeting at the
headquarters of the Company located at Chase Financial Center, St. Croix, U.S.
Virgin Islands 00821, during business hours for a period of at least ten days
prior to the Special Meeting.
At the close of business on the Record Date, 10,959,131 Shares were issued
and outstanding. Each Share outstanding at the close of business on the Record
Date is entitled to one vote on each matter submitted to the stockholders.
The affirmative vote of holders of a majority of the votes cast in person or
by proxy at the Special Meeting is required to approve and adopt the Merger
Agreement. The Parent and the Purchaser have informed the Company that they
intend to vote FOR approval and adoption of the Merger Agreement. Because
Shares of the Parent and the Purchaser will represent more than a majority of
the Shares outstanding as of the Record Date, it is expected that the Merger
Agreement will be approved and adopted.
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A Proxy Statement (which contains more detailed information with respect to
the matters to be considered at the Special Meeting) and a proxy card
accompany this Notice of Special Meeting of Stockholders. Stockholders are
urged to review carefully the entire Proxy Statement and the proxy card.
By Order of the Board of Directors,
/s/ Jeffrey J. Prosser
Jeffery J. Prosser
Secretary
St. Croix, U.S. Virgin Islands
September 23, 1998
----------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED REPLY
ENVELOPE. THIS WILL NOT LIMIT YOUR RIGHT TO ATTEND OR VOTE AT THE
SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE BY
PROVIDING WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY
SUBMITTING A SUBSEQUENT PROXY OR BY VOTING YOUR SHARES IN PERSON
AT THE SPECIAL MEETING.
DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME
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EMERGING COMMUNICATIONS, INC.
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
(340) 777-7700
----------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 1998
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 2
Purpose of the Meeting.................................................. 2
Record Date; Vote Required for Approval................................. 3
Solicitation and Revocation of Proxies.................................. 3
Adjournment of the Special Meeting...................................... 4
THE MERGER AGREEMENT AND THE MERGER....................................... 5
Purchaser's and Parent's Reasons for the Offer and the Merger........... 5
Fairness of the Merger.................................................. 5
Interests of Certain Persons in the Merger; Potential Conflicts of In-
terest................................................................. 6
Background of the Offer and the Merger.................................. 6
Recommendation of the Company's Board of Directors and the Special Com-
mittee................................................................. 10
Valuation of Emerging Communications, Inc. ............................. 13
Fairness of Consideration............................................... 14
Effect of the Merger on Market for the Shares; Stock Exchange Listing,
and Exchange Act Registration.......................................... 15
Contracts and Agreements the Company.................................... 16
The Merger Agreement; Appraisal Rights.................................. 19
Source and Amount of Funds.............................................. 23
Certain Legal Matters................................................... 23
Certain U.S. Federal Income Tax Consequences............................ 24
Accounting Treatment of the Merger...................................... 24
SELECTED HISTORICAL FINANCIAL DATA........................................ 24
PRICE RANGE OF SHARES; DIVIDENDS.......................................... 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 28
CERTAIN INFORMATION CONCERNING MERGER SUB................................. 29
OTHER MATTERS............................................................. 29
SCHEDULE I OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL............... I-1
SCHEDULE II APPRAISAL RIGHTS OF STOCKHOLDERS UNDER DELAWARE LAW........... II-1
APPENDIX A--THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997........................................................ A-1
APPENDIX B--THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERLY
PERIODS ENDED MARCH 31, 1998 AND JUNE 30, 1998........................... B-1
APPENDIX C--AGREEMENT AND PLAN OF MERGER.................................. C-1
</TABLE>
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INTRODUCTION
This Proxy Statement is being furnished to the holders of common stock, par
value $0.01 per share (the "Shares"), of Emerging Communications, Inc., a
Delaware corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board") from such
holders in the form of the enclosed proxy card for use at the Special Meeting
of Stockholders of the Company (including any adjournments, continuations or
postponements thereof, the "Special Meeting"). The Special Meeting will be
held on Monday, October 5, 1998 at 9:00 a.m., local time, at Cahill Gordon &
Reindel, 80 Pine Street, New York, New York 10005.
The Company was formed in 1997 as a wholly owned subsidiary of Atlantic
Tele-Network, Inc. ("ATN"). On December 31, 1997, ATN undertook a series of
transactions (the "Split Off Transaction") whereby the business and operations
of ATN in the Virgin Islands and certain other assets and liabilities were
transferred to the Company, and the outstanding shares of Common Stock of the
Company were distributed to the public stockholders of ATN and Jeffrey J.
Prosser, the Company's Chairman of the Board, Chief Executive Officer and
Secretary. For more information about the Company, see the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 included as Appendix
A attached hereto and the Company's Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1998 and June 30, 1998 included as Appendix
B attached hereto. The Parent through operating subsidiaries of the Purchaser
owns and operates cable television systems serving St. Croix, St. Thomas, St.
John, St. Maarten and the British Virgin Islands (the "Cable Systems") and
owns and operates the Virgin Islands Daily News, which services St. Croix, St.
Thomas and St. John.
At some time after consummation of the Merger, the Parent currently intends
to combine the businesses conducted by the operating subsidiaries of the
Purchaser with those of the Company. While the definitive terms of such
combination and the timing of the consummation thereof have not been
finalized, the Parent currently expects that at some time after consummation
of the Merger, (i) the Purchaser will transfer all of the Shares then owned by
it (which is expected to be approximately 48% of the then outstanding shares)
to a newly formed limited liability company wholly owned by the Parent ("New
LLC") for a note of New LLC (the "New LLC Note"), (ii) the Purchaser will
transfer all of the stock of its subsidiaries which conduct the Parent's cable
television and newspaper operations, together with the New LLC Note and a
$20.0 million note of Mr. Prosser, to the ATNCo. in exchange for equity
securities of ATNCo and ATNCo's assumption of the indebtedness of the
Purchaser owing to the RTFC and (iii) the Purchaser will liquidate and
distribute its assets to the Parent. Following the Merger, the Parent intends
to continue the Company's strategy of expanding its operations through the
acquisition of other businesses. Any such acquisition may significantly
increase the Company's revenues, income or equity value.
This Proxy Statement and the enclosed proxy card, together with the Notice
of Special Meeting of Stockholders, are first being mailed to the Company's
stockholders on or about September 23, 1998.
PURPOSE OF THE MEETING
The purpose of the Special Meeting is to consider and vote upon the
following proposal:
Proposal I. To approve and adopt the Agreement and Plan of Merger, dated as
of August 17, 1998 (as such may be amended, supplemented or modified from time
to time, the "Merger Agreement"), among the Company, Innovative Communication
Corporation, a U.S. Virgin Islands corporation (the "Purchaser"), and ICC
Merger Sub Corporation, a Delaware corporation and a wholly owned subsidiary
of the Purchaser ("Merger Sub"), pursuant to which Merger Sub will be merged
with and into the Company, with the Company as the surviving corporation (the
"Merger"). In the Merger, all of the Shares outstanding at the effective time
of the Merger (other than Shares owned by Innovative Communication Company,
LLC, a Delaware limited liability company (the "Parent"), the Purchaser, the
Company or any direct or indirect subsidiary of the Parent or the Company or
stockholders of the Company who have properly exercised their appraisal rights
in accordance with Section 262 of the Delaware General Corporation Law (the
"DGCL")) will be converted into the right to receive
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$10.25 in cash. Jeffrey J. Prosser, the Chairman, Chief Executive Officer and
Secretary of the Company, owns all of the outstanding membership interests in
the Parent, and the Parent owns all of the outstanding capital stock of the
Purchaser. The Parent and the Purchaser own approximately 51% and [ ]%,
respectively, of the outstanding Shares. A copy of the Merger Agreement is
attached as Appendix C hereto.
The purpose of the Special Meeting also is to transact such other business,
including, without limitation, the adjournment of the Special Meeting, as may
properly come before the Special Meeting or any adjournments, continuations or
postponements thereof.
The Board presently knows of no matters that will presented for
consideration at the Special Meeting other than those matters described in
this Proxy Statement. If, however, other business is properly brought before
the Special Meeting, the persons named as proxies and appointed as such on the
enclosed proxy card or their substitutes will have discretion to vote or act
thereon in accordance with their best judgment and applicable law.
RECORD DATE; VOTE REQUIRED FOR APPROVAL
The Board has fixed the close of business on September 22, 1998 as the
record date (the "Record Date") for the determination of stockholders entitled
to notice of, and to vote at, the Special Meeting. Only holders of record of
Shares at the close of business on the Record Date are entitled to notice of,
and to vote at, the Special Meeting. A complete list of such stockholders will
be made available for inspection for any purpose germane to the Meeting at the
headquarters of the Company located at Chase Financial Center, St. Croix, U.S.
Virgin Islands 00821, during business hours for a period of at least ten days
prior to the Special Meeting.
At the close of business on the Record Date, 10,959,131 Shares were issued
and outstanding. Each Share outstanding at the close of business on the Record
Date is entitled to one vote on each matter submitted to the stockholders.
Holders of at least a majority of the outstanding Shares as of the close of
business on the Record Date must be present in person or represented by proxy
at the Meeting in order to establish a quorum.
The affirmative vote of holders of a majority of the votes cast in person or
by proxy at the Special Meeting is required to approve and adopt the Merger
Agreement. Any other business to properly come before the Special Meeting
(except as otherwise provided by applicable law, the Restated Certificate of
Incorporation or the Company's By-laws) will require the affirmative vote of
holders of a majority of the Shares present in person or represented by proxy
at the Special Meeting and entitled to vote.
The Parent and the Purchaser collectively own [ ]%, or [ ], of the
outstanding Shares as of the close of business on the Record Date. The Parent
and the Purchaser have indicated their intention to vote FOR the approval and
adoption of the Merger Agreement. Because such Shares will represent more than
a majority of the Shares outstanding as of the close of business on the Record
Date, it is expected that the Merger Agreement will be adopted and approved.
SOLICITATION AND REVOCATION OF PROXIES
The enclosed proxy card is being solicited by the Board for use in
connection with the Special Meeting and any postponement, continuation or
adjournment thereof. Stockholders of record as of the close of business on the
Record Date are entitled to cast their votes, in person or by properly
executed proxy, at the Special Meeting. All Shares 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 SHARES WITHOUT INDICATING ANY VOTING INSTRUCTIONS, THE
SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND IN THE DISCRETION OF THE PROXIES NAMED THEREIN WITH
RESPECT TO ANY OTHER MATTER PROPERLY BROUGHT BEFORE THE SPECIAL MEETING OR ANY
POSTPONEMENT, ADJOURNMENT OR CONTINUATION THEREOF.
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Abstentions and 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. With respect to the vote to approve and adopt the Merger
Agreement, abstentions and broker non-votes will not be considered in the
calculation, although they will reduce the number of "FOR" votes required.
With respect to all other business to properly come before the Special
Meeting, abstentions with respect to Shares represented and entitled to vote
will have the effect of votes cast against; however, Shares represented by
proxies that reflect broker non-votes will be treated as not entitled to vote
for purposes of determining approval of any such matter and will be considered
in the calculation, although they will reduce the number of "FOR" votes
required.
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).
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 Shares held of record by such persons, and the Company will reimburse
such nominees, fiduciaries and custodians for their reasonable expenses
incurred in connection therewith.
All expenses of the solicitation of proxies from stockholders in connection
with the Special Meeting will be borne by the Company.
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. Notwithstanding the immediately
preceding sentence, if the adjournment is for more than 30 days, or if after
the adjournment the 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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THE MERGER AGREEMENT AND THE MERGER
On August 24, 1998, the Purchaser commenced an offer to purchase (the
"Offer") all of the outstanding Shares not owned by the Parent. On September
21, 1998, the Offer expired, and the Purchaser purchased the [ ] shares
owned it.
PURCHASER'S AND PARENTS REASONS FOR THE OFFER AND THE MERGER
The purpose of the Merger is to enable the Parent to, directly and
indirectly, acquire the entire equity interest in the Company. The Merger
Agreement provides that, subject to the satisfaction or waiver of the terms
and conditions of the Merger, Merger Sub will be merged into the Company. In
the Merger, each Share not owned by the Parent or any subsidiary of the Parent
(other than Shares held by stockholders of the Company who have properly
exercised their appraisal rights under Section 262 of the DGCL) at the
effective time of the Merger (the "Effective Time") will be converted into the
right to receive an amount in cash equal to $10.25 (the "Merger
Consideration"). Following consummation of the Merger, the Company will
continue as the surviving corporation and will become a wholly owned
subsidiary of Parent. THE BOARD OF DIRECTORS OF THE COMPANY AND THE SPECIAL
COMMITTEE (AS DEFINED) HAVE UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR TO
AND IN THE BEST INTEREST OF THE COMPANY AND ITS STOCKHOLDERS AND HAVE APPROVED
THE MERGER. In determining to effect the Merger, the Parent and the Purchaser
focused on a number of factors set forth below.
The Parent believes that the costs associated with the listing of the Shares
on the American Stock Exchange ("AMEX") and the Company being a reporting
company under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), outweigh any resulting benefits. The Shares have attracted limited
interest from institutional investors and generally have low trading volumes.
This illiquidity and the Company's relatively small market capitalization, in
the Parent's view, had caused the Shares to trade at unattractive multiples as
compared to other telecommunications and media companies. As a result, the
Parent believes that the utilization of Shares for acquisitions or capital-
raising has been and will continue to be an unattractive alternative for the
Company. The present requirement to maintain the listing of the Shares on the
AMEX and registration of the Shares under the Exchange Act imposes on the
Company significant direct and indirect compliance costs. In addition,
compliance with such ongoing requirements imposes an administrative burden on
the Company, resulting in the diversion of management time and resources. The
Parent intends to seek the delisting of the Shares from the AMEX and
termination of registration of the Shares under the Exchange Act as soon as
possible after consummation of the Merger.
The Parent believes that the Company's status as a publicly traded entity
unnecessarily creates potential conflicts of interest between the interests of
the Parent and the other stockholders of the Company. Although potential
conflicts of interest that have arisen in the past have been addressed through
the formation of a special committee of the Board of Directors of the Company
(see "-- Background of the Offer and the Merger"), the Parent believes that
terminating the Company's status as a separate publicly traded entity would
more effectively reduce the potential for future conflicts of interest of this
type.
FAIRNESS OF THE MERGER
Each of Mr. Prosser, the Parent and the Purchaser believes that transactions
to be consummated pursuant to the Merger Agreement, including the $10.25 cash
consideration proposed to be paid pursuant to the Merger, are fair to the
minority stockholders of the Company. The offer price provides a substantial
premium over pre-announcement market prices to holders of the Shares and
enables the Company's stockholders to receive cash for their stockholdings now
at a premium per share price. The $10.25 offer price represents a premium of
46.4% over the market price of the Company's Common Stock as of May 28, 1998
(the day prior to public announcement that the Parent had proposed to acquire
the Shares at $9.125 per Share). The belief by each of Mr. Prosser, the Parent
and the Purchaser that the terms of the transactions contemplated by the
Merger Agreement are fair to the minority stockholders of the Company is based
primarily on the fact that the $10.25
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cash consideration offers a substantial premium over historical market prices
and the pre-announcement market price of the Common Stock. Mr. Prosser, the
Parent and the Purchaser did not take into account the net book value of the
Shares (although such value as of June 30, 1998 was $5.66 per Share,
substantially below the offer price) because they did not, and do not, believe
that such valuation is relevant in evaluating the fairness of the Offer or the
transactions contemplated by the Merger Agreement. In addition, they did not
take into account the going concern value or liquidation value of the Company
in making the Offer and do not believe that such valuations are relevant in
evaluating the Offer or the Merger because Mr. Prosser currently controls the
Company, the Shares to be acquired pursuant to the Offer and the Merger
represent a minority interest in the Company and Mr. Prosser has indicated
that he is not interested under any circumstances in selling his interest in
the Company. In addition, no offers have been received from any unaffiliated
person to acquire control of the Company during the past eighteen months.
While the opinion of Houlihan Lokey was not available to Mr. Prosser, the
Parent or the Purchaser prior to the execution of the Merger Agreement, such
opinion, together with the approval of the Offer and the Merger Agreement by
the Special Committee and the Board of Directors, confirm their belief that
these transactions are fair to the minority stockholders of the Company. In
addition, the requirement that the Minimum Tender Condition not be waived
without the consent of the Company, which was demanded by the Special
Committee and which has the effect of requiring a majority of the minority
stockholders to accept the Offer for the Offer and the Merger to be
consummated, further confirms the belief by Mr. Prosser, the Parent and the
Purchaser that the terms of the Offer and the transactions contemplated by the
Merger Agreement are fair to the minority stockholders of the Company.
Neither the Purchaser nor the Parent nor Prudential Securities Incorporated
("Prudential"), their financial advisor, solicited other offers for the
Company or its assets, and there can be no assurance that the terms of the
Merger are as favorable to the public stockholders of the Company as could be
obtained in a transaction, or one or more transactions, with an unaffiliated
party or parties. Neither Parent nor any of its affiliates has received any
firm offers or inquiries with respect to the business and assets of the
Company or its investment therein from any unaffiliated party.
Prudential was not asked to render, and has not rendered, any opinion as to
the fairness of the Merger to either the Company or the public stockholders of
the Company. Neither the Parent nor the Purchaser has obtained any opinions as
to the fairness of the Merger to the public stockholders of the Company or any
valuation or appraisal of the Company's assets from any independent party in
connection with the Merger.
Following the delivery by the Parent of the letter, dated May 29, 1998,
described under "--Background of the Offer and the Merger" below, the Company
announced that the proposal contained in such letter was being referred to the
Special Committee, which would consider the proposal. The Special Committee is
composed of directors of the Company who are neither officers or directors of
the Purchaser or the Parent nor officers of the Company. The Special Committee
retained Houlihan Lokey Howard & Zukin Capital ("Houlihan Lokey") as its
financial advisor to analyze the terms of the Offer and the Merger. Houlihan
Lokey has provided the Board of Directors with its written opinion that, as of
August 17, 1998, the $10.25 cash consideration to be received by the holders
of Shares (other than the Parent and the Purchaser) pursuant to the Offer and
the Merger is fair to such holders from a financial point of view. The Board
of Directors of the Company and the Special Committee have unanimously
determined that Merger is fair to and in the best interests of the Company and
its stockholders and have approved the Merger. See "--Recommendation of the
Company's Board of Directors and the Special Committee."
INTERESTS OF CERTAIN PERSONS IN THE MERGER; POTENTIAL CONFLICTS OF INTERESTS
Stockholders should be aware that certain members of the Board of Directors
of the Company (collectively, the "Board" and each a "Director"), other than
the members of the Special Committee, have certain interests which are
referred to below, and which may present them with actual or potential
conflicts of interest in connection with the Offer. Among other things, the
Parent and the Purchaser, which are wholly owned by Mr. Prosser, already own
approximately 51% and [ ]%, respectively of the outstanding Shares and, after
the
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consummation of the Merger, Mr. Prosser will continue to serve as the Chairman
of the Board, Chief Executive Officer and Secretary of the Company. In
addition, the Merger Agreement provides that the directors of the Company will
continue as directors of the Company after consummation of the Merger.
In addition, the law firm of Cahill Gordon & Reindel ("Cahill") has provided
legal services to the Company. Cahill Gordon & Reindel is acting as legal
counsel to the Parent and the Purchaser in connection with the Merger and the
other transactions contemplated herein.
BACKGROUND OF THE OFFER AND THE MERGER
Prior to December 30, 1997, the business and operations of the Company were
owned and conducted by ATN. The two principal stockholders and co-chief
executive officers of ATN prior to December 31, 1997 were Mr. Prosser and
Cornelius B. Prior, Jr. Beginning in early 1993, material disagreements arose
between Mr. Prior and Mr. Prosser pertaining to the management and direction
of ATN and its businesses. These disagreements created a management deadlock
which significantly impaired the ability of ATN to function other than in the
ordinary course of business and effectively precluded Mr. Prosser's aggressive
acquisition strategy. In order to pursue acquisition opportunities as they
arose which were precluded by the Split Off Transaction, Mr. Prosser had
entered into agreements to acquire the Cable Systems and the Virgin Islands
Daily News prior to consummation of the Split Off Transaction, and thereafter
assigned such agreements to the Purchaser.
On August 11, 1997, Mr. Prosser, Mr. Prior and ATN entered into definitive
documentation with respect to the Split Off Transaction. On December 30, 1997,
the stockholders of ATN approved the Split Off Transaction, and on December
30, 1997, the Split Off Transaction was consummated.
During January 1998, Mr. Prosser and certain other members of management of
the Company began exploring the feasibility of combining the businesses of the
Company and Purchaser. On January 20, 1998, the Company engaged Prudential to
render an opinion as to the fairness, from a financial point of view, of a
merger involving the Parent and the Purchaser to the public stockholders of
the Company.
During February 1998, Mr. Prosser and certain other members of management of
the Company, with the assistance of the Company's legal and financial
advisors, developed the proposed terms of such a transaction.
The proposal to merge the businesses of the Company and the Purchaser was
presented to the Board by Jeffrey J. Prosser at a Board meeting held on March
9, 1998. The proposal contemplated a merger of the Purchaser with Atlantic
Tele-Network Co., a wholly owned subsidiary of the Company ("ATNCo."),
pursuant to which the Parent would receive $35.0 million of convertible
preferred stock of ATNCo.
The Board discussed with the Company's advisors the draft agreement and
other materials distributed to the Board members. Following that discussion,
and in light of the relationship of the Chairman of the Board, Jeffrey J.
Prosser and the Parent, the Board requested that directors Richard N. Goodwin,
Sir Shridath Ramphal and John P. Raynor act as a special committee to further
consider and recommend to the Board a course of action concerning the merger
proposal. In addition, the Board ratified the Company's decision to engage
Prudential to act as financial advisor to the Special Committee.
The members of that special committee met with Prudential and that special
committee's legal advisors on April 3, 1998. At that meeting, Prudential
described to such special committee the various valuation analyses they would
undertake in connection with their engagement and also discussed with the
special committee the terms of the draft merger agreement and proposed certain
recommended revisions thereto. The members of the special committee requested
that Prudential prepare a revised term sheet for the transaction consistent
with its recommendations and deliver the proposed revised terms to the Parent.
From April 3, 1998 through May 20, 1998, Prudential engaged in various
discussions with the Parent regarding the proposed terms of such transaction.
During the third week of May 1998, Mr. Prosser began to have significant and
material reservations about the proposed merger with ATNCo., given the
unenthusiastic market interest in the Company's common stock.
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On May 21, 1998, Mr. Prosser together with John P. Raynor, a member of the
Board, met with representatives of Prudential and the Parent's counsel to
discuss the feasibility of the Parent acquiring all of the outstanding Shares.
During May 22-28, Mr. Prosser, Prudential and the Parent's counsel had
various discussions regarding the language of a proposal letter to be
delivered to the Board. On May 29, 1998, the Parent sent the following letter
to the Board (the "May 29 Letter"):
May 29, 1998
Board of Directors
Emerging Communications, Inc.
Chase Financial Center
Orange Grove, Christiansted
St. Croix, USVI 00821
Gentlemen:
Innovative Communication Company, LLC ("ICC"), a Delaware Limited Liability
Company, is pleased to make a proposal to acquire all of the outstanding
shares of common stock of Emerging Communications, Inc. (the "Company") not
currently owned by ICC (the "Remaining Shares"). It is currently contemplated
that the transaction would be structured as a cash tender offer with a backend
merger or reverse stock split in which each holder of Remaining Shares would
receive $9.125 per share, in cash.
We believe that such a transaction would result in substantial benefits to
the Company and the holders of the Remaining Shares and would provide the
holders of the Remaining Shares with the opportunity to realize a fair and
generous cash value for their shares. The offer price of $9.125 per Remaining
Share represents a premium of approximately 30% over the closing sale price of
the Company's common stock on May 28, 1998.
Such a transaction would permit the holders of the Remaining Shares to
obtain at an attractive premium liquidity which is not normally available to
them in light of the thinly traded market for the Company's common stock.
Indeed, the price of $9.125 per share is higher than any closing sale price of
the Company's common stock since it commenced trading on December 31, 1997. We
also believe that the acquisition can be structured to accommodate and promote
the interests of the Company's employees and customers.
This proposal is subject, among other things, to the following:
1. the execution of a definitive Merger Agreement with the Company
containing representations, covenants, conditions, and other terms usual
for transactions of this type;
2. approval of the transaction by a Special Committee of the Board of
Directors of the Company, the Board of Directors of the Company and the
Company's shareholders;
3. the receipt of satisfactory financing for the transaction;
4. the receipt of a fairness opinion from the financial advisor to the
Special Committee stating that the proposed transaction is fair, from a
financial point of view, to the holders of the Remaining Shares; and
5. the receipt of all required third party and governmental consents.
ICC's advisors are in the process of preparing a definitive Acquisition
Agreement relating to the transaction, which we will provide you in the near
future. In addition, we have engaged Prudential Securities Incorporated to
advise us with respect to the transaction. Based on conversations with ICC's
financing sources, ICC believes it will be able to secure the necessary
financing to fund the transaction.
ICC wishes to make it clear that it is not interested under any
circumstances in selling its interest in the Company.
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We expect that you will desire to elaborate on this proposal through a
Special Committee of disinterested directors and that such committee will
desire to retain its own advisors to assist in those deliberations. We look
forward to working with you and the advisors to the Special Committee to
complete this transaction and trust you will give this proposal your prompt
attention. We, of course, reserve the right to amend or withdraw this proposal
at any time in our sole discretion.
Very truly yours,
Innovative Communication Company,
LLC
By: /s/ Jeffrey J. Prosser
A meeting of the Board of Directors was held on May 29, 1998. Mr. Prosser
began the meeting of the Board by discussing certain opportunities that
management had been pursuing for the Company to acquire certain businesses.
Mr. Prosser advised the Board that it is likely that the Company would be
required to issue equity in order to finance any acquisition of significant
size. Mr. Prosser also advised the Board that he believed that the Company's
stock price had not achieved the desired appreciation as a result of, among
other things, the relatively small public float and the fact that the Company
has failed to be followed by Wall Street analysts. Mr. Prosser then read to
the Board the May 29 Letter. Mr. Prosser then excused himself from the
meeting. After discussion, the Board determined, given the inherent conflict
of interest, to form a special committee consisting of Messrs. Sir Shridath S.
Ramphal, Richard N. Goodwin and John Vondras (the "Special Committee") to
review the terms of the proposed transaction. In that connection and to help
in their evaluation, the Board of Directors authorized the Special Committee
to engage its own counsel and to engage an independent financial advisor to
the Special Committee to assist the Special Committee in negotiating the
proposed transaction on behalf of the Company's public stockholders and to
render an opinion as to the fairness of the transaction from a financial point
of view to the public stockholders.
On May 29, 1998, the Company issued a press release concerning the May 29
Letter. In addition, on May 29, 1998, Mr. Prosser informed the Board that he
was withdrawing the proposal to combine the businesses of the Purchaser and
the Company pending the final outcome of the proposal set forth in the May 29
Letter.
On June 3, 1998, the Company received notice of a lawsuit instituted by
purported shareholders of the Company alleging a breach of fiduciary duties
and seeking injunctive and other relief in response to the Company's
announcement regarding the Parent's proposal in the May 29 Letter.
On June 5, 1998, the Special Committee hired Paul, Hastings, Janofsky &
Walker LLP ("Paul Hastings") as its outside legal counsel. On June 5, 1998,
the Special Committee and its legal advisors participated in a telephone
conference with Mr. Prosser and his legal advisors. At this meeting, Roger
Meltzer, Esq. of Cahill reported that Mr. Prosser was not prepared to support
or accept any alternative business transaction besides the Purchaser's offer
to acquire the Shares of the Company not owned directly or indirectly by the
Parent.
On July 13, 1998, after interviewing a number of nationally recognized
investment banking firms, the Special Committee engaged Houlihan Lokey to act
as independent financial advisor to the Special Committee and to advise the
Special Committee with respect to the offer by the Purchaser to purchase the
shares of Common Stock of the Company not beneficially owned directly or
indirectly by the Parent at a price of $9.125 per share.
On July 17, 1998, Cahill delivered to Paul Hastings a proposed draft of the
Merger Agreement. During the next week and thereafter, Paul Hastings reviewed
the terms and conditions of the Merger Agreement and negotiated the terms and
conditions with Cahill.
On July 21-22, 1998, representatives of Houlihan Lokey and Paul Hastings
visited the Company's business offices in St. Thomas and interviewed and met
with senior management of the Company to discuss financial results and
projections, tour the Company's facilities and commence other legal and
financial due diligence.
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Following July 22, 1998, Houlihan Lokey continued its financial due
diligence investigation and analysis of the Company, engaged in numerous
telephone calls with senior management of the Company, met with Prudential and
Mr. Prosser to discuss the results of operations and prospects of the Company,
met with Mr. Goodwin to update the Special Committee on the results of
Houlihan Lokey's investigation and met with Houlihan Lokey's internal
committee to review and analyze the results of Houlihan Lokey's investigation.
On August 4, 1998, the Special Committee along with its financial and legal
advisors held a special meeting by telephone to consider the offer by the
Purchaser to purchase the shares of Common Stock of the Company at a price of
$9.125 per share. The Houlihan Lokey representatives discussed with the
Special Committee their assumptions and the various valuation methodologies
used in evaluating the offer and reviewed the results of their financial
investigation. The Houlihan Lokey representatives concluded by stating that
Houlihan Lokey was not in a position to render an opinion that the offer price
of $9.125 per share was fair to the public stockholders from a financial point
of view. Houlihan Lokey based such conclusion on the results of valuation
analyses described under "--Recommendation of the Board of Directors and the
Special Committee--Valuation of Emerging Communications Inc." and "--Fairness
of Consideration" (such analyses consisting of a "market multiple approach", a
"discounted cash flow approach", an "acquisition premium analysis" and a
"comparable transaction multiples" analysis) calculated as of August 4, 1998.
The market multiple approach as of August 4, 1998 yielded a valuation of the
Company's Common Stock in the range of $7.90 to $10.37 per Share and the
discounted cash flow approach as of August 4, 1998 yielded a valuation of the
Company's Common Stock in the range of $9.36 to $13.74 per Share. The
acquisition premiums implied by the original $9.125 offer relative to the "30-
day unaffected trading price" and the 52-week high and low for the Common
Stock of the Company as of August 4, 1998 were 33.5%, 1.4% and 46.0%,
respectively. The comparable transaction multiples as of August 4, 1998
indicated: (i) the TIC/Revenue multiples had a median of 2.7x; (ii) the
TIC/EBIT multiples had a median of 16.3x; and (iii) the TIC/EBITDA multiples
had a median of 12.9x. The TIC/Revenue, TIC/EBIT and TIC/EBITDA multiples for
the Company based on the original offer price of $9.125 were 3.2x, 12.8x and
6.8x, respectively, utilizing the financial results of the Company for the
latest 12 month period on a pro forma basis ended June 30, 1998. Houlihan
Lokey informed the Special Committee that the analysis described above, taken
as a whole, indicated that the $9.125 original offer was not adequate
compensation to the shareholders (other than the Parent and the Purchaser).
This conclusion was based primarily on the fact that the offer was below the
range of values under the discounted cash flow approach. In light of such
conclusion, the Special Committee then considered various alternative methods
designed to seek a higher price for the Company's stockholders.
The Special Committee determined that Mr. Goodwin would discuss the
inadequacy of the current offer price with Mr. Prosser and seek a higher price
for the public shareholders. The Special Committee also considered directing
Houlihan Lokey to begin discussions simultaneously with Prudential Securities
Inc. in an attempt to obtain a higher offer price, but it was decided to await
the results of the discussions between Mr. Goodwin and Mr. Prosser.
During the period between August 5, 1998 and August 10, 1998, Mr. Goodwin,
on behalf of the Special Committee, and Mr. Prosser, on behalf of the
Purchaser, engaged in further discussions regarding the price offered by the
Purchaser for the public shares of the Company, and during such period, Mr.
Goodwin kept Houlihan Lokey informed as to the progress of such discussions.
In such discussions with Mr. Goodwin, Mr. Prosser initially raised the offer
price to $9.625 per share which Mr. Goodwin, on behalf of the Special
Committee, rejected as insufficient. On behalf of the Purchaser, Mr. Prosser,
after further discussions, offered $10.00 per share and following additional
discussions with Houlihan Lokey, Mr. Goodwin again informed Mr. Prosser that
the offer was insufficient. After additional discussions, Mr. Prosser raised
the offer price to $10.125 per share and Mr. Goodwin, on behalf of the Special
Committee, again informed Mr. Prosser that $10.125 per share was inadequate.
Following further deliberations, Mr. Prosser raised his offer price to $10.25
per share. In response to a request from Mr. Goodwin for a price of $10.50 per
share, Mr. Prosser refused, indicating that $10.25 per share was the
Purchaser's highest and best offer. Mr. Goodwin then informed Mr. Prosser that
Mr. Goodwin would report an offer price of $10.25 per share to the Special
Committee.
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On August 12, 1998, by telephonic conference, Messrs. Goodwin and Vondras
met with the Special Committee's financial and legal advisors for further
consideration of the Purchaser's offer price of $10.25 per share. Houlihan
Lokey updated the Special Committee with respect to Houlihan Lokey's valuation
analysis based on the revised offer price of $10.25 per share. Houlihan Lokey
concluded by indicating that the revised offer price was fair to the public
shareholders from a financial point of view, subject to satisfactory
negotiation of the merger agreement. Messrs. Goodwin and Vondras agreed that,
subject to the approval of Mr. Ramphal, the third member of the Special
Committee, they would recommend the revised offer price of $10.25 per share to
the Board of Directors of the Company.
Immediately following the meeting on August 12, 1998, Mr. Goodwin reviewed
with Mr. Ramphal the deliberations of the telephonic meeting and Houlihan
Lokey's views, including its opinion that the revised offer price of $10.25
per share was fair to the public shareholders from a financial point of view.
Mr. Ramphal approved the revised offer price, leading to a unanimous
recommendation by the Special Committee.
On August 13, 1998, the Board of Directors of the Company (along with its
legal and financial advisors) held a special meeting by telephone to discuss
the Purchaser's offer to purchase the public shares of the Company at an offer
price of $10.25 per share, and to negotiate the terms of the merger agreement.
Houlihan Lokey presented the results of its financial analysis and concluded
by opining that, from a financial point of view, the Purchaser's offer of
$10.25 per share was fair to the Company's public shareholders. The Board of
Directors, after further discussions with Houlihan Lokey, agreed to consider
the Purchaser's offer subject to the satisfactory negotiation of a final,
complete merger agreement between the Purchaser and the Company. Paul
Hastings, on behalf of the Board of Directors of the Company, requested, among
other items, that the draft of the merger agreement be revised to provide that
the Minimum Tender Condition (as defined in the Merger Agreement) could not be
waived by the Purchaser without the consent of the Special Committee. Mr.
Meltzer, of Cahill agreed to discuss these points with the Purchaser's
representatives as soon as practicable, and the Board of Directors adjourned
the meeting until the morning of August 17, 1998. Immediately prior to the
August 17 meeting, Mr. Meltzer informed Paul Hastings that Mr. Prosser had
agreed to the proposed revisions to the draft Merger Agreement regarding the
Minimum Tender Condition.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
At the August 17, 1998 meeting of the Board of Directors of the Company, the
Board of Directors of the Company, including those members of the Board of
Directors of the Company constituting the Special Committee, acting upon the
unanimous recommendation of the Special Committee, unanimously approved the
Merger Agreement, the Offer and the Merger, determined that the terms of the
Offer and the Merger are fair to, and in the best interest of, the
stockholders of the Company and recommended that all stockholders of the
Company accept the Offer and tender their Shares pursuant to the Offer.
Reasons for Recommendation
The Special Committee received presentations from, and reviewed the Offer
and the Merger with, senior management of the Company as well as the Special
Committee's financial advisor, Houlihan Lokey. The Special Committee, in
determining whether to recommend the approval of the Merger Agreement and the
transactions contemplated thereby to the full Board of Directors, considered a
number of factors, including, but not limited to, the following:
(i) The belief, based on its familiarity with the Company's business, its
current financial condition and results of operations and its future
prospects, and the current and anticipated developments in the Company's
industry, that the consideration to be received by the Company's
stockholders in the Offer and Merger fairly reflects the Company's
intrinsic value.
(ii) The oral and written presentations made by Houlihan Lokey at
meetings held on August 4, 1998 and August 12, 1998 as to various financial
and other considerations deemed relevant to the evaluation of the Offer and
the Merger, including, but not limited to, a review of (A) the business
prospects and financial
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condition of the Company, (B) historical business information and financial
results of the Company, (C) non-public financial and operating results of
the Company, (D) financial projections and budgets prepared by the
Company's management, (E) information obtained from meetings with senior
management of the Company, (F) the trading range and volume history of the
Shares, (G) public financial information of comparable companies and (H)
public information of comparable acquisitions.
(iii) The opinion of Houlihan Lokey that the consideration to be received
by the Company's stockholders pursuant to the Offer and the Merger is fair
to such stockholders (other than the Parent and the Purchaser) from a
financial point of view. In considering Houlihan Lokey's opinion, the
Special Committee was aware that Houlihan Lokey is entitled to a fee in
accordance with the terms of its engagement described below.
(iv) The relationship between the consideration to be received by
stockholders as a result of the Offer and the Merger and the historical
market prices and recent trading activity of the Shares. Specifically, that
$10.25 per Share represents a premium of 46.4% over the market price of the
Shares on May 28, 1998 (the day prior to the public announcement that the
Parent had proposed to acquire the Shares at $9.125 per Share and that the
Shares had never traded in excess of the offer price.
(v) The agreed value of the Company between Mr. Prosser and Mr. Prior in
the Split Off Transaction of $13.2484 per share (before giving effect to
indebtedness incurred to purchase $17.4 million of shares from Mr Prior) as
a component of the $22.7284 per share agreed value of ATN between Mr.
Prosser and Mr. Prior in the Split Off Transaction, and the fact that the
trading price of the ATN common stock prior to the Split Off Transaction
was approximately $11.00 per share.
(vi) Houlihan Lokey's assumption that the benefit of the tax abatement
which the Company is to receive from the Virgin Islands taxing authority
would be realized by the Company rather than passed on to the Company's
customers. If the Company is not able to retain the benefit of the tax
abatement, Houlihan Lokey believes that its valuation of the Company would
decrease.
(vii) The recognition that, following consummation of the Offer and the
Merger, the current stockholders of the Company will no longer be able to
participate in any increases or decreases in the value of the Company's
business and properties. The Special Committee concluded, however, that
this consideration did not justify foregoing the opportunity for
stockholders to receive an immediate and substantial cash purchase price
for their Shares.
(viii) The fact that the terms of the Offer, and the increase in the
consideration offered to the public stockholders from $9.125 per Share to
$10.25 per Share, were determined through arm's-length negotiations with
the Parent by the Special Committee and its financial and legal advisors,
all of whom are unaffiliated with Parent, and the judgment of the Special
Committee and Houlihan Lokey that, based upon the negotiations that
transpired, a price higher than $10.25 per Share could not likely be
obtained by the Parent and that further negotiations with the Parent could
cause the Parent to abandon the Offer, with the resulting possibility that
the market price for the Shares could fall substantially below $10.25, and
possibly $9.125, per Share, or to commence a tender offer without the
involvement of the Special Committee at a price less than $10.25 per Share.
(ix) The Parent's ownership of approximately 51% of the currently
outstanding Shares and the effects of such ownership on the alternatives
available to the Company and the fact that, as a practical matter, no
strategic alternative could be effected without the support of Parent; and
the consequences of continuing to operate the Company as a majority-owned
subsidiary of Parent.
(x) The fact that Mr. Prosser informed the Special Committee that he
would not support nor accept any alternative business transaction.
(xi) The terms and conditions of the Merger Agreement, the fact that
there are no unusual requirements or conditions to the Offer and the
Merger, and the fact that Parent has a Commitment Letter from the Rural
Telephone Finance Cooperative (the "RTFC") to provide the financing
necessary to consummate the Offer and the Merger expeditiously.
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(xii) The fact that the Merger Agreement provides that the Offer cannot
be consummated unless a majority of the shares outstanding and not
beneficially owned directly or indirectly by Parent are tendered.
(xiii) The fact that the consideration to be paid to the Company's public
stockholders in the Offer and the Merger is all cash.
(xiv) The fact that the Offer and the Merger have been structured to
include a first-step cash tender offer for any and all outstanding Shares,
thereby enabling stockholders who tender their Shares to promptly receive
$10.25 per Share in cash, and the fact that any public stockholders who do
not tender their Shares or properly exercise appraisal rights will receive
the same price per Share in the subsequent Merger.
(xv) The possible conflicts of interest of certain directors and members
of management of both the Company and Parent discussed in "Item 3(b)--
Interests of Certain Persons" of the Company's Schedule 14D-9.
(xvi) The fact that, while no appraisal rights are available to
stockholders as a result of the Offer, stockholders who do not tender
pursuant to the Offer will have the right to dissent from the Merger and to
demand appraisal of the fair value of their Shares under the DGCL. See "--
The Merger Agreement; Appraisal Rights."
The Special Committee considered each of the factors listed above during the
course of its deliberations prior to recommending that the Company enter into
the Merger Agreement. In light of its knowledge of the business and operations
of the Company and its business judgment, the Special Committee believed that
each of these factors supported its respective conclusions. In view of the
wide variety of factors considered, the Special Committee did not find it
practicable to, and did not, quantify the specific factors considered in
making its determination, although the Special Committee did place a special
emphasis on the opinion and analysis of Houlihan Lokey.
In determining that the Offer and the transactions contemplated by the
Merger Agreement are fair to, and in the best interests of, the minority
stockholders of the Company, the Special Committee and the Board of Directors
did not take into account the net book value of the Shares (although such
value as of June 30, 1998 was $5.66 per Share, substantially below the offer
price) because they did not, and do not, believe that such valuation is
relevant in evaluating the fairness of the Offer or the transactions
contemplated by the Merger Agreement. In addition, they did not take into
account the liquidation value of the Company and do not believe that such
valuation is relevant in evaluating the Offer or the Merger because Mr.
Prosser currently controls the Company, the Shares to be acquired pursuant to
the Offer and the Merger represent a minority interest in the Company and Mr.
Prosser has indicated that he is not interested under any circumstances in
selling his interest in the Company.
The Board of Directors of the Company approved the Merger Agreement and the
transactions contemplated thereby after receiving a report from the Special
Committee on its deliberations and recommendation. In reaching this decision,
the Board of Directors principally considered the recommendation of the
Special Committee and its familiarity with the Company's business, its current
financial condition and results of operations and future prospects, and
current and anticipated developments in the Company's industry.
Opinion of Financial Advisor
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies followed by Houlihan Lokey. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgments made
or the conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised the Special Committee,
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
factors and analyses, could create an incomplete view of the process
underlying its analyses and opinions.
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The Company and the Special Committee retained Houlihan Lokey to render an
opinion as to the fairness, from a financial point of view, of the
consideration to be received by the holders of Shares (other than the Parent
and Purchaser) pursuant to the Offer and the Merger. At the August 4, 1998
meeting of the Special Committee, Houlihan Lokey presented its analysis as
hereinafter described and updated the Special Committee with respect to the
discussions and current state of the transaction. At the August 13, 1998
meeting of the Board, Houlihan Lokey presented its oral opinion, and on August
17, 1998 delivered its written opinion, that as of such date and based on the
matters described therein, the consideration to be received by the holders of
Shares (other than the Parent and the Purchaser) was fair from a financial
point of view.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED HERETO AS SCHEDULE
I. THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH OPINION. STOCKHOLDERS ARE URGED TO READ SUCH OPINION
CAREFULLY IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE
FACTORS CONSIDERED AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion addresses only the fairness from a financial point
of view of the consideration to be received by the holders of Shares (other
than the Parent and the Purchaser) pursuant to the Offer and the Merger and
does not constitute a recommendation to the shareholders as to whether such
shareholders should tender their shares in the Offer or how such shareholders
should vote at any shareholders' meeting. Houlihan Lokey's opinion does not
address the Company's underlying business decision to effect the Offer and the
Merger.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under
the circumstances. Among other things, Houlihan Lokey: (i) reviewed the
publicly available financial information of the Company since the split-off of
the Company from ATN, including the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and the Quarterly Report on 10-Q for
the quarter ended March 31, 1998; (ii) reviewed the Proxy Statement for the
Special Meeting of Stockholders of ATN dated December 9, 1997; (iii) reviewed
a draft copy of Schedule 13E-3 dated June 22, 1998, including the draft Merger
Agreement contained therein; (iv) reviewed unaudited financial results of the
Company through June 30, 1998 as prepared by the Company; (v) met with certain
members of the senior management of the Company to discuss the operations,
financial condition, future prospects and projected operations and performance
of the Company; (vi) visited certain facilities and business offices of the
Company in St. Thomas, U.S. Virgin Islands; (vii) reviewed forecasts dated
March 25, 1998 as prepared by the Company's management for the years ending
December 31, 1998 through 2007; (viii) reviewed the historical market prices
and trading volume for the publicly traded securities of the Company; (ix)
reviewed publicly available financial data for certain companies that it
deemed comparable to the Company, and publicly available prices and premiums
paid in other transactions that it considered similar to the Offer and the
Merger; (x) held discussions with Jeffrey J. Prosser, the majority shareholder
of the Company and the sole shareholder of the Parent, and with certain
members of Prudential which is acting as financial adviser to Mr. Prosser; and
(xi) conducted such other studies, analyses and inquiries as it deemed
appropriate.
In assessing the financial fairness of the consideration to be received in
the Offer and the Merger by the holders of Shares (other than the Parent and
the Purchaser), Houlihan Lokey: (i) analyzed the reasonableness of the trading
value of the Company's publicly traded common stock; (ii) valued the common
equity of the Company using widely accepted valuation methodologies; and (iii)
analyzed the reasonableness of the consideration being offered pursuant to the
Offer and the Merger.
VALUATION OF EMERGING COMMUNICATIONS, INC.
Historical Stock Trading Analysis. As part of its analysis, Houlihan Lokey
analyzed the trading value of the Company's common stock. Houlihan Lokey
calculated the implied Price/Net Income, total invested capital (defined as
the value of equity plus debt, net of cash) ("TIC") to revenue
("TIC/Revenue"), TIC to earnings before interest and taxes ("TIC/EBIT") and
TIC to earnings before interest, taxes, depreciation and amortization
("TIC/EBITDA") multiples for the Company based on pro forma results (which
include the results of St. Martin
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Cellular) for its fiscal year ended December 31, 1997, latest 12 month results
through June 30, 1998 and its projected fiscal years ending December 31, 1998
and December 31, 1999 and compared those ratios to comparable publicly traded
companies. Houlihan Lokey also analyzed daily closing stock prices and volumes
for the 90-day period preceding the offer made on May 29, 1998.
Independent Valuation Analysis of the Company. In addition to analyzing
recent trading activity, Houlihan Lokey applied two widely used valuation
approaches to arrive at an independent valuation of the Company. The first
approach, the market multiple approach, involved the multiplication of various
earnings and cash flow measures by appropriate risk-adjusted multiples.
Multiples were determined through an analysis of certain publicly traded
companies, selected on the basis of operational and economic similarity with
the principal business operations of the Company. Earnings and cash flow
multiples were calculated for the comparative companies based upon daily
trading prices. A comparative risk analysis between the Company and the public
companies formed the basis for the selection of appropriate risk-adjusted
multiples for the Company. The risk analysis incorporates both quantitative
and qualitative risk factors which relate to, among other things, the nature
of the industry in which the Company and other comparative companies are
engaged. For purposes of this analysis, Houlihan Lokey selected the following
publicly-traded telecommunications companies: Aliant Communications, Inc., CFW
Communications Co., CT Communications, Inc., Century Telephone Enterprises,
Inc., Conestoga Enterprises, Inc., D&E Communications, Inc., Hickory Tech
Corp., and North Pittsburgh Systems, Inc. Houlihan Lokey's market multiple
approach yielded a valuation of the Company's common stock in the range of
$8.01 to $10.47 per share.
In the second approach, the discounted cash flow approach, projections for
the Company, as prepared by the Company's management, for the fiscal years
1998 through 2002 were utilized. The projected cash flows were analyzed on a
"debt-free" basis (before cash payments to equity and interest-bearing debt
investors) in order to develop a TIC value indication for the Company. A
provision for the TIC value of the Company at the end of the forecast period,
or terminal value, was also made. The present value of the interim cash flows
and the terminal value was determined using a risk-adjusted rate of return or
"discount rate." The discount rate, in turn, was developed through an analysis
of rates of return on alternative investment opportunities in companies with
similar risk characteristics to the Company. Houlihan Lokey's discounted cash
flow approach yielded a valuation of the Company's common stock in the range
of $9.47 to $13.94 per share.
FAIRNESS OF CONSIDERATION
Acquisition Premium Analysis. Houlihan Lokey analyzed the acquisition
premiums as implied by the offer relative to the "30-day unaffected trading
price" and the 52-week high and low for the common stock of the Company. The
"30-day unaffected trading price" represents the average stock price for the
thirty days prior to the announcement of the offer set forth in the May 29
Letter. These premiums are shown in the table below.
<TABLE>
<CAPTION>
30-DAY
UNAFFECTED
TRADING PRICE 52-WEEK HIGH 52-WEEK LOW
------------- ------------ -----------
<S> <C> <C> <C>
Premium......... 49.9% 13.9% 64.0%
----- ----- -----
</TABLE>
Houlihan Lokey believed that these premiums were within an acceptable range
of fairness for transactions in which control was not being acquired.
Comparable Transactions Multiples. Houlihan Lokey analyzed the acquisition
multiples paid in publicly announced, majority acquisitions of domestic
telecommunications companies with transaction values in excess of $25 million.
Houlihan Lokey's study analyzed sixteen transactions for public and private
companies that were announced between April 1996 and July 1998.
Houlihan Lokey advised the Special Committee that none of the transactions
reviewed were directly comparable to the Offer and the Merger. As part of this
analysis, Houlihan Lokey calculated the TIC/Revenue, TIC/EBIT and TIC/EBITDA
multiples. Houlihan Lokey's analysis indicated that for the acquisitions of
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<PAGE>
companies with available financial information: (i) the TIC/Revenue multiples
had a median of 2.66; (ii) the TIC/EBIT multiples had a median of 16.3; and
(iii) the TIC/EBITDA multiples had a median multiple of 12.9. The TIC/Revenue,
TIC/EBIT and TIC/EBITDA multiples for the Company based on the Offer were
3.33, 13.4 and 7.1, respectively, utilizing the financial results of the
Company for the latest 12 month period on a pro forma basis ended June 30,
1998. Although the Offer implied multiples for TIC/EBIT and TIC/EBITDA were
below the medians for the transactions, the multiples were in excess of the
median TIC/Revenue multiple and were within the range of multiples for
TIC/EBIT and TIC/EBITDA. Houlihan Lokey also noted that the transactions
analyzed represented control transactions which generally exhibit higher
multiples than transactions, such as the Offer and the Merger, in which
control is not being acquired.
Fairness Conclusion. Based on the analyses described above, Houlihan Lokey
concluded that the value of the consideration to be received by the holders of
Shares (other than the Parent and the Purchaser) pursuant to the Offer and the
Merger is fair from a financial point of view.
Houlihan Lokey was not requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Company. Houlihan
Lokey was not asked to express an opinion as to the relative merits of the
Offer and the Merger compared to any alternative business strategies that
might exist for the Company.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it were reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company, and that there was no material
change in the assets, financial condition, business or prospects of the
Company since the date of the most recent financial statements made available
to Houlihan Lokey.
Houlihan Lokey did not independently verify the accuracy and completeness of
the information supplied to it with respect to the Company and does not assume
any responsibility with respect to it. Houlihan Lokey did not make any
independent appraisal of any of the properties or assets of the Company.
Houlihan Lokey's opinion is necessarily based on business, economic, market
and other conditions as they existed and could be evaluated by Houlihan Lokey
at the date of the opinion.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities
and rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes.
Fees and Expenses. Pursuant to a retainer agreement (the "Retainer") entered
into on July 13, 1998, Houlihan Lokey was retained by the Company to analyze
the fairness of the consideration to be received in the Offer and the Merger
by the holders of Shares (other than the Parent and the Purchaser) from a
financial point of view. Houlihan Lokey received $100,000 upon signing of the
Retainer and $125,000 when it informed the Special Committee that it was
prepared to render the opinion (the "Opinion Fee"), and Houlihan Lokey will
receive $125,000 upon the closing of the Merger, plus reasonable out-of-pocket
expenses incurred in connection with the rendering of a fairness opinion. The
Company has further agreed to indemnify Houlihan Lokey against certain
liabilities and expenses in connection with the rendering of its services.
EFFECT OF THE MERGER ON MARKET FOR THE SHARES, STOCK EXCHANGE LISTING, AND
EXCHANGE ACT REGISTRATION
Upon consummation of the Merger, the Parent intends to seek delisting of the
shares from the AMEX and termination of registration of the Shares under the
Exchange Act.
Upon such delisting, the Shares will no longer constitute "margin
securities" for the purposes of the margin regulations of the Federal Reserve
Board and therefore could no longer be used as collateral for "purpose loans"
made by brokers.
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<PAGE>
CONTACTS AND AGREEMENTS WITH THE COMPANY
The Company and Mr. Prosser are parties to several agreements set forth
below. The following summaries are qualified in their entirety by reference to
the copies of such agreements.
In connection with the Split Off Transaction, the Company entered into a
number of agreements with Mr. Prosser. These agreements are summarized below.
Non-Competition Agreement. Pursuant to a Non-Competition Agreement among the
Company, ATN and Mr. Prosser (the "Non-Competition Agreement"), the Company
and Mr. Prosser have agreed 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 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 is
a period of 10 years after the effective date of the Split Off Transaction.
The telecommunications service covered by the Non-Competition Agreement
includes both carrying and/or terminating telecommunications traffic. The Non-
Competition 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 voice and data traffic. In the
Non-Competition Agreement, the Company and Mr. Prosser have also agreed to
hold in strict confidence all information of a proprietary nature relating to
ATN's business of providing telecommunications services with regard to
international audiotext traffic.
Indemnity Agreement. In accordance with the provisions of an Indemnity
Agreement among the Company, ATN, Mr. Prosser and Mr. Prior (the "Indemnity
Agreement"):
(i) Mr. Prosser has agreed to indemnify ATN, its subsidiaries, their
respective officers, directors and agents and Mr. Prior, 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 ATN or of the Company arising out of or
relating to the repurchase by ATN of shares of ATN Common Stock owned by
Mr. Prior and/or a trust of which he is a trustee (the "Trust") in
connection with the Split Off Transaction or the number of shares of Common
Stock to be received by Mr. Prosser or members of his family in connection
with the Split Off Transaction 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 the proxy statement-prospectus relating to
the Split Off Transaction, 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 the indemnity described in this
clause (b) applies only with respect to the biographical information of Mr.
Prosser contained in such proxy statement-prospectus and the information
contained therein concerning the beneficial ownership of ATN Common Stock
by Mr. Prosser and the members of his family and his or their affiliates.
(ii) Mr. Prior has agreed to indemnify the Company, its subsidiaries,
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 ATN or the
Company arising out of or relating to the number of shares of ATN Common
Stock to be received by Mr. Prior or members of his family in connection
with the Split Off Transaction 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 such proxy statement-prospectus, or the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, but the
indemnity described in this clause (b) applies only with respect to the
biographical information of Mr. Prior contained in such proxy statement-
prospectus and the information contained therein concerning the beneficial
ownership of ATN Common Stock by Mr. Prior and the members of his family
and his or their affiliates.
17
<PAGE>
(iii) The Company has agreed to indemnify ATN, its subsidiaries, 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 the Company before or after the Split Off Transaction or any
of the liabilities specifically to be assumed by the Company in connection
with the Split Off Transaction 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 such proxy statement-prospectus 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 the
indemnity described in this clause (b) applies only with respect to the
information contained in such proxy statement-prospectus concerning the
business, prospects or planned or proposed activities of the Company and
its subsidiaries, the activities of the Company or such subsidiaries after
April 30, 1997, and prospective acquisitions of businesses or other
transactions not in the ordinary course of business then planned or
contemplated by the Company, such subsidiaries or Mr. Prosser.
(iv) ATN has agreed to indemnify the Company, its subsidiaries, 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 ATN before or after the Split Off Transaction or
any of the liabilities of ATN not specifically assumed by the Company 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 such proxy
statement-prospectus 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 the indemnity described in this
clause (b) applies only with respect to the information contained in such
proxy statement-prospectus concerning the business, prospects or planned or
proposed activities of ATN and its subsidiaries after the Split Off
Transaction, the activities of ATN after April 30, 1997, and prospective
acquisitions of businesses or other transactions not in the ordinary course
of business planned or contemplated by ATN or Mr. Prior.
(v) Each of (A) Mr. Prosser and the Company and (B) Mr. Prior and ATN
have agreed not to be, without the prior written consent of ATN or the
Company, respectively, beneficial owners of greater than 5% of the
outstanding stock of ATN or the Company, respectively, nor to participate
in any solicitation of proxies or election contests with respect or to ATN
or the Company, respectively.
Tax Sharing Agreement. In accordance with the terms of the Tax Sharing and
Indemnification Agreement (the "Tax Sharing Agreement"):
(i) ATN, the Company, Mr. Prior and Mr. Prosser have each agreed not to
take certain actions which might jeopardize the Split Off Transaction
qualifying for tax-free treatment under the Code (as hereinafter defined).
Under the terms of the Tax Sharing Agreement, unless approved by the IRS or
legal counsel or agreed to by both ATN and the Company, ATN and the Company
will not at any time take any action which may be inconsistent with the tax
treatment of the Split Off Transaction as contemplated in the IRS ruling
received in connection therewith (the "Tax Ruling"). Without limiting the
generality of the foregoing, ATN and the Company will not, prior to
December 31, 1999, unless approved by the IRS or legal counsel or agreed to
by both ATN and the Company: (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 Split Off Transaction; (c) with certain exceptions, redeem,
purchase or otherwise reacquire its capital stock issued and outstanding
immediately after the Split Off Transaction; (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 business relied upon in the Tax
Ruling to satisfy Section 355(b) of the Code; or (e) discontinue the active
conduct of the trades or businesses relied upon in the Tax Ruling request
to satisfy Section 355(b) of the Code. If required, the Purchaser intends
to cause a legal opinion to be delivered to ATN to comply with the
provisions of the Tax Sharing Agreement as they relate to the Merger.
(ii) ATN has agreed to be liable for, and indemnify and hold harmless the
Company and its affiliates from and against, (a) any taxes resulting from
any income or gain recognized as a result of the Split Off Transaction,
including any taxes resulting from any income or gain recognized as a
result of the Split Off
18
<PAGE>
Transaction failing to qualify for tax-free treatment under the Code, which
arise from any breach by ATN of its representations or covenants under the
Tax Sharing Agreement, or from certain actions by ATN or its affiliates
which may be inconsistent with the tax treatment of the Split Off
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 ATN and its affiliates after the Split Off Transaction, (b)
any taxes taken into account as debits for purposes of calculating the
final closing adjustment under the terms of the Split Off Transaction, (c)
certain taxes arising from ATN's operations between April 30, 1997 and the
effective date of the Split Off Transaction, (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 ATN or certain subsidiaries
with respect to any period prior to and including the effective date of the
Split Off Transaction, except for taxes described in clause (a), (b) or (c)
of the following section (iii).
(iii) The Company has agreed to be liable for, and indemnify and hold
harmless ATN and its affiliates from and against, (a) any taxes resulting
from any income or gain recognized as a result of the Split Off Transaction
including any taxes resulting from any income or gain recognized as a
result of the Split Off Transaction failing to qualify for tax-free
treatment under the Code, which arise from any breach by the Company of its
representations or covenants under the Tax Sharing Agreement, or from
certain actions by the Company or its affiliates which may be inconsistent
with the tax treatment of the Split Off 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 the Company and its affiliates
after the Split Off Transaction, (b) one hundred percent (100%) of all
taxes of the Company (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 Atlantic
Tele-Network Co. or any of its subsidiaries to ATN except to the extent
taken into account as debits for purposes of computing the final closing
adjustment under the terms of the Split Off Transaction and (d) fifty
percent (50%) of all other taxes of ATN or certain subsidiaries with
respect to any period prior to and including the effective date of the
Split Off Transaction, except for taxes described in clauses (a), (b), (c)
and (d) of the preceding section (ii).
(iv) Mr. Prior has agreed to be liable for, and to indemnify and hold
harmless ATN, the Company, and their respective affiliates from and
against, any taxes resulting from any income or gain recognized as a result
of the Split Off Transaction, including any taxes resulting from any income
or gain recognized as a result of the Split Off 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
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 Split Off
Transaction.
(v) Mr. Prosser has agreed to be liable for, and to indemnify and hold
harmless ATN, the Company, and their respective affiliates from and against
any liability for any taxes resulting from any income or gain recognized as
a result of the Split Off Transaction, including any taxes resulting from
any income or gain recognized as a result of the Split Off 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 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 Split Off
Transaction.
Employment Agreement. The Company has entered into an employment agreement
(the "Employment Agreement") with Mr. Prosser dated December 31, 1997 for an
initial five-year term. The Employment Agreement is automatically renewable
for successive five-year terms and provides 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,
19
<PAGE>
an annual bonus may be awarded at the discretion of the Board or any duly
authorized committee thereof. The Employment Agreement provides for a grant of
options to purchase 273,978 shares of Common Stock pursuant to the Company's
1997 Long Term Incentive and Share Award Plan, which were granted to Mr.
Prosser on December 31, 1997. In the event Mr. Prosser's employment is
terminated for other than cause or disability by the Company 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. In addition, all
options to purchase Common Stock then owned by Mr. Prosser shall become
immediately vested and exercisable, and the exercisability thereof shall be
extended for a period of ten years following 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, the
Company 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 offering of registrable stock (as defined in the
Employment Agreement), (i) 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 (ii) include in any
registration statement of the Company (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 the Company)
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, the Company will indemnify Mr. Prosser against certain claims or
liabilities under the Securities Act, as amended.
THE MERGER AGREEMENT; APPRAISAL RIGHTS
The Merger. The Merger Agreement provides that, promptly after the purchase
of Shares pursuant to the Offer and the receipt of any required approval of
the Merger Agreement by the Company's stockholders and the satisfaction or
waiver of certain other conditions, Merger Sub will be merged into the
Company. Following consummation of the Merger, the Company will continue as
the surviving corporation in the Merger (the "Surviving Corporation") and will
become a wholly owned subsidiary of Parent.
At the Effective Time, each Share outstanding immediately prior to the
Effective Time (other than Shares owned by Parent, the Purchaser, the Company
or any direct or indirect subsidiary of Parent or the Company or Shares
("Dissenting Shares") held by stockholders of the Company who have properly
exercised their appraisal rights in accordance with Section 262 of the DGCL
(collectively, "Excluded Shares")) will be converted into the right to receive
the Merger Consideration.
At the Effective Time the shares of common stock, par value $0.01 per share,
of Merger Sub issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of Merger
Sub or the holders of such shares, be converted into that number of shares of
Common Stock of the Surviving Corporation equal to the number of outstanding
Shares at the Effective Time less the number of Excluded Shares.
The Merger Agreement provides that the Dissenting Shares will not be
converted into or represent the right to receive the Merger Consideration.
Holders of such Shares will be entitled to receive payment of the "fair value"
of such Shares held by them in accordance with the provisions of Section 262
of the DGCL, except that all Dissenting Shares held by stockholders who fail
to perfect or who effectively withdraw or lose their rights to dissent will
thereupon be deemed to have been converted into, as of the Effective Time, the
right to receive, without any interest thereon, the Merger Consideration, upon
surrender of the certificate or certificates that formerly evidenced such
Shares.
The Merger Agreement provides that Purchaser shall make available or cause
to be made available to the paying agent appointed by Purchaser with the
Company's prior approval (the "Paying Agent") amounts sufficient in the
aggregate to provide all funds necessary for the Paying Agent to make payments
described above to holders of Shares issued and outstanding immediately prior
to the Effective Time. Promptly after the Effective
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<PAGE>
Time, the Paying Agent shall, pursuant to irrevocable instructions, make the
payments provided for in the preceding sentence out of the funds deposited
with the Paying Agent for such purpose. One hundred eighty days following the
Effective Time, the Surviving Corporation shall be entitled to cause the
Paying Agent to deliver to it any funds (including any interest received with
respect thereto) made available to the Paying Agent which have not been
disbursed to holders of certificates formerly representing Shares outstanding
at the Effective Time, and thereafter such holders shall be entitled to look
to the Surviving Corporation only as general creditors thereof with respect to
the cash payable under due surrender of their certificates. The Surviving
Corporation shall pay all charges and expenses, including those of the Paying
Agent, in connection with the exchange of cash for Shares and Purchaser shall
reimburse the Surviving Corporation for such charges and expenses.
Conditions to Certain Obligations. The obligations of the Company, the
Purchaser and Parent to effect the Merger are subject to the satisfaction of
certain conditions set forth in the Merger Agreement, including (i) the
purchase by the Purchaser (or one or more affiliates of the Purchaser) of
Shares pursuant to the Offer, (ii) to the extent required by applicable law,
the receipt of stockholder approval of the Merger and the Merger Agreement and
(iii) there being no statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) enacted, issued,
promulgated, enforced or entered by any governmental entity, or any court
which is in effect and prohibits consummation of the Merger.
Termination. According to its terms, the Merger Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time,
whether before or after any approval by the stockholders of the Company, by
the mutual consent of the Purchaser and the Company, by action of their
respective Boards and Directors. In addition, the Merger Agreement may be
terminated by action of the Board of Directors of either the Purchaser or the
Company if (i) the Purchaser shall have terminated the Offer without
purchasing any Shares pursuant thereto; provided that the right to terminate
the Merger Agreement shall not be available to the Purchaser, whose failure to
fulfill any obligation under the Merger Agreement has been the cause of or
resulted in the failure to purchase such Shares and provided, further, that in
the case of termination of the Merger Agreement by the Purchaser, such
termination of the Offer is not in violation of the terms of the Offer or (ii)
without fault of the terminating party, the Merger shall not have been
consummated by December 31, 1999, whether or not such date is before or after
any approval by the stockholders of the Company of the Merger and the Merger
Agreement. The Merger Agreement may be terminated by the Purchaser at any time
prior to the Effective Time, whether before or after any approval by the
stockholders of the Company, by the action of the board of directors of the
Purchaser, if (i) the Company shall have failed to comply in any material
respect with any of the covenants and agreements contained in the Merger
Agreement to be complied with or performed by the Company at or prior to such
date of termination or (ii) the Board of Directors of the Company or those
directors of the Company who are not officers of Parent or the Company or any
affiliate of either of them (the "Independent Directors") shall have withdrawn
or modified in a manner adverse to the Purchaser their approval or
recommendation of the Offer, the Merger Agreement or the Merger or the Board
of Directors of the Company or the Independent Directors, upon request by the
Purchaser, shall fail to reaffirm such approval or recommendation, or shall
have resolved to do any of the foregoing. The Merger Agreement may be
terminated at any time prior to the Effective Time, before or after any
approval by the stockholders of the Company, by action of the Board of
Directors of the Company, if the Purchaser or Merger Sub (i) shall have failed
to comply in any material respect with any of the covenants or agreements
contained in the Merger Agreement to be complied with or performed by the
Purchaser or Merger Sub at or prior to such date of termination or (ii) shall
have failed to commence the Offer within the time required by the Merger
Agreement.
Subject to the applicable provisions of the DGCL, the Merger Agreement may
be amended by action taken by the Company, the Purchaser and Merger Sub at any
time prior to the Effective Time.
Certain Covenants of the Parties. The Purchaser has agreed in the Merger
Agreement that it will not, without the prior written consent of the Company,
decrease the price per Share or change the form of consideration payable in
the Offer, decrease the number of Shares sought, change the conditions to the
Offer or waive the Minimum Tender Condition. Also, the Purchaser shall not
terminate or withdraw the Offer or extend the Expiration Date unless at the
Expiration Date the conditions to the Offer have not been satisfied or waived.
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<PAGE>
The Merger Agreement provides that for six years after the Effective Time,
the Surviving Corporation shall maintain the Company's existing directors' and
officers' liability insurance or equivalent liability insurance ("D&O
Insurance") so long as the annual premium therefor is not in excess of the
last annual premium paid prior to the date of the Merger Agreement (the
"Current Premium"); provided, however, if the existing D&O Insurance expires,
is terminated or canceled during such six-year period, the Surviving
Corporation will use its best efforts to obtain as much D&O Insurance as can
be obtained for the remainder of such period for a premium not in excess (on
an annualized basis) of 200 percent of the Current Premium. In lieu of the
insurance arrangement described above, the Company may, on or before the
expiration of the Offer, enter into alternative insurance arrangements,
provided that such arrangements are approved by the Independent Directors and
the Purchaser. The Merger Agreement also provides that, from and after the
Effective Time, the Purchaser and the Surviving Corporation will indemnify and
hold harmless each present and former director and/or officer of the Company,
determined as of the Effective Time (the "Indemnified Parties") that is made a
party or threatened to be made a party to any threatened, pending or
completed, action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she was a
director or officer of the Company or any subsidiary of the Company prior to
the Effective Time and arising out of actions or omissions of the Indemnified
Party in any such capacity occurring at or prior to the Effective Time (a
"Claim") against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, amounts paid in settlement pursuant to the provisions of the
Merger Agreement described in the next succeeding paragraph, losses, claims,
damages or liabilities (collectively, "Costs") reasonably incurred in
connection with any Claim, whether asserted or claimed prior to, at or after
the Effective Time, to the fullest extent that the Company would have been
permitted under Delaware law. The Merger Agreement further provides that the
Surviving Corporation and Purchaser shall also advance expenses (including
attorneys' fees), as incurred by the Indemnified Party to the fullest extent
permitted under applicable law provided such Indemnified Party provides an
undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification.
Pursuant to the Merger Agreement, upon learning of any Claim described in
the preceding paragraph, such Indemnified Party shall promptly notify the
Surviving Corporation and the Purchaser thereof. In the event of any such
Claim (whether arising before or after the Effective Time), (i) the Purchaser
or the Surviving Corporation shall have the right to assume the defense
thereof and the Purchaser shall not be liable to such Indemnified Parties for
any legal expenses of other counsel or any other expenses subsequently
incurred by such Indemnified Parties in connection with the defense thereof,
except that if the Purchaser or the Surviving Corporation elects not to assume
such defense or counsel for the Indemnified Parties advises that there are
issues which raise conflicts of interest between the Purchaser or the
Surviving Corporation and the Indemnified Parties, the Indemnified Parties may
retain counsel satisfactory to them, and the Purchaser or the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received; provided,
however, that the Surviving Corporation and the Purchaser shall be obligated
pursuant to the Merger Agreement to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest,
(ii) the Indemnified Parties will cooperate in the defense of any such matter
and (iii) the Purchaser shall not be liable for any settlement effected
without its prior written consent; and provided further that the Surviving
Corporation and the Purchaser, respectively, shall not have any obligation
under the Merger Agreement to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination
shall have become final and non-appealable, that the indemnification of such
Indemnified Party in the manner contemplated by the Merger Agreement is
prohibited by applicable law. If such indemnity is not available with respect
to any Indemnified Party, then the Surviving Corporation and the Indemnified
Party shall contribute to the amount payable in such proportion as is
appropriate to reflect relative faults and benefits.
The Merger Agreement further provides that if a claim for indemnification or
advancement under the Merger Agreement is not paid in full by the Surviving
Corporation or the Purchaser within thirty days after a written claim therefor
has been received by the Surviving Corporation or the Purchaser, the
Indemnified Party may any time thereafter bring suit against the Surviving
Corporation or the Purchaser to recover the unpaid amount of the claim and, if
successful in whole or in part, the Indemnified Party shall be entitled to be
paid also
22
<PAGE>
the expense of prosecuting such claims. Under the terms of the Merger
Agreement, neither the failure of the Surviving Corporation or the Purchaser
(including their Boards of Directors, independent legal counsel or
shareholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnified Party is proper in the
circumstances because he or she has met the applicable standard of conduct,
nor an actual determination by the Surviving Corporation or the Purchaser
(including their boards of directors, independent legal counsel, or
shareholders) that the Indemnified Party has not met such applicable standard
of conduct, shall be a defense to the suit or create a presumption that the
Indemnified Party has not met the applicable standard of conduct.
The Merger Agreement also provides that no amendment to the Certificate of
Incorporation or By-laws of the Surviving Corporation shall reduce in any way
the elimination of personal liability of the directors of the Company
contained therein or adversely affect any then existing right of any director
or officer (or former director or officer) to be indemnified with respect to
acts, omissions or events occurring prior to the Effective Time.
In the Merger Agreement, the Company has agreed that its Board of Directors
and a majority of the Independent Directors will recommend acceptance of the
Offer to the Company's stockholders and will file with the Commission, and
mail to its stockholders, a Solicitation/Recommendation Statement on Schedule
14D-9 containing the unanimous recommendation of the Company's Board of
Directors and the Independent Directors that the Company's stockholders accept
the Offer. The Merger Agreement also provides that if the Company's Board of
Directors determines that its fiduciary duties require it to amend or withdraw
its recommendation, such amendment or withdrawal shall not constitute a breach
of the Merger Agreement.
The Merger Agreement also contains certain other restrictions as to the
conduct of business by the Company pending the Merger, as well as
representations and warranties of each of the parties customary in
transactions of this kind.
The foregoing description of the Merger Agreement is qualified in its
entirety by reference to the text of the Merger Agreement, a copy of which is
attached hereto as Appendix C. The foregoing description of the Merger
Agreement is qualified in its entirety by reference to that document.
Appraisal Rights. In connection with the Merger, holders of the Shares will
have certain rights under the DGCL to demand appraisal of, and payment in cash
for the fair value of, their Shares. Such rights, if the statutory procedures
are complied with, could lead to a judicial determination of the fair value
(excluding any element of value arising from accomplishment or expectation of
the Merger) required to be paid in cash, plus a payment in cash of a fair rate
of interest from the date of consummation of the Merger, to such dissenting
holders for their Shares. Any judicial determination of the fair value of
Shares would take into account all relevant factors and could accordingly, be
based upon considerations other than or in addition to the price paid in the
Merger and the market value of the Shares, asset values, earning capacity and
the investment value of the Shares. The value so determined could be more or
less than the consideration per Share to be paid in the Merger. The costs of
appraisal litigation (including fees of counsel and experts retained by the
parties) will be taxed upon the parties, or either of them, in such manner as
appears equitable to the court. See "SCHEDULE II--Appraisal Rights of
Stockholders under Delaware Law" attached hereto for a summary of appraisal
rights under the DGCL and for a copy of the text of Section 262 of the DGCL.
The Purchaser does not intend to object, assuming the proper procedures are
followed, to the exercise by any other stockholder of such stockholder's
appraisal rights in connection with the Merger and who demands appraisal of,
and payment in cash for the fair value of, such stockholder's Shares. However,
Parent intends to cause the Company, as the surviving corporation in the
Merger, to argue in any appraisal proceeding that, for the purposes of such a
proceeding, the fair value of the Shares is less than the price paid in the
Merger.
THE FOREGOING SUMMARY OF THE APPRAISAL RIGHTS OF STOCKHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY
STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE APPRAISAL RIGHTS. THE
PRESERVATION AND EXERCISE OF APPRAISAL RIGHTS ARE CONDITIONED ON STRICT
ADHERENCE TO THE APPLICABLE PROVISIONS OF DELAWARE LAW.
23
<PAGE>
SOURCE AND AMOUNT OF FUNDS
The Purchaser estimates that the total amount of funds required to purchase
the outstanding Shares pursuant to the Merger and to pay related fees and
expenses will be approximately $[ ] million. The Purchaser will obtain these
funds pursuant to a loan agreement with the RTFC described below.
The Purchaser has entered into a senior credit facility with the RTFC in the
aggregate amount of up to $60.0 million (the "Credit Facility"). The purpose
of the Credit Facility is to finance the Offer and the Merger, and to pay
related fees and expenses.
The Credit Facility will mature in fifteen years and will be repayable in
consecutive quarterly installments, commencing on March 31, 2001. The Credit
Facility is secured by substantially all of the assets of the Purchaser and
its subsidiaries (other than Shares, except to the extent permitted by the
margin rules of the Board of Governors of the Federal Reserve) and is
guaranteed by the Parent and such subsidiaries.
Borrowings under the Credit Facility bear interest at the RTFC's variable
and/or fixed interest rate(s) for long term loans with 5% Subordinated Capital
Certificates, plus 2.5%.
The RTFC Loan Agreement contains conditions precedent, representations and
warranties, covenants (including financial covenants), events of default and
other provisions customary for such financings.
It is anticipated that the indebtedness incurred through borrowing under the
Credit Facility will be repaid from funds generated internally by the
Purchaser and its subsidiaries (or, if the Purchaser's operations are combined
with the Company, by the combined companies) and from other sources that may
include the proceeds of the private or public sale of debt or equity
securities. No final decisions have been made concerning the method the
Purchaser will employ to repay such indebtedness. Such decisions when made
will be based upon the Purchaser's review from time to time of the
advisability of particular actions, as well as on prevailing interest rates
and financial and other economic conditions.
CERTAIN LEGAL MATTERS
General. Except as otherwise disclosed herein, based upon an examination of
publicly available filings with respect to the Company, neither the Purchaser
nor Parent is aware of any licenses or other regulatory permits which appear
to be material to the business of the Company and which might be adversely
affected by the acquisition of Shares by the Purchaser pursuant to the Merger
or of any approval or other action by any governmental, administrative or
regulatory agency or authority which would be required for the acquisition or
ownership of Shares by the Purchaser pursuant to the Merger. Should any such
approval or other action be required, it is currently contemplated that such
approval or action would be sought or taken.
Certain Litigation. The Company has been served notice of a stockholder
lawsuit filed on or about June 3, 1988 in the Delaware Court of Chancery, New
Castle Division, with respect to the May 29, 1998 proposal by Parent to
acquire all of the Shares of the Company. The lawsuit, entitled Brickell
Partners v. Jeffrey J. Prosser, et al. (C.A. No. 16425-NC) (the "Shareholder
Litigation"), asks for class action status and names the Company and
individual members of the Company's Board of Directors as defendants,
including Mr. Prosser. The suit, inter alia, alleges breaches of fiduciary
duty by Mr. Prosser as controlling shareholder of the Company. The complaint
alleges that the proposed acquisition of the Company "serves no legitimate
business purpose" and that it is "an attempt by defendant Prosser to benefit
himself unfairly at the expense" of Company shareholders. The complaint seeks,
among other things, a preliminary and permanent injunction against the Offer,
rescission of the Offer if it is consummated, and unspecified monetary
damages. Defendants have not filed any responsive pleadings and their time to
respond has been extended into September of 1998.
While neither the Company nor the Purchaser presently anticipates that the
Shareholder Litigation will result in the Merger Agreement not continuing to
be in full force and effect in accordance with its terms, there can be no
assurance as to the outcome of any such lawsuit. The litigation could result
in substantial expense to the Company and significant diversion of efforts of
the Company's management team.
24
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
General. The receipt of cash for Shares pursuant to the Merger will be a
taxable transaction for U.S. federal income tax law purposes and may also be a
taxable transaction under applicable state, local or foreign tax laws. The tax
consequences of such receipt pursuant to the Merger may vary depending upon,
among other things, the particular circumstances of the stockholder. In
general, a stockholder who receives cash for Shares pursuant to the Merger
will recognize gain or loss for federal income tax purposes equal to the
difference between the amount of cash received in exchange for the Shares sold
and such stockholder's adjusted tax basis in such Shares.
Provided that the Shares constitute capital assets in the hands of the
stockholder, such gain or loss will be capital gain or loss, and will be long
term capital gain or loss if the holder has held the Shares for more than one
year at the time of sale.
Dissenters. A holder of Shares who exercises and perfects his or her
applicable rights under Section 262 of the DGCL to demand fair value for such
Shares will recognize capital gain or loss (and may recognize an amount of
interest income) for federal income tax purposes attributable to any payment
received pursuant to the exercise of such rights based upon the principles
described in the previous paragraphs.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE
MINIMUM TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS. IN ADDITION, THE
DISCUSSION SET FORTH ABOVE MAY NOT APPLY TO PARTICULAR CATEGORIES OF
STOCKHOLDERS, INCLUDING STOCKHOLDERS WHO ACQUIRED SHARES PURSUANT TO THE
EXERCISE OF EMPLOYER STOCK OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS
WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, AND FOREIGN
CORPORATIONS, LIFE INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS, FINANCIAL
INSTITUTIONS OR ENTITIES THAT ARE OTHERWISE SUBJECT TO SPECIAL TAX TREATMENT.
ACCOUNTING TREATMENT OF THE MERGER
For accounting purposes the Merger will be accounted for as a transfer
between entities under common control at historical cost. Accordingly, the
historical cost of the assets and liabilities of Merger Sub will be carried
over to the Company. The consideration paid in the Merger in excess of the
controlling shareholder's carrying value will be recorded as a capital
distribution (a disproportionate dividend to the controlling shareholder) and
charged to retained earnings.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company as of and
for the years ended December 31, 1995, 1996 and 1997 have been derived from
the Company's audited financial statements. The following related historical
data as of and for the six months ended June 30, 1997 and 1998 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.
On December 30, 1997, ATN split off into two separate public companies
pursuant to the Split Off Transaction: the Company, which contains all of the
predecessors' telephone operations in the U.S. Virgin Islands; and ATN, which
continues to own the business and operations in Guyana. Since the Company was
the larger of the split-off entities, ATN was deemed for accounting purposes
to be the split-off entity. The Company is the successor company and its
historical financial statements prior to the split-off are the historical
financial statements of ATN. Therefore, the historical financial statements of
the Company include the operations in Guyana prior to the Split Off
Transaction.
The Split Off Transaction was a non-pro rata split-off and accordingly, the
split-off of ATN has been accounted for at fair value as evidenced by the
market capitalization of ATN. Consequently, the loss on fair valuation of the
net assets of ATN has been included in the Company's consolidated statement of
operations.
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, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 and the Company's unaudited
consolidated condensed financial statements and notes thereto as of and for
the six months ended June 30, 1997 and 1998 which are included elsewhere in
this Proxy Statement. All dollar amounts are in thousands, except per share
data.
26
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Telephone operations (1)... $184,632 $206,002 $182,349 $ 90,968 $ 32,663
Cellular services.......... 5,910 5,480 3,663 2,146 1,752
Product sales and rent-
als....................... 5,128 5,435 4,942 2,334 2,573
-------- -------- -------- -------- --------
Total revenues........... 195,670 216,917 190,954 95,448 36,988
Expenses:
Telephone operations....... 130,575 155,174 134,401 69,609 21,547
Cellular services, product
sales and rental ex-
penses.................... 8,399 8,231 7,957 3,870 3,806
General and administrative
expenses.................. 10,219 9,458 12,168 4,956 2,654
-------- -------- -------- -------- --------
Total operating ex-
penses.................. 149,193 172,863 154,526 78,435 28,007
-------- -------- -------- -------- --------
Income from operations...... 46,477 44,054 36,428 17,013 8,981
Other income and expense: ..
Loss on split-off of ATN... -- -- (45,041) -- --
Equity in earnings of un-
consolidated subsidiary... -- -- -- -- 315
Interest expense........... (12,511) (11,289) (10,548) (5,317) (4,392)
Interest income............ 971 458 351 158 79
-------- -------- -------- -------- --------
Total other income and
expense................. (11,540) (10,831) (55,238) (5,159) (3,998)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and minority inter-
est........................ 34,937 33,223 (18,810) 11,854 4,983
Income tax (expense) benefit
(2)........................ (15,250) (13,039) 897 6,612 (1,761)
Minority interest........... (2,477) (2,177) (1,340) (308) --
-------- -------- -------- -------- --------
Income (loss) from continu-
ing operations............. $ 17,210 $ 18,007 $(19,253) $ 18,158 $ 3,222
======== ======== ======== ======== ========
Basic net income (loss) per
share from continuing oper-
ations..................... $ 1.40 $ 1.47 $ (1.57) $ 1.48 $ 0.29
Dividends per share......... -- -- -- -- --
Weighted average number of
shares..................... 12,273 12,273 12,269 12,273 10,959
OTHER DATA:
Ratio of earnings to fixed
charges (3)................ 3.79x 3.94x -- 3.22x 2.13x
<CAPTION>
AT DECEMBER 31, AS OF JUNE 30,
---------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Fixed assets, net........... $226,660 $251,996 $154,096 $252,135 $164,074
Total assets................ 371,939 389,324 224,308 376,782 259,211
Short-term debt (including
current portion of long-
term debt)................. 24,841 30,095 28,227 28,658 46,347
Long-term debt, net......... 128,362 116,227 105,138 104,173 126,173
Stockholders' equity........ 130,956 149,791 58,770 167,949 61,992
OTHER DATA:
Book value per share........ $ 10.67 $ 12.21 $ 5.36 $ 13.68 $ 5.66
</TABLE>
- --------
(1) In September 1997, the Guyana High Court denied an order which the
Consumer Advisory Bureau had sought to temporarily enjoin Guyana Telephone
& Telegraph Ltd. ("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 regard 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 year ended December 31, 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 $12 million ($.98 per share) in the
year ended December 31, 1997.
(3)There was a deficiency of earnings to fixed charges for the year ended
December 31, 1997 of $29.4 million.
27
<PAGE>
PRICE RANGE OF SHARES; DIVIDENDS
The Shares are listed on the AMEX under the symbol "ECM." The Shares began
trading on AMEX on December 31, 1997, on which day the high and low sales
prices were $8.25 and $7.875, respectively. The following table sets forth,
for the 1998 calendar quarters indicated, the high and low sales prices for
the Shares, based upon public sources:
<TABLE>
<CAPTION>
SHARES
-----------------
CALENDAR QUARTER HIGH LOW
---------------- -------- -------
<S> <C> <C>
January 1--March 31.................... $ 9.0000 $6.2500
April 1--June 30....................... 8.9375 6.2500
July 1--September 22................... [ ] [ ]
</TABLE>
On May 28, 1998, the last full trading day prior to the public announcement
of Parent's intention to seek to cause the Company to become a wholly owned
subsidiary of Parent in a transaction in which holders of Shares would receive
$9.125 in cash per share, the reported closing price on the AMEX was $7.00 per
Share. On August 17, 1998, the last trading day prior to the public
announcement of the execution of the Merger Agreement and the Purchaser's
agreement to commence the Offer, the reported closing price was $8.3125 per
Share. Stockholders are urged to obtain a current market quotation for the
Shares.
The Company has not paid any dividends on the Common Stock. The declaration
of dividends on the Common Stock is at the discretion of the Board. Subject to
legal and contractual restrictions, its decisions regarding future payment of
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 the Company's business and operations.
28
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the information regarding the Share ownership
by each stockholder who is known by the Company to own beneficial five percent
or more of the outstanding Shares and directors and officers of the Company as
of September 22, 1998, unless otherwise noted.
<TABLE>
<CAPTION>
SHARES
NAMES AND ADDRESS OF BENEFICIALLY PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS OWNED COMMON STOCK
- -------------------------------- ------------ ------------
<S> <C> <C>
Directors:
Jeffrey J. Prosser................................ [ ](1) [ ]%
Richard N. Goodwin................................ -- --
Salvatore Muoio................................... [ ] *
John P. Raynor.................................... -- --
Sir Shridath S. Ramphal........................... -- --
John G. Vondras................................... -- --
Terrence A. Todman................................ -- --
Executive Officers:
Jeffrey J. Prosser................................ [ ](1) [ ]%
Chairman, Chief Executive Officer, Secretary and
Acting Chief Financial Officer
Thomas R. Minnich................................. -- --
Chief Operating Officer
Edwin Crouch...................................... [ ](2) *
Vice President
All Directors and Executive Officers as a Group (8
persons)......................................... [ ] [ ]%
<CAPTION>
NAMES AND ADDRESS OF
5% BENEFICIAL OWNERS
- --------------------
<S> <C> <C>
[To Come]
</TABLE>
- --------
29
<PAGE>
CERTAIN INFORMATION CONCERNING MERGER SUB
Merger Sub is a newly incorporated Delaware corporation and a wholly-owned
subsidiary of the Purchaser. To date, Merger Sub has not conducted any
business other than in connection with its organization and the Merger.
Accordingly, no meaningful financial information with respect to Merger Sub is
available.
OTHER MATTERS
Management knows of no other matter which may properly be brought before the
Special Meeting. Under the Company's Bylaws, no business may be transacted at
a special meeting of stockholders unless it is included in the notice of the
meeting. If any other matters properly come before the Special Meeting, it is
intended that the holders of the proxies hereby solicited will act in respect
to such matters in accordance with their best judgement. Representatives of
Deloitte & Touche, LLP are expected to be present at the Special Meeting,
where they will have the opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. All such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, and
at the commission's regional offices at 7 World Trade Center, Suite 1300, New
York, NY 10048 and 500 West Madison Street, Suite 1300, Chicago, IL 60661.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 3190, Washington, D.C. 20549
at prescribed rates. Such material should be available on-line through the
Commission's EDGAR electronic filing and retrieval system and on the
Commission's World Wide Web site at http://www.sec.gov.
By Order of the Board of Directors,
/s/ Jeffrey J. Prosser
-------------------------------------
JEFFREY J. PROSSER
Secretary
St. Croix, U.S. Virgin Islands
Dated: September 23, 1998
Your vote is important. Stockholders who do not expect to be present at the
Special Meeting and who wish to have their stock voted are requested to sign
and date the enclosed proxy and return it in the enclosed envelop. No postage
is required if mailed in the United States.
30
<PAGE>
SCHEDULE I
OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
<PAGE>
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
- -------------------------------------------------------------------------------
INVESTMENT BANKERS
AUGUST 17, 1998
The Special Committee of the Board of Directors of Emerging Communications,
Inc.
c/o Mr. Richard Goodwin
Chairman of the Special Committee of the Board of Directors
Chase Financial Center
P.O. Box 1730
St. Croix, U.S. Virgin Islands 08821
Dear Gentlemen:
We understand that Innovative Communication Corporation (the "Purchaser" or
"ICC"), a company wholly owned by Jeffrey J. Prosser, has proposed to purchase
the common equity of Emerging Communications, Inc. (the "Company"), pursuant
to the terms of an agreement and plan of merger (the "Agreement") dated as of
August 17, 1998, among the Company, the Purchaser and a wholly owned
subsidiary of the Purchaser. As more specifically set forth in the Agreement,
holders of each share of issued and outstanding common stock of the Company
will be entitled to receive a cash price of $10.25 per share, pursuant to a
tender offer. Promptly after the purchase of shares in the tender offer, and
the satisfaction or waiver of certain conditions set forth in the Agreement, a
subsidiary of ICC will be merged with and into the Company and each holder of
shares will be entitled to receive a cash price of $10.25 per share. Such
transactions and all related transactions are referred to collectively herein
as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion addresses only the fairness from a financial point of view
of the consideration to be received by the Company's common shareholders
(other than the Purchaser or Jeffrey J. Prosser) in the Transactions and does
not constitute a recommendation to the shareholders as to whether such
shareholders should tender their shares in the Transaction. The Opinion does
not address the Company's underlying business decision to effect the
Transaction. We have not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Company.
NEW YORK
31 West 52nd Street, 11th Floor
New York, New York 10019-6118
Tel 212.582.5000 Fax 212.582.7405
Broker/dealer services through
Houlihan Lokey Howard & Zukin Capital.
LOS ANGELES
CHICAGO SAN FRANCISCO
MINNEAPOLIS WASHINGTON, D.C.
DALLAS ATLANTA TORONTO
<PAGE>
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the publicly available financial information of the Company
since the split-off of the Company from Atlantic Tele-Network, Inc.
("ATN"), including the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and the Quarterly Report on 10-Q for the
quarter ended March 31, 1998;
2. reviewed the Proxy Statement for the Special Meeting of Stockholders
of Atlantic Tele-Network, Inc. dated December 9, 1997;
3. reviewed a draft copy of Schedule 13E-3 dated June 22, 1998, including
the draft agreement and plan of merger contained therein;
4. reviewed unaudited financial results of the Company through June 30,
1998 as prepared by the Company;
5. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and projected
operations and performance of the Company;
6. visited certain facilities and business offices of the Company in St.
Thomas, U.S. Virgin Islands;
7. reviewed forecasts dated March 25, 1998 as prepared by the Company's
management for the years ending December 31, 1998 through 2007;
8. reviewed the historical market prices and trading volume for the
publicly traded securities of the Company;
9. reviewed publicly available financial data for certain companies that
we deem comparable to the Company, and publicly available prices and
premiums paid in other transactions that we considered similar to the
Transaction;
10. held discussions with Jeffrey J. Prosser, the majority shareholder of
the Company and the sole shareholder of ICC, and with certain members of
Prudential Securities who are acting as financial advisor to Mr. Prosser;
11. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company, and that there has been no
material change in the assets, financial condition, business or prospects of
the Company since the date of the most recent financial statements made
available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other
conditions as they exist and can be evaluated by us at the date of this
letter.
We hereby consent to your reference to the Opinion in, and the inclusion of
the Opinion as an exhibit to, materials to be filed with the Securities and
Exchange Commission in connection with the Transaction. This Opinion is
delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in this Opinion and our engagement
letter, and subject to the understanding that the obligations of Houlihan
Lokey in the Transaction are solely corporate obligations, and no officer,
director, employee, agent, shareholder or controlling person of Houlihan Lokey
shall be subjected to any personal liability whatsoever to any person, nor
will any such claim be asserted by or on behalf of you or your affiliates.
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<PAGE>
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that the consideration to be received by the Company's common
shareholders (other than the Purchaser or Jeffrey J. Prosser) in the
Transaction is fair from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
/s/ Houlihan Lokey Howard & Zukin Capital
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<PAGE>
SCHEDULE II
APPRAISAL RIGHTS OF STOCKHOLDERS
UNDER DELAWARE LAW
Holders of Shares issued and outstanding immediately prior to the effective
date of the Merger are entitled to appraisal rights in connection with the
Merger under Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL"). In order to perfect such appraisal rights, a
stockholder is required to follow the procedures set forth in Section 262 of
the DGCL, as summarized below. The following discussion of the provisions of
Section 262 is not intended to be a complete statement of its provisions and
is qualified in its entirety by reference to the full text of that section.
All references in Section 262 of the DGCL and in this summary to a
"stockholder" are to a record holder of the Shares immediately prior to the
effective time of the Merger as to which appraisal rights are asserted. A
person having a beneficial interest in Shares held of record in the name of
another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect appraisal rights. THE PROCEDURES SET FORTH IN SECTION 262
SHOULD BE STRICTLY COMPLIED WITH. FAILURE TO FOLLOW ANY SUCH PROCEDURES MAY
RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER SECTION 262.
Under the DGCL, persons who hold Shares immediately prior to the effective
date of the Merger and who follow the procedures set forth in Section 262 will
be entitled to have their Shares appraised by the Delaware Court of Chancery
and to receive payment of the "fair value" of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, as determined by such court. A
stockholder who votes in favor of the Merger, whether in person or by proxy,
will not be entitled to assert appraisal rights. However, a stockholder is not
required to vote against the Merger in order to qualify to exercise appraisal
rights in connection with the Merger.
The Company is required, not less than 20 days prior to the meeting of
stockholders, to notify each of its stockholders who was such on the record
date for such meeting that appraisal rights are available and must include in
such notice a copy of Section 262 of the DGCL. This Proxy Statement shall
satisfy such notice requirement. Any stockholder electing to exercise the
appraisal rights must deliver to the Company, before the taking of the vote on
the proposed Merger, a written demand for appraisal of such stockholder's
Shares. Such demand must reasonably inform the Company of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal
of such stockholder's Shares within ten (10) days after the effective date of
such Merger, the surviving or resulting corporation must notify each
stockholder of each constituent corporation who had complied with Section
262(d)(1) and has not voted in favor of or consented to the Merger of the date
that has become effective.
A Stockholder Who Fails To Make Such Written Demand Will Not Be Entitled To
Assert Appraisal Rights.
A holder of Shares wishing to exercise such holder's appraisal rights must
be the record holder of the Shares on the date the written demand for
appraisal is made and must continue to hold the Shares of record through the
effective date of the Merger. Accordingly, a holder of Shares who is the
record holder of Shares on the date the written demand for appraisal is made,
but who thereafter transfers such Shares prior to the consummation of the
Merger, will lose any right to appraisal in respect of such Shares. A holder
of Shares who votes against adoption of the Merger Agreement will not be
deemed to have satisfied the notice requirement of such holder with respect to
appraisal rights merely by so voting. The written demand for appraisal must be
in addition to and separate from any proxy or vote abstaining from or against
adoption of the Merger Agreement. The notice shall be sent by certified or
registered mail, return receipt requested, addressed to the stockholder, at
such stockholder's address as it appears on the records of the Company. Any
stockholder entitled to appraisal rights may, within twenty (20) days after
the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of such stockholder's Shares. Such demand
must reasonably inform the Company of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
Shares.
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A Stockholder Who Fails To Make Such Written Demand Will Not Be Entitled To
Assert Appraisal Rights.
The written demand for appraisal must be made by or for the holder of record
of Shares registered in such holder's name. Accordingly, such demand should be
executed by or for such stockholder of record, fully and correctly, as such
stockholder's name appears on such stockholder's stock certificates. If the
stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in such capacity
and if the stock is owned of record by more than one person as in a joint
tenancy or tenancy in common, such demand should be made in such capacity and
if the stock is owned of record by more than one person as in a joint tenancy
or tenancy in common, such demand should be executed by or for all joint
owners. An authorized agent, including one or two or more joint owners, may
execute the demand for appraisal for a stockholder of record. However, the
agent must identify the record owner or owners and expressly disclose the fact
that in executing the demand he is acting as agent for the record owner.
Within 120 days after the day of the effective date of the Merger, but not
thereafter, the Company or any stockholder who has satisfied the foregoing
conditions and who is otherwise entitled to appraisal rights under Section
262, may file a petition in the Delaware Court of Chancery demanding a
determination of the value of the Shares held by all stockholders entitled to
appraisal rights. If no such petition is filed, appraisal rights will be lost
for all stockholders who had previously demanded appraisal of their Shares.
Stockholders seeking to exercise appraisal rights should not assume that the
surviving or resulting corporation will file a petition with respect to the
appraisal of the value of their Shares or that the surviving or resulting
corporation will initiate any negotiations with respect to the "fair value" of
such Shares. ACCORDINGLY, STOCKHOLDERS WHO WISH TO EXERCISE THEIR APPRAISAL
RIGHTS SHOULD REGARD IT AS THEIR OBLIGATION TO TAKE ALL STEPS NECESSARY TO
PERFECT THEIR APPRAISAL RIGHTS IN THE MANNER PRESCRIBED IN SECTION 262.
Within 120 days after the day of the effective date of the Merger, any
stockholder who has complied with the provisions of Section 262 is entitled,
upon written request, to receive from the surviving or resulting corporation a
statement setting forth the aggregate number of Shares not voted in favor of
the Merger and with respect to which demands for appraisal have been received
by the surviving or resulting corporation and the aggregate number of holders
of such Shares. Such statement must be mailed to the stockholder within 10
days after the written request therefor is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under Section 262, whichever is later.
If a stockholder files the petition for appraisal in a timely manner, the
surviving or resulting corporation must file, within 20 days of service of the
stockholders' petition, a verified list of the names and addresses of all
stockholders who have demanded appraisal for their shares and with whom the
surviving or resulting corporation has not reached an agreement regarding
value. If the surviving or resulting corporation files a petition, it must be
accompanied by a similar list.
After notice to such former stockholders as required by the Court, the
Delaware Court of Chancery is empowered to conduct a hearing on such petition
to determine those former stockholders who have complied with Section 262 and
who have become entitled to appraisal rights thereunder. The Delaware Court of
Chancery may require the former holders of Shares who demanded payment for
their shares to submit their stock certificates to the Register in Chancery
for notation thereon of the pendency of the appraisal proceeding; and if any
former stockholder fails to comply with such direction, the Court of Chancery
may dismiss the proceedings as to such former stockholder.
After determining the former holders of Shares entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their Shares,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Former holders of
Shares considering seeking appraisal should be aware that the fair value of
their Shares as determined by Section 262 could be more than, the same as or
less than the consideration they would receive pursuant to the Merger if they
did not seek appraisal of the Shares and that investment banking
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opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value under Section 262. The Delaware Supreme Court has
stated that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered in the appraisal proceedings. In addition,
Delaware courts have decided that the statutory appraisal remedy, depending on
factual circumstances, may or may not be a dissenter's exclusive remedy. The
Court will also determine the amount of interest, if any, to be paid upon the
amounts to be received by persons whose Shares have been appraised. The costs
of the action may be determined by the Court and taxed upon the parties as the
Court deems equitable. The Court may also order that all or a portion of the
expenses incurred by any former stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the Shares entitled to be appraised.
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective date of the Merger, be entitled to
vote such stockholder's Shares for any purpose nor be entitled to the payment
of any dividends or other distributions on such stockholder's Shares (other
than those payable to stockholders of record as of a date prior to the
effective date of the Merger).
If no petition for an appraisal is filed within the time provided, or if a
stockholder delivers to the surviving or resulting corporation a written
withdrawal of such stockholder's demand for an appraisal and an acceptance of
the Merger, either within 60 days or after the effective date of the Merger
or, with the written approval of the surviving or resulting corporation,
thereafter, then the right of such stockholder to an appraisal will cease and
such stockholder shall be entitled to receive in cash, without interest, the
amount to which he would have been entitled had he not demanded appraisal of
such stockholder's Shares. However, no appraisal proceeding in the Court of
Chancery will be dismissed as to any stockholder without the approval of the
Court, which approval may be conditioned on such terms as the Court deems
just.
Any notice, objection, demand or other written communication required to be
given to the Company by a dissenting stockholder should be delivered to the
Secretary of such respective corporation at the address set forth in this
Proxy Statement or should be delivered as otherwise permitted by law. Although
not specifically required, it is recommended that such written communications
be sent by registered or certified mail, return receipt requested.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, ANY
STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD CONSULT SUCH
STOCKHOLDER'S LEGAL ADVISOR.
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<PAGE>
TEXT OF SECTION 262 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of to act upon the agreement of merger or consolidation, were
either (i) listed on a national securities exchange or designed as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the vote
of the stockholders of the surviving corporation as provided in subsection
(f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the Intermedia corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not Less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record
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<PAGE>
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
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<PAGE>
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX A
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-13385
----------------
EMERGING COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 66-0547028
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
CHASE FINANCIAL CENTER 00821
P.O. BOX 1730 (ZIP CODE)
ST. CROIX, U.S. VIRGIN ISLANDS
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
NAME OF EACH EXCHANGE ON WHICH REGISTERED: AMERICAN STOCK EXCHANGE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (340) 777-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 26, 1998, 10,959,131 shares of Common Stock were outstanding.
The aggregate market value of Common Stock held by nonaffiliates as of March
26, 1998 was approximately $37,992,195, based on the closing sale price per
share as reported on such date on the American Stock Exchange.
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PART I
ITEM 1. BUSINESS.
Emerging Communications, Inc., a Delaware corporation ("ECI" or the
"Company"), was formed in 1997 as a wholly owned subsidiary of Atlantic Tele-
Network, Inc. ("ATN"). On December 31, 1997, ATN undertook a series of
transactions (the "Split Off Transaction") whereby the business and operations
of ATN in the Virgin Islands and certain other assets and liabilities were
transferred to the Company, and the outstanding shares of Common Stock of the
Company were distributed to the public stockholders of ATN and Jeffrey J.
Prosser, the Company's Chairman of the Board, Chief Executive Officer and
Secretary.
ECI's principal subsidiary is Virgin Islands Telephone Company ("Vitelco"),
the sole 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 is also engaged, through its wholly owned subsidiary Atlantic
Tele-Network Co. ("ATN-VI") in selling and leasing telecommunications
equipment in the U.S. Virgin Islands and, through its wholly-owned subsidiary,
Vitelcom Cellular, Inc. ("Vitelcellular"), in providing cellular telephone
service in the U.S. Virgin Islands to land-based and marine subscribers.
ECI intends to endeavor to expand its 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 (as defined), 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
RISKS RELATING TO ECI
Dependence on Virgin Islands Operations. ECI owns all of the outstanding
capital stock of ATN-VI, which in turn owns all of the outstanding capital
stock of Vitelco and Vitelcellular and conducts directly the business
previously conducted by Vitelcom, Inc. ("Vitelcom"). These companies, which
currently conduct all of the Company's operations in the Virgin Islands, are
ECI's only operating subsidiaries.
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 after that date. See "--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 PSC appointed counsel to evaluate the impact
such rebate has on Vitelco's rate of return. It is unknown whether the PSC
will initiate a proceeding to modify Vitelco's rates as a result of this
evaluation.
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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. If this develops, 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 "--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 has 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.
Significant Revenue Sources. Revenues from AT&T, derived principally from
interstate network access and billing and collection services of Vitelco,
comprised approximately 13% of Vitelco's total revenues in 1997. No other
revenue source accounted for more than 10% of Vitelco's total revenues in
1997.
Control by a Single Stockholder. Jeffrey J. Prosser owns approximately 52%
of the outstanding ECI Common Stock. As a result, he has the power to
significantly control the affairs of ECI, including to amend ECI's Restated
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. ECI intends 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 any
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 "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." In addition, pursuant to the terms of the Tax Sharing and
Indemnification Agreement among ECI, Mr. Prosser, ATN and Cornelius B. Prior
(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 "Item 13. Certain
Relationships and Related Transactions--Split Off Transaction Agreements--Tax
Sharing Agreement."
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995. The statements contained herein which are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. These forward-looking statements involve risks and uncertainties,
including, but not limited to, those discussed in this "--Risks Relating to
ECI" section.
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LOCAL SERVICE
In 1996, based upon access line data provided by the United States Telephone
Association (the "USTA"), Vitelco was the 32nd largest local telephone company
of more than 1,000 local telephone companies in the United States.
Approximately 41% of Vitelco's total revenue in 1997 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 1997, Vitelco's growth rate in access lines was 4.5%. 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, 1997, approximately 67% of Vitelco's 62,140 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.
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 Federal Communications Commission (the "FCC"). See
"--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 26.9% of Vitelco's total revenues in 1997 was derived from
access charges.
OTHER SERVICES
During 1997, Vitelco received approximately 10.5% 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.
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
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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.
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.
ECI currently has insurance coverage for windstorm damage in the amount of
$30 million per storm and $55 million in the aggregate.
CELLULAR AND OTHER OPERATIONS
ECI 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.
On February 13, 1998, Comsat Mobile Investments, Inc., a subsidiary of
Communications Satellite Corporation, sold the 10% of the common stock of
VitelCellular which it owned since October 1990 to ATN-VI.
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.
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.
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
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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 pro-competition 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 (i) allow others to resell their services at retail
rates, (ii) ensure that customers can keep their telephone numbers when
changing carriers, (iii) 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, (iv) ensure access to telephone poles, ducts, conduits and rights of
way and (v) 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 PSC. Vitelco expects to request such exemption,
suspension or modification from some or all of these requirements in the
future. The PSC may grant such a petition to the extent that it determines
that such suspension or modification is necessary to avoid a significant
adverse 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 PSC will respond to such a request. If the PSC denies some or all
of that request and if the PSC 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.
Pursuant to Section 251(c) of the 1996 Act, incumbent LECs ("ILECs"), which
only include local telephone companies like Vitelco, are required to (i)
interconnect their facilities and equipment with any
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requesting telecommunications carrier at any technically feasible point, (ii)
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, (iii) offer their retail services for
resale at wholesale rates, (iv) 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 (v) 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 PSC if a competing carrier files a bona fide
request for such interconnection. No such request is pending before the PSC.
If such a request is filed, Vitelco would ask the PSC to retain the exemption.
The PSC 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 PSC would rule on these requests. If the PSC lifts such exemption in
whole or in part and if the PSC 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
ECI's long-distance access services and its radio-based services in the U.S.
Virgin Islands are regulated by the FCC and 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 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
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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 in 1998. 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 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 a
forward-looking economic cost mechanism 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 rural 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 appointed counsel to
evaluate the impact such rebate has on Vitelco's rate of return. It is unknown
whether the PSC will initiate a proceeding to modify Vitelco's rates as a
result of this evaluation.
Between 1987, when ECI's predecessor acquired Vitelco, and 1992, ECI's
predecessor 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 Rural Telephone Finance Cooperative (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 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
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petitioning state will have to clear substantial hurdles to be allowed to
regulate rates for cellular service. The Company knows of no PSC interest in
filing such a petition with the FCC.
TAXATION
United States. As a U.S. corporation, ECI is subject to U.S. federal income
tax on its worldwide net income, currently at rates up to 35%. ECI's Virgin
Islands subsidiaries are 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. Pursuant to the foreign tax credit
provisions of the Code, and subject to complex limitations contained in those
provisions, ECI is 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%. ECI does not
believe that it will satisfy the income criterion for classification as a PHC.
U.S. Virgin Islands. Although the U.S. Virgin Islands is a taxing
jurisdiction separate from the United States, the Code 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 that 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, VitelCellular and, until its merger into ATN-VI, Vitelcom
(the "ATN-VI Group") file consolidated income tax returns in the U.S. Virgin
Islands. Pursuant to the IDC and subject to the satisfaction of certain
conditions by Vitelco, 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 1997
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was $0. 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 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, 1997, Vitelco employed approximately 397 individuals.
Approximately 268 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.
ITEM 2. PROPERTIES.
At December 31, 1997, 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 (the "RUS")) 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.
ITEM 3. LEGAL PROCEEDINGS.
ECI is not currently party to any legal proceedings which are expected to
have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of ECI's security holders during the
fourth quarter of the fiscal year covered by this report.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ECI's Common Stock began trading on the American Stock Exchange (symbol
"ECM") on December 31, 1997.
The high and low prices of ECI's Common Stock for the period ended March 26,
1998 were $8 3/4 and $6 1/2, respectively.
The Company has not paid cash dividends in the past and does not intend to
pay cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical financial data of the Company and its
subsidiaries as of and for the years ended December 31, 1997, 1996, 1995, 1994
and 1993 have been derived from ECI's audited consolidated financial
statements. The Company's selected historical consolidated financial data
should be read in conjunction with the ECI's audited consolidated financial
statements and related notes thereto, as of December 31, 1997 and for each of
the three years in the period ended December 31, 1997. All dollar amounts are
in thousands, except per share data.
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<PAGE>
SELECTED STATEMENT OF OPERATIONS DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telephone operations (1).... $102,200 $134,867 $184,632 $206,002 $182,349
Cellular services........... 2,808 3,616 5,910 5,480 3,663
Product sales and rental.... 4,489 4,879 5,128 5,435 4,942
-------- -------- -------- -------- --------
Total revenues.............. 109,497 143,362 195,670 216,917 190,954
Expenses:
Telephone operations........ 66,307 89,320 130,575 155,174 134,401
Cellular services, product
sales and rental expenses.. 5,747 6,553 8,399 8,231 7,957
General and administrative
expenses................... 12,921 9,341 10,219 9,458 12,168
-------- -------- -------- -------- --------
Total operating expenses.... 84,975 105,214 149,193 172,863 154,526
-------- -------- -------- -------- --------
Income from operations....... 24,522 38,148 46,477 44,054 36,428
Other income and expense:
Loss on split-off of ATN.... -- -- -- -- (45,041)
Interest expense............ (12,041) (13,044) (12,511) (11,289) (10,548)
Interest income............. 204 246 971 458 351
-------- -------- -------- -------- --------
Total other income and
expense.................... (11,837) (12,798) (11,540) (10,831) (55,238)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and minority
interest.................... 12,685 25,350 34,937 33,223 (18,810)
Income taxes (expense)
benefit (2)................. (5,458) (10,465) (15,250) (13,039) 897
Minority interest............ (1,030) (1,743) (2,477) (2,177) (1,340)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations.................. $ 6,197 $ 13,142 $ 17,210 $ 18,007 $(19,253)
======== ======== ======== ======== ========
Basic net income (loss) per
share from continuing
operations.................. $ 0.50 $ 1.07 $ 1.40 $ 1.47 $ (1.57)
Dividends per share.......... $ 0.20 -- -- -- --
Weighted average number of
shares...................... 12,273 12,273 12,273 12,273 12,269
SELECTED BALANCE SHEET DATA OF THE COMPANY
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Fixed assets, net............ $249,415 $242,548 $226,660 $251,996 $154,096
Total assets................. 336,564 340,113 371,939 389,324 224,308
Short-term debt (including
current portion of
long-term debt)............. 19,362 19,249 24,841 30,095 28,227
Long-term debt, net.......... 152,453 141,214 128,362 116,227 105,138
Stockholders' equity......... 101,300 114,861 130,956 149,791 58,770
</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 year ended December 31,
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 $12 million ($.98 per share) in the
year ended December 31, 1997.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
SPLIT OFF TRANSACTION
On December 30, 1997, ATN split off into two separate public companies
pursuant to the Split Off Transaction. One company, ECI contains all the
predecessors telephone operations in the U.S. Virgin Islands. The other, ATN,
continues to own the business and operations in Guyana. Because ECI was the
larger of the two entities, ATN was deemed the split-off entity and ECI was
deemed the successor company. Consequently, the historical financial
statements of ECI prior to the Split Off Transaction reflect those of the
consolidated group and include the operations in Guyana.
The Split Off Transaction was a non pro-rata split off and was accounted for
at fair value as evidenced by the market capitalization of ATN subsequent to
the Split Off Transaction. Accordingly, the loss on fair valuation of the net
assets of ATN has been included in the consolidated statement of operations.
Subsequent to the split-off, ECI will no longer include the operations or
financial results of the Guyana subsidiary GT&T. Pro-forma results of
operations for the year ended December 31, 1997 as if GT&T had been split-off
as of December 31, 1996 are presented below. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred if the Split Off Transaction
had occurred at the beginning of the period indicated, nor is it necessarily
indicative of future operating results. All figures are in thousands, except
per share data.
<TABLE>
<S> <C>
Revenues......................................................... $73,339
Expenses (1)..................................................... 55,403
-------
Income from Operations......................................... $17,936
Other income and expense......................................... (8,038)
Income Taxes..................................................... (8,391)
Pro-Forma Net Income (2)....................................... $18,289
-------
Income per share................................................. $ 1.67
-------
Pro forma average shares outstanding............................. 10,959
=======
</TABLE>
- --------
(1) Includes an allocation of the total general and administrative cost ECI
shared with ATN. 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.
(2) Includes approximately $12 million ($1.09 per share) of IDC benefits for
the year ended December 31, 1997. See footnote H to ECI's consolidated
financial statements for additional information.
INTRODUCTION
The Company's revenues and income from continuing operations have been
derived principally from the operations of its telephone subsidiaries, Vitelco
and, prior to the Split Off Transaction, 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 in the Company's historical Consolidated Statements of Operations
include: Vitelcom Cellular, Inc. d/b/a VitelCellular, which provides cellular
telephone service in the U.S. Virgin Islands; and, until its merger into ATN-
VI, 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, 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
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<PAGE>
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
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 amortizations.
RESULTS OF OPERATIONS
Years ended December 31, 1997 and 1996
Operating revenues for the year ended December 31, 1997 were $191.0 million
as compared to $216.9 million for the prior year, a decrease of $25.9 million,
or 12%. The decrease was due principally to a $30.6 million decrease in GT&T's
operating revenues and a $1.9 million decrease in VitelCellular's operating
revenues. These decreases were partially offset by a $7.0 million increase in
Vitelco's operating revenues.
The $30.6 million decrease in GT&T's operations was primarily due to a $44.0
million decrease in audiotext traffic revenues partially offset by a $14.3
million increase in outbound international revenues. The $44.0 million
decrease in audiotext traffic revenues for the year ended December 31, 1997
was primarily due to reduced audiotext traffic. GT&T's volume of audiotext
traffic fluctuated between 9 and 10 million minutes per month in 1996, while
the monthly volume of audiotext traffic in 1997 averaged about 20% less. The
reduction in traffic volume accounted for approximately $21.3 million, or 48%
of the $44.0 million decrease in audiotext revenues. Fifteen percent of the
decline in audiotext traffic in 1997 resulted from approximately $6.6 million
chargebacks from a carrier. The remaining decrease in audiotext revenues
results from a combination of the following factors: 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.
Outbound international revenues at GT&T for the year ended December 31, 1997
were $26.6 million, an increase of $14.3 million, from $12.3 million for the
prior year. The increase was principally a result of the recognition of $9.5
million in revenues relating to outbound international long distance revenues
for the period from October 1995 to January 1997. In September 1997, the
Guyana High Court denied an order which 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. The
balance of the increase is attributable to the restoration in January 1997 of
the higher rates that were in effect in October 1995, even though traffic
volumes were approximately 19% lower in 1997 compared to the prior year.
Vitelco's telephone operations revenues for the year ended December 31, 1997
were $64.7 million, an increase of $7.0 million, from $57.7 million for the
prior year. This increase is primarily the result of the completion of the
recovery from Hurricane Marilyn in September 1995 and an increase in Universal
Service Fund revenues of $2.9 million as a result of increased investment in
net fixed assets. At December 31, 1997, Vitelco had 62,140 lines in service
compared to 59,470 at December 31, 1996.
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<PAGE>
Operating expenses for the year ended December 31, 1997 were $154.5 million,
a decrease of $18.3 million, or 11%, from consolidated operating expenses of
$172.9 million for the prior year. This decrease was due principally to
decreases in audiotext and outbound traffic expenses at GT&T of $24.4 million
in 1997 due to decreased traffic volumes. Partially offsetting these decreases
were increases in plant non-specific expenses resulting from increased plant
in service. General and administrative expenses increased $2.7 million for
1997. The increase in general and administrative expense for 1997 is
principally due to a $1.3 million charge related to the suspension of the
acquisition of the Congo national phone system in the second quarter of 1997.
Income from operations decreased $7.6 million in 1997 as a result of those
factors affecting operating revenues and expenses discussed above. Including
the $9.5 million of outbound international long distance revenues related to
the surcharge put into effect October 1, 1997, as discussed above, GT&T's
contribution to income from operations decreased by $8.5 million, or 25%, in
1997. Vitelco's contribution to income from operations increased by $5.2
million, or 31% for the year ended December 31, 1997. Income from Cellular
Services and Product Sales decreased $2.0 million in 1997 principally due to a
decrease in cellular service revenues.
As indicated in the discussion of the Split-Off Transaction above, the loss
recorded in 1997 on the split off of ATN on December 30, 1997 was $45.0
million. Net interest expense decreased $634,000 for the year due to reduced
average debt. Income before income taxes and minority interest decreased $7.0
million to $26.2 million in 1997. As discussed in Note H to the Consolidated
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 $12 million. 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 and the non-deductible
loss on the split-off and fair valuation of ATN, as discussed above, the
Company's effective tax rate for the years ended December 31, 1996 and 1997
were 39.2% and 41.1%.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
Years ended December 31, 1996 and 1995
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
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<PAGE>
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 the future 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.
The minority interest in earnings consists primarily of the Guyana
government's 20% interest in GT&T.
LIQUIDITY AND CAPITAL RESOURCES
ECI depends upon funds received from its subsidiaries to meet its capital
needs, including servicing debt and financing of any future acquisitions. As a
result of the split-up of ATN in two separate public companies, the Company's
capital resources have changed significantly, and the Company has fewer
resources and significantly reduced operations for the near term. However, the
Company believes existing liquidity and capital resources will be adequate to
meet current operating needs.
In connection with the Split Off Transaction, ECI assumed approximately $5.5
million of bank debt of ATN, of which $5.5 million was outstanding at December
31, 1997 under a short-term credit facility which matures October 1, 1998. The
Company's primary sources of funds are management fees, repayment of loans,
interest from ATN-VI, and dividends from ATN-VI.
In connection with the Split Off Transaction, ATN-VI borrowed approximately
$17.4 million, net, from the RTFC under a 15 year credit facility (the "1997
RTFC Credit Facility"). This facility provides for quarterly
A-17
<PAGE>
amortization of principal and interest of approximately $500,000. At December
31, 1997, $17.4 million, net, was outstanding under this credit facility,
which bears interest at a variable rate, which was 6.65% at December 31, 1997.
In addition to the 1997 RTFC Credit Facility, ATN-VI had other outstanding
borrowings from the RTFC of $15.6 million, net, at December 31, 1997, of which
$1.3 million bears interest at a variable rate, which was 6.65% at December
31, 1997, and $14.3 million bears interest at a fixed rate of 8%.
ATN-VI's loan agreements with the RTFC limit the payment of dividends by
ATN-VI to ECI unless ATN-VI meets certain financial ratios, which were met at
December 31, 1997, and, after payment of the dividend ATN-VI's stockholders'
equity is greater than 30% of total assets. ATN-VI's loan agreements with the
RFTC contain covenants that restrict ATN-VI 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 ATN-VI without, in each case, the
prior written approval of RTFC.
ATN-VI's ability to service its debt or to pay dividends will be dependent
on funds from its parent or its subsidiaries, primarily Vitelco. Vitelco's
loan agreement with the RUS (the "RUS Loan Agreement") 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, if
the equity ratio, as defined, is below 40%, 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, 1997, Vitelco's dividend
paying capacity was approximately $4.7 million.
At December 31, 1997, Vitelco had an outstanding balance under the RUS Loan
Agreement of $54.4 million, which bears interest at a fixed rate of 5%. 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. The
RUS Loan Agreement contains 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.
At December 31, 1997, Vitelco has outstanding borrowings from the RTFC of
$20.5 million, of which $10.6 million was owing under a term loan which bears
interest at a fixed rate of 9.75% (the "9.75% Term Loan"), $9.9 million was
owing under a term loan which bears interest at a fixed rate of 8% (the "8%
Term Loan"), $5 million was owing under a $5 million revolving line of credit
with an interest rate of 7.25% and $13.5 million was owing under a $15 million
revolving loan of credit with an interest rate of 7.25%. The $5 million line
of credit with the RTFC expires in March 2000, and the $15 million line of
credit with the RTFC expires 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 RTFC.
Vitelco's Loan agreements with the RTFC require, among other things, ATN-VI
and Vitelco to maintain certain financial ratios. Vitelco may incur additional
debt with RUS without prior approval from RTFC if Vitelco
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<PAGE>
maintains certain financial ratios. Vitelco's 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 and RTFC 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 December 31,
1997, the Company was in compliance with all covenants in its long-term debt
agreements.
While the Company believes capital resources are adequate to meet current
operations, the Company is also exploring several opportunities to acquire
cellular licenses, cable television properties or land line telephone
companies in the Caribbean and developing countries. There can be no assurance
as to whether, when or on what terms the Company will be able to acquire any
of the businesses or licenses it is currently seeking or whether it will
obtain financing to do so.
IMPACT OF INFLATION
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
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.
YEAR 2000 COMPLIANCE
The inability of computer hardware, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2-
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is identifying all significant applications in its systems that
will require modification or replacement to ensure Year 2000 Compliance.
Internal and external resources are being used to make the required
modifications and replacements and test Year 2000 Compliance. The modification
process of all significant applications is under way. The Company plans on
completing the testing process of all significant applications by December 31,
1998.
In addition, the Company is planning to communicate with others with whom it
does significant business to determine their Year 2000 Compliance readiness
and the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the
A-19
<PAGE>
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
An index to the Consolidated Financial Statements appears in Item 14(a) of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NOT APPLICABLE.
A-20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<C> <C> <S>
Jeffrey J. Prosser............... 40 Chairman of the Board, Chief Executive
Officer and Secretary
Thomas R. Minnich................ 60 Chief Operating Officer
Edwin Crouch..................... 49 Vice President for Investor Relations
James J. Heying.................. 43 Executive Vice President for
Acquisitions and Chief Financial
Officer
Richard N. Goodwin............... 67 Director
Salvatore Muoio.................. 38 Director
Sir Shridath Ramphal............. 69 Director
John P. Raynor................... 46 Director
John G. Vondras.................. 50 Director
Terrence A. Todman............... 72 Director
</TABLE>
DIRECTORS
JEFFREY J. PROSSER, 40, was elected Chairman, Chief Executive Officer and
Secretary of the Company in 1997. He was Chairman of the Board, Co-Chief
Executive Officer and Secretary of ATN from June 1987 to December 1997. From
1980 until 1987, Mr. Prosser was a managing shareholder of Prosser & Prosser,
P.C. ("Prosser & Prosser"), an accounting firm.
RICHARD N. GOODWIN, 67, was elected a director in 1997. He 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 shows, 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, was elected a director of the Company in 1997. He 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, was elected a director of the Company in 1997. He was a
director of ATN from June 1987 to December 1997. 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.
SIR SHRIDATH S. RAMPHAL, 69, was elected a director of the Company in 1997.
He was a director of ATN from February 1, 1992 to December 1997. 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
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<PAGE>
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, was elected a director of the Company in 1997. He 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.
TERRENCE A. TODMAN, 72, was elected a director of the Company on March 9,
1998. Ambassador Todman is President of Todman & Associates, Inc., an
international consulting firm, and an Associate of Global Business Access Ltd.
Ambassador Todman is also a special advisor to the Governor of the U.S. Virgin
Islands. Ambassador Todman served as Ambassador to Argentina (1989-1993),
Ambassador to Denmark (1983-1983), Ambassador to Spain (1978-1983), Ambassador
to Costa Rica (1975-1977), Ambassador to Guinea (1972-1975), Ambassador to
Chad (1969-1972) and as Assistant Secretary of State for Inter-American
Affairs (1977-1978). Ambassador Todman is a member of the board of directors
of Aerolineas Argentinas and of the Exxel Group.
OFFICERS
For information regarding Mr. Prosser, see "--Directors".
Thomas R. Minnich has been the Chief Operating Officer of the Company since
1997. Previously, he was employed by ATN from August 1995 and he was the
General Manager--Guyana Telephone and Telegraph Company Limited, a subsidiary
of ATN, from March 1996 until 1997. 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 the Company's Executive Vice President for
Acquisitions since 1997. In January 1998, he was appointed Chief Financial
Officer of the Company. Mr. Heying was Chief Operating Officer and Vice
President of ATN from April 1993 to December 1997. Previously, from January
1990 until April 1993, Mr. Heying was Chief Financial Officer and Treasurer of
both ATN and the Virgin Islands Telephone Company, a wholly owned subsidiary
of the Company. 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 ATN 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 the Company's Vice President for Investor Relations
since 1997. Previously, he was Vice President, Investor Relations of ATN from
1990 to 1997.
BOARD AND COMMITTEE MEETINGS
During 1997, the Board took all corporate action by unanimous written
consent (principally related to the Split Off Transaction) and held no
meetings.
The Board has two standing Committees: an Audit Committee and a Compensation
Committee. The members and functions of these committees are as follows:
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<PAGE>
The Audit Committee has the authority, among other things, to appoint the
auditors of the Company and to approve their audit fee, to review all
financial statements and report to the Board and to review and assess the
Company's internal audit program and the adequacy of the Company's accounting,
financial and operating policies and controls. The members of the Audit
Committee are John P. Raynor and John G. Vondras. During 1997, the Audit
Committee held no meetings.
The Compensation Committee 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 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 are Salvatore Muoio, Sir Shridath S. Ramphal and John
P. Raynor. During 1997, the Compensation Committee held no meetings.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The executive compensation philosophy, policies, plans and programs of the
Company are under the supervision of the Compensation Committee of the Board.
Since the Company did not begin its operations as an entity separate from ATN
until December 31, 1997, the Compensation Committee did not meet in 1997. The
Compensation Committee is in the process of evaluating the appropriate
compensation philosophy, plans and programs for the Company. The compensation
of the Company's Chief Executive Officer will be determined in part by the
terms of his employment agreement with the Company described below.
A-23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the individual
compensation information for the Chairman of the Board and Chief Executive
Officer the other four 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 in the prior three years (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-
ANNUAL COMPENSATION TERM COMPENSATION AWARDS
------------------------------ -------------------------
NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY(A) BONUS OPTIONS COMPENSATION(B)
- --------------------------- ----------- --------- ----- --------- ---------------
<S> <C> <C> <C> <C> <C>
Jeffrey J. Prosser...... 1997 $250,000 -- 273,978 --
Chairman of the Board,
Chief Executive 1996 250,667 -- --
Officer and Secretary 1995 250,667 -- --
Thomas R. Minnich....... 1997 218,349 -- -- --
Chief Operating Officer 1996 195,825 -- -- --
1995 46,321(c) -- -- --
James J. Heying......... 1997 188,000 -- -- 4,750
Chief Financial Officer
and Executive 1996 188,673 -- -- 4,750
Vice President for
Acquisition 1995 237,142 -- -- 4,620
David L. Sharp.......... 1997 172,395 -- -- 4,750
President of Vitelco 1996 173,067 -- -- 4,750
1995 173,066 -- -- 4,620
Edwin Crouch............ 1997 125,000 -- -- 2,908
Vice President for
Investor Relations 1996 166,305 -- -- 4,750
1995 93,640 -- -- 4,620
</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
ATN, through December 31, 1995.
Option Grants in 1997
The following table sets forth the number of stock options that were granted
by the Company during 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS
GRANTED TO GRANT
OPTIONS EMPLOYEES EXERCISE DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT
NAME (NO. OF SHARES)(1) YEAR PURCHASE(2) DATE VALUE(3)
- ---- ------------------ ---------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Jeffrey J. Prosser...... 273,978 100% $8.00 December 31, 2007 $1,005,646
</TABLE>
- --------
(1) The options consist of options granted under the Company's 1997 Long-Term
Incentive and Share Award Plan to Mr. Prosser pursuant to the terms of his
employment agreement. Of these options, 68,495 were vested and exercisable
as of December 31, 1997. The remaining 205,483 options vest and become
exercisable ratably and daily (rounded up to the nearest share) from
January 1, 1998 through December 1, 2000.
(2) The exercise price of the options is equal to the closing trading price of
the Common Stock on the date of grant.
A-24
<PAGE>
(3) The Black-Sholes model was used to determine the grant date present value
of the stock options. This method requires the use of certain assumptions
that affect the value of the options. The assumptions used in this model
are the volatility of the Company's stock price, an estimate of the risk-
free interest rate and expected dividend yield. For purposes of this
model, a volatility factor of 43%, 5.56% risk-free interest rate and a 0%
expected dividend yield were used. No adjustments were made for non-
transferability of the stock options. This model assumed all of the
options were exercised by the fifth year. There is no assurance that these
assumptions will prove true. The actual value of the options depends upon
the market price of the Common Stock at the date of exercise, which may
vary from the theoretical value indicated in the table.
OPTIONS EXERCISED IN 1997 AND 1997 YEAR END VALUES
The following table sets forth the number of stock options held, as of
December 31, 1997, by the Named Executive Officers. No options were exercised
during 1997, and, at December 31, 1997, no options were "in the money."
<TABLE>
<CAPTION>
TOTAL NUMBER OF UNEXERCISED OPTIONS
NAME HELD AT DECEMBER 31, 1997 (1)
---- -----------------------------------
<S> <C>
Jeffrey J. Prosser.................... 273,978
</TABLE>
--------
(1) Of these options, 68,495 were exercisable as of December 31, 1997.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement (the "Employment
Agreement") with Mr. Prosser dated December 31, 1997 for an initial five-year
term. The Employment Agreement is renewable for successive five-year terms and
provides 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 Board or any duly
authorized committee thereof. The Employment Agreement provides for a grant of
options to purchase 273,978 shares of Common Stock pursuant to the Company's
1997 Long Term Incentive and Share Award Plan, which were granted to Mr.
Prosser on December 31, 1997. 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 Company Common
Stock, the Company 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 offering of registrable stock (as defined in
the Employment Agreement), (i) 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 (ii) include in any
registration statement of the Company (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 the Company)
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, as amended.
1997 LONG TERM INCENTIVE AND SHARE AWARD PLAN
On December 31, 1997, the Company adopted the 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 the Company upon
whose judgment, initiative and efforts the continued success, growth and
development of the Company depends.
A-25
<PAGE>
The Plan will be administered by the Compensation Committee of the Board or
such other committee designated by the Board, consisting of two or more non-
employee directors (the "Committee"). Any employee of the Company or its
affiliate who is responsible for or contributes to the management, growth or
profitability of the Company 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 the Company 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 the Company, 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
the Company. 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 Company's stockholders; 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The number of shares and percentage of ECI Common Stock beneficially owned
as of December 31, 1997, 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 is as follows:
<TABLE>
<CAPTION>
SHARES
NAMES AND ADDRESS OF 5% STOCKHOLDERS, BENEFICIALLY PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS OWNED COMMON STOCK
------------------------------------- ------------ ------------
<S> <C> <C>
DIRECTORS:
Jeffrey J. Prosser................................ 5,783,976(1) 52%
Richard N. Goodwin................................ -- --
Salvatore Muoio................................... 4,600 *
John P. Raynor.................................... -- --
Sir Shridath S. Ramphal........................... -- --
John G. Vondras................................... -- --
Terrence A. Todman................................ -- --
EXECUTIVE OFFICERS:
Jeffrey J. Prosser................................ 5,783,976(1) 52%
Chairman, Chief Executive Officer, Secretary and
acting Chief Financial Officer
Thomas R. Minnich................................. -- --
Chief Operating Officer
</TABLE>
A-26
<PAGE>
<TABLE>
<CAPTION>
SHARES
NAMES AND ADDRESS OF 5% STOCKHOLDERS, DIRECTORS BENEFICIALLY PERCENT OF
AND EXECUTIVE OFFICERS OWNED COMMON STOCK
----------------------------------------------- ------------ ------------
<S> <C> <C>
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)..................................... 5,807,647 53%
5% BENEFICIAL OWNERS:
Fidelity Management & Resources Corp............. 1,056,700(4) 9.6%
82 Devonshire Street
Boston, MA 02109
Chancellor L.G.T. Asset Management, Inc.......... 633,000(4) 5.8%
50 California, 27th Floor
San Francisco, CA 94111
</TABLE>
- --------
* Less than 1% ownership.
(1) Includes 97,358 shares owned by Mr. Prosser's children, as to which Mr.
Prosser disclaims ownership. Also includes options to purchase 68,495
shares of Common Stock exercisable at December 31, 1997 and options to
purchase an additional 11,250 shares of Common Stock which will become
exercisable within 60 days of December 1997.
(2) Includes 288 shares owned by Mr. Crouch that were allocated to him as a
participant in ATN's Employee Stock Ownership Plan which was assumed by
the Company in connection with the Split Off Transaction, 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 ATN's Employee Stock Ownership Plan, which was assumed by
the Company in connection with the Split Off Transaction.
(4) Based on available public filings and conversations with Fidelity
Management & Resources Corp. and Chancellor L.G.T. Asset Management, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SPLIT OFF TRANSACTION AGREEMENTS
In connection with the Split Off Transaction, ECI entered into a number of
agreements with ATN, Mr. Prosser and Cornelius B. Prior under which ECI has
continuing obligations. These agreements are summarized below.
Non-Competition Agreement. Pursuant to a Non-Competition Agreement among
ECI, ATN and Mr. Prosser (the "Non-Competition Agreement"), ECI and Mr.
Prosser have agreed 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 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 is
a period of 10 years after the effective date of the Split Off Transaction.
The telecommunications service covered by the Non-Competition Agreement
includes 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. In the
Non-Competition Agreement, ECI and Mr. Prosser have also agreed to hold in
strict confidence all information of the proprietary nature relating to ATN's
business of providing telecommunications services with regard to international
audiotext traffic.
A-27
<PAGE>
Indemnity Agreement. In accordance with the provisions of an Indemnity
Agreement among ECI, ATN, Mr. Prosser and Mr. Prior (the "Indemnity
Agreement"):
(i) Mr. Prosser has agreed to indemnify ATN, its subsidiaries, their
respective officers, directors and agents and Mr. Prior, 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 ATN or of ECI arising out of or relating to the
repurchase by ATN of shares of ATN Common Stock owned by Mr. Prior and/or a
trust of which he is a trustee (the "Trust") in connection with the Split Off
Transaction or the number of shares of ECI Common Stock to be received by Mr.
Prosser or members of his family in connection with the Split Off Transaction
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 the
proxy statement-prospectus relating to the Split Off Transaction, 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
the indemnity described in this clause (b) applies only with respect to the
biographical information of Mr. Prosser contained in such proxy statement-
prospectus and the information contained therein concerning the beneficial
ownership of ATN Common Stock by Mr. Prosser and the members of his family and
his or their affiliates,
(ii) Mr. Prior has agreed to indemnify ECI, its subsidiaries, 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 ATN or ECI arising
out of or relating to the number of shares of ATN Common Stock to be received
by Mr. Prior or members of his family in connection with the Split Off
Transaction 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 such proxy statement-prospectus, or the omission or alleged
omission to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, but the indemnity described in
this clause (b) applies only with respect to the biographical information of
Mr. Prior contained in such proxy statement-prospectus and the information
contained therein concerning the beneficial ownership of ATN Common Stock by
Mr. Prior and the members of his family and his or their affiliates,
(iii) ECI has agreed to indemnify ATN, its subsidiaries, 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
before or after the Split Off Transaction or any of the liabilities
specifically to be assumed by ECI in connection with the Split Off Transaction
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 such proxy
statement-prospectus 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 the indemnity described in this clause
(b) applies only with respect to the information contained in such proxy
statement-prospectus concerning the business, prospects or planned or proposed
activities of ECI and its subsidiaries, the activities of ECI or such
subsidiaries after April 30, 1997, and prospective acquisitions of businesses
or other transactions not in the ordinary course of business then planned or
contemplated by ECI, such subsidiaries or Mr. Prosser.
(iv) ATN has agreed to indemnify ECI, its subsidiaries, 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 ATN before or after the Split Off Transaction or any of the liabilities ATN
not specifically 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 such proxy statement-prospectus 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 the indemnity
described in this clause (b) applies only with respect to the information
contained in such proxy statement-prospectus concerning the business,
prospects or planned or proposed activities of ATN and its subsidiaries after
the Split Off Transaction, the activities of ATN after April 30, 1997, and
prospective acquisitions of businesses or other transactions not in the
ordinary course of business planned or contemplated by ATN or Mr. Prior.
A-28
<PAGE>
Technical Assistance Agreement. In accordance with the terms of a Technical
Assistance Agreement among ATN, ATN-VI, Vitelco and Vitelcellular (the
"Technical Assistance Agreement"), ATN-VI, Vitelco and Vitelcellular have
agreed to provide, at the request of ATN, personnel and facilities to assist
and support ATN in carrying out ATN's continuing obligations to provide
technical and professional service, advice and assistance under an advisory
contract it has entered into with its Guyana Telephone & Telegraph Ltd.
subsidiary ("GTT"). ATN-VI, Vitelco and Vitelcellular are to be paid
approximately 200% of the direct compensation cost incurred by them in
performing services at the request of ATN under the Technical Assistance
Agreement and 100% of all "out-of-pocket" expenses incurred by them in
performing such services.
Tax Sharing Agreement. In accordance with the terms of the Tax Sharing
Agreement:
(i) ATN, ECI, Mr. Prior and Mr. Prosser have each agreed not to take certain
actions which might jeopardize the Split Off Transaction qualifying for tax-
free treatment under the Code. Under the terms of the Tax Sharing Agreement,
unless approved by the IRS or legal counsel or agreed to by both ATN and ECI,
ATN and ECI will not at any time take any action which may be inconsistent
with the tax treatment of the Split Off Transaction as contemplated in the IRS
ruling received in connection therewith (the "Tax Ruling"). Without limiting
the generality of the foregoing, ATN and ECI will not, prior to December 31,
1999, unless approved by the IRS or legal counsel or agreed to by both ATN and
ECI: (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 Split Off
Transaction; (c) with certain exceptions, redeem, purchase or otherwise
reacquire its capital stock issued and outstanding immediately after the Split
Off Transaction; (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 business
relied upon in the Tax Ruling to satisfy Section 355(b) of the Code; (e)
discontinue the active conduct of the trades or businesses relied upon in the
Tax Ruling request to satisfy Section 355(b) of the Code.
(ii) ATN has agreed 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 Split Off Transaction, including
any taxes resulting from any income or gain recognized as a result of the
Split Off Transaction failing to qualify for tax-free treatment under the
Code, which arise from any breach by ATN of its representations or covenants
under the Tax Sharing Agreement, or from certain actions by ATN or its
affiliates which may be inconsistent with the tax treatment of the Split Off
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 ATN and its affiliates after the Split Off Transaction, (b) any
taxes taken into account as debits for purposes of calculating the final
closing adjustment under the terms of the Split Off Transaction, (c) certain
taxes arising from ATN'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 ATN or certain subsidiaries 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 has agreed to be liable for, and shall indemnify and hold harmless
ATN and its affiliates from and against, (a) any taxes resulting from any
income or gain recognized as a result of the Split Off Transaction including
any taxes resulting from any income or gain recognized as a result of the
Split Off 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 Agreement, or from certain actions by ECI or its
affiliates which may be inconsistent with the tax treatment of the Split Off
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 ECI and its affiliates after the Spin Off Tranaction, (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 ATN except to the extent taken into
account as debits form purposes of computing the final closing adjustment
under the terms of the Split Off Transaction and
A-29
<PAGE>
(d) fifty percent (50%) of all other taxes of ATN or certain subsidiaries 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 has agreed to be liable for, and to indemnify and hold
harmless ATN, ECI, and their respective affiliates from and against, any taxes
resulting from any income or gain recognized as a result of the Split Off
Transaction, including any taxes resulting from any income or gain recognized
as a result of the Split Off 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 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 Split Off Transaction.
(v) Mr. Prosser has agreed to be liable for, and to indemnify and hold
harmless ATN, 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 Split Off Transaction, including any taxes resulting from any
income or gain recognized as a result of the Split Off 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 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 Split Off Transaction.
Employee Benefits Agreement. ATN and ECI entered into an Employee Benefits
Agreement in connection with the Split Off Transaction (the "Employee Benefits
Agreement"). In accordance with the terms of the Employee Benefits Agreement,
ECI has adopted as is own ATN's Defined Benefit Plan for Salaried Employees,
ATN's Management Employees' Savings Plan, and ATN's Employees' Stock Ownership
Plan, each of the trusts (and all assets thereof) forming a part of such plans
have been assumed by ECI, and ECI and ATN have agreed 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 continue to be sponsored by such entities after the Effective Date. As
of the Effective Date, employees of ATN and its subsidiaries ceased
participation in all the employee benefit plans maintained by ECI or any of
its subsidiaries.
OTHER 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.
John P. Raynor, who is a director of ECI, is a partner in this firm. In 1997,
Raynor, Rensch & Pfeiffer was paid $479,000 for legal services to ECI and its
predecessor.
A-30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
(A)(2) EXHIBITS
<TABLE>
<C> <S>
2.1 Subscription Agreement, dated as of August 11, 1997, between
Atlantic Tele-Network, Inc. and Emerging Communications, Inc.*
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.*
2.3 Agreement and Plan of Merger, dated as of August 11, 1997, between
ATN Merger Co. and Atlantic Tele-Network, Inc.*
3.1 Restated Certificate of Incorporation of Emerging Communications,
Inc.
3.2 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 Financial
Cooperative, as amended April 30, 1991.*
10.1 Employment Agreement, between Emerging Communications, Inc. and Mr.
Prosser dated December 31, 1997.
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, 1998.*
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 Electronic
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 American and the 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.***
</TABLE>
A-31
<PAGE>
<TABLE>
<C> <S>
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.****
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 3, 1993.*
10.13 Franchise to Virgin Islands Telephone Corporation for Telephone
Service to the Virgin Islands, dated October 30, 1995.*
10.14 Line of Credit Application and Agreement, dated March 20, 1995,
between Virgin Islands Telephone Corporation, as Borrower, and the
Rural Telephone Finance Cooperative, as Lender.*
10.15 Line of Credit Application and Agreement, dated March 10, 1996,
between Virgin Islands Telephone Corporation, as Borrower, and the
Rural Telephone Finance Cooperative, as Lender.*
10.16 Senior Credit Facility between Atlantic Tele-Network Co., as
Borrower, and Rural Telephone Cooperative, as Lender.
10.17 1997 Long-Term Incentive and Share Award Plan of Emerging
Communications, Inc.
10.18 Non-Competition Agreement among ATN, the Company and Jeffrey J.
Prosser dated December 30, 1997.
10.19 Indemnity Agreement among the Company, ATN, Jeffrey J. Prosser and
Cornelius B. Prior dated December 30, 1997.
10.20 Technical Assistance Agreement among ATN, ATNVI, Vitelco and
VitelCellular dated December 30, 1997.
10.21 Tax Sharing and Indemnification Agreement among ATN, the Company,
Jeffrey J. Prosser and Cornelius B. Prior dated December 30, 1997.
10.22 Employee Benefits Agreement between ATN and the Company dated
December 30, 1997.
21 Subsidiaries.
27 Financial Data Schedule.
</TABLE>
- --------
*Filed as an Exhibit to the Company's Registration Statement on Form S-4 (File
No. 333-33401).
** Filed as an Exhibit to Atlantic Tele-Network, Inc.'s Registration
Statement (File No. 33-43012), except for amendments dated May 18, 1994
and June 9, 1994, which were filed as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-33401); both Exhibits are
incorporated by reference herein.
*** Filed as an Exhibit to Atlantic Tele-Network, Inc.'s Registration
Statement (File No. 33-43012) and incorporated 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.
A-32
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules for the Company and its subsidiaries are
filed as a separate section of this annual report. See index to financial
statements and schedules which appear on page F-1 hereof.
(C) REPORTS ON FORM 8-K.
ECI did not file any Reports on Form 8-K during 1997.
A-33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Dated: March 30, 1998
Emerging Communications, Inc.
/s/ Jeffrey J. Prosser
By: _________________________________
Name: Jeffrey J. Prosser
Title: Chairman of the Board,
Chief Executive Officer and
Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE AND TITLE DATE
/s/ Richard N. Goodwin March 30, 1998
By: _________________________________
Name: Richard N. Goodwin
Title:Director
/s/ Salvatore Muoio March 30, 1998
By: _________________________________
Name: Salvatore Muoio
Title:Director
/s/ Sir Shridath Ramphal March 30, 1998
By: _________________________________
Name: Sir Shridath Ramphal
Title:Director
/s/ John P. Raynor March 30, 1998
By: _________________________________
Name: John P. Raynor
Title:Director
/s/ John G. Vondras March 30, 1998
By: _________________________________
Name: John G. Vondras
Title:Director
/s/ Terrence A. Todman March 30, 1998
By: _________________________________
Name: Terrence A. Todman
Title:Director
A-34
<PAGE>
EMERGING COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES COMPRISING ITEM 14 OF ANNUAL
REPORT ON FORM 10-K TO SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
Financial Statement Schedules Furnished Pursuant to the Requirements of
Form 10-K:
I--Condensed Financial Statements of Emerging Communications, Inc.
(Parent Company Only).................................................. F-20
II--Valuation and Qualifying Accounts................................... F-24
</TABLE>
All other schedules are omitted because they are not applicable or because
the required information is shown elsewhere herein.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Emerging Communications, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Emerging
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedules listed in the Index
on Item 14. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules 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 Emerging Communications, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
Deloitte & Touche LLP
Omaha, Nebraska
March 20, 1998
F-2
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 11,540 $ 4,013
Accounts receivable, net................................. 63,660 14,548
Materials and supplies................................... 9,658 6,241
Prepayments and other current assets..................... 4,110 4,396
-------- --------
Total current assets................................... 88,968 29,198
Fixed assets:
Property, plant and equipment............................ 328,895 237,825
Less accumulated depreciation............................ (117,031) (111,296)
Franchise rights and cost in excess of underlying book
value, less accumulated amortization of $11,170,000 and
$10,112,000............................................. 40,132 27,567
-------- --------
Net fixed assets....................................... 251,996 154,096
Property costs recoverable from future revenues, less
accumulated amortization of $1,406,000 and $2,715,000..... 22,905 21,596
Uncollected authorized rate increases...................... 3,119 --
Other assets............................................... 22,336 19,418
-------- --------
$389,324 $224,308
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................ $ 17,153 $ 19,280
Accounts payable......................................... 25,021 14,169
Accrued taxes............................................ 2,457 1,087
Advance payments and deposits............................ 2,701 2,072
Other current liabilities................................ 8,231 5,863
Current portion of long-term debt........................ 12,942 8,947
-------- --------
Total current liabilities.............................. 68,505 51,418
Deferred income taxes and tax credits...................... 33,066 2,774
Long-term debt, excluding current portion.................. 116,227 105,138
Pension and other long-term liabilities.................... 6,702 6,208
Minority interest.......................................... 15,033 --
Contingencies and commitments (Note J)
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; none issued and outstanding.......... -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 12,272,500 and 10,959,131 shares issued and
outstanding............................................. 123 110
Paid-in capital.......................................... 81,852 59,633
Pension liability........................................ (849) (973)
Retained earnings........................................ 68,665 --
-------- --------
Total stockholders' equity............................. 149,791 58,770
-------- --------
$389,324 $224,308
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Telephone operations........................... $184,632 $206,002 $182,349
Cellular services.............................. 5,910 5,480 3,663
Product sales and rentals...................... 5,128 5,435 4,942
-------- -------- --------
Total revenues............................... 195,670 216,917 190,954
Expenses:
Telephone operations........................... 130,575 155,174 134,401
Cellular services and product sales and rental
expenses...................................... 8,399 8,231 7,957
General and administrative expenses............ 10,219 9,458 12,168
-------- -------- --------
Total operating expenses..................... 149,193 172,863 154,526
-------- -------- --------
Income from operations....................... 46,477 44,054 36,428
Other income and expense:
Loss on split-off of ATN....................... -- -- (45,041)
Interest expense............................... (12,511) (11,289) (10,548)
Interest income................................ 971 458 351
-------- -------- --------
Total other income and expense............... (11,540) (10,831) (55,238)
-------- -------- --------
Income (loss) before income taxes and minority
interest........................................ 34,937 33,223 (18,810)
Income taxes (benefit)........................... (15,250) (13,039) 897
Minority interest................................ (2,477) (2,177) (1,340)
-------- -------- --------
Net income (loss)................................ $ 17,210 $ 18,007 $(19,253)
======== ======== ========
Basic net income (loss) per share................ $ 1.40 $ 1.47 $ (1.57)
======== ======== ========
Weighted average shares outstanding.............. 12,273 12,273 12,269
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED PENSION STOCKHOLDERS'
STOCK CAPITAL EARNINGS LIABILITY EQUITY
------ -------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.... $123 $ 81,852 $ 33,448 $ (562) $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 50,658 (1,677) 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 68,665 (849) 149,791
Minimum pension liability
adjustment, net of income
tax benefit of $74,000... -- -- -- (124) (124)
Net loss.................. -- -- (19,253) -- (19,253)
Purchase and cancellation
of 765,562 shares of
Company stock............ (8) -- (17,392) -- (17,400)
Split-off of ATN.......... (5) (22,219) (32,020) -- (54,244)
---- -------- -------- ------- --------
Balance, December 31, 1997.. $110 $ 59,633 $ -- $ (973) $ 58,770
==== ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 17,210 $ 18,007 $(19,253)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Loss on split-off of ATN..................... -- -- 45,041
Depreciation and amortization................ 18,584 19,272 20,880
Deferred income taxes........................ 4,651 5,528 (9,356)
Minority interest............................ 2,477 2,177 1,340
Changes in operating assets and liabilities,
net of effect of
split-off Transaction:
Accounts receivable........................ (29,733) (307) 11,035
Materials, supplies and other current
assets.................................... 743 (512) (268)
Uncollected surcharges..................... 2,946 1,220 (2,822)
Accounts payable........................... 7,248 5,453 (350)
Accrued taxes.............................. 4,659 (3,720) 2,092
Other...................................... 2,321 (1,892) (2,102)
-------- -------- --------
Net cash flows from operating
activities.............................. 31,106 45,226 46,237
Cash flows from investing activities:
Capital expenditures........................... (22,539) (47,202) (20,929)
Cash transferred to ATN........................ -- -- (15,803)
Split-off transaction costs.................... -- -- (4,509)
-------- -------- --------
Net cash flows from investing
activities.............................. (22,539) (47,202) (41,241)
Cash flows from financing activities:
Repayment of long-term debt.................... (12,436) (16,826) (15,566)
Issuance of long-term debt..................... 5,291 1,336 18,316
Net borrowings (repayments) on notes........... (115) 10,184 2,127
Purchase of Company stock...................... -- -- (17,400)
-------- -------- --------
Net cash flows from financing
activities.............................. (7,260) (5,306) (12,523)
-------- -------- --------
Net change in cash............................... 1,307 (7,282) (7,527)
Cash, beginning of Year.......................... 17,515 18,822 11,540
-------- -------- --------
Cash, end of Year................................ $ 18,822 $ 11,540 $ 4,013
======== ======== ========
Supplemental cash flow information:
Interest paid.................................. $ 12,090 $ 10,920 $ 9,706
======== ======== ========
Income taxes paid.............................. $ 4,113 $ 11,186 $ 5,588
======== ======== ========
Non-cash activities:
Change in minimum pension liability.............. $ 1,842 $ (1,071) $ 3
======== ======== ========
Change in pension intangibles.................... $ 61 $ 251 $ (195)
======== ======== ========
Split-off of ATN................................. $ -- $ -- $ 99,285
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
A. SIGNIFICANT ACCOUNTING POLICIES
Split-Off Transaction--On December 30, 1997, Atlantic Tele-Network, Inc.
(ATN) split-off into two separate public companies (the Transaction). One, a
new company, Emerging Communications, Inc. and subsidiaries (EmCOM or the
Company) contains all of the predecessors telephone operations in the U.S.
Virgin Islands. The other, ATN, continues to own the business and operations
in Guyana. Since Emerging Communications, Inc. was the larger of the split-off
entities, ATN was the split-off entity. The Company is the successor company
and its historical financial statements prior to the split-off are those of
the historical financial statements of ATN. Therefore, the historical
financial statements of the Company include the operations in Guyana prior to
the split-off.
The Transaction was a non-pro rata split-off and accordingly, the split-off
of ATN has been accounted for at fair value as evidenced by the market
capitalization of ATN. Consequently, the loss on fair valuation of the net
assets of ATN has been included in the consolidated statement of operations.
Basis of Presentation--The consolidated financial statements include the
accounts of EmCOM, 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) prior to the split-off.
All material intercompany transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to the 1995 and 1996
financial statements to conform with the 1997 presentation.
General--The Company 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, prior to the split-off
Transaction, the Cooperative Republic of Guyana.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
F-7
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
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, prior to the split-off, the acquisition
of GT&T franchises, all of which are being amortized over forty years on the
straight-line method.
Depreciation--The Company provides for depreciation using the straight-line
and equal life group methods. This has resulted in a composite annualized rate
of 6.9%, 6.3% and 5.2% for Vitelco and 4.8%, 4.5% and 4.5% for GT&T for the
years ended December 31, 1995, 1996 and 1997, 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.
Impairment of Long-Lived Assets--In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121). The
Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets.
Under provisions of the Statement, impairment losses are recognized when
expected future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company evaluates
the carrying value of property, plant and equipment and intangibles in
relation to the operating performance and future undiscounted cash flows of
the underlying business. The Company adjusts the net book value of the
underlying assets if the sum of expected future cash flows is less than book
value. The adoption of SFAS 121 did not have a material effect on the Company
financial statements.
Debt Issuance Costs--Costs relating to the issuance of debt are being
amortized over the term of the debt.
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.
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 and other foreign currency are adjusted to reflect the current exchange
rate. Currency transaction gains and (losses), which relate primarily to
settlement with foreign carriers, approximated $1,808,000, $51,000 and
$(1,507,000) for the years ended December 31, 1995, 1996 and 1997,
respectively.
Basic Income Per Share--Income per share is computed on the basis of the
weighted average number of shares outstanding.
F-8
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
Current Accounting Pronouncements--In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130 entitled Reporting Comprehensive
Income (SFAS No. 130). This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and all
other revenues, expenses, gains and losses that under generally accepted
accounting principles are not included in reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 entitled Disclosures About Segments of an Enterprise and Related
Information (SFAS No. 131). This statement utilizes the "management approach"
for segment reporting which is based on the way that the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and more specific and
detailed geographic disclosures especially by countries as opposed to broad
geographic regions.
These statements are effective for fiscal years beginning after December 15,
1997, or January 1, 1998, for the Company, with earlier application permitted.
The provisions of these statements, which are of a disclosure nature, will not
have a material impact on the financial statements.
B. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Subscribers and installment sales, net of allowance for
doubtful
accounts of $2,145,000 and $1,191,000...................... $12,577 $10,593
Connecting companies........................................ 49,636 3,317
Other....................................................... 1,447 638
------- -------
$63,660 $14,548
======= =======
</TABLE>
F-9
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Used in telephone operations:
Outside plant........................................... $158,860 $125,991
Central office equipment................................ 80,936 46,120
Land and building....................................... 21,124 14,536
Station equipment....................................... 9,739 5,990
Furniture and office equipment.......................... 5,493 3,573
Construction in process................................. 15,603 5,696
Other................................................... 11,593 10,277
-------- --------
Total used in telephone operations.................... 303,348 212,183
Used in other operations.................................. 25,547 25,642
-------- --------
$328,895 $237,825
======== ========
</TABLE>
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. 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. The Company has deferred the intrastate portion of these
costs and anticipates amortizing them over the same period as the Virgin
Islands Industrial Development Commission (IDC) tax benefit. 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.
F-10
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
E. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Rural Telephone Finance Cooperative subordinated capital
certificates.............................................. $ 6,490 $ 6,554
Rural Telephone Finance Cooperative patronage capital
certificates and patronage dividends receivable........... 5,781 5,531
Windstorm prepaid insurance premium, long-term portion..... -- 2,978
Debt service reserve fund and escrow account............... 3,900 --
Pension and retirement plan intangibles.................... 1,877 1,682
Debt issuance costs........................................ 1,626 1,184
Deferred costs and intangibles, net........................ 872 --
Other...................................................... 1,790 1,489
------- -------
$22,336 $19,418
======= =======
</TABLE>
F. NOTES PAYABLE
The Company has in place a $5.5 million line of credit bearing interest at
0.75% and 0.25% over prime rate which was 9.0% and 8.75% at December 31, 1996
and 1997, respectively. As of December 31, 1996 and 1997, $5.5 million was
outstanding under this arrangement.
At December 31, 1996 and 1997, Vitelco had short-term notes payable to an
insurance company of $432,000 and $280,000, respectively, with interest rates
of 5.7% and 5.8%, respectively.
Vitelco has a $5 million revolving line of credit with a variable rate of
interest with the Rural Telephone Finance Cooperative (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 October 1998. At December 31, 1997 and
1996, Vitelco has borrowings of $5 million for the line of credit expiring in
March 2000 and $8.5 million and $6.0 million for the line of credit expiring
October 1998, respectively, both with interest rates of 7.25% and 6.9%,
respectively.
At December 31, 1996, the Company had demand notes payable to a stockholder
of $222,000, with an interest rate of 9.58%. The note was paid in 1997.
F-11
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
G. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Notes payable to RTFC, with principal and interest
payments due quarterly through December 30, 2002:
ATN-VI.................................................. $ 19,098 $ 36,252
Vitelco................................................. 24,142 20,519
-------- --------
43,240 56,771
Notes payable to Rural Utilities Service (RUS) with
principal and interest payments due monthly through
2012..................................................... 56,901 54,367
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)...................... 25,447 --
Other note payable with semi-annual payments and a balloon
payment of $1,925,000 on December 31, 1999............... 3,300 2,750
Other..................................................... 281 197
-------- --------
129,169 114,085
Less current portion...................................... 12,942 8,947
-------- --------
$116,227 $105,138
======== ========
</TABLE>
All of the common stock of the Company's significant subsidiaries as well as
a first mortgage on the assets and revenue of ATN-VI have been pledged on the
debt, and therefore, substantially all assets and revenue of the Company are
pledged as security.
The Vitelco note payable to the RTFC consists of balances of $10,622,000 and
$9,897,000 with fixed interest rates of 9.75% and 8.0%, respectively. On the
ATN-VI note payable, $1.3 million and $19.7 million with a variable interest
rate of 6.3% and 6.65% was outstanding at December 31, 1996 and 1997,
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 coverage, as defined, and times interest earned
coverages, as defined, and restrictions on issuance of additional long-term
debt. The RTFC agreements 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. At December 31, 1997, the ability of ATN-VI to
service its debt was dependent on funds from its subsidiaries. The RUS loan
and applicable RUS regulations restrict Vitelco's ability to pay dividends
based upon certain net worth tests.
F-12
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
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 if the
equity ratio as defined is below 40%, 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, 1997, Vitelco had
approximately $4,668,000 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 (included in other assets) with
the RTFC. The Company received cash repayments of $1,575,000 and $916,000 for
the years ended December 31, 1996 and 1997, respectively, related to the
subordinated capital certificates. Subordinated capital certificates are non-
interest bearing. As a member of the RTFC, the Company shares proportionately
in the net earnings of the RTFC. RTFC distributions of net earnings are made
primarily through cash distributions and issuances of patronage capital
certificates (included in other assets) which are redeemed at the option of
the RTFC. The Company's share of RTFC net earnings, included as an offset to
interest expense, was $528,000, $551,000 and $473,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The other note payable is collateralized by property with a book value of
$7,234,000 as of December 31, 1997. The variable interest rate was 7.3% and
7.55% at December 31, 1996 and 1997.
The annual requirements for principal payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, TOTAL
------------------------- --------
<S> <C>
1998.......................................................... $ 8,947
1999.......................................................... 9,533
2000.......................................................... 10,064
2001.......................................................... 10,740
2002.......................................................... 10,563
Thereafter.................................................... 64,238
--------
$114,085
========
</TABLE>
H. INCOME TAXES
The following is a reconciliation from the tax computed at statutory income
tax rates to the Company's income tax expense (benefit):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Tax computed at statutory U.S. federal income
tax rates..................................... $12,228 $11,628 $ (6,583)
Guyana income taxes in excess of statutory U.S.
rate.......................................... 2,906 2,038 1,314
IDC tax benefits............................... -- -- (11,968)
Nondeductible loss on split-off Transaction.... -- -- 15,764
Other, net..................................... 116 (627) 576
------- ------- --------
Income tax expense (benefit)................... $15,250 $13,039 $ (897)
======= ======= ========
</TABLE>
F-13
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
The components of income tax expense (benefit) are comprised of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
United States and U.S. Virgin Islands....... $ 1,210 $ 3,096 $ 5,458
Foreign..................................... 10,370 4,948 3,312
Deferred...................................... 4,651 5,528 (9,356)
Amortization of regulatory liability and
investment tax credits....................... (981) (533) (311)
-------- -------- -------
$ 15,250 $ 13,039 $ (897)
======== ======== =======
</TABLE>
The significant components of deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property......... $24,887 $1,445
Property costs recoverable from future revenues............ 8,566 1,138
Pension paid in excess of book expense..................... -- 1,041
Revenues not recognized for tax purposes................... 1,680 --
Other...................................................... 73 --
------- ------
35,206 3,624
Deferred tax assets:
Non-deductible expense..................................... 1,067 596
Pension costs not currently deductible..................... 507 582
Regulatory liability....................................... 1,297 269
------- ------
2,871 1,447
------- ------
Net deferred tax liabilities............................. $32,335 $2,177
======= ======
</TABLE>
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 (IDC tax benefits). In accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109), 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 charge has resulted in the Company recording
non-recurring credit to income tax expense of approximately $11,968,000 for
the year ended December 31, 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.
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,
1996 and 1997, the Company has a regulatory liability of approximately $3.5
million and $3.0 million which is included in other long-term liabilities.
F-14
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
At December 31, 1997, unremitted earnings of foreign subsidiaries (ATN-VI
and subsidiaries) were approximately $56,522,000. 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.
I. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans--The Company has noncontributory defined benefit pension plans
(the Plan) for salaried employees who are not members of a collective
bargaining unit and eligible hourly union employees 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,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost................................... $ 600 $ 811 $ 720
Interest on projected benefit obligation....... 890 1,061 1,131
Actual return on assets........................ (1,292) (1,331) (1,959)
Net amortization and deferral.................. 1,052 1,085 1,429
-------- -------- --------
Net periodic pension cost...................... $ 1,250 $ 1,626 $ 1,321
======== ======== ========
</TABLE>
The following table sets forth the funded status, the amounts recognized in
the balance sheet of the Company at December 31, 1996 and 1997, and the
principal assumptions of the Company's plans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.................................... $ 13,681 $ 15,649
Nonvested benefits................................. 39 437
-------- --------
Accumulated plan benefits............................ $ 13,720 $ 16,086
======== ========
Projected benefit obligation......................... $(16,027) $(17,425)
Fair value of plan assets............................ 12,389 15,483
-------- --------
Plan projected benefit obligation in excess of
assets.............................................. (3,638) (1,942)
Unrecognized net loss................................ 2,699 2,894
Unrecognized prior service costs..................... 1,257 900
Unrecognized net obligation at January 1, 1987....... 939 782
-------- --------
Prepaid pension included in the balance sheet........ $ 1,257 $ 2,634
======== ========
</TABLE>
F-15
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
The discount rate was 7.4% and 7.0% at December 31, 1996 and 1997 and the
expected rate return on invested assets was 8.0% for both years.
In accordance with Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company has recorded an additional
minimum pension liability equal to the unfunded pension benefit obligation of
$3,234,000 and $3,237,000 and an intangible asset (to the extent of the
additional liability) equal to the aggregate of the prior service cost and
transition obligation of $1,877,000 and $1,682,000 at December 31, 1996 and
1997, respectively. The excess of the additional minimum pension liability
over the intangible of $849,000 and $973,000 at December 31, 1996 and 1997,
respectively, has been recorded as a separate component (a reduction in) of
equity, net of taxes of $507,000 and $581,000. The change in the excess of the
minimum pension liability over the intangible asset for the years ended
December 31, 1996 and 1997 of $828,000 and $(124,000), respectively, has been
recorded as a credit to (reduction in) equity, net of tax expense (benefit) of
$494,000 and $(74,000).
Long-Term Incentive and Share Plan--On December 31, 1997, the Company
adopted the 1997 Long-Term Incentive and Share Award Plan (the Incentive
Plan). Any employee of the Company or its affiliate who is responsible for or
contributes to the management, growth, or profitability of the Company or its
affiliates is eligible to participate in the Incentive Plan.
The total number of shares reserved for awards under the Incentive Plan is
1,095,913. Awards under the Incentive Plan may consist of incentive stock
options (ISOs), nonqualified stock options (NQSOs) and stock appreciation
rights (SARs) as well as other types of awards. On December 31, 1997, stock
options of 273,978 shares at $8.00 were granted under the Incentive Plan. Of
these options, 68,495 were vested and exercisable as of December 31, 1997. The
remaining 205,483 options vest and become exercisable ratably and daily from
January 1, 1998 through January 1, 2000. The exercise price of the options is
equal to market value on the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 entitled
Accounting for Stock Issued to Employees in accounting for its stock option
plan. Accordingly, no compensation expense has been recognized for stock
options granted. The pro forma compensation expense and related earnings per
share impact for the stock options granted under Statement of Financial
Accounting Standards No. 123 entitled Accounting for Stock-Based Compensation
was not material for the fiscal year ended December 31, 1997.
Postretirement Benefits--The Company 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,
-------------
1996 1997
------ ------
<S> <C> <C>
Service cost.................................................. $ 73 $ 57
Interest cost................................................. 116 116
Transition obligation......................................... 38 38
Net other amortization and deferral........................... 68 50
------ ------
Net postretirement benefit cost............................. $ 295 $ 261
====== ======
</TABLE>
F-16
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
The following table sets forth the funded status and the amounts recognized
in the balance sheet of the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $ 281 $ 322
Eligible actives........................................ 412 436
Non-eligible actives.................................... 1,053 1,026
------- -------
1,746 1,784
Fair value of plan assets................................ -- --
------- -------
Accumulated benefit obligation in excess of assets....... (1,746) (1,784)
Unrecognized net loss (gain)............................. (263) (368)
Unrecognized prior service costs......................... 543 513
Unrecognized net obligation.............................. 605 567
------- -------
Pension liability included in the balance sheet.......... $ (861) $(1,072)
======= =======
</TABLE>
In determining the accumulated postretirement benefit obligations, the
discount rate was assumed to be 7.4% in 1996 and 7.0% in 1997. For 1997, the
assumed health care cost trend rate was 9.6% and 8.6% 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 $15,000 for 1997 and
increase the accumulated postretirement benefits obligations by $144,000.
Retirement Savings Plan--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 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 $178,000, $181,000 and $182,000 for the years ended
December 31, 1995, 1996 and 1997, 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.
Employee Stock Ownership Plan--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 EmCOM, either on the
open market or directly from the Company). The ESOP is permitted to borrow
money to purchase Company stock. No Company contributions were made in 1995,
1996 or 1997.
J. CONTINGENCIES AND COMMITMENTS
In connection with the split-off Transaction, the Company believes it has
certain claims against ATN, and ATN may, in turn, have claims against the
Company. Due to the preliminary nature of the situation, management and legal
counsel are unable to predict the ultimate resolution of these matters.
F-17
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
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.
K. FAIR VALUE DISCLOSURE
Management has determined the carrying amounts of cash, accounts receivable,
accounts payable and notes payable are a reasonable estimate of fair value.
The fair value of long-term debt is estimated using a discounted cash flow
analysis. At December 31, 1996 and 1997, the carrying value of long-term debt
was $129,169,000 and $114,085,000 and the estimated fair value was
$127,783,000 and $113,150,000, respectively.
L. GEOGRAPHIC AND CREDIT CONCENTRATIONS
Geographic data:
<TABLE>
<CAPTION>
UNITED STATES GUYANA CONSOLIDATED
------------- -------- ------------
<S> <C> <C> <C>
1997 operations:
Total revenues........................ $73,339 $117,615 $190,954
Income from operations................ 17,748 18,680 36,428
Identifiable assets................... 224,308 -- 224,308
1996 operations:
Total revenues........................ $68,664 $148,253 $216,917
Income from operations................ 10,063 33,991 44,054
Identifiable assets................... 230,714 158,610 389,324
</TABLE>
Revenues from AT&T comprised approximately 27%, 29% and 24% of consolidated
total revenues in 1995, 1996 and 1997, respectively. Revenues from MCI
comprised approximately 15% and 7% in 1996 and 1997, respectively. 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 international long-distance revenue discussed
above is generated by GT&T's audiotext providers, which operate as service
bureaus or intermediaries for a number of audiotext information providers. One
such audiotext provider accounted for $78 million, $83 million and $39 million
of these revenues for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-18
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(COLUMNAR AMOUNTS IN THOUSANDS)
M. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the Company's quarterly results of operations for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Revenues........................ $50,124 $45,324 $54,277 $ 41,229
Expenses........................ 39,543 38,892 38,248 37,843
------- ------- ------- --------
Income from operations.......... 10,581 6,432 16,029 3,386
Other income and expense........ 2,483 2,676 2,584 47,495
------- ------- ------- --------
Income (loss) before income
taxes and minority interest.... 8,098 3,756 13,445 (44,109)
Income taxes.................... 2,909 (9,521) 5,873 (158)
------- ------- ------- --------
Income before minority
interest....................... 5,189 13,277 7,572 (43,951)
Minority interest............... 307 1 1,050 (18)
------- ------- ------- --------
Net income (loss)............... $ 4,882 $13,276 $ 6,522 $(43,933)
======= ======= ======= ========
Net income (loss) per share..... $ 0.40 $ 1.08 $ 0.53 $ (3.58)
======= ======= ======= ========
Weighted average shares
outstanding.................... 12,273 12,273 12,273 12,259
======= ======= ======= ========
<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
Other income and expense........ 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
outstanding.................... 12,273 12,273 12,273 12,273
======= ======= ======= ========
</TABLE>
F-19
<PAGE>
SCHEDULE I
EMERGING COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 578 $ --
Other current assets....................................... 192 15
-------- -------
770 15
Property and equipment....................................... 3,149 2,543
Less accumulated depreciation.............................. (2,094) (2,091)
-------- -------
1,055 452
Investment in and advances to subsidiaries................... 155,038 63,846
Other assets................................................. 2,044 153
-------- -------
$158,907 $64,466
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $ 5,722 $ 5,500
Accounts payable........................................... 952 --
Accrued taxes.............................................. 1,214 --
Other current liabilities.................................. 952 --
Current portion of long-term debt.......................... 88 98
-------- -------
Total current liabilities................................ 8,928 5,598
Long-term debt, excluding current portion.................... 188 98
Contingencies and commitments
Stockholders' equity:
Common stock............................................... 123 110
Paid-in capital............................................ 81,852 59,633
Pension liability.......................................... (849) (973)
Retained earnings.......................................... 68,665 --
-------- -------
Total stockholders' equity............................... 149,791 58,770
-------- -------
$158,907 $64,466
======== =======
</TABLE>
See note to condensed financial statements.
F-20
<PAGE>
SCHEDULE I
(CONTINUED)
EMERGING COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Advisory fees..................................... $ 7,870 $ 8,895 $ 7,057
Interest income................................... 4,555 4,490 4,681
------- ------- --------
12,425 13,385 11,738
Expenses:
Interest........................................ 893 548 533
Loss on split-off of ATN........................ -- -- 45,041
General and administrative...................... 7,215 7,117 7,227
------- ------- --------
8,108 7,665 52,801
------- ------- --------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries........... 4,317 5,720 (41,063)
Income taxes...................................... (1,049) (1,651) (1,445)
------- ------- --------
Income (loss) before equity in undistributed
earnings of subsidiaries......................... 3,268 4,069 (42,508)
Equity in undistributed earnings of subsidiaries.. 13,942 13,938 23,255
------- ------- --------
Net income (loss)................................. $17,210 $18,007 $(19,253)
======= ======= ========
Basic net income (loss) per share................. $ 1.40 $ 1.47 $ (1.57)
======= ======= ========
</TABLE>
See note to condensed financial statements.
F-21
<PAGE>
SCHEDULE I
(CONTINUED)
EMERGING COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).............................. $ 17,210 $ 18,007 $(19,253)
Adjustments to reconcile net income to net cash
flows from operating activities:
Loss on split-off of ATN..................... -- -- 45,041
Equity in undistributed earnings of
subsidiaries................................ (13,942) (13,938) (23,255)
Depreciation and amortization................ 662 694 427
Change in operating assets and liabilities,
net of effect of split-off Transaction:
Other assets............................... 1,138 (1,120) (2,782)
Other liabilities.......................... 1,267 (7) 894
Other...................................... 395 138 366
-------- -------- --------
Net cash flows from operating
activities.............................. 6,505 3,426 1,438
Cash flows from investing activities:
Change in advance to subsidiaries.............. (4,844) 669 21,205
Cash transferred to ATN........................ -- -- (5,482)
Capital expenditures........................... (377) -- (36)
-------- -------- --------
Net cash flows from investing
activities.............................. (5,221) 669 15,687
Cash flows from financing activities:
Net repayments on notes........................ -- (790) (222)
Issuance of long-term debt..................... 356 -- --
Repayment of long-term debt.................... (204) (4,342) (81)
Purchase of Company stock...................... -- -- (17,400)
-------- -------- --------
Net cash flows from financing
activities.............................. 152 (5,132) (17,703)
-------- -------- --------
Net change in cash............................... 1,436 (1,037) (578)
Cash, beginning of year.......................... 179 1,615 578
-------- -------- --------
Cash, end of year................................ $ 1,615 $ 578 $ --
======== ======== ========
Supplemental cash flow information:
Interest paid.................................. $ 1,037 $ 542 $ 515
======== ======== ========
Income taxes paid.............................. $ 260 $ 620 $ 2,310
======== ======== ========
Non-cash activities:
Split-off of ATN............................... $ -- $ -- $ 99,285
======== ======== ========
</TABLE>
See note to condensed financial statements.
F-22
<PAGE>
SCHEDULE I
(CONTINUED)
EMERGING COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
A. SIGNIFICANT ACCOUNTING POLICIES
Investment in Subsidiaries--Emerging Communications, Inc.'s investment in
subsidiary is accounted for using the equity method.
Split-Off Transaction--On December 30, 1997, Atlantic Tele-Network, Inc.
(ATN) split-off into two separate public companies (the Transaction). One, a
new company, Emerging Communications, Inc. and subsidiaries (EmCOM or the
Company) contains all of the predecessors telephone operations in the U.S.
Virgin Islands. The other public company, ATN, continues to own the business
and operations in Guyana. Since Emerging Communications, Inc. was the larger
of the split-off entities, ATN was the split-off entity. The Company is the
successor company and its historical financial statements prior to the split-
off are those of the consolidated group, and therefore include the operations
in Guyana prior to the split-off.
The Transaction was a non-pro rata split-off and accordingly has been
accounted for at fair value as evidenced by the market capitalization of ATN.
Consequently, the loss on fair valuation of the net assets of ATN has been
included in the consolidated statement of operations.
F-23
<PAGE>
SCHEDULE II
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO NET BALANCE
BEGINNING COSTS AND CHARGE TRANSFERRED AT END
OF PERIOD EXPENSES OFFS TO ATN OF PERIOD
---------- ---------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995:
Description:
Allowance for doubtful
accounts................. $1,908 $1,723 $ 627 $-- $3,004
====== ====== ====== ==== ======
YEAR ENDED DECEMBER 31,
1996:
Description:
Allowance for doubtful
accounts................. $3,004 $ 389 $1,248 $-- $2,145
====== ====== ====== ==== ======
YEAR ENDED DECEMBER 31,
1997:
Description:
Allowance for doubtful
accounts................. $2,145 $ 427 $ 882 $502 $1,191
====== ====== ====== ==== ======
</TABLE>
F-24
<PAGE>
APPENDIX B
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13385
----------------
EMERGING COMMUNICATIONS, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 66-0547028
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
(809) 777-8000
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of March 31, 1998, the registrant had outstanding 10,959,131 shares of
its common stock ($.01 par value).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
B-1
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 4,013 $ 5,342
Accounts receivable, net............................ 14,548 13,254
Materials and supplies.............................. 6,241 6,031
Prepayments and other current assets................ 4,396 2,627
--------- ---------
Total current assets.............................. 29,198 27,254
Fixed assets:
Property, plant and equipment....................... 237,825 240,139
Less accumulated depreciation....................... (111,296) (114,982)
Franchise rights and cost in excess of underlying
book value, less accumulated amortization of
$10,112,000 and $10,346,000........................ 27,567 27,333
--------- ---------
Net fixed assets.................................. 154,096 152,490
Property costs recoverable from future revenues, less
accumulated amortization of $2,715,000 and
$3,038,000........................................... 21,596 21,273
Other assets.......................................... 19,418 20,958
--------- ---------
$ 224,308 $ 221,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... 19,280 24,300
Accounts payable.................................... 14,169 7,926
Accrued taxes....................................... 1,087 1,040
Advance payments and deposits....................... 2,072 2,192
Other current liabilities........................... 5,863 5,157
Current portion of long-term debt................... 8,947 9,152
--------- ---------
Total current liabilities......................... 51,418 49,767
Deferred income taxes and tax credits................. 2,774 2,833
Long-term debt, excluding current portion............. 105,138 102,616
Pension and other long-term liabilities............... 6,208 6,050
Contingencies and commitments (Note D)
Stockholders' equity:
Preferred stock, par value $.01 per share;
10,000,000 shares authorized; none issued and out-
standing........................................... 110 110
Common stock, par value $.01 per share; 20,000,000
shares authorized; 10,959,131 shares issued and
outstanding........................................
Paid-in capital..................................... 59,633 59,633
Pension liability................................... (973) (973)
Retained earnings................................... -- 1,939
--------- ---------
Total stockholders' equity........................ 58,770 60,709
--------- ---------
$ 224,308 $ 221,975
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
B-2
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Telephone operations................................... $ 47,945 $ 15,884
Cellular services...................................... 1,149 883
Product sales and rentals.............................. 1,030 1,389
--------- ---------
Total revenues....................................... 50,124 18,156
Expenses:
Telephone operations................................... 36,015 10,488
Cellular services and product sales and rental
expenses.............................................. 1,860 1,822
General and administrative expenses.................... 1,668 1,103
--------- ---------
Total operating expenses............................. 39,543 13,413
--------- ---------
Income from operations............................... 10,581 4,743
Other income and expense:
Interest expense....................................... (2,572) (1,679)
Interest income........................................ 89 34
--------- ---------
Total other income and expense....................... (2,483) (1,645)
--------- ---------
Income before income taxes and minority interest......... 8,098 3,098
Income taxes............................................. 2,909 1,159
--------- ---------
Income before minority interest.......................... 5,189 1,939
Minority Interest........................................ (307) --
--------- ---------
Net income............................................... $ 4,882 $ 1,939
========= =========
Net income per share..................................... $ 0.40 $ 0.18
========= =========
Weighted average shares outstanding...................... 12,273 10,959
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
B-3
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net cash flows provided by operating activities.......... $ 8,570 $ 1,114
Cash flows from investing activities:
Capital expenditures................................... (5,081) (2,488)
--------- ---------
Net cash used in investing activities................ (5,081) (2,488)
Cash flows from financing activities:
Repayment of long-term debt............................ (2,221) (2,317)
Net borrowings (repayments) on notes................... (343) 5,020
--------- ---------
Net cash flows (used) provided by financing
activities.......................................... (2,564) 2,703
Net increase in cash..................................... 925 1,329
Cash, Beginning of Period................................ 11,540 4,013
--------- ---------
Cash, End of Period...................................... $ 12,465 $ 5,342
========= =========
Supplemental cash flow information:
Interest paid.......................................... $ 2,606 $ 2,738
========= =========
Income taxes paid...................................... $ 2,219 $ --
========= =========
Depreciation and amortization expense.................... $ 6,003 $ 5,029
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
B-4
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
A. GENERAL
Significant Accounting Policies
On December 30, 1997, Atlantic Tele-Network, Inc. (ATN) split-off into two
separate public companies (the Transaction). One, a new company, Emerging
Communications, Inc. and subsidiaries (EmCom or the Company) contains all of
the predecessors telephone operations in the U.S. Virgin Islands. The other,
ATN, continues to own the business and operations in Guyana. Since Emerging
Communications, Inc. was the larger of the two entities, ATN was the split-off
and EmCom was deemed the successor company. Consequently, the historical
financial statements of EmCom prior to the split-off reflect those of the
consolidated group (ATN's historical financial statements) and include the
operations in Guyana prior to the split-off.
The consolidated condensed balance sheet of Emerging Communications, Inc.
and subsidiaries at December 31, 1997 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 in the
Company's Annual Report on Form 10K for the year ended December 31, 1997.
The unaudited interim consolidated condensed financial statements furnished
herein reflect all adjustments, (consisting only of normal recurring accruals)
which are, in the opinion of management, necessary to fairly present the
financial results for the interim periods presented. The results for the three
months ended March 31, 1997 and 1998 are not necessarily indicative of the
operating results for the full year not yet completed.
Reclassification--Certain reclassifications have been made to the 1997
amounts to conform to the 1998 presentation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 entitled Disclosures About Segments of an Enterprise and Related
Information (SFAS No. 131). This statement utilizes the "management approach"
for segment reporting which is based on the way that the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and more specific and
detailed geographic disclosures especially by countries as opposed to broad
geographic regions. This statement is effective for fiscal years beginning
after December 31, 1997, or January 1, 1998 for the Company. However, the
provisions of this statement are not required for the interim reporting
periods in the first year of implementation. The provisions of this statement,
which are of a disclosure nature, will not have a material impact on the
financial statements.
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 "FCC"
to include the interstate portion of these costs in its rate base and amortize
them over a five year period. In May 1997, Vitelco received approval from the
Virgin Islands Industrial Development Commission ("IDC") for a five
B-5
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
year exemption (commencing October 1, 1998) from 90% of Virgin Islands income
taxes and 100% of Virgin Islands gross receipts, excise and property taxes to
assist in recovering the intrastate portion of the hurricane related costs.
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. The
Company has deferred the intrastate portion of these costs and anticipates
amortizing them over the same period as the IDC tax benefit. 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.
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.
D. CONTINGENCIES AND COMMITMENTS
In connection with the split-off Transaction, the Company believes it has
certain claims against ATN, and ATN may, in turn, have claims against the
Company. Due to the preliminary nature of the situation, management and legal
counsel are unable to predict the ultimate resolution of these matters.
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.
E. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130). Statement of Financial Accounting Standards No. 130 establishes
standards for the display of comprehensive income and its components in a full
set of financial statements. There was no material difference between net
income and comprehensive income for the three months ended March 31, 1997 and
1998.
B-6
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
SPLIT-OFF TRANSACTION
On December 30, 1997, Atlantic Tele-Network, Inc. ("ATN") split off into two
separate public companies pursuant to the split-off Transaction. One company,
EmCom contains all the predecessors telephone operations in the U.S. Virgin
Islands. The other, ATN, continues to own the business and operations in
Guyana. Because EmCom was the larger of the two entities, ATN was deemed the
split-off entity and EmCom was deemed the successor company. Consequently, the
historical financial statements of EmCom prior to the split-off Transaction
reflect those of the consolidated group and include the operations in Guyana.
The split-off Transaction was a non pro-rata split off and was accounted for
at fair value as evidenced by the market capitalization of ATN subsequent to
the split-off Transaction. Accordingly, the loss on fair valuation of the net
assets of ATN was included in the consolidated statement of operations for the
year ended December 31, 1997.
As a result of the split-off, EmCom no longer includes the operations or
financial results of the Guyana subsidiary GT&T in its current year financial
statements.
INTRODUCTION
The Company's revenues and income from continuing operations have been
derived principally from the operations of its telephone subsidiaries, Vitelco
and, prior to the split-off Transaction, 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. The holding
company for EmCom's United States Virgin Islands operations is Atlantic Tele-
Network, Co. ("ATN-VI"). Other operations in the Company's Consolidated
Condensed Statements of Operations include: Vitelcom Cellular, Inc. d/b/a.
VitelCellular, which provides cellular telephone service in the U.S. Virgin
Islands; and, until it merged into ATN-VI, Vitelcom, which supplies customer
premises equipment in the U.S. Virgin Islands.
RESULTS OF OPERATIONS
Three Months ended March 31, 1997 and 1998
Operating revenues for the three months ended March 31, 1998 were $18.1
million as compared to $50.1 million for the corresponding period of the prior
year, a decrease of $32.0 million. The decrease was due principally to the
split-off Transaction since revenues for the three months ended March 31, 1997
included approximately $31.8 million in revenues related to GT&T's telephone
operations. After giving effect to the split-off Transaction, the revenues of
the operations retained by the Company decreased approximately $226,000 or 1%
from revenues for the same period last year.
Revenues from telephone operations decreased approximately $319,000, or 2%,
compared to revenues for the same period last year. This decrease is
principally due to a decline in Universal Service Fund revenues offset by
increases in revenues from local exchange service, access charges, and billing
and collection services attributable to increased subscriber access lines.
Revenues from cellular services declined approximately $266,000, or 23% as
compared to revenues for the same period last year due to decreases in
subscribers and average revenues per subscriber. Revenues from product sales
and rentals increased $359,000, or 35% compared to revenues for the same
period last year as a result of completing several projects in the first
quarter of 1998.
Operating expenses for the three months ended March 31, 1998 were $13.4
million as compared to $39.5 million for the corresponding period of the prior
year, a decrease of $26.1 million, or 66%. This decrease was due principally
to the inclusion of approximately $26.4 million of operating expenses related
to GT&T and ATN,
B-7
<PAGE>
Inc. for the period ended March 31, 1997. As a result of the split-off
Transaction, GT&T and ATN, Inc. are no longer part of the Company's
operations.
After giving effect to the split-off Transaction, operating expenses were
$13.4 million for the three months ended March 31, 1998, a $400,000 or 3%
increase as compared to $13.0 million for the corresponding period of the
prior year. This increase is principal due to a $182,000 increase in expenses
of telephone operations and a $243,000 increase in general and administrative
expenses.
As a percentage of revenues from telephone operations, after giving effect
to the split-off Transaction, operating expenses were approximately 74% and
71% for the three months ended March 31, 1998 and 1997, respectively.
Income from operations for the three months ended March 31, 1998 was $4.7
million, a $5.8 million decrease compared to income from operations for the
same period last year. However, after giving effect to the split-off
Transaction, income from operations decreased $613,000 or 11% for the three
months ended March 31, 1998 as compared to the same period last year. This
decrease is attributable to the $226,000 or 1% decrease in revenues combined
with the approximate $400,000 or 3% increase in operating expenses as
discussed herein.
Net interest expense for the three months ended March 31, 1998 was $1.6
million as compared to $2.5 million for the corresponding period of the prior
year, a decrease of $838,000. After giving effect to the split-off
Transaction, net interest expense increased approximately $100,000 as a result
of an increase in outstanding debt. Income before taxes and minority interest
decreased $5.0 million to $3.1 million for the first three months of 1998.
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 Island 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. The effect of the tax
exemption on future current taxes payable during the benefit period will be
reflected in the Company 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 three months ended March 31, 1998 was
37.40% as compared to 35.90% for the corresponding period of the prior year.
The minority interest in earnings for the three months ended March 31, 1997
consists of the Guyana government's 20% interest in GT&T and Comsat Mobile
Investments, Inc.'s (a subsidiary of Communications Satellite Corporation) 10%
interest in VitelCelluar. As a result of the split-off Transaction, the
minority interest held in GT&T is no longer included in the operations of the
Company. Additionally, on February 13, 1998, ATN-VI purchased the 10% minority
interest held in VitelCellular. The minority interest in earnings up to the
date of ATN-VI's acquisition of 10% minority interest is immaterial.
LIQUIDITY AND CAPITAL RESOURCES
The Company depends upon funds received from subsidiaries to meet its
capital needs, including servicing debt and financing any future acquisitions.
As a result of the split-up of ATN into two separate public companies, the
Company's capital resources have changed significantly, and the Company has
fewer resources and significantly reduced operations for the near term.
However, the Company believes existing liquidity and capital resources will be
adequate to meet current operating needs.
B-8
<PAGE>
In connection with the split-off Transaction, EmCom assumed approximately
$5.5 million of bank debt of ATN, of which $5.5 million was outstanding at
March 31, 1998 under a short-term credit facility which matures October 1,
1998. The Company's primary sources of funds are management fees, repayment of
loans, interest from ATN-VI and dividends from ATN-VI.
In connection with the split-off Transaction, ATN-VI borrowed approximately
$17.4 million, net, from the Rural Telephone Finance Cooperative ("RTFC")
under a 15 year credit facility (the "1997 RTFC Credit Facility"). This
facility provides for quarterly payments of principal and interest of
approximately $500,000. At March 31, 1998, $17.2 million, net, was outstanding
under this credit facility, which bears interest at a variable rate, which was
6.65% at March 31, 1998. In addition to the 1997 RTFC Credit Facility, ATN-VI
had other outstanding borrowings from the RTFC of $15.6 million, net, at March
31, 1998, of which $1.3 million bears interest at a variable rate, which was
6.65% at March 31, 1998, and $14.3 million bears interest at a fixed rate of
8%.
ATN-VI's loan agreements with the RTFC limit the payment of dividends by
ATN-VI to EmCom unless ATN-VI meets certain financial ratios, which were met
at March 31, 1998, and, after payment of the dividend ATN-VI's stockholders
equity is greater than 30% of total assets. ATN-VI's loan agreements with the
RTFC contain covenants that restrict ATN-VI 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 ATN-VI-without, in each case, the
prior written approval of RTFC.
ATN-VI's ability to service its debt or to pay dividends will be primarily
dependent on funds from its parent or its subsidiaries, primarily Vitelco.
Vitelco's loan agreement (the "RUS Loan Agreement") with the Rural Utilities
Service ("RUS") 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, if the equity ratio, as defined, is below
40%, 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 March
31, 1998, Vitelco's dividend paying capacity was approximately $.7 million.
At March 31, 1998, Vitelco had an outstanding balance under the RUS Loan
Agreement of $53.7 million, which bears interest at a fixed rate of 5%. 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. The
RUS Loan Agreement contains 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.
At March 31, 1998, Vitelco has outstanding borrowings from the RTFC of $37.6
million, of which $9.9 million was owing under a term loan which bears
interest at a fixed rate of 9.75% (the "9.75% Term Loan"), $9.5 million was
owing under a term loan which bears interest at a fixed rate of 8% (the "8%
Term Loan"), $5 million was owing under a $5 million revolving line of credit
with an interest rate of 7.25% and $13.2 million was owing under a $15 million
revolving loan of credit with an interest rate of 7.25%. The $5 million line
of credit with the RTFC expires in March 2000, and the $15 million line of
credit with the RTFC expires 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
B-9
<PAGE>
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.
Vitelco's Loan agreements with the RTFC require, among other things, ATN-VI
and Vitelco to maintain certain financial ratios. Vitelco may incur additional
debt with RUS without prior approval from RTFC if Vitelco maintains certain
financial ratios. Vitelco's 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 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 March 31, 1998,
the Company was in compliance with all covenants contained in its long-term
debt agreements.
While the Company believes capital resources are adequate to meet current
operations, the Company is also exploring several opportunities to acquire
cellular licenses, cable television properties or land line telephone
companies in the Caribbean and developing countries. There can be no assurance
as to whether, when or on what terms the Company will be able to acquire any
of the businesses or licenses it is currently seeking or whether it will
obtain financing to do so.
IMPACT OF INFLATION
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.
YEAR 2000 COMPLIANCE
The inability of computer hardware, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2-
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is identifying all significant applications in its systems that
will require modification or replacement to ensure Year 2000 Compliance.
Internal and external resources are being used to make the required
modifications and replacements and test Year 2000 Compliance. The modification
process of all significant applications is under way. The Company plans on
completing the testing process of all significant applications by December 31,
1998.
In addition, the Company is planning to communicate with others with whom it
does significant business to determine their Year 2000 Compliance readiness
and the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a
B-10
<PAGE>
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors, However, there
can be no guarantee that these estimates will be achieved and actual results
could differ from those plans.
B-11
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
B-12
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
SIGNATURES
PURSUANT TO THE SECURITIES ACT OF 1934, THE REGISTRANT HAS CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED.
Date: May 14, 1998 Emerging Communications, Inc.
/s/ James J. Heying
_____________________________________
James J. Heying
Chief Financial Officer and Vice-
President
signing both in his capacity as Vice
President on behalf of the
Registrant and as Chief Financial
Officer of the Registrant
B-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13385
EMERGING COMMUNICATIONS, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 66-0547028
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
CHASE FINANCIAL CENTER
P.O. BOX 1730
ST. CROIX, U.S. VIRGIN ISLANDS 00821
(809) 777-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of June 30, 1998, the registrant had outstanding 10,959,131 shares of its
common stock ($.01 par value).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
B-14
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 4,013 $ 4,340
Accounts receivable, net.............................. 14,548 14,093
Materials and supplies................................ 6,241 6,105
Prepayments and other current assets.................. 4,396 2,423
-------- --------
Total current assets................................ 29,198 26,961
Fixed assets:
Property, plant and equipment......................... 237,825 254,859
Less accumulated depreciation......................... (111,296) (117,884)
Franchise rights and cost in excess of underlying book
value, less accumulated amortization of $10,112,000
and $10,580,000...................................... 27,567 27,099
-------- --------
Net fixed assets.................................... 154,096 164,074
Property costs recoverable from future revenues, less
accumulated amortization of $2,715,000 and $3,355,000.. 21,596 20,956
Investment in unconsolidated subsidiary............... -- 21,113
Other assets.......................................... 19,418 26,107
-------- --------
$224,308 $259,211
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......................................... $ 19,280 $ 37,688
Accounts payable...................................... 14,169 7,277
Accrued taxes......................................... 1,087 1,501
Advance payments and deposits......................... 2,072 2,000
Other current liabilities............................. 5,863 5,136
Current portion of long-term debt..................... 8,947 8,659
-------- --------
Total current liabilities........................... 51,418 62,261
Deferred income taxes and tax credits................... 2,774 2,892
Long-term debt, excluding current portion............... 105,138 126,173
Pension and other long-term liabilities................. 6,208 5,893
Contingencies and commitments (Note D)
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; 10,959,131 shares issued and out-
standing............................................. 110 110
Paid-in capital....................................... 59,633 59,633
Pension liability..................................... (973) (973)
Retained earnings..................................... -- 3,222
-------- --------
Total stockholders' equity.......................... 58,770 61,992
-------- --------
$224,308 $259,211
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
B-15
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1997 1998 1997 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Telephone operations............... $ 43,023 $ 16,779 $ 90,968 $ 32,663
Cellular services.................. 997 869 2,146 1,752
Product sales and rentals.......... 1,304 1,184 2,334 2,573
--------- --------- -------- --------
Total revenues................... 45,324 18,832 95,448 36,988
Expenses:
Telephone operations............... 33,594 11,059 69,609 21,547
Cellular services and product sales
and rental expenses............... 2,010 1,984 3,870 3,806
General and administrative ex-
penses............................ 3,288 1,551 4,956 2,654
--------- --------- -------- --------
Total operating expenses......... 38,892 14,594 78,435 28,007
Income from operations........... 6,432 4,238 17,013 8,981
Other income and expense:
Equity in undistributed earnings of
unconsolidated subsidiary......... -- 315 -- 315
Interest expense................... (2,745) (2,713) (5,317) (4,392)
Interest income.................... 69 45 158 79
--------- --------- -------- --------
Total other income and expense... (2,676) (2,353) (5,159) (3,998)
--------- --------- -------- --------
Income before income taxes and minor-
ity interest........................ 3,756 1,885 11,854 4,983
Income taxes......................... (9,521) 602 (6,612) 1,761
--------- --------- -------- --------
Income before minority interest...... 13,277 1,283 18,466 3,222
Minority interest.................... (1) -- (308) --
--------- --------- -------- --------
Net income........................... $ 13,276 $ 1,283 $ 18,158 $ 3,222
========= ========= ======== ========
Net income per share................. $ 1.08 $ 0.12 $ 1.48 $ 0.29
========= ========= ======== ========
Weighted average shares outstanding.. 12,273 10,959 12,273 10,959
========= ========= ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
B-16
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(COLUMNAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Net cash flows from operating activities................... $ 17,221 $ (681)
Cash flows from investing activities:
Capital expenditures..................................... (10,319) (17,349)
Investment in SMB Holdings, Ltd. ........................ -- (20,798)
-------- --------
Net cash from investing activities..................... (10,319) (38,147)
Cash flows from financing activities:
Repayment of long-term debt.............................. (5,570) (7,140)
Issuance of long-term debt............................... -- 27,887
Net borrowings (repayments) on notes..................... (1,431) 18,408
-------- --------
Net cash flows from financing activities............... (7,001) 39,155
-------- --------
Net change in cash......................................... (99) 327
Cash, Beginning of Period.................................. 11,540 4,013
-------- --------
Cash, End of Period........................................ $ 11,441 $ 4,340
======== ========
Supplemental cash flow information:
Interest paid............................................ $ 5,233 $ 5,675
======== ========
Income taxes paid........................................ $ 3,683 $ 580
======== ========
Depreciation and amortization expense.................... $ 10,920 $ 10,467
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
B-17
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
A. GENERAL
Significant Accounting Policies
On December 30, 1997, Atlantic Tele-Network, Inc. (ATN) split-off into two
separate public companies (the Transaction). One, a new company, Emerging
Communications, Inc. and subsidiaries (EmCom or the Company) contains all of
the predecessors telephone operations in the U.S. Virgin Islands. The other,
ATN, continues to own the business and operations in Guyana. Since Emerging
Communications, Inc. was the larger of the two entities, ATN was the split-off
entity and EmCom was deemed the successor Company. Consequently, the
historical financial statements of EmCom prior to the split-off reflect those
of the consolidated group (ATN's historical financial statements) and include
the operations in Guyana prior to the split-off.
The consolidated condensed balance sheet of the Company at December 31, 1997
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 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The unaudited interim consolidated condensed financial statements furnished
herein reflect all adjustments, (consisting only of normal recurring accruals)
which are, in the opinion of management, necessary to fairly present the
financial results for the interim periods presented. The results for the three
and six months ended June 30, 1997 and 1998 are not necessarily indicative of
the operating results for the full year not yet completed.
Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 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.l million. These costs have been
removed from the property accounts and along with certain excess maintenance
costs and costs of removal of $7.l 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 (FCC)
to include the interstate portion of these costs in its rate base and amortize
them over a five year period. In May 1997, Vitelco received approval from the
Virgin Islands Industrial Development Commission (IDC) 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 to assist
in recovering the intrastate portion of the hurricane related costs. 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. The Company has
deferred the intrastate portion of these costs and anticipates amortizing them
over the same period as the IDC tax benefit. 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. On May
1, 1998, a consultant appointed by the PSC provided a report stating the
opinion that since a decrease in rates would be appropriate, a full rate
investigation appeared to be warranted. The consultant requested Vitelco's
comments and working papers be provided prior to a PSC meeting on the issue.
On July 13, 1998, Vitelco provided the PSC with a response to the report. The
PSC has not yet responded, nor has a meeting date been set. There can be no
assurance as to the outcome of this proceeding.
B-18
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
C. ACCOUNTING FOR INCOME TAXES
As discussed in Note B above, Vitelco received approval from the IDC 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.
D. CONTINGENCIES AND COMMITMENTS
In connection with the split-off Transaction, the Company believes it has
certain claims against ATN, and ATN may, in turn, have claims against the
Company. Due to the preliminary nature of the situation, management and legal
counsel are unable to predict the ultimate resolution of these matters.
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
E. ACQUISITION OF SMB HOLDINGS, LTD.
On April 16, 1998, the Company acquired a 67% equity interest (50% voting
interest) in SMB Holdings, Ltd. (SMB), a British Virgin Islands corporation,
for $20 million in cash. SMB is principally engaged in cellular mobile
telecommunications on the island of St. Martin. The acquisition was funded
with loan proceeds from the Rural Telephone Finance Corporation. The
acquisition was accounted for under the equity method of accounting with
resulting subscriber intangibles and goodwill from the transaction to be
amortized straight line over 15 and 40 years, respectively. The acquisition of
SMB was not material to the total assets, liabilities and operations of the
Company.
F. GOING-PRIVATE BUYOUT OFFER
On May 29, 1998, the Company announced that its Board of Directors had
received a proposal from Innovative Communication Company, a Delaware limited
liability company wholly owned by Jeffrey J. Prosser, the Chairman, Chief
Executive Officer and controlling stockholder of the Company, for the
acquisition of the Company pursuant to which the public shareholders of the
Company would receive $9.125 per share in cash. The Company also announced
that its Board of Directors had established a special committee to evaluate
and consider the offer and has authorized the special committee to engage
financial and legal advisors. The proposal is subject, among other things, to
the execution of a definitive acquisition agreement, approval of the
transaction by the special committee, receipt of satisfactory financing,
receipt of a fairness opinion and receipt of all required third party and
governmental consents. A class suit has been filed in Delaware, Civil action
No. 16415-MC, by Brickell Partners seeking an injunction against such a
buyout, alleging that the $9.125 per share amount is insufficient.
G. CURRENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 establishes standards for the display of comprehensive
income and its components in a full set of financial statements. There was no
material difference between net income and comprehensive income for the three
and six months ended June 30, 1997 and 1998.
B-19
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 entitled "Disclosures About Segments of
an Enterprise and Related Information" (SFAS No. 131). This statement utilizes
the "management approach" for segment reporting which is based on the way that
the chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and more
specific and detailed geographic disclosures especially by countries as
opposed to broad geographic regions. This statement is effective for fiscal
years beginning after December 31, 1997, or January 1, 1998 for the Company.
However, the provisions of this statement are not required for the interim
reporting periods in the first year of implementation. The provisions of this
statement, which are of a disclosure nature, will not have a material impact
on the financial statements.
B-20
<PAGE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
SPLIT-OFF TRANSACTION
On December 30, 1997, ATN split off into two separate public companies
pursuant to the split-off Transaction. One company, EmCom contains all the
predecessors telephone operations in the U.S. Virgin Islands. The other, ATN,
continues to own the business and operations in Guyana. Because EmCom was the
larger of the two entities, ATN was deemed the split-off entity and EmCom was
deemed the successor company. Consequently, the historical financial
statements of EmCom prior to the split-off Transaction reflect those of the
consolidated group and include the operations in Guyana.
The split-off Transaction was a non pro-rata split-off and was accounted for
at fair value as evidenced by the market capitalization of ATN subsequent to
the split-off Transaction. Accordingly, the loss on fair valuation of the net
assets of ATN was included in the consolidated statement of operations for the
year ended December 31, 1997.
As a result of the split-off, EmCom no longer includes the operations or
financial results of the Guyana subsidiary GT&T in its current year financial
statements.
INTRODUCTION
The Company's revenues and income from continuing operations have been
derived principally from the operations of its telephone subsidiaries, Vitelco
and, prior to the split-off Transaction, 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. The holding
company for EmCom's United States Virgin Islands operations is Atlantic Tele-
Network, Co. (ATN-VI). ATN-VI supplies customer premises equipment in the U.S.
Virgin Islands. Other operations in the Company's Consolidated Condensed
Statements of Operations other than Vitelco include Vitelcom Cellular, Inc.
d/b/a VitelCellular, which provides cellular telephone service in the U.S.
Virgin Islands.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Operating revenues for the three and six months ended June 30, 1998 were
$18.8 million and $37.0 million as compared to $45.3 million and $95.4 million
for the corresponding periods of the prior year. This resulted in decreases of
$26.5 million and $58.5 million, respectively. The decrease was due
principally to the split-off Transaction since revenues for the three and six
months ended June 30, 1997 included $27.2 million and $58.9 million in
revenues related to GT&T's telephone operations. After giving effect to the
split-off Transaction, total revenues of the operations retained by the
Company increased approximately $668,000, or 4% and $442,000, or 1% from
revenues for the same periods last year.
After giving effect to the split-off Transaction, revenues from telephone
operations increased approximately $916,000, or 6% and $597,000, or 2%
compared to revenues for the same periods of the prior year. This increase is
principally due to an increase in local exchange service and access charges,
which were partially offset by decreases in Universal Service Fund revenues.
For the three and six months ended June 30, 1998, revenues from cellular
services declined approximately $128,000, or 13% and $394,000, or 18% as
compared to revenues for the same periods last year due to decreases in
subscribers and average revenues per subscriber. Revenues from product sales
and rentals decreased $120,000, or 9% and increased $239,000, or 10% for the
three and six months ended June 30, 1998, respectively, compared to revenues
for the same periods last year as a result of completing several projects in
the first quarter of 1998.
B-21
<PAGE>
Operating expenses for the three and six months ended June 30, 1998 were
$14.6 million and $28.0 million as compared to $38.9 million and $78.4 million
for the corresponding periods of the prior year, resulting in decreases of
$24.3 million, or 62% and $50.4 million, or 64%. These decreases were due
principally to the inclusion of approximately $26.1 and $52.7 million of
operating expenses related to GT&T and ATN for the three and six months ended
June 30, 1997. As a result of the split-off Transaction, GT&T and ATN are no
longer part of the Company's operations.
After giving effect to the split-off Transaction, operating expenses were
$14.6 million and $28.0 million for the three and six months ended June 30,
1998, a $1.8 million, or 14% and $2.2 million or 9% increase as compared to
$12.7 million and $25.8 million for the corresponding periods of the prior
year. These increases are principally due to increases of $1.4 million in
expenses of telephone operations for the three and six months ended June 30,
1998 as well as increases of $487,000 and $882,000 over the corresponding
periods of the prior year in general and administrative expenses.
As a percentage of revenues from operations, after giving effect to the
split-off Transaction, operating expenses were approximately 77% and 76% for
the three and six months ended June 30, 1998 as compared to 70% and 71% for
the same periods in 1997, respectively.
Income from operations for the three and six months ended June 30, 1998 were
$4.2 million and $9.0 million, compared to $6.4 million and $17.0 million for
the same periods last year resulting in decreases of $2.2 million, 34% and
$8.0 million, 47% respectively. However, after giving effect to the split-off
Transaction, income from operations decreased $1.2 million, or 22% and $1.8
million, or 17% for the three and six months ended June 30, 1998 as compared
to the same periods of the prior year. These decreases are attributable to the
$1.8 million and $2.2 million increases in operating expenses which were
partially offset by increases in revenues of $668,000 and $442,000 for the
three and six months ended June 30, 1998 as described above.
Net interest expense for the three and six months ended June 30, 1998 was
$2.7 million and $4.3 million as compared to $2.7 million and $5.2 million for
the corresponding periods of the prior year, decreases of $8,000 and $846,000
for the three and six month periods, respectively. After giving effect to the
split-off Transaction, net interest expense increased $404,000 and $25,000 for
the three and six months ended June 30, 1998 over the prior periods as a
result of increased outstanding debt.
Income before taxes and minority interest decreased to $1.9 million and $5.0
million for the three and six months ended June 30, 1998, resulting in
decreases of $1.9 million and $6.9 million, respectively, over the prior year.
After giving effect to the split-off Transaction, income before taxes and
minority interest decreased to $1.9 million and $5.0 million for the three and
six months ended June 30, 1998, resulting in decreases of $1.3 million and
$1.5 million, respectively.
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. 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. On May 1, 1998, a consultant appointed by the PSC
provided a report stating the opinion that since a decrease in rates would be
appropriate, a full rate investigation appeared to be warranted. The
consultant requested Vitelco's comments and working papers be provided prior
to a PSC meeting on the issue. On July 13, 1998, Vitelco provided the PSC with
a response to the report. The PSC has not yet responded, nor has a meeting
date been set. There can be no assurance as to the outcome of this proceeding.
B-22
<PAGE>
Before giving effect to the change in deferred taxes discussed above, the
Company's effective tax rate for the three and six months ended June 30, 1998
was 31.9% and 35.3% as compared to 36.7% and 36.2% for the corresponding
periods of the prior year. After giving effect to the split-off Transaction,
but before giving effect to the change in deferred taxes discussed above, the
Company's effective tax rate for the three and six months ended June 30, 1997
was 33.1% and 29.5%, respectively.
The minority interest in earnings for the three and six months ended June
30, 1997 consists of the Guyana government's 20% interest in GT&T and Comsat
Mobile Investments, Inc.'s (a subsidiary of Communications Satellite
Corporation) 10% interest in VitelCellular. As a result of the split-off
Transaction, the minority interest held in GT&T is no longer included in the
operations of the Company. Additionally, on February 13, 1998, ATN-VI
purchased the 10% minority interest held in VitelCellular. The minority
interest in earnings up to the date of ATN-VI's acquisition of the 10%
minority interest is immaterial.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets are its investments in ATN-VI and its newly
acquired 67% equity interest in SMB Holdings, Ltd. The Company does not
generate any significant revenues independent of ATN-VI and its subsidiaries.
The Company's liquidity depends upon funds received from subsidiaries as well
as short and long term borrowings to meet its capital needs.and to finance any
future acquisitions. As a result of the split-off Transaction, the Company's
capital resources have changed significantly, and the Company has fewer
resources and significantly reduced operations for the near term. However, the
Company believes existing liquidity and capital resources will be adequate to
meet current operating needs and to service existing debt.
As reflected in the Consolidated Condensed Statement of Cash Flows, net cash
flows used by operating activities totaled $678,000 for the six months ended
June 30, 1998 and net cash flows provided by operating activities totaled
$17.2 million for the six months ended June 30, 1997. The decrease was due
principally to cash used for accounts payable paid, investment in other
assets, and lower net income. Additionally, amounts fluctuate from period to
period as a result of the split-off Transaction as cash flows from operations
for GT&T are not included in the 1998 amounts.
Net cash flows used in investing activities totaled $38.1 million and $10.3
million for the six months ended June 30, 1998 and 1997, respectively. Amounts
fluctuate from period to period primarily as a result of the purchase of a 67%
equity interest in SMB Holdings, Ltd. for $20.0 million in cash plus
transaction costs on April 16, 1998, and the purchase of commercial real
estate in the United States Virgin Islands and equipment for $13.7 million.
These increase were partially offset by a decrease in investment in telephone
plant and equipment as a result of the split-off Transaction as cash flows
from investing activities for GT&T are not included in the 1998 amounts.
Net cash flows provided by financing activities during the six months ended
June 30, 1998 was $39.2 million compared to net cash used by financing
activities of $7.0 million for the six months ended June 30, 1997. Amounts
fluctuated primarily due to (i.) an increase in repayments on debt of $1.6
million primarily as a result of increased debt balances and (ii.) the
acquisition of SMB Holdings, Ltd., commercial real estate and equipment
through short and long-term credit facilities from the Rural Telephone Finance
Cooperative (RTFC). The newly issued debt consisted of:
(i.) A $500,000 line of credit bearing interest at a variable rate, which
was 7.25% at June 30, 1998. The amount drawn on this facility was $272,000
at June 30, 1998.
(ii.) A $15.0 million line of credit bearing interest at a variable rate
which was 8.25% at June 30, 1998. The amount drawn on this facility was
$13.4 million at June 30, 1998.
(iii.) A $21.1 million, 15 year term note bearing interest at a variable
rate which was 7.65% at June 30, 1998.
(iv.) A $6.8 million, 20 year term note bearing interest at a variable
rate which was 7.65% at June 30, 1998.
B-23
<PAGE>
In connection with the split-off Transaction, the Company assumed a $5.5
million line of credit of ATN and ATN-VI borrowed approximately $18.3 million
from the RTFC under a 15-year credit facility (the 1997 RTFC Credit Facility).
Under the line of credit, which matures October 1, 1998, $5.5 million was
outstanding at June 30, 1998. The 1997 RTFC Credit Facility provides for
quarterly payments of principal and interest of approximately $500,000. At
June 30, 1998, $18.0 million was outstanding under the 1997.RTFC Credit
Facility with a variable interest rate of 6.65%.
In addition to the 1997 RTFC Credit Facility, ATN-VI had other outstanding
borrowings from the RTFC of $17.3 million at June 30, 1998, of which $1.3
million bears interest at a variable rate, which was 6.65% at June 30, 1998,
and $16.0 million bears interest at a fixed rate of 8%.
ATN-VI's loan agreements with the RTFC limit the payment of dividends by
ATN-VI to the Company unless ATN-VI meets certain financial ratios, which were
met at June 30, 1998, and, after payment of the dividend, ATN-VI's
stockholder's equity is greater than 30% of total assets. ATN-VI's loan
agreements with the RTFC contain covenants that restrict ATN-VI 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 version or entity; (iv)
acquiring assets or capital stock of other entitles except for certain
permitted acquisitions; and (v) redeeming, retiring or purchasing capital
stock of ATN-VI without, in each case, the prior written approval of RTFC.
ATN--VI's ability to service its debt or to pay dividends will be primarily
dependent on funds from its parent or its subsidiaries, primarily Vitelco.
Vitelco's loan agreement with the RUS (the RUS Loan Agreement) 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, if
the equity ratio, as defined, is below 40%, 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 June 30, 1998, Vitelco's dividend
paying capacity was approximately $1.7 million.
At June 30, 1998, Vitelco had an outstanding balance under the RUS Loan
Agreement of $53.0 million, which bears interest at a fixed rate of 5%. 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. The
RUS Loan Agreement contains 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.
At June 30, 1998, Vitelco has outstanding borrowings from the RTFC of $37.6
million, of which $9.5 million was owing under a term loan which bears
interest at a fixed rate of 9.75% (the 9.75% Term Loan), $9.0 million was
owing under a term loan which bears interest at a fixed rate of 8% (the 8%
Term Loan), $5 million was owing under a $5 million revolving line of credit
with an interest rate of 7.25% and $13.2 million was owing under a $15 million
revolving line of credit with an interest rate of 7.25%. The $5 million line
of credit with the RTFC expires in March 2000, and the $15 million line of
credit with the RTFC expires 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
B-24
<PAGE>
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.
Vitelco's Loan agreements with the RTFC require, among other things, ATN-VI
and Vitelco to maintain certain financial ratios. Vitelco may incur additional
debt with RUS without prior approval from RTFC if Vitelco maintains certain
financial ratios. Vitelco's 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 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 June 30, 1998,
the Company was in compliance with all covenants contained in its long-term
debt agreements.
While the Company believes capital resources are adequate to meet current
operations, the Company is also exploring several opportunities to acquire
cellular licenses, cable television properties or land line telephone
companies in the United States, the Caribbean and developing countries. There
can be no assurance as to whether, when, or on what terms, the Company will be
able to acquire any of the businesses or licenses it is currently seeking or
whether it will obtain financing to do so.
IMPACT OF INFLATION
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.
YEAR 2000 COMPLIANCE
The inability of computer hardware, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2-
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company is identifying all significant applications in its systems that
will require modification or replacement to ensure Year 2000 Compliance.
Internal and external resources are being used to make the required
modifications and replacements and test Year 2000 Compliance. The modification
process of all significant applications is under way. The Company plans on
completing the testing process of all significant applications by December 31,
1998.
In addition, the Company is planning to communicate with others with whom it
does significant business to determine their Year 2000 Compliance readiness
and the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
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The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ from those plans.
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PART II OTHER INFORMATION
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
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SIGNATURES
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
Pursuant to the Securities Act of 1934, the registrant has caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 14, 1998
Emerging Communications, Inc.
/s/ Jeffrey J. Prosser
-------------------------------------
Jeffrey J. Prosser
Chairman of the Board, and Acting
Chief Financial Officer signing both
in his capacity as Chairman of the
Board on behalf of the Registrant
and as acting Chief Financial
Officer of the Registrant
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APPENDIX C
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated as
of August 17, 1998, among Emerging Communications, Inc., a Delaware
corporation (the "Company"), Innovative Communication Corporation, a U.S.
Virgin Islands corporation ("Purchaser"), and ICC Merger Sub Corporation, a
Delaware corporation and a wholly-owned subsidiary of Purchaser ("Merger
Sub"), the Company and Merger Sub sometimes being hereinafter collectively
referred to as the "Constituent Corporations."
RECITALS
WHEREAS, the Boards of Directors of Purchaser and the Company each have
determined that it is in the best interests of their respective shareholders
for Purchaser to acquire the shares of Common Stock, par value $0.01 per share
of the Company, not currently owned by Innovative Communications Company, a
Delaware limited liability company (the "Parent"), which owns all of the
outstanding capital stock of the Purchaser upon the terms and subject to the
conditions set forth herein; and
WHEREAS, the Company, Purchaser and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein the
parties hereto hereby agree as follows:
ARTICLE I
THE TENDER OFFER
1.1. Tender Offer. (a) Provided that this Agreement shall not have been
terminated in accordance with Article IX hereof and none of the events set
forth in Annex A hereto shall have occurred or be existing, within five
business days of the date hereof, the Purchaser will commence a tender offer
(the "Offer") for all of the outstanding Shares that the Parent does not own
at a price of $10.25 per Share in cash, net to the seller, subject to the
conditions set forth in Annex A hereto. Subject to the terms and conditions of
the Offer, the Purchaser will promptly pay for all Shares duly tendered that
it is obligated to purchase thereunder. The Company's Board of Directors and a
majority of the Company's Independent Directors (as defined below) shall
recommend acceptance of the Offer to its stockholders in a
Solicitation/Recommendation Statement on Schedule 14D-9 (as such statement may
be amended or supplemented from time to time, the "Schedule 14D-9") to be
filed with the Securities and Exchange Commission (the "SEC") upon
commencement of the Offer; provided, however, that if the Company's Board of
Directors determines that its fiduciary duties require it to amend or withdraw
its recommendation, such amendment or withdrawal shall not constitute a breach
of this Agreement. The Purchaser will not without the prior written consent of
the Company decrease the price per Share or change the form of consideration
payable in the Offer, decrease the number of Shares sought, change the
conditions to the Offer or waive the Minimum Tender Condition (as defined on
Annex A hereto). The Purchaser shall not terminate or withdraw the Offer or
extend the expiration date of the Offer unless at the expiration date of the
Offer the conditions to the Offer set forth on Annex A hereto shall not have
been satisfied or waived.
(b) Purchaser agrees, as to the Offer to Purchase and related Letter of
Transmittal (which together, as either of them may be amended or supplemented
from time to time, constitute the "Offer Documents"), and the Company agrees,
as to the Schedule 14D-9, that such documents shall, in all material respects,
comply with the requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations thereunder and
other applicable laws. The Company and its counsel, as to the Offer Documents,
and
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Purchaser and its counsel, as to the Schedule 14D-9, shall be given an
opportunity to review such documents prior to their being filed with the SEC.
(c) In connection with the Offer, the Company will cause its transfer agent
to furnish promptly to the Purchaser a list, as of a recent date, of the
record holders of Shares and their addresses, as well as mailing labels
containing the names and addresses of all record holders of Shares and lists
of security positions of Shares held in stock depositories. The Company will
furnish the Purchaser with such additional information (including, but not
limited to, updated lists of holders of Shares and their addresses, mailing
labels and lists of security positions) and such other assistance as Purchaser
or its agents may reasonably request in communicating the Offer to the record
and beneficial holders of Shares.
ARTICLE II
THE MERGER; CLOSING; EFFECTIVE TIME
2.2. The Merger. Subject to the terms and conditions of this Agreement and
the Delaware Certificate of Merger (as defined below), at the Effective Time
(as defined in Section 2.4) Merger Sub shall be merged with and into the
Company and the separate corporate existence of the Merger Sub shall thereupon
cease (the "Merger"). The Company shall be the surviving corporation in the
Merger (sometimes hereinafter referred to as the "Surviving Corporation") and
shall continue to be governed by the laws of the State of Delaware, and the
separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger,
except as set forth in Section 3.1. The Merger shall have the effects
specified in the Delaware General Corporation Law (the "DGCL").
2.3. Closing. The closing of the Merger (the "Closing") shall take place (i)
at the offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York
10005 at 10:00 A.M. on the first business day on which the last to be
fulfilled or waived of the conditions set forth in Article VIII (other than
those conditions that by their nature are to be satisfied at the Closing, but
subject to the fulfillment or waiver of those conditions) shall be fulfilled
or waived in accordance with this Agreement or (ii) at such other place and
time and/or on such other date as the Company and Purchaser may agree.
2.4. Effective Time. As soon as practicable following the Closing, and
provided that this Agreement has not been terminated or abandoned pursuant to
Article IX hereof, the Company and Purchaser will cause a Certificate of
Merger (the "Delaware Certificate of Merger") to be executed and filed with
the Secretary of State of Delaware as provided in Section 251 of the DGCL. The
Merger shall become effective on the date on which the Delaware Certificate of
Merger has been duly filed with the Secretary of State of Delaware, and such
time is hereinafter referred to as the "Effective Time." At the Effective
Time, all of the assets, properties, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities, obligations and duties of the Company and Merger Sub shall
become the debts, liabilities, obligations and duties of the Surviving
Corporation.
2.5. Merger Without Meeting of Stockholders. Notwithstanding Section 2.4
hereof, in the event that Purchaser, Merger Sub or any other subsidiary of
Purchaser shall acquire at least 90% of the outstanding Shares pursuant to the
Offer or otherwise, the parties hereto agree, at the request of Purchaser or
Merger Sub, to take all necessary and appropriate action to cause the Merger
to become effective as soon as practicable after the acceptance for payment
and purchase of Shares by the Purchaser pursuant to the Offer without a
meeting of stockholders of the Company in accordance with Section 253 of the
DGCL.
ARTICLE III
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION
3.1. The Certificate of Incorporation. The Restated Certificate of
Incorporation of the Company (the "Certificate") in effect at the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation,
until duly amended in accordance with the terms thereof and the DGCL.
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3.2. The By-Laws. The By-Laws of the Company in effect at the Effective Time
shall be the By-Laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the DGCL.
ARTICLE IV
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
4.1. Officers and Directors. The directors and officers of the Company at
the Effective Time shall, from and after the Effective Time, be the directors
and officers, respectively, of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and By-Laws.
4.2. Actions by Directors. For purposes of Section 1.1(a), Article IX and
Sections 10.3 and 10.4, no action taken by the Board of Directors of the
Company prior to the Merger shall be effective unless such action is approved
by the affirmative vote of at least a majority of the directors of the Company
who are not officers of Purchaser or the Company or any affiliate of either of
them (the "Independent Directors").
ARTICLE V
CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
5.1. Conversion or Cancellation of Shares. The manner of converting or
canceling shares of the Company and Merger Sub in the Merger shall be as
follows:
(a) At the Effective Time, each share of the Common Stock, par value
$0.01 per share (the "Shares"), of the Company issued and outstanding
immediately prior to the Effective Time (other than Shares owned by the
Parent, the Purchaser, Merger Sub or any other direct or indirect
subsidiary of the Parent (collectively, the "Purchaser Companies") or
Shares that are owned by the Company or any direct or indirect subsidiary
of the Company or Shares ("Dissenting Shares") which are held by
stockholders ("Dissenting Stockholders") properly exercising appraisal
rights pursuant to Section 262 of the DGCL (collectively, "Excluded
Shares")) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive, without
interest, an amount in cash (the "Merger Consideration") equal to $10.25 or
such greater amount which may be paid pursuant to the Offer. At the
Effective Time, all Shares (other than Excluded Shares), by virtue of the
Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such Shares (other
than Excluded Shares) shall thereafter cease to have any rights with
respect to such Shares, except the right to receive the Merger
Consideration for such Shares upon the surrender of such certificate in
accordance with Section 5.2 or the right, if any, to receive payment from
the Surviving Corporation of the "fair value" of such Shares as determined
in accordance with Section 262 of the DGCL.
(b) At the Effective Time, each Share issued and outstanding at the
Effective Time and owned by any of Purchaser Companies or held in the
Company's treasury or owned by the Company or any direct or indirect
subsidiary of the Company shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into one share of
common stock of the Surviving Corporation. From and after the Effective
Time, each outstanding certificate theretofore representing Shares of the
Company owned by any of the Purchaser Companies shall be deemed for all
purposes to evidence ownership of, and to represent the number of shares
of, the Surviving Corporation into which such Shares of the Company shall
have been converted.
(c) At the Effective Time, the shares of common stock, par value $0.01
per share, of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of Merger Sub or the holders of such shares, be converted into that
number of shares of common stock of the Surviving Corporation equal to the
number of issued and outstanding Shares at the
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Effective Time less the number of Excluded Shares. From and after the
Effective Time, each outstanding certificate theretofore representing
shares of Merger Sub shall be deemed for all purposes to evidence ownership
of, and to represent the number of shares of, the Surviving Corporation
into which such shares of Merger Sub shall have been converted.
5.2. Payment for Shares. At or prior to the Effective Time, purchaser shall
make available or cause to be made available to the paying agent appointed by
Purchaser with the Company's prior approval (the "Paying Agent") amounts
sufficient in the aggregate to provide all funds necessary for the Paying
Agent to make payments pursuant to Section 5.1(a) hereof to holders of Shares
issued and outstanding immediately prior to the Effective Time. Promptly after
the Effective Time, the Surviving Corporation shall cause to be mailed to each
person who was, at the Effective Time, a holder of record (other than holders
of Excluded Shares) of issued and outstanding Shares a form (mutually agreed
to by Purchaser and the Company) of letter of transmittal and instructions for
use in effecting the surrender of the certificates which, immediately prior to
the Effective Time, represented any of such Shares in exchange for payment
therefor. Upon surrender to the Paying Agent of such certificates, together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, the Surviving Corporation shall promptly cause
to be paid to the persons entitled thereto a check in the amount to which such
persons are entitled, after giving effect to any required tax withholdings. No
interest will be paid or will accrue on the amount payable upon the surrender
of any such certificate. If payment is to be made to a person other than the
registered holder of the certificate surrendered, it shall be a condition of
such payment that the certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of the certificate
surrendered or establish to the satisfaction of the Surviving Corporation or
the Paying Agent that such tax has been paid or is not applicable. One hundred
and eighty (180) days following the Effective Time, the Surviving Corporation
shall be entitled to cause the Paying Agent to deliver to it any funds
(including any interest received with respect thereto) made available to the
Paying Agent which have not been disbursed to holders of certificates formerly
representing Shares outstanding on the Effective Time, and thereafter such
holders shall be entitled to look to the Surviving Corporation only as general
creditors thereof with respect to the cash payable upon due surrender of their
certificates. Notwithstanding the foregoing, neither the Paying Agent nor any
party hereto shall be liable to any holder of certificates formerly
representing Shares for any amount paid to a public official pursuant to any
applicable abandoned property, escheat or similar law. The Surviving
Corporation shall pay all charges and expenses, including those of the Paying
Agent, in connection with the exchange of cash for Shares and Purchaser shall
reimburse the Surviving Corporation for such charges and expenses.
5.3 Dissenters' Rights. If any Dissenting Stockholder shall be entitled to
be paid the "fair value" of such Dissenting Stockholder's Shares, as provided
in Section 262 of the DGCL, the Company shall give Purchaser notice thereof
and Purchaser shall have the right to participate in all negotiations and
proceedings with respect to any such demands. Neither the Company nor the
Surviving Corporation shall, except with the prior written consent of
Purchaser, voluntarily make any payment with respect to, or settle or offer to
settle, any such demand for payment. If any person who otherwise would have
been a Dissenting Stockholder shall have failed to perfect or shall have
effectively withdrawn or lost the right to dissent, the Shares held by such
person shall thereupon be treated as though such Shares had been converted
into the Merger Consideration pursuant to Section 5.1.
5.4 Transfer of Shares After the Effective Time. No transfers of Shares
shall be made on the stock transfer books of the Surviving Corporation at or
after the Effective Time.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser and Merger Sub that:
(a) Corporate Authority. Subject only to approval of this Agreement by
the holders of a majority of the outstanding Shares, the Company has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(b) Fairness Opinion. The Board of Directors of the Company has received
an opinion of Houlihan, Lokey, Howard and Zukin, dated the date hereof, to
the effect that the offer and the Merger are fair, from a financial point
of view, to the holders of Shares (other than Purchaser).
(c) Schedule 14D-9; Offer Documents. The Schedule 14D-9 distributed to
the Company's stockholders in connection with the Merger will not, at the
date of filing with the SEC, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information supplied
by the Parent, Purchaser or Merger Sub for inclusion in the Schedule 14D-9.
None of the information supplied by the Company for inclusion in the Offer
Documents or the Rule 13e-3 Transaction Statement on Schedule 13E-3
(together with any supplements or amendments thereto, the "Schedule 13E-
3"), at the respective times such Offer Documents or the Schedule 13B-3 or
any amendments or supplements thereto are filed with the SEC, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. The Company agrees to correct promptly any information in the
Schedule 14D-9 or any information provided by it for use in the Offer
Documents or the Schedule 13E-3 if and to the extent that it shall have
become false or misleading in any material respect and the Company further
agrees to take all steps necessary to cause the Schedule 14D-9 as so
corrected to be filed with the SEC and disseminated to the holders of
Shares, in each case as and to the extent required by applicable federal
securities laws.
6.2. Representations and Warranties of Purchaser and Merger Sub. Purchaser
and Merger Sub represent and warrant to the Company that:
(a) Corporate Organization and Qualification. Each of Purchaser and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and
is in good standing as a foreign corporation in each jurisdiction where the
properties owned, leased or operated, or the business conducted, by it
require such qualification except for such failure to so qualify or to be
in such good standing, which, when taken together with all other such
failures, could not reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), properties, assets,
liabilities, business or results of operations of Purchaser and its
subsidiaries, taken as a whole. Purchaser owns record and beneficially all
of the issued and outstanding shares of common stock of Merger Sub.
(b) Corporate Authority. Each of Purchaser and Merger Sub has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of Purchaser and Merger Sub enforceable against Purchaser and
Merger Sub in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors, rights and to general
equity principles.
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(c) Governmental Filings; No Violations. (i) Other than filings by
Purchaser of the certificate of merger under the DGCL and filings required
under the Exchange Act (the "Purchaser Regulatory Filings"), no notices,
reports or other filings are required to be made by Purchaser and Merger
Sub with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by Purchaser and Merger Sub from,
any governmental entity or third party in connection with the execution and
delivery of this Agreement by Purchaser and Merger Sub and the consummation
of the transactions contemplated hereby by Purchaser and Merger Sub, the
failure to make or obtain any or all of which could prevent or materially
delay the transactions contemplated by this Agreement.
(ii) The execution and delivery of this Agreement by Purchaser and Merger
Sub do not, and the consummation of the transactions contemplated hereby by
Purchaser and Merger Sub will not, constitute or result in a breach or
violation of, or a default under, the Certificate of Incorporation or By-
Laws (or similar organizational documents) or any contract or agreement of
Purchaser or Merger Sub.
(d) Funds. Purchaser has received a commitment from the Rural Telephone
Financial Corporation to provide the funds necessary to consummate the
Offer and the Merger.
(e) Offer Documents; Schedule 14D-9. The Offer Documents will not, at the
date of filing with the SEC, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied by Purchaser or Merger Sub for inclusion in the
Schedule 14D-9 or related materials or the Schedule 13E-3 at the respective
times such Schedules or any amendments or supplements thereto are filed
with the SEC, will contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Purchaser and Merger Sub agree to correct promptly any
information in the Offer Documents or any information provided by them for
use in the Schedule 14D-9 or related materials or the Schedule 13E-3 if and
to the extent that it shall have become false or misleading in any material
respect and Purchaser and Merger Sub further agree to take all steps
necessary to cause the Offer Documents as so corrected to be filed with the
SEC and to be disseminated to holders of Shares, in each case as and to the
extent required by applicable federal securities laws.
ARTICLE VII
COVENANTS
7.1. Interim Operations of the Company. The Company covenants and agrees
that, prior to the Effective Time (unless Purchaser shall otherwise agree in
writing and except as otherwise expressly contemplated by this Agreement), the
business of the Company and its subsidiaries shall be conducted only in the
ordinary and usual course consistent with past practice and, to the extent
consistent therewith, each of the Company and its subsidiaries shall use its
best efforts to preserve its business organization intact (including
maintaining all of its Permits) and maintain its existing relations with
customers, suppliers, employees and business associates and it will take no
action that would adversely affect the ability of the parties to promptly
consummate the transactions contemplated by this Agreement.
7.2. Meetings of the Company's Stockholders. If required following
termination of the Offer, the Company will take all action necessary to
convene a meeting of holders of Shares as promptly as practicable to consider
and vote upon the approval of this Agreement and the Merger. Subject to
fiduciary requirements of applicable law, the Board of Directors of the
Company shall recommend such approval and the Company shall take all lawful
action to solicit such approval provided, however, that nothing contained in
this Section 7.2 shall prohibit the Company or its Board of Directors, or the
representatives of either of them, from recommending to the stockholders of
the Company against, or withdrawing, modifying or changing its recommendation
to the stockholders with respect to, the Merger, if the Board of Directors
determines, after consultation with counsel, that failure to do so would
violate its fiduciary duty to the stockholders of the Company under applicable
law. At any such meeting of the Company all of the Shares then owned by
Purchaser Companies (including all Shares currently owned by the Purchaser
Companies) will be voted in favor of this Agreement.
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7.3. Filings; Other Action. Subject to the terms and conditions herein
provided, (a) the Purchaser shall promptly make the Purchaser Regulatory
Filings and thereafter make any other required submissions with respect to the
Offer and the Merger and (b) the Company and the Purchaser shall use their
respective best efforts to take promptly, or cause to be taken promptly, all
other action and do, or cause to be done, all other things necessary, proper
or appropriate under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as soon as
practicable.
7.4. Publicity. The initial press release issued in connection with the
execution of this Agreement shall be a joint press release and thereafter the
Company and Purchaser shall consult with each other prior to issuing any press
releases or otherwise making public statements with respect to the
transactions contemplated hereby and prior to making any filings with any
governmental entity or with any national securities exchange with respect
thereto.
7.5. Indemnification; Directors' and Officers' Insurance. (a) From and after
the Effective Time, the Surviving Corporation and Purchaser each agrees that
it will indemnify and hold harmless each present and former director and/or
officer of the Company, determined as of the Effective Time (the "Indemnified
Parties"), that is made a party or threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or claim, whether
civil, criminal, administrative or investigative, by reason of the fact that
he or she was a director or officer of the Company or any subsidiary of the
Company prior to the Effective Time and arising out of actions or omissions of
the Indemnified Party in any such capacity occurring at or prior to the
Effective Time (a "Claim") against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, amounts paid in settlement pursuant to
Section 7.5(b), losses, claims, damages or liabilities (collectively, "Costs")
reasonably incurred in connection with any Claim, whether asserted or claimed
prior to, at or after the Effective Time, to the fullest extent that the
Company would have been permitted under Delaware law. The Surviving
Corporation and Purchaser shall also advance expenses (including attorneys'
fees), as incurred by the indemnified Party to the fullest extent permitted
under applicable law provided such indemnified Party provides an undertaking
to repay such advances if it is ultimately determined that such Indemnified
Party is not entitled to indemnification.
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 7.5, upon learning of any such Claim, shall promptly
notify the Surviving Corporation and Purchaser thereof, but the failure to so
notify shall not relieve the Surviving Corporation or Purchaser of any
liability it may have to such Indemnified Party if such failure does not
materially prejudice the indemnifying party. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) Purchaser or the Surviving Corporation shall have the
right to assume the defense thereof and Purchaser shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if Purchaser or the Surviving Corporation
elects not to assume such defense or counsel for the Indemnified Parties
advises that there are issues which raise conflicts of interest between
Purchaser or the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and Purchaser or
the Surviving Corporation shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received; provided, however, that the Surviving Corporation and Purchaser
shall be obligated pursuant to this paragraph (b) to pay for only one firm of
counsel for all Indemnified Parties in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a
conflict of interest, (ii) the Indemnified Parties will cooperate in the
defense of any such matter and (iii) Purchaser shall not be liable for any
settlement effected without its prior written consent; and provided further
that the Surviving Corporation and Purchaser, respectively, shall not have any
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and non-appealable, that the indemnification of such Indemnified
Party in the manner contemplated hereby is prohibited by applicable law. If
such indemnity is not available with respect to any Indemnified Party, then
the Surviving Corporation and the Indemnified Party shall contribute to the
amount payable in such proportion as is appropriate to reflect relative faults
and benefits.
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(c) If a claim for indemnification or advancement under this Section 7.5 is
not paid in full by the Surviving Corporation or Purchaser within thirty days
after a written claim therefor has been received by the Surviving Corporation
or Purchaser, the Indemnified Party may any time thereafter bring suit against
the Surviving Corporation or Purchaser to recover the unpaid amount of the
claim and, if successful in whole or in part, the Indemnified Party shall be
entitled to be paid also the expense of prosecuting such claims.
Neither the failure of the Surviving Corporation or Purchaser (including
their Boards of Directors, independent legal counsel or shareholders) to have
made a determination prior to the commencement of such suit that
indemnification of the Indemnified Party is proper in the circumstances
because he or she has met the applicable standard of conduct, nor an actual
determination by the Surviving Corporation or Purchaser (including their
Boards of Directors, independent legal counsel, or shareholders) that the
Indemnified Party has not met such applicable standard of conduct, shall be a
defense to the suit or create a presumption that the Indemnified Party has not
met the applicable standard of conduct.
(d) The Surviving Corporation shall maintain the Company's existing
officers' and directors' liability insurance or equivalent liability insurance
("D&O Insurance") for a period of six years after the Effective Time so long
as the annual premium therefor is not in excess of the last annual premium
paid prior to the date hereof (the "Current Premium"); provided, however, if
the existing D&O Insurance expires, is terminated or canceled during such six-
year period, the Surviving Corporation will use its best efforts to obtain as
much D&O Insurance as can be obtained for the remainder of such period for a
premium not in excess (on an annualized basis) of 200 percent of the Current
Premium.
(e) In lieu of the insurance arrangement referred to in clause (d) of
this Section 7.5, the Surviving Corporation may, on or before the
expiration of the Offer, enter into alternative insurance arrangements
provided that such arrangements are approved by the Independent Directors
and Purchaser.
7.6. Other Agreements.
(a) Takeover Statute. If any "fair price," "control share acquisition" or
similar anti-takeover statute or regulation shall become applicable to the
Merger, the Offer or the other transactions contemplated hereby, the
Company and the members of the Board of Directors of the Company shall
grant such approvals and take such actions as are necessary so that the
transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate
or minimize the effects of such statute or regulation on the transactions
contemplated hereby.
(b) Best Efforts and Cooperation. The Company and Purchaser each shall
use (and shall cause its subsidiaries to use) its best efforts to cause the
conditions set forth in Article VIII to be satisfied and to consummate the
Merger and the other transactions contemplated by this Agreement.
(c) Purchaser Vote. Purchaser shall vote (or consent with respect to) or
cause to be voted (or a consent to be given with respect to) any Shares
(including all Shares currently owned) and any shares of common stock of
Merger Sub beneficially owned by it, the Parent or any of their respective
subsidiaries or with respect to which it, the Parent or any of their
respective subsidiaries has the power (by agreement, proxy or otherwise) to
cause to be voted (or to provide a consent), in favor of the adoption and
approval of this Agreement at any meeting of stockholders of the Company or
Merger Sub, respectively, at which this Agreement shall be submitted for
adoption and approval and at all adjournments or postponements thereof (or,
if applicable, by any action of stockholders of either the Company or
Merger Sub by consent in lieu of a meeting).
(d) Consents. Each Purchaser Company shall, and shall cause each of its
respective subsidiaries to, use its and their reasonable best efforts to
obtain prior to the Effective Time all consents, registrations, approvals,
permits, authorizations, notices, reports or other filings required to be
made or obtained by any Purchaser Company with or from any third Person
including any Governmental Entity in connection with the Offer and the
Merger and which are necessary for the consummation of the Offer and the
Merger and the other transactions contemplated thereby.
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7.7. Certain Amendments to the Certificate of Incorporation and By-laws of
the Surviving Corporation. No amendment to the Certificate of Incorporation or
By-laws of the Surviving Corporation shall reduce in any way the elimination
of personal liability of the directors of the Company contained therein or
adversely affect any then existing right of any director or officer (or former
director or officer) to be indemnified with respect to acts, omissions or
events occurring prior to the Effective Time.
ARTICLE VIII
CONDITIONS
8.1. Conditions to Obligations of Parties. The respective obligations of the
parties to consummate the Merger are subject to the fulfillment of each of the
following conditions:
(a) Stockholder Approval. In the event of a Company stockholder meeting
pursuant to Section 7.2, this Agreement shall have been duly approved by
the holders of a majority of the Shares, in accordance with applicable law
and the Certificate and By-Laws of the Company;
(b) Purchase of Shares. The Purchaser (or one of Purchaser Companies)
shall have purchased Shares pursuant to the Offer; and
(c) Litigation. No court or other governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect and
prohibits consummation of the Merger.
ARTICLE IX
TERMINATION
9.1. Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by holders of Shares, by the mutual consent of Purchaser
and the Company, by action of their respective Boards of Directors.
9.2. Termination by Either Purchaser or the Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Purchaser or the Company if: (i) the Purchaser, or any Purchaser
Company, shall have terminated the Offer without purchasing any Shares
pursuant thereto; provided that the right to terminate this Agreement under
this Section 9.2 (i) shall not be available to the Purchaser or any Purchaser
Company whose failure to fulfill any obligation under this Agreement has been
the cause or results in the failure to purchase such Shares; and provided,
further, that in the case of termination of this Agreement by Purchaser, such
termination of the Offer is not in violation of the terms of the Offer; or
(ii) without fault of the terminating party, the Merger shall not have been
consummated by December 31, 1999, whether or not such date is before or after
the approval by holders of Shares.
9.3. Termination by Purchaser. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by holders of Shares, by action of the Board of Directors
of Purchaser, if: (i) the Company shall have failed to comply in any material
respect with any of the covenants or agreements contained in this Agreement to
be complied with or performed by the Company at or prior to such date of
termination; or (ii) the Board of Directors of the Company or the Independent
Directors shall have withdrawn or modified in a manner adverse to Purchaser or
Merger Sub its approval or recommendation of the Offer, this Agreement or the
Merger or the Board of Directors of the Company or the Independent Directors,
upon request by Purchaser, shall fail to reaffirm such approval or
recommendation, or shall have resolved to do any of the foregoing.
9.4. Termination by the Company. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by holders of Shares by action of the Board
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of Directors of the Company, if Purchaser or Merger Sub (i) shall have failed
to comply in any material respect with any of the covenants or agreements
contained in this Agreement to be complied with or performed by Purchaser or
Merger Sub at or prior to such date of termination or (ii) shall have failed
to commence the Offer within the time required in Section 1.1.
9.5. Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article IX, no
party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other party to this Agreement, except as provided in
Section 10.2 below and except that nothing herein will relieve any party from
any liability or damages for any breach of this Agreement.
ARTICLE X
MISCELLANEOUS AND GENERAL
10.1 Payment of Expenses. Whether or not the Merger shall be consummated,
each party hereto shall pay its own expenses incident to preparing for,
entering into and carrying out this Agreement and the consummation of the
Merger.
10.2. Survival. The agreements of the Company, Purchaser and Merger Sub
contained in Sections 5.2 (but only to the extent that such Section expressly
relates to actions to be taken after the Effective Time), 5.3, 5.4, 7.5, 7.7,
and 10.1 shall survive the consummation of the Merger. The agreements of the
Company, Purchaser and Merger Sub contained in Section 9.5 and this Article X
shall survive the termination of this Agreement. All other representations,
warranties, agreements and covenants in this Agreement shall not survive the
consummation of the Merger or the termination of this Agreement.
10.3. Modification or Amendment. Subject to the applicable provisions of the
DGCL, at any time prior to the Effective Time, the parties hereto may modify
or amend this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties.
10.4. Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party
and may be waived by such party in whole or in part to the extent permitted by
applicable law.
10.5. Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
10.6. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF
DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Delaware and the Federal courts of the United States of America located in the
State of Delaware solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement, and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it
is not subject thereto or that such action, suit or proceeding may not be
brought or is not maintainable in said courts or that the venue thereof may
not be appropriate or that this Agreement or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree that
all claims with respect to such action or proceeding shall be heard and
determined in such a Delaware State or Federal court. The parties hereby
consent to and grant any such court jurisdiction over such parties and over
the subject matter of such dispute and agree that mailing of process or other
papers in connection with any such action or proceeding in the manner provided
in Section 10.7, or in such other manner as may be permitted by law, shall be
valid and sufficient service thereof.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES,
AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.6.
10.7. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid:
if to Purchaser or Merger Sub
Innovative Communications Corporation
5 and 10A Estate Shoys
St. Croix, U.S. Virgin Islands 00820
Attention: Jeffrey J. Prosser
with a copy to:
Roger Meltzer, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
if to the Company
Emerging Communications, Inc.
Chase Financial Center
Orange Grove Christiansted
St. Croix, U.S. Virgin Islands 00821
Attention: Thomas Minnich
with a copy to:
William P. Schwitter, Esq.
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, N.Y. 10022
or to such other persons or addresses as may be designated in writing by the
party to receive such notice.
10.8. Entire Agreement. This Agreement (including any annexes exhibits or
Schedules hereto) constitutes the entire agreement, and supersedes all other
prior agreements, understandings, representations and warranties both written
and oral, among the parties, with respect to the subject matter hereof.
10.9. No Third Party Beneficiaries. Except as provided in Sections 7.5
(Indemnification; Directors' and Officers' Insurance) and 7.7 (Certain
Amendments to the Certificate of Incorporation and By-laws of the Surviving
Corporation), this Agreement is not intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder.
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<PAGE>
10.10. Obligations of Purchaser and of the Company. Whenever this Agreement
requires Merger Sub or, after the Effective Time, the Surviving Corporation,
to take any action, such requirement shall be deemed to include an undertaking
on the part of Purchaser to cause Merger Sub or the Surviving Corporation,
respectively, to take such action, including providing the requisite funds to
purchase Shares or make any other payment obligation. Whenever this Agreement
requires a subsidiary of the Company to take any action, such requirement
shall be deemed to include an undertaking on the part of the Company to cause
such subsidiary to take such action and, after the Effective Time, on the part
of the Surviving Corporation to cause such subsidiary to take such action.
10.11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may
be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (b) the remainder of this Agreement and the
application of such provision to other persons or circumstances shall not be
affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or
the application thereof, in any other jurisdiction.
10.12. Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Schedule, such
reference shall be to a Section of or Annex or Schedule to this Agreement
unless otherwise indicated. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
10.13. Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Purchaser may designate, by written
notice to the Company, another wholly-owned direct or indirect subsidiary to
be a Constituent Corporation in lieu of Merger Sub, in the event of which, all
references herein to Merger Sub shall be deemed references to such other
subsidiary except that all representations and warranties made herein with
respect to Merger Sub as of the date of this Agreement shall be deemed
representations and warranties made with respect to such other subsidiary as
of the date of such designation.
10.14. Definition of "Subsidiary" and "Person". When a reference is made in
this Agreement to a subsidiary of a party, the word "subsidiary" means any
corporation or other organization whether incorporated or unincorporated of
which at least a majority of the securities or interests having by the terms
thereof ordinary voting power to elect at least a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries. When a reference is made in this
Agreement to a person, the word "person" means and includes any natural
person, corporation, partnership, firm, joint venture, association, joint-
stock company, trust, unincorporated organization, governmental or political
subdivision, regulatory body or other entity.
C-12
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first
hereinabove written.
Emerging Communications, Inc.
/s/ Thomas R. Minnich
By:__________________________________
Name: Thomas R. Minnich
Title:Chief Operating Officer
Innovative Communication Corporation
/s/ Jeffrey J. Prosser
By:__________________________________
Name:Jeffrey J. Prosser
Title:President
ICC Merger Sub Corporation
/s/ Jeffrey J. Prosser
By:__________________________________
Name:Jeffrey J. Prosser
Title:President
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ANNEX A
Certain Conditions of the Offer. Notwithstanding any other provision of the
Offer, the Purchaser shall not be obligated to accept for payment any Shares
or, subject to any applicable rules and regulations of the SEC, including Rule
14e-l(c) (relating to Purchaser's obligation to pay for or return tendered
Shares promptly after termination or withdrawal of the Offer) or pay for, and
may delay the acceptance for payment of or payment for, any tendered Shares
unless (I) there have been validly tendered and not withdrawn prior to the
expiration date of the Offer a majority of the outstanding Shares not
beneficially owned directly or indirectly by the Parent or its affiliates as
of the date the Shares are accepted for payment pursuant to the Offer (the
"Minimum Tender Condition"), or (II) the Purchaser shall have received funds
sufficient to purchase all Shares tendered in the Offer and to pay the Merger
Consideration or (III) if on or after August 24, 1998, and at or before the
time of payment for any of such Shares (whether or not any Shares have
theretofore been accepted for payment or paid for pursuant to the Offer), any
of the following events shall occur:
(a) there shall be any statute, rule, regulation, judgment, injunction or
other order, enacted, promulgated, entered, enforced or deemed applicable
to the Offer or the Merger or any other action shall have been taken by any
government, legislative body, court or governmental, regulatory or
administrative agency, authority, tribunal or commission, domestic,
supranational or foreign (each, a "Governmental Entity"), (i) challenging
the legality of the acquisition by the Purchaser of the Shares; (ii)
restraining, delaying or prohibiting the making or consummation of the
Offer or the Merger or obtaining from the Parent, Company, Purchaser or the
Merger Sub any damages in connection therewith; (iii) imposing limitations
on the ability of Parent, Purchaser or Merger Sub (or any affiliate of
Parent, Purchaser or the Merger Sub) to acquire or hold or to exercise full
rights of ownership of the Shares, including, without limitation, the right
to vote the Shares purchased by them on all matters properly presented to
the stockholders of the Company or (iv) having a substantial likelihood of
any of the foregoing.
(b) there shall have occurred (i) any general suspension of, or
limitation on times or prices for, trading in securities on any national
securities exchange or in the over-the-counter market in the United States
or (ii) a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States (whether or not mandatory);
(c) the Company shall have breached or failed to perform in any material
respect any of its covenants, obligations or agreements under the Agreement
or any representation or warranty of the Company set forth in the Agreement
shall have been inaccurate or incomplete in any material respect when made
or thereafter shall become inaccurate or incomplete in any material
respect;
(d) any change, including, without limitation, any change arising out of
or related to any natural disaster (including hurricanes and earthquakes),
shall have occurred or been threatened or become known (or any condition,
event or development shall have occurred or been threatened or become known
involving a prospective change) in the business, properties, assets,
liabilities, condition (financial or otherwise), or results of operations
of the Company or any of its subsidiaries that could reasonably be expected
to be materially adverse to the Company and its subsidiaries taken as a
whole (a "Material Adverse Effect");
(e) all consents, registrations, approvals, permits, authorizations,
notices, reports or other filings required to be made or obtained by the
Parent, Company, Purchaser, the Merger Sub or any stockholder of Purchaser
with or from any Governmental Entity in connection with the Offer and the
Merger shall not have been made or obtained except where the failure to
make or to obtain, as the case may be, such consents, registrations,
approvals, permits, authorizations, notices, reports or other filings could
not reasonably be expected to have a Material Adverse Effect;
<PAGE>
(f) the Special Committee of the Board of Directors shall have adversely
amended or modified or shall have withdrawn its recommendation of the Offer
or the Merger, or shall have failed to publicly reconfirm such
recommendation upon request by Parent, Purchaser or Merger Sub, or shall
have resolved to do any of the foregoing; or
(g) the Agreement shall have been terminated in accordance with its terms
or the Merger Sub shall have reached an agreement or understanding with the
Special Committee providing for termination of the Offer which, in the
reasonable judgment of the Purchaser with respect to each and every matter
referred to above, and regardless of the circumstances (including any
action or inaction by the Parent, Merger Sub, Purchaser or any affiliate of
Parent) giving rise to any such condition, makes it inadvisable to proceed
with the Offer or with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Purchaser and may
be asserted by the Purchaser regardless of the circumstances (including any
action or inaction by the Purchaser, Merger Sub or any affiliate of Parent)
giving rise to any such conditions or, subject to the terms of the Merger
Agreement, may be waived by the Purchaser in whole or in part at any time and
from time to time in its sole discretion. The failure by the Purchaser at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time. Any determination by the
Purchaser concerning the events described above will be final and binding on
all holders of the Shares.
2
<PAGE>
[FORM OF PROXY]
EMERGING COMMUNICATIONS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EMERGING
COMMUNICATIONS, INC. FOR SPECIAL MEETING, ON MONDAY, OCTOBER 5, 1998
The undersigned hereby appoints Jeffrey J. Prosser and John P. Raynor, and
either of them, as Proxies, with full power of substitution, and hereby
authorizes them to represent and to vote, as directed below, all shares of
Common Stock of EMERGING COMMUNICATIONS, INC. (the "Company") held of record by
the undersigned on September 22, at the Special Meeting of Stockholders to
be held on Monday, October 5, 1998 or any adjournments, continuations or
postponements thereof, and to vote on all matters coming before said meeting,
hereby revoking any proxy heretofore given.
Item 1. To approve and adopt the Agreement and Plan of Merger, dated as of
August 17, 1998 (as such may be amended, supplemented or modified from time to
time), among the Company, Innovative Communication Corporation, a U.S. Virgin
Islands corporation, ICC Merger Sub Corporation, a Delaware corporation ("Merger
Sub"), and the Company pursuant to which Merger Sub will be merged with and into
the Company, with the Company as the surviving corporation.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued on reverse side)
<PAGE>
Item 2. In their discretion, the proxies are authorized to vote upon such
other business as many properly come before the meeting or any
adjournment or postponement thereof.
This Proxy, when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ITEM 1.
Please date this proxy and sign exactly as name appears below. If the
stock is held jointly, signatures should include both names. When signing as
attorney, executor, administrator, trustee guardian, please give title as such.
DATED: ______________________________________, 199_
SIGNATURE(S) ______________________________________
